聯合設備租賃 (URI) 2016 Q1 法說會逐字稿

Good morning and welcome to the United Rentals first-quarter 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, 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 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. Welcome and good morning, everyone, and thank you for joining us on today's call.

As you saw last night, our first-quarter results were shaped by a market that is fundamentally positive, while presenting some notable constraints, and we delivered $584 million of adjusted EBITDA on $1.3 billion of revenue, with lower rental rates partially offset by higher volumes. It was a solid performance, particularly in light of the challenges of oil and gas in Canada.

In addition, we generated strong free cash flow of $627 million and we are on track for free cash flow in the range of $900 million to $1 billion this year, in line with our outlook.

Behind the scenes, our results showed some encouraging momentum. While utilization was down 10 basis points for the quarter versus the prior year, it was up year over year both February and March, driven by an increase in OEC on rent. The utilization in March increased by 100 basis points.

Now taken in total, these numbers reflect a good quarter. The obvious disappointment was rate and that's a major focus for us. In fact, we believe that we can improve our rate management in this year's operating environment, even though there is still some uncertainty out there.

I will start by summarizing what we know, then what we don't know, about 2016. We know that the cycle appears to be intact. Volumes continue to be strong across a majority of our businesses. Secular penetration is still a tailwind and demand from nonresidential construction is on the rise.

We also know that our industry added a lot of fleet last year. The new fleet, combined with equipment coming out of Canada and the oil patch, has created an oversupply in US markets in the short term. However, our services are still earning premium pricing. Strategically, this is the right positioning for us in the long term.

Canada was a major constraint. The drag from our Canadian business was significant in the quarter. It accounted for almost 1 full point of rate decline, and we are managing through it by reducing fleet in weak markets, particularly in the western provinces. So we are pleased to see that the Canadian government is taking steps to turn the economy around, and importantly for us, the current plan includes an investment of more than $120 billion in Canadian infrastructure over 10 years, with $11 billion to be allocated immediately.

So, let's talk about what we don't know. We don't know when supply and demand will achieve equilibrium. No single rental company controls that timing, but we do believe the market is moving in that direction. Independent data indicates that the growth in supply is now tracking below the growth in demand. Rouse reports that their absorption ratio hit an inflection point in March of last year. The timing makes sense when you think about the decline in oil and gas.

Then the negative ratio hit bottom in November and has been improving ever since. Last month, the ratio was close to parity and it is the best we have seen in a year.

If rental companies continue to show discipline with CapEx in 2016, excess fleet will be absorbed more quickly by the growth in demand. Oil and gas is another question mark and there is plenty of speculation, but no certainty, about the future of this sector. We don't think upstream vertical has hit bottom yet. And finally, a change in the relative strength of the American dollar would affect the results we report from Canada and that's a challenge to predict.

So it's been a series of puts and takes, but when you analyze all the various dynamics, it comes down on the side of market growth, and the cycle is still very much on track and, in our view, it will be for several years before it reaches its peak. It is also the consensus of industry analysts that supports that view, as well as our customers.

Nevertheless, our experience tells us that pricing will be very difficult to predict in the short term. And while rate is just one component of our outlook, it underlies some of our other metrics. Consequently, we made some adjustments to our guidance, as Bill will discuss in a moment.

Before I move on, I want to emphasize that our focus continues to be on managing our business for significant long-term value. And as a leader in our industry, we are not willing to be a bystander. We are taking every measure to ensure that we generate the highest possible returns on our capital over time, and that includes managing rates more effectively.

We're also being very diligent about taking costs out of the business. Our lean initiative is on track to reach an annual run rate of $100 million in savings by year-end, and we are committed to that target and we see more room for improvement next year.

Now let's talk about CapEx. In the first quarter, our capital spend was down by two-thirds versus last year and it gives us major flexibility to manage the balance of our CapEx spend in 2016. Last night, we reaffirmed our $1.2 billion CapEx target for the full year, and this is based on the substantial demand that we are seeing in many of our end markets.

So here is a quick snapshot of the quarter. Nonresidential construction in the US increased year over year by more than 11% through February, which is the latest data available. It drove up equipment rentals across a wide range of verticals. We saw year-over-year revenue increases in some of our largest end markets, such as infrastructure, chemicals, and refinery, and we generated double-digit growth from verticals that are important targets for us. These include pharmaceuticals, entertainment, and disaster recovery.

Our specialty rental operations are continuing to turn in strong performance. Rental revenues were up 8.7% year over year for specialty, with same-store growth being more than 6%. And the combined rental revenues from trench safety and power HVAC, our two largest specialty businesses, increased by 12% year over year, again largely on a same-store basis.

With our pump business, we are continuing to diversify our market base both in terms of verticals and geographies. In the first quarter, we opened cold starts for pump in Tennessee and Minnesota.

Specialty is the area of our business that we are funding for growth again in 2016. We have a lot of investor interest in these operations, so I want to take this opportunity to invite you to a branch visit on May 5 in Tampa. We're taking investors to a co-located trench pump and power branch starting at noon. It is a good opportunity to spend some time in the field with several of our key leaders, including Paul McDonnell, who runs our specialty business. Space is limited, so please give Fred a call this week if you're interested in attending.

So in (technical difficulty) and realistic about 2016. We have looked at this year from every angle and the prospects for equipment rental in North America appear strong. Demand is building and our fleet on rent is keeping pace.

Our focus continues to be on many aspects of our business that are within our control. These include asset management, our cost structure, and cash generation, and you will see us flex all these areas as conditions warrant, while strategically we will stay the course in a year that offers significant opportunities to deliver for our shareholders.

So with that, I will hand it over to Bill and he will go over the results with you. So Bill, over to you.

Thanks, Mike, and good morning to everyone. As usual, I will add some color to the numbers that you have already seen or heard from Mike just now.

Starting with rental revenue, $1.117 billion of rental revenue in the quarter. That was down 7/10 of 1%, or $8 million, year over year and the components are as follows. Re-rent and ancillary revenues netted out to an increase year over year of $2 million. Ancillary was up a little bit more, up $4 million, offset by re-rent coming down slightly. Within owned equipment revenue, the increase totaled -- excuse me, the decrease totaled about $10 million, with rate accounting for about $28 million of decline on that 2.8% year-over-year rate decline that we reported, and that was almost exactly offset by volume being up pretty strongly, $28 million of volume contribution on the 2.7% increase in OEC on rent that we recorded.

Netting against that is the replacement CapEx inflation for the quarter. That was about $20 million of year-over-year decline, reflecting about 2% impact from the inflation of the CapEx that we replaced.

Mix and other was a solid positive contributor this quarter, plus $10 million versus last year, and that very largely reflected the fact that there was an extra day in the reporting period this year.

So net all that together, it was $10 million of decline in OER, as I said, and that totals the $8 million of decline that we saw overall.

Within that revenue decline, I will point out that we did have an impact from the Canadian dollar. It is weaker this year by about $10 million worth of rental impact, so if you excluded that Canadian-dollar currency impact, we actually would have reported an increase in our rental revenue of 0.3%.

While I am on Canada, I would also point out that that's just the Canadian-dollar impact. If you just look at the US-only performance in rental revenue, our US-only rental revenue was actually up 3% in the quarter. That's up 3% when you exclude Canada.

Time utilization performance in the quarter actually trended very nicely as you went through each month. The overall quarter, as you saw, was down 10 basis points, but within that we had a decline in January of about 150 basis points, and then February, the utilization flipped to a positive 30 basis points on its way to the 100 basis-point year-over-year improvement that we reported in the earnings release. So, we are on a pretty good positive trend in utilization in the quarter.

Moving briefly to used equipment sales, $115 million of proceeds from used this quarter was essentially flat with last year. The margin of 48.7% was down just over 2 basis points, and that's primarily driven by some of the discounting that we have done to move volume in the quarter at a little bit higher pace than we might otherwise have done. When you look at the margin overall, 48.7% adjusted gross margin is still a very high level of margin in absolute terms versus where margins have been historically.

Within that used equipment sales result, we sold about 60 million -- excuse me, 60% of our revenue through the retail channel, consistent with where we were in the first quarter and consistent with what we have been trying to do to focus much of our sales effort through the retail channel.

So, a solid used result in the quarter to get us started for the year.

On profitability, just real briefly on adjusted EBITDA, $584 million, was down $18 million or 3% versus last year and the margin was 44.6%. That was down 120 basis points. The key components, that rate impact that we called out earlier cost us about $27 million compared to last year, but that was offset by the volume impact, which was a positive $18 million in the quarter. Fleet inflation was a headwind of about $12 million, so the net effect of all of those was really driven by the rate result and inflation.

The ancillary revenue impact that I pointed out earlier was a benefit of about $2 million in the quarter. That offset the used equipment sales result, which was a negative $2 million in the quarter compared to last year. Then we had our normal merit increase impact of about $6 million in the quarter, and the mix and other benefit, primarily driven by that extra day, was a positive $9 million in the quarter, so all of that nets to the $18 million year-over-year decline that we called out.

Sprinkled throughout that decline was about $3 million worth of headwind from the impact of currency that occurs in various lines here. So, that $3 million was reflecting that $10 million decline in revenue that I talked about from currency.

Real briefly on adjusted EPS, we delivered $1.40 of EPS in the quarter and that was $0.06 better than last year, and again, that overcame the impact of Canadian currency, which was about a $0.02 headwind compared to last year in the quarter, so a solid EPS result for us during the quarter as well.

On free cash flow, a good quarter there, $627 million in the first quarter. That's up $177 million versus last year. The key drivers there, obviously the lower CapEx spend in the quarter was a benefit of about $223 million year over year. We also had lower interest expense of about $20 million, and offsetting those two benefits were really timing of working capital that cost us about $67 million versus last year and obviously the adjusted EBITDA result, a decline of $18 million. So those are the key components of that $177 million improvement.

I would caution against running too far with the overall result of $627 million in the quarter as you think about the full-year free cash flow. The timing in some of the subsequent quarters will weigh that down. Still, we expect to deliver between $900 million and $1 billion worth of free cash flow over the full year.

On rental CapEx, you saw the $100 million in the quarter, down $223 million versus last year, and that's consistent with the approach that we have taken to rental CapEx this year, which was to give ourselves as much flexibility as we can early in the year and then decide as we go through the year where it is appropriate to spend. So, we still are expecting to spend $1.2 billion across the entire quarter for rental CapEx -- or, excuse me, across the entire year for rental CapEx. The quarters will vary this year as we respond to demand.

On liquidity, real briefly, we finished the quarter at $1.4 billion of liquidity, or just over $1.4 billion, and that reflected about $1.2 billion in ABL capacity and another $200 million in cash on the balance sheet.

Let me just touch on the share repurchase program briefly. We purchased in the quarter $153 million worth of shares. That resulted in about 2.7 million shares coming back to us, and if you look at the entire current authorization, the $1 billion authorization we are operating under, we've spent about $264 million through the end of the quarter against that program.

So, we're on the pace that we've talked about. As we think about the share repurchase program, our intention right now is to continue the way that we have said, steady purchases toward about $675 million or so worth of repurchases this year. And they will be fairly steady throughout the months.

I've mentioned before the restricted payments limitations, that we have to make sure we operate within from our debt covenants. As we finished the quarter, we had about $566 million worth of available capacity either from RP baskets in the debt or from cash capacity at the holding company. So we are very well positioned to continue the share repurchase program without concern about those limitations slowing us down.

ROIC for the quarter was 8.7%. That was down 30 basis points from the prior year and clearly reflects the impact of the weaker rate environment, after netting out the somewhat stronger demand environment and higher utilization.

Let me finish up with just a real brief comment on the updated outlook. You saw the numbers, with total revenue coming down to a range of $5.6 billion to $5.8 billion and adjusted EBITDA coming down to a range of $2.650 billion to $2.750 billion. Essentially, we adjusted both ranges down to reflect the renewed outlook on rate. Its impact is about $100 million, and so that was -- at midpoint, it was about $100 million, so that was the motivation for revising those component of the guidance downward.

Our new view of rate is now for a decline of 3% to 4% over the course of the year, and really that reflects the experience that we've had early in the year. We can talk about the sequential rate performance that we had in the first three months of the year, but it's fair to say that those came in weaker than we expected and the new rate guidance for the full year essentially reflects that decline.

Our utilization is going the other way. We have had a stronger start to the year on utilization and on fleet on rent, and so we now expect our utilization for the year to be up about 100 basis points. That will bring us in at around 68.3% for the full year.

No change to the CapEx plan, as we have mentioned before. $1.2 billion is still the gross spend that we are targeting, which should net down to about $700 million after used sales proceeds. And again, no change to the free cash flow outlook between $900 million and $1 billion.

The final comment is just regards April. We have got a lot of questions about how April has started, so we figured we would offer up just a little bit more thought about that. On the rate front, it is fair to say that April has started slightly better than what we saw sequentially in March. We'd call April so far, month to date, it is something like a sequential minus 5/10ths.

On utilization, it is also slightly better than where we finished out. As of yesterday, our utilization against last year was up 130 basis points.

So, we think it is important to understand how the early part of the year plays out, and as we think about the remainder of the year, we're optimistic, optimistic about our ability to put fleet on rent, about our ability to start realizing rate more effectively than we have, and as always, we are going to drive as hard as we can toward all of those objectives.

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

(Operator Instructions). Steven Fisher, UBS.

Bill, I know you said the rate outlook for the rest of the year reflects the beginning of the year trend, but I think you are assuming sequential monthly declines for the balance of the year. So maybe you could just give us a little more context for why it makes sense to assume that the rates are going to decline sequentially for the rest of the year, as they did last year, just because we are seeing oil prices rising and the overfleeting may be moderating, as you're talking about, and the volumes are good. You could just give us a little more color there. Thanks.

So I will start out and please chime in, Mike and Matt. The rate range that we give -- actually, if we achieve a 3%, you would have some positives in the back half of the year on a reasonable profile of where sequentials would go. So, it's not like we are saying there is going to be declines every month in the remainder of the year.

And, in fact, if we repeated last year's sequential performance from May on, that puts us right about the midpoint of the down 3% to 4% range that we gave, and there were some flat months in last year's sequential decline.

So, we are not here saying that there are going to be sequential declines every month going forward. We are saying that we want to make sure that we understand how our business looks if you don't get a significant turnaround in the short term. The reality is we did start weaker than we thought in the first quarter and things don't turn around instantly. And so we're trying to allow room for things to take a little bit longer to turn around, but we certainly believe that that's a possibility and that's why we put the range the way we did.

Okay, and how are you thinking about the trade-off between rate versus volume and utilization? To what extent are you making a conscious decision this year in favor of volumes versus rates, and any sense of how you think your market share has trended this year?

Sure, Steve, this is Matt. I would say that the two are connected, but the strategy of trying to drive both rate improvement and time improvement has not changed.

Our time utilization doing better than we had originally thought was mostly due to demand, and even overcoming some of the headwinds that Mike talked to in his prepared comments in Canada in oil and gas. We have some real strong end markets. I would say 70% of our regions, and those are the ones that aren't touched by oil and gas, and you can think about it geographically as on the coast, have robust demand. And that is what we are taking advantage of.

As far as what is that balance between rate, that is more of a supply dynamic, and we put -- we added a slide on slide 5 of our investor deck where you start to see where the absorption of the fleet coming in has been over the past year and where we are starting to see some improvement there, and that informs the stronger end of our range of 3% rate where that's what we are driving towards and we believe the supply side will work its way through because there is such robust demand.

The only thing I would add to that is -- this is Mike, by the way -- I would just add that in my opening comments, we still maintain a premium, so we are not sacrificing. The market is the market.

This is the first year in, what, five years that we haven't had -- the industry has had oil as a backdrop, and we understood that. And we also are looking at ways in which we can drive efficiencies in our fleet and our CapEx spend.

So, we took CapEx down as well in Q1. So, we wanted to see demand. We are seeing demand and that's what gives us a lot of comfort for the cycle still playing out.

So just to be clear, in these markets where you are seeing the volumes, you are not seeing just excessive amounts of competitive pressure?

No, if you think about our rates, Steve, and you separate out the US and Canada, we are not where we wanted to be in the US. Our rates in the US are down 2% for the quarter versus the 2.8%, and that's driven by -- in the tougher markets where there is not demand, where there is not time utilization in Canada, our rates are down 9.7%. So that's really where the big drag is.

If you took oil and gas out of the number, large oil and gas, our rates would have only declined 1.6%. If we had numbers like that holistically, we wouldn't have re-guided rate. We would have overcome that. We would have felt like with our rate management systems and the robustness of the focus we wouldn't have had to re-guide. But when you put the whole experience in, we just thought it was appropriate to give that guidance.

I just want to reiterate we are driving towards the better end of that guidance and even beyond. This is not a statement of a lack of focus. It is more a statement of realizing what we experienced in Q1.

All right, thank you.

George Tong, Piper Jaffray.

Can you provide further details on what has changed in the Canadian oil and gas markets over the past 90 days that prompted you to lower your revenue and EBITDA guidance?

So, George, maybe I will start and ask Matt and Mike to chime in. I think it's just a continuation of what we saw late last year, right? Remember in the fourth quarter we talked about Canada being down significant -- I can't even remember the exact percentage decline in rent revenue, but those factors have continued.

We continue to have adjustments in the oil sands projects in the western part being a major driver there, continue to have pressure on some of the commodity pricing that affects other industries elsewhere within Canada, and that's being exacerbated by all the fleet looking for a home and moving around in that marketplace. So, I don't know, Matt or Mike, can you guys point to anything else specific that might have changed in the last three months?

No, and I wouldn't put it just to Canada. If you carry through, as Bill had talked about in his opening comments, if you carry through what the rate build was planned to be in the year, which had our initial guidance, and you carry that through the balance of the year, that's why the revenue guidance dropped. It wasn't just specifically Canada and I think we spoke about that in detail.

Thanks. I will jump back in queue.

Joe O'Dea, Vertical Research.

On slide 5, when you show supply/demand dynamics, and we have seen the improvement over the last couple of months, the rate seems to contemplate that you still have pressure through most of the year when you comp it to last year and sequential declines. So why as we see that supply/demand improving is there not the potential that things accelerate a little bit more quickly? Why do you think that even as that improves and you find balance you continue to face rate pressure?

So, this is Mike. It is the unknown. We know -- it is a snapshot of where we are today. We know what we are spending and how we are spending. We have taken down our capital spend significantly.

It is what I don't know is going to happen to the rest of the industry and what they intend to do and spend. So, it is projected, as you stated, according to Rouse, that it looks like some time at the end of the second quarter you could expect some sort of equilibrium. Now, I can't control what the rest of the industry does. I can only speak to United Rentals, but it gives me -- what I have seen so far and what I hear from OEMs, it gives me confidence that our mark -- we are marching in the right direction.

That's the unknown, and is there opportunity? Yes. That's why if you look at the 3% to 4% there is some opportunity for some positives. But we have to call it as we see it and derisk it a little bit.

I would add, Joe, I think it's just how quickly can we change the momentum, right, and that's probably what we are wrestling with. The good news, as Bill pointed out, April we started to see an improvement in the momentum, and how quickly that plays through, we will see where we get to reaching our goal of 3%.

Okay. And then on the US only and rate down about 2%, and obviously commodity-related pressure, but outside of that, are there any pockets that you're able to identify, whether it is on the national account front or whether it is the walk-in business, where you are seeing a little bit more of the contribution of downward pressure on rate there?

I think we have seen pressure in different customer segments. Yes, I think that reflects the overall dynamics of what is going on in the marketplace right now, right? It is an excess of fleet and that fleet's going to look for a home, and whether it finds a home with a large national or a midsize regional or a mom -- a small walk-in oriented market, I don't think it discriminates.

So we have seen pressure in a variety of different areas. I think the key for us is to make sure that we support our strategy, right, which is make sure that we are embracing those large national accounts as a core part of our strategy and then continuing to offer the services that justify the midsize and the smaller players coming to us as well, and to do all of that at a price point that reflects the premium service that we offer.

So, I don't know, again, Matt and Mike, I will ask if you guys want to add anything, but I would say -- I wouldn't point out any particular group of customers or project types that represent the pressure on rate. But that's another way of saying that we have seen some pressure in a variety of different areas.

Got it. Thanks very much.

Robert Wertheimer, Barclays.

So, the question is on Canada, and obviously it is tough there and probably particularly in the west with the oil and such. And I am wondering if you can speak at all to either the competitive balance or the speed at which you can reduce fleet and normalize? I don't know whether it is more consolidated and therefore you can get things in line faster, or just when do you anticipate, given the plans you have up there, even if the market continues to be soft you have taken [enough] fleet that we can stabilize a bit?

Yes, Robert, this is Matt. I think you're hitting on something where the real challenged markets are pretty dense. And when you are thinking about western Canada and more specifically Alberta, we have been very aggressive in moving fleet out of there and that has been able to help us right-size our business.

And we are seeing -- it is broad based in western Canada. We are seeing our competitors faced with the same challenges. It is a macro issue, and not a performance issue with our team or a market-share issue. It is really just a macro issue in western Canada.

I want to separate out eastern Canada because I think they may even have some opportunities in some of the provinces in eastern Canada. It is just not robust enough to call out. But because it's concentrated in certain areas, we are able to move the fleet appropriately.

Okay, I will follow up again off-line. Thank you.

Seth Weber, RBC Capital.

So sticking in Canada, not surprisingly, I guess what struck me is -- thanks, Matt, for the -- I think you said down 9.7%. That was good data. And I think you said in the fourth quarter it was down 6%. I guess what I think people are trying to figure out is when do these comps start to anniversary, because it seems like there has been a lag here relative to the inflection in oil last year, so I think what everybody is trying to calibrate is when do the Canada comps specifically get easier? And then also, maybe, can you talk about is this all just direct energy exposure or are you also seeing indirect knock-on type project activity slow down in those markets as well?

Seth, I will start. I think we saw Canada declining really throughout the year last year, but the acceleration really was most pronounced in Q4, and so in that sense, the comps really start to get easier in Q4, although they will be gradually getting easier as we go through the year.

Matt, I don't know if you want to answer the question about concentration in oil and gas or is it more broad based.

Most of us realize, right, so it is very highly driven by natural resources, the whole country, quite frankly, and I think it was just exacerbated in western Canada.

But it is something that, as Bill pointed out, was really driven in Q4 and Q1 this year, and during that period, we pulled over $70 million of fleet out of western Canada. So we have been very aggressive in dealing with it and I think -- I would leave it at that. It would be hard for me to parse out knock-on versus direct. I think the whole economy -- if you are in Alberta, almost the whole economy is somewhat oil and gas related, and that's where we have seen the biggest drop.

Yes, Seth, the only thing I would add is if you take a look at our investor deck, the industrial outlook for Canada by province I think is a good way of looking at it, and it is not just oil and gas. It is minerals and metals that are all wrapped in there.

You know as well as I do Canada is reliant on commodities, natural resources, with the western taking the biggest part of that, particularly in oil. And you see that highlighted in our deck by province, reduction outlook on industrial spend that they see in Canada, offset by growth both on the east and the west, far east and far west.

Okay. Just to frame it, though, for the, I think, 9.7% down in the first quarter, would you expect second quarter to be in that same kind of range or does that start to get less negative here in the second quarter?

If I -- so, we haven't proven to be great at forecasting it, to be frank, but I would say that we are expecting our improvements to come in the US and that's where we think the opportunity is. It is where the greater demand is and where we expect to get our rate improvement.

Right, but I'm just talking about on a relative basis -- okay. Maybe if I could slide another one. Just on the CapEx, Bill, second quarter last year was, I think, close to $700 million gross CapEx. Is that -- order of magnitude, should we haircut that by 20%, 25% kind of number, consistent with your full year, or is there any kind of help you can give us just to calibrate that?

Yes, sure. So, the intent is to respond to demand and that is going to drive the number, so that's why we hesitate to give you a more specific guide.

What I would say is we could spend as much as we did last year, if the demand continues to hold and if we can land the fleet from OEMs. But we could spend materially less than last year, and I know that's not terribly helpful, but it could be in the area of $600 million, it could be in the area of $700 million, just depending on how the demand plays out as we go through the quarter.

Okay, I will get back in queue. Thanks, guys.

David Raso, Evercore ISI Group.

I know looking out to next year there is a lot of movement in oil and gas that could change things and so forth, but on your slide 18, just trying to think about the midpoint of your CapEx is basically net CapEx goes up 27%, 28%. And when I think about the way you're laying out the rest of the year, you actually exit the fourth quarter with rental rates down over 3%. But in that slide, you're saying you think there will be modest rate growth.

So I am just trying to think through if I am going to raise CapEx that much in 2017, I'm exiting 2016 with a lot of negative carryover on rate. Obviously, I guess, the answer could be you are just that bullish on 2017. I am just trying to think through how that makes sense to start the year that negative on rate. You're going to raise net CapEx midpoint by 28%, and we think the full year rate in 2017 is going to be positive.

David, so there are a lot of assumptions in there. What I would say is regards the exit rate from 2016 or the carryover into 2017, if you want to use the midpoint of our current rate guidance, right, down 3% to 4%. If we finish the year at the same pace as last year on the sequentials, right, that approximately 3.5% set of sequentials, the carryover for 2017 in that scenario would be something like 1 point negative, right? So we look at that and we say that's not insurmountable to overcome during the course of 2017 and get back to positive rate throughout the course of next year.

So, that's how we think about what we would have to overcome in order to get to modest rate increase next year.

As for the CapEx, we gave a range, right? We said it could be $1.2 billion to $1.7 billion, I think it was, and we are using that as a statement that we're going to be very focused on preserving flexibility in responding to the market, more so than just saying, hey, we're going to spend -- it was $1.6 billion at the top end of that range. We're going to spend $1.6 billion right here and now in 2017, come hell or high water, right?

So, we're going to be responsive. We are going to be very mindful of how rates do behave as we finish up 2016, and that will inform our thought about what rates are going to look like in 2017 and inform our thoughts about what the CapEx plan should be as a result.

Yes, I was just trying to think through what some of your suppliers may -- if you faced that decision today, do you err on I want to get that rate positive and I will back away from the CapEx growth? I know the CapEx, though, is going more specialty than gen rent, but I'm just trying to understand. Is the focus still on we want to push rate? And, obviously, last night's report, it made some people question is it about trying to play a little catch-up on some volume growth and market-share recapture or no, it's just the dynamics of this year and next year? Of those two, you would err on we will pull the CapEx down to make sure we get the rate?

David, this is Mike. We haven't changed our stripes. We took CapEx down this year, and the easiest thing I could do is throw CapEx in.

To your point, our growth CapEx is going to specialty. As we go through the year, it depends how it plays out is how I think what -- how we think about it. We don't know. We are giving ourselves the flexibility, but we haven't changed our strategy or our story as far as how we are thinking about it. We are not going to throw out CapEx for the sake of volume.

Yes, I thought it was interesting that the rate breakdown, that even if you pull out large oil, and I assume that was large oil out of US and Canada, that the rate was still down 160 bps. Is that -- in a way, is that almost more the surprise, the rate degradation in non-oil and gas areas? It shows a little more. I know there is a hangover in the whole oil and gas contagion, equipment moving to other parts of the country. But it is interesting that rate even outside of oil and gas is down when the utilization, and correct me if I'm wrong, the ut is probably stronger outside of oil and gas. So I am just trying to marry that up so I understand the core gen rent business outside of oil and gas.

David, as I said earlier, this is Matt, it is the supply side, and we saw that midyear last year and you saw it in all the Rouse data. There is just more fleet that came in that didn't get absorbed, and if it ended 2015 that way, then we knew there was a first half of the year dynamic, just because of seasonality, where it was going to put more a challenge on it.

So I would say that it was less -- we didn't have an expectation that rates in the US were going to be positive in the low season in Q1, and I think Canada just really, really surprised us even more so. But this is the supply-side dynamic we have been speaking about for the last few quarters.

That's what I am trying to understand. Obviously, we all try to figure out the supply/demand balance, but when you think most iron gets delivered now, right, April, May, June. Obviously, your CapEx in particular is heavily second quarter. So the idea of forecasting fleet versus demand, I mean, we haven't really seen the real fleeting up this year, right? Seasonally, it's still to come.

And when you spend time with dealers, it doesn't seem like the rental CapEx is even going down this year versus last year, which would still be fleet growth. So I am just trying to understand. It is not your data. Maybe it is not a fair question to you, but the fleet, to measure it in March and say, hey, we're near a balance, you haven't taken delivery yet, right? Most of the delivery comes the next three or four months. There is still a supply/demand question that naturally isn't really answered until June/July, right?

So I am just trying to understand how much are we embracing that forecast when we don't really know what is being shipped yet, but it seems like the dealers aren't really backing off much right now on year-over-year CapEx. You are doing a good job cutting; I am just trying to understand how can I make that forecast off of March fleet when all the fleet comes (multiple speakers)

We can't -- we obviously can't comment on the dealers and what's going on there, but what I would say is you are right. The fleet tends to come now, but so does the demand.

And what we are taking as encouragement is that the relationship between growth in fleet and growth in demand seems to be one that is near or heading towards balance. And you couple that with the pain that the industry has suffered overall regards an excess of fleet, right, low utilizations over the last -- well, since oil broke, really, we think that there is a very reasonable case to say that the industry will continue even though they are bringing in more fleet, bringing in less fleet than demand might otherwise warrant. And that will help with absorption.

So, that's the mindset that we are bringing to it. Time will tell whether it is right or not. That's why -- the uncertainty is why we are being very flexible in how we approach spending capital this year, right (multiple speakers)

I'm sorry, one last thing. On the positive side -- I am sorry to cut you off, Bill. On the positive side, Matt maybe in particular can answer this, but all of you, there is no more need to move any iron around, would you say? Hopefully, you are past that point. You feel Canada has seemed like this last three months getting some stuff back to the suppliers and so forth on buybacks and stuff. Canada, I know the rate is done, and obviously, Matt, you weren't willing to say rates are getting much better year over year when you said the US is the improvement. But are we at least comfortable with where the iron generally is right now? Are we past that point?

Yes, we believe so, and I think that's a fair depiction of where we are. We are going to be moving a lot of fleet around, as we always do, but I think the big moves of having to move major blocks out of any geography, I think we have swallowed that pill.

That's good to hear. Okay, thank you very much. I appreciate it.

Nick Coppola, Thompson Research Group.

I wanted to ask more about the demand in that industrial nonconstruction segment of the market. So looking at the slide deck, you have got a 2.2% forecast in 2016 in the US. Clearly oil and gas is down, but can you talk more about what you are seeing in manufacturing, petrochemicals, refineries, and the like? So any more color on trends and where you are seeing green shoots there?

I'm sorry, the last part of your question I didn't catch, Nick. Was (multiple speakers)

Trends in the industrial segment of the US.

I think that obviously the one decliner, and really one of the few declining verticals we have, we have talked about it ad nauseam, which is specifically upstream oil and gas. We have actually seen some improvement in certain markets in refining. We have seen great improvements in chemical and infrastructure.

And I think additionally, and I think it was Mike referred to it in his opening comments, we have some targeted vertical efforts, admittedly in some smaller verticals, like entertainment and restoration, where we have been very encouraged by what we have seen through those efforts.

And that is a strategy change that we're going to invest in and continue to implement as an organization. So I think that there is plenty of robust end markets both vertically and geographically that we feel comfortable with the level of capital being able to be deployed profitably.

The other thing I would only add to that is there is still some revamping of some automotive plants that are underway and will probably play out for the balance of this year into next year.

Okay, that's helpful. And then, can you give us an update on pump solutions? So what does performance look like there, and any kind of update on your ability to cross-sell and put that equipment into sectors other than oil and gas, as you have talked about?

Nick, pump is tracking fairly well for us in terms of coming in relative to what we had as a plan for the full year. In the first quarter, rental revenue was basically flat and that's where we had our mindset coming into the year. We are having pretty good success in looking at verticals outside of oil and gas and driving the cross-sell, as we've talked about for some time here. So, we're feeling good about pump relative to its -- the forecast that we had for the full year.

Yes, this is Mike. I would only add that in those numbers, upstream oil and gas is down about 70% on a year-over-year basis, with revenues that are relatively flat, so we have been diversifying our portfolio very nicely and we still see increases in opportunities in the cross-sell.

All right, thanks for taking my questions.

Jerry Revich, Goldman Sachs.

Michael, can you talk about as we get out within the next, call it, 3 to 4 months based on the performance that you folks are at it for utilization mid-April and applying normal seasonality, you would be pretty close to your utilization high by the third quarter, and I'm just wondering what is it that is making you folks a little bit shy about getting more aggressive on pricing as you hopefully get utilization to those levels. Is it a situation where you feel like you're that far ahead of the industry in terms of a utilization difference where you want to see the rest of the industry catch up or has it just been a tough environment? You want to make sure that demand is there before you start to push pricing. Can you just calibrate us on how you're thinking about that?

Sure, Jerry. I think it is important to recognize that -- obviously, we don't control pricing in the marketplace. We respond to a significant extent, but at higher levels of utilization, we have more room to select those rental transactions that are most appealing from rate and it gives people some confidence in being able to quote rates that are a little bit higher.

So, that dynamic we expect to play out as the year goes on and that's why we are encouraged by our ability to improve our rate realization. When it gets to absolute sequential increases will depend on things that are outside of our control, including the overall level of industry fleet and the level of utilization of that fleet in the industry. That's why we've spent so much time talking about how industry fleet is being absorbed.

You use the word confidence. It is a matter of confidence to say that you're going to start moving sequential rate higher several months down the road. Our experience recently has made us be mindful of getting too aggressive and far out ahead of where the market actually is, and so that's why we put the rate forecast out there that we did.

The key for us is to make sure that our management processes are focused on realizing as much rate as we can in the marketplace, and if we do that and if the industry absorbs more of the fleet that is out there and avoids bringing in a lot of excess fleet to compound the problem from here, then the rate we realize is going to be better than what we've got in that guidance range. But it's hard to put that down in black and white in a forecast as we sit right here.

Jerry, the only thing I would add to that is lessons learned last year has made us a better company. We spend -- we have a lot more rigor and controls around our fleet and our capital. And we have made significant improvements in our process. That gives me comfort, number one.

If you were to ask me, okay, hey, Mike, what were you thinking when you gave us guidance in January, given the numbers that we posted there? I would tell you that we go through and the team goes through a rigorous process to figure out what has to occur, what has to be true, on rates and utilizations. And as Bill mentioned, they're moving targets in one direction or one aspect or the other.

So in January, our plan called for being down 0.3. We actually finished 0.4, so up a 10th of 1 point, not bad. But it really was in February -- and February is always a swing month for us, and then it was really -- it leans on March, and then as March played out, that is when we -- as we have talked about, the hole got bigger, but the demand was picking up and we started seeing that demand. And you see that in the numbers that we've talked about.

So, it is a balancing act. We think we can improve on that. That's our goal, that's our job, and we will continue to focus on it as we go through the year and report out to the best of our ability how we see the world playing out.

I appreciate the color. And historically, RSC, before you acquired the business, had a higher proportion of its contracts expiring at around calendar year-end. Has that changed at all? And what are the implications for rate next year if those contracts reprice at lower rates exiting 2015 -- exiting 2016 than where we were exiting 2015?

Sure, Jerry, it is Matt. So most national account contracts will get renegotiated somewhere around year-end, either a month or so before or a month or so after. It depends on the length of the negotiations.

We are not seeing -- so we have renegotiated just about all of our national account agreements for this year already and we are not seeing really any significant different performance than the overall markets that they work in.

So the Canadian national accounts are maybe faring a little bit better than the overall market, but in the US it is -- our national accounts are behaving like the rest of our business, and that's usually -- that's the way it's been throughout the last few years, both pre- and post acquisition. So, we don't foresee any difference.

I appreciate it. Thanks, everyone.

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

Thanks, Operator. Before we end this call, I want to mention that Ted Grace has joined our team as head of investor relations. I think many of you know Ted from his work as an analyst covering the industrial and construction sectors. Ted and Fred will be working closely together in the coming months, so please feel free to reach out to them in Stamford anytime.

And then, going back to my opening comments, we have the specialty tour that is set up for May 5. We hope to see many of you there and please reach out to Fred as soon as possible, but I look forward to showcasing the capabilities of our specialty branches that we are very proud of. So, thank you for joining us and I hope to see you in Tampa. Thanks, bye.

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