聯合設備租賃 (URI) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the United Rentals Fourth Quarter and Full Year 2017 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, 2017, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.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.

Hello, everyone, and thanks for joining us in the call this afternoon. I want to start the dialogue today with one word: deliver. Yesterday, you saw us report a fourth quarter that more than delivered on expectations. It was a strong end to a record year. But to us, delivering is more about looking forward. It's about delivering again in the months ahead. So today, we'll connect the momentum we created over the past 12 months with our positive outlook for 2018.

So looking at the fourth quarter, the most prevalent tailwind was market demand. We leveraged this with 2 significant acquisitions and a flexible CapEx strategy. As a result, our revenue, growth in the quarter, outperformed the market, and that's on a pro forma basis, which assumes we owned our acquisitions from 2016 forward.

Not only did we grow rental revenue by 11.5% in the quarter, we improved all 3 underlying metrics. Volume was up 8.8% year-over-year, and rates improved 2%. Time utilization was a solid 70%, up 100 basis points for the quarter. This brought our full year time utilization to over 69%, which is a new record for us.

Now 3 months ago, I made the observation that the industry background on rates had become more constructive, and that was clear in December when every one of our regions reported positive year-over-year rates for the first time in years. And rates are a key driver of growth and returns, and they'll continue to be a major focus for us in 2018. And it's been a while since we've seen this window of opportunity, and I can promise you we won't rest.

And here's another point. Almost every metric in the fourth quarter performance compares favorably to the full year. Rental revenue for the year was up 7.6% versus 11.5% for the quarter. The quarter outpaced the year on volume, rates and utilization as well. So yes, we delivered on 2017. But more to the point, we're poised to build on that in 2018.

Now Bill will review our guidance, but I want to take a minute to comment on the free cash flow line. Like most companies, we're working through the estimated impacts of the U.S. tax reform. We anticipate a meaningful benefit to free cash flow. Our board is considering the potential uses of the extra cash, but no decisions have been made yet.

That being said, we have many options available, and we're always very disciplined about our capital allocations. Any decisions we make will be consistent with our focus on balancing growth and returns to maximize long-term value. (technical difficulty) premise of our 2018 guidance, a strong operating environment.

And I'll frame 2 questions that cover the basics. First, will our core business and our specialty segment continue to see solid demand in 2018? And second, will this demand be driven by a healthy rental cycle without relying on natural disasters, legislation or other events? In our opinion, the answer to both these questions is yes. Our core general rental business is performing extremely well. Commercial construction remains robust, and we're seeing continued strength in infrastructure, which has been a strategic focus of ours for more than a year. In fact, our revenue growth in this vertical has been outpacing market growth. Our infrastructure contracts run the gamut from airport renovations in New York and New Jersey to roads and bridges in Texas and a pipeline work in the central region. States and municipalities are finding the money to make critical infrastructure repairs. And if Washington comes up with funding for public works, that money will benefit future years.

In other verticals, a large number of energy-related projects has been a pleasant surprise. It's encouraging to see oil prices stabilize in the 60s, and corporate construction is going strong. This includes large corporate campuses and data centers. There's over $4 billion of data center construction scheduled for Virginia, DC area alone. And tax reform may encourage more corporate spending, possibly as early as 2019. More immediately, there are signs that plant turnarounds could ramp up later this year, and this should benefit -- would benefit our industrial business.

Internally, all of our regions submitted market outlooks that are bullish on 2018. Perhaps the most important is the customer sentiment is positive and on the rise. Almost 66% of our customers surveyed in December described our outlook as improving. This was the strongest reading in almost 4 years. And in fact, the quarter, as a whole, showed sizable gains in customer confidence, both sequentially and year-over-year. In Western Canada, which has been an economic outlier, our team reports that customer sentiment is positive for the first time in 3 years.

Turning to our specialty segment. Our Trench, Power and Pumps operations gave significant ground in the fourth quarter. As reported, segment rental revenue was up almost 39% year-over-year, primarily on same-store basis. The gross rental margin increased 230 basis points to 47.5% for the segment. The plan for this year is to open at least 18 specialty branches and continue to grow this very successful arm of our strategy, and this follows the 16 cold-starts that we opened last year.

So that's a backdrop for 2018, a number of promising dynamics underscored by broad-based demand in a healthy cycle. And this is consistent with virtually every key indicator for our industry. Given the level of customer activity, we've earmarked up to $1.95 billion of gross rental CapEx this year. And as we consistently demonstrated to our investors, we maintain a high standard for the use of capital. And we'll be keeping a close eye on market trends, and we're not -- we won't hesitate to adjust our CapEx up or down if necessary.

Another tailwind for us in 2018 will be the added capacity we brought onboard last year. Our acquisition of NES last April gave us greater density on the East Coast, Gulf and Midwest and further entrenched our brand as an aerial supplier. With Neff, we gained a strategic position in earthmoving with almost a 40% increase in dirt equipment. Our gen rent segment has been able to sell more effectively to verticals such as infrastructure and disaster recovery with its fleet. And in addition, we expanded our specialty offering with smaller acquisitions focused on power equipment and site services.

Our larger organization stands to benefit from every growth initiative we take going forward. For example, we're making significant investments in the future of customer service through innovation. Our digital technologies will enhance the way we gain and retain customers and manage change. One major development we have underway is a single digital platform that integrates all of our customer-facing technologies. This includes online ordering, account management, GPS analytics, used equipment sales, Total Control asset management and our United Academy training portal. We're also leveraging the data we harvest in areas like telematics, and it's one of the many ways we help our customers become more productive in their use of equipment.

And that is just as important is that you understand why we're making these investments. Today, more than ever, customer service is a moving target. The spaces we operate are constantly evolving. It's critical that we give customers multiple ways to work with us, and we must anticipate the needs for tomorrow's job sites. The investments we're making are intended to deliver tangible business benefits over the long term.

So as you can see, 2017 was one step forward after another. It was our busiest year, but it was also our safest year on record. Our total recordable incident rate for 2017 was just 0.78, making it the fourth year in a row our rate was below 1. And this speaks to the caliber of our people and our culture. You may have noticed that culture is getting a lot of attention lately in the business world. Lots of us talk about what it takes to achieve employee engagement and sustainability and other attributes of good corporate citizenship. Well, I'm proud to say that these are all part of our core values.

United Rentals has a long history as a purpose-driven company. Our employees are personally invested in our vision. Last quarter, I spoke about our United Compassion Fund, which is the way our employees help each other. We also support the National Association of Women in Construction, and we've been advocating for military veterans for over a decade, lending our support to numerous causes. And just recently, we were ranked #7 in the nation as a top military-friendly employer across all industries.

Years ago when we made -- when we first made culture a priority, we decided that the best way to create sustainable value was to bring together the interest of our investors, our customers and our employees as one cohesive company. And as a result, all stakeholders are well served by our success. That's how we delivered a record year in 2017. Now it's our time to do it again.

So with that, I'll ask Bill to cover the quarter and recap the year, and then we'll take your questions. So over to you, Bill.

Thanks, Mike, and good afternoon to everybody. We've got a lot of topics to go over in this quarter, so I may thin out some of the normal commentary we do. But please, if I skip over anything of interest, raise it in Q&A.

Michael gave a lot of the pro formas for the full year performance, so most of my comments will be focused on as-reported data. I'll call out the pro formas where I think it adds to the understanding.

I'll start with rental revenue as always. $1.646 billion was the rental revenue in the quarter. That's up 27% or $348 million versus last year, the breakdown starting with ancillary and re-rent. Those 2 combined were up $51 million year-over-year. Ancillary was the big driver, and that reflected primarily the volume of delivery, fuel and Rental Protection Program revenue that we had from the addition of NES and Neff. Certainly, we continue to drive delivery realization as well in the base business. Those were the main drivers, though, of that $51 million increase between those 2 items.

OER was the remainder. Within OER, volume was up $322 million, reflecting the nearly 29% growth in OEC on rent that Mike called out. Our rate was a $12 million contributor as well year-over-year, as positive rate of 1.1% in the quarter on as-reported basis. The pro forma rate realization in the quarter is 2%, and that certainly is encouraging as we go into 2018. Replacement CapEx inflation. We called $17 million, reflecting our normal inflation. And mix and other was a headwind of about $20 million in the quarter as well. So the net of all of those added together gives you the $348 million change on rental revenue in the quarter.

Quickly moving to used equipment sales. Another good quarter for us in used equipment with $172 million in proceeds. That's up $37 million versus last year, a 27% increase. The adjusted gross margin on that revenue was at 57.6%, and that's an 8 percentage point improvement over the prior year. Key drivers there, we talked in the past about improving the realization against fair market value, and our used equipment sales is one of the Project XL initiatives. So that continued to contribute in the current quarter, as well, though, that the overall market was strong. Pricing in the market was strong with pricing as indicated by our proceeds as a percent of OEC coming in at 53.6%. That's up 20 basis points over last year. And I'll remind you that's on very old units that we're selling. We sold units at an average age of about 91 months in the quarter.

To give you another view of pricing in our used experience, if you just look at our retail sales on used equipment and compare like-for-like units that sold this year versus last year, the pricing on like-for-like units in our retail channel was up about 5% over last year. So again, a good market for used equipment pricing. And the demand for volume is still robust so we're able to sell everything that we need to sell.

Moving to adjusted EBITDA, $947 million in the quarter. That was up $198 million over last year or about a 26% increase. And the margin on adjusted EBITDA in the quarter was 49.3%. That improved by about 10 point -- 10 basis points over last year. The components in the bridge of that $198 million increase: volume was $216 million contributor on the growth that we talked about; rental rates at EBITDA contributed about $12 million of year-over-year improvement; the ancillary performance I mentioned contributed about $23 million of EBITDA; and the used sales performance was another $33 million of positive year-over-year contribution.

The headwinds. Fleet inflation, we'll call that $13 million of headwind versus last year, our usual merit increase of about $6 million. And then the bonus accrual across all of the incentive comp programs cost us about $26 million versus last year. Mix and other accounts for the other $41 million of headwind. And really, that mix and other number is a little bigger than normal driven by the fact that we added Neff in the quarter, right. Neff revenue came in fully loaded with all of the cost of Neff as opposed to incremental costs for the other increases in revenue. And so put it all together and it explains the $198 million increase in adjusted EBITDA for the quarter.

The flow-through on adjusted EBITDA was 49.6% in the quarter. I'll remind you that, that experience, the headwind of incentive comp adjustment, that $26 million I called out previously, if you take that out, the flow-through was about 56% for the quarter.

Just to touch on Neff a little bit more. We estimate that Neff total revenues in the quarter came in at about $115 million, of which about $96 million was rental revenue in the quarter. The EBITDA contribution for Neff, we're calling $62 million, and that includes the impact of about $3 million in synergies that we realized in the fourth quarter from the Neff acquisition. In fact, on the synergy front of that $3 million, the bulk of it came late in the quarter in December. If you annualize what we experienced in synergies -- these are pure cost synergies, mind you. If you annualize that December result, we're at a run rate savings of about $25 million of Neff-related synergies.

So we're well on our way toward the $35 million cost synergy that we called out when we did the Neff acquisition, and we certainly expect to deliver that before the end of year 2 as we called out initially. We're also on track to deliver the procurement savings, and it's still early days on the -- all of the revenue synergies that we expect. But we certainly haven't seen anything that causes us to believe we won't be able to deliver on all of the synergy targets when we acquired Neff.

Moving quickly to adjusted EPS. You saw the numbers in the press release, $11.37 for the quarter. I'll remind you that, that includes the benefit of tax reform. We had a positive tax adjustment. I'll touch on it in a minute. But if you take out that tax reform-aided benefit, which was about $8.03 in the quarter, you end up with $3.34 on an adjusted after-tax reform basis. That's up 20% versus last year, which was $2.67. If you do the same adjustment for the full year, you end with an adjusted EPS after the tax benefit of about $10.59, and that's up just over 18% over the prior year. So even taking out the impact of tax reform, it's very clear that our EPS performance is nicely higher.

Free cash flow in the quarter, just briefly on that, $983 million for the year. That includes, however, $76 million worth of payments that we made for merger-related and restructuring items. If you take that $76 million out, obviously that leaves $907 million, which is still a very robust free cash flow performance in this part of the cycle.

So we're very pleased about the free cash flow that we generated in '17 and look forward to an even more robust free cash flow performance in '18.

I'll skip a lot of the discussion I usually go through on the debt activity in the interest of time. But certainly, we discussed the actions in our debt portfolio in the press release: redemptions, upsizing ABL, upsizing AR facility -- all of that in the quarter made for a very active quarter. But the net effect was that we ended the quarter with net debt of $9.1 billion. That's up about $1.6 billion from

last year. But obviously, we added the debt to finance the acquisitions of NES and Neff over that period.

Our liquidity at year-end was very strong. $1.7 billion of total liquidity made up of about $1.3 billion in ABL capacity and the remainder in cash within the business.

Real briefly on the share repurchase program. You saw that we reinitiated our share repurchase activity in Q4. We bought about $28 million worth of shares. That's a little over 167,000 shares in the quarter and certainly left us with about $345 million to repurchase under our existing repurchase authorization at the end of the year. Since the end of the year, I'll note that we have also bought another $45 million or so during the month of January to date. So as we sit today, there's about $300 million left on the existing program. And as we've said before, we expect to execute the remainder of that program during the course of 2018.

On ROIC, just real briefly. We finished the year with ROIC at 8.8%. That's a 50 basis point improvement over the prior year. And just to give you a sense of the impact of tax reform on ROIC, it will be significant. So if the 21% federal tax rate had been in effect for all of 2017, that 8.8% ROIC would have come out at 10.7% as calculated, so obviously a very significant impact. Based on the way that we calculate ROIC, looking back over the prior 4 quarters, as we go forward through 2018, the effect of that tax reform change will gradually increase our ROIC as reported. So in the quarters coming, we'll be sure to call out both the actual calculation but also the calculation assuming that the 21% federal rate had been in effect for the full period.

Real briefly on tax reform. I'm going to try not to get too deep into this one but just want to make sure that several things are clear. First, in the impact on 2017, there was a significant tax benefit that appeared in our tax expense line. That benefit reflected 2 things primarily. One is revaluing our deferred tax liability for the new lower tax rate. That reval adjustment was about $746 million. Separately, we also recognized $57 million of additional transition tax to cover the transition payment associated with our foreign earnings. The net of those 2 was what you saw flowing through our fourth quarter tax line. If you take those out of our fourth quarter tax expense, the full year effective tax rate was right around 38%, which is our normal effective tax rate.

As we look forward to 2018, the impact on our cash taxes in 2018 will be significant. We estimate it will be at least $250 million. Around half of that benefit will be from the lower tax rate. The remainder will be the benefit of 100% expensing of CapEx netted against the loss of like-kind exchange deferral, which was eliminated under the new tax law. And I'll remind you, that $250 million is $250 million reduction from what we otherwise would have paid under the old tax law.

Just to make it simple and straightforward, we expect to pay about $150 million of cash taxes in calendar 2018. And we expect our effective tax rate for the year to be around 25%. So hopefully that helps in being a little clearer about the impact of taxes, both in '17 and '18.

Real briefly on Project XL. The statement there is that we're making very good progress on all the Project XL initiatives. We feel very good about the $200 million gross number run rate that we called out as a target for the end of 2018. In fact, we feel so good that at some point we may end up revising that target upward to reflect the progress that we've made so far. I will remember everybody that that's -- remind everybody that's a gross number. It's not the net incremental number that we expect. We certainly continue to evaluate how we might call out a net incremental value for the initiatives in Project XL.

I will also point to the investor deck where we added another example of a Project XL initiative and how we think about the value that it's contributing. This one focused on our sales optimization effort that involves assigning more single point of responsibility for key accounts.

Finally, guidance. You saw the guidance that we issued in the press release. I won't go through all the numbers, but maybe it would be helpful to talk about the adjusted EBITDA guidance and give you a framework for thinking about the range that we put out.

If you look at the -- let's use the midpoint of that adjusted EBITDA guidance, so $3.675 billion, and look at the components that lead you to that midpoint from our 2017 actual experience. We call it this way. The addition of NES and Neff for the periods that we didn't own last year would add about $180 million worth of EBITDA just from the businesses as we bought them last year. So assuming no growth, they would add about $180 million in 2018. The other acquisitions would add another roughly $10 million or so to get us to a new baseline for the acquired businesses.

If on top of that, you added synergies for NES and Neff, which combined are about $50 million, call it $20 million for NES, $30 million for Neff, you get another $50 million on top. Our bonus reset will be a tailwind for us in 2018. It will be about $30 million less expense than we had in '17, so add a $30 million on top of that. Our used equipment sales will go up a little bit in 2018. So in our net rental CapEx guidance, we called out an impact of about $700 million -- excuse me, $600 million of used equipment proceeds in 2018. If you take a 50% margin applied to that, just as a rough estimate, that adds another $25 million year-over-year.

And for the remainder, if you just assumed a simple 6% rental revenue growth at a 60% flow-through, all of those assumptions take you right to the midpoint of our guidance range. Whether we do 6% rental revenue growth or more or less, we'll leave to your own imagination as analysts. But we wanted to frame the guidance range that we gave for adjusted EBITDA in a way that lets you see the broad impacts of some of the specific items and gets you in the neighborhood of what we think the year will look like.

Finally, just a comment on free cash flow and capital allocation. There's a lot of interest in what are we going to do with all this cash flow, right. We're guiding to $1.3 billion, $1.4 billion of free cash flow as the range for 2018. I think it's fair to say that as we look at the possible uses of that cash flow, our mindset for how to make decisions about capital allocations have not changed.

We still want to make sure, first and foremost, that the leverage of our business is appropriate for where we are in the cycle. We believe the answer to that is yes. Then we want to make sure that we're making the right decision about the amount of organic growth to put in the business through CapEx is appropriate. We believe the range that we've given you for CapEx is very appropriate in the market environment we expect. M&A is always part of our thinking about uses for cash flow, and we certainly will be ready to do acquisitions that make sense, but they need to make sense. We've been very disciplined about that.

And finally, share repurchase. We've talked about completing the existing program, $300 million remaining as we sit today. Whether and how much more we might do beyond that is the subject of a discussion that we'll continue to have with the board as we go forward throughout the course of the year.

If we deliver the guidance that we talked about here, we should finish the year with our leverage ratio of something like 2.2x at the end of the year. That would be very low versus the range that we've historically talked about at 2.5x to 3.5x. So we'll have a very active discussion throughout the year about where we allocate the use of this cash flow and what level of leverage we think is appropriate for where we are in the cycle.

Like I said, a lot of topics, so let me stop there. But if there's anything that I missed, please raise it in Q&A.

So operator, can we open the call for Q&A?

(Operator Instructions) Our first question comes from the line of Ross Gilardi.

Just want to kick off with a free cash question just, Bill, as you were going through those details. But look, your guidance right now, your EBITDA to free cash flow conversion looks like it's 35% to 40%, at least for 2018. But looking further out, is there any reason that you can't hold that level of conversion for the next several years? Because if EBITDA continues to grow, you're presumably kicking off $1.5 billion per year on consensus numbers for the foreseeable future. So just wanted to get your reaction to that thought process. Is there any reason why that cash conversion should really change materially in the next couple of years?

So Ross, I'd say that there is nothing really -- other than the impact of tax reform, nothing else unusual driving our free cash realization. So I think the story might be told by the impact of tax reform. Remember that the 100% depreciation under tax reform goes away after 5 years. So at some point, that benefit is going to be reduced. Remember also that they placed caps on the amount -- the percentage of EBITDA that you need to be below in order to still deduct interest expense. We are below that cap currently, but that cap changes from a percent of EBITDA to a percent of EBIT at some point in the next few years. And depending on where we are in our profitability and our leverage, it may have an impact as well. But those are the things, as I think over the future years, the unusual things that might impact the cash conversion outside of just our normal operating performance.

Got it. And then just on the supply-demand balance for rental equipment. If the market was excessively tight after the hurricanes, do you feel like we've come back into balance as you pulled forward some CapEx? And clearly, it's a seasonally softer time of the year. But do you feel like price momentum has got to subside in the first half of '18, more when you get into the spring months as you pull forward some of your CapEx?

Sure, Ross. This is Matt. So I wouldn't say that there has been extraordinary tightness due to the hurricanes. Maybe in a few markets. But we felt all year demand was -- the combination of demand and the disciplined supply of the industry really played into the dynamic of great opportunity and better time utilization. And we see that continuing, and we're forecasting that to continue throughout 2018.

As far as -- we may be a little bit lighter on the cadence of our 2018 CapEx growth, so we might bring in a little bit less than normal in Q1, just because we brought more in Q4 than we usually would. But other than that, no real impact on our full year thoughts about CapEx. It will get back to more normal cadence.

Our next question comes from Rob Wertheimer.

So I have 2 questions, if I may. The first is just on dirt as a relative attractiveness. I mean, there's a lot of signs that with used equipment, et cetera, that dirt is maybe tight. I don't know if you think there's any structural improvement in that. And obviously, you've mixed the fleet that direction with the acquisition.

And then second, I'll just ask them both, and maybe you can just respond as you choose. I love that Total Control chart that you've got in the slide deck. I mean, can you give anecdotes around this? It would appear that you're steadily, steadily growing that base. I don't know if you're losing anybody who's installed it, or if there's really good lock-in on it; and what people are seeing in terms of benefits and savings, I guess as well as you guys.

Sure, Rob. This is Matt. On the -- as far as -- great observation on the Total Control value. We feel very strongly about it, and fortunately, the customer response seems to feel strong as well. So that is organic growth, and it's -- as you could see a couple of points higher than what our overall growth is. And I think that's important because although it's not a huge percentage of our customer base, they're usually large, important strategic customers. And we go through that extra effort to add value to them, and they do outpace our overall growth.

As far as the dirt attractiveness, obviously we like the impact of the Neff acquisition, not just the talent we brought in or the fleet mix, but I think the biggest opportunity are the customers that we brought with that. So adding a larger mix of dirt gives us an opportunity to serve maybe a broader customer base than we had previously. The net-net impact in dirt fleet, it's -- it went from 12% of our overall fleet profile last year to 14% this year. And although that is an impact, the bigger impact is the access to those customer bases, especially in key verticals like infrastructure, which we're very bullish on.

That's great. And so can we expect you to continue to invest a little bit in -- following along with the dirt side?

Absolutely, especially as the demand continues. And we already were, to be clear, set aside from the Neff acquisition. The Neff acquisition just gave us a real boost, specifically in the larger end of the dirt.

Our next question comes from Joe O'Dea.

First question. Just -- you referenced in the industrial side of the business. Could you talk about what portion of your revenues are really made up of the industrial side? And then what you've seen over the past couple of years, whether that's more stabilization or whether that's kind of moving off of a bottom; and just trying to appreciate what kind of a recovery we can see there.

Joe, it's Bill. So just the aggregate industrial, I'll have to pull a number together. But the key areas for us as we think about growth going forward, chemical processing certainly is an attractive growth area for us. Manufacturing might be a little slower this year. Metals and mining and minerals, we think could be a nice growth area for us as we go forward as well. And then power, pulp, paper and wood products will probably contribute as we go forward as well.

Oil and gas, if you want to call that industrial, has been a growth area for us, right. Upstream activity had a nice growth in 2017 given the impact of oil pricing and drilling activity. The upstream part of that will be a growth area for us. Midstream and downstream will depend on, quite honestly, on the timing of some of the turnarounds in the refinery complex, right. And that timing is always a little bit of a wild card for us. But certainly, we have reason to be somewhat optimistic that, that will be a growth area for us as well. So hopefully, that's useful.

Yes. I would just add, and additionally, the capital spending forecast for what is the largest part of our industrial business is petrochem are both positive for 2018 and '19. So we're encouraged about that as well.

Those are helpful details. And then Michael, you're occasionally asked about interest in expanding internationally. I think you usually address that as something down the road but certainly don't eliminate the possibility. And when you think about the kind of cash that you're looking at generating over the next few years, does that, in any way, influence how you think about the timing of potentially expanding some of your growth overseas?

The fact that we've had the capital available to us, not only coming into this year in 2018, but we've had it for quite some time, it really, to me, is going to be predicated on our customers, the customer demand and wanting us to go beyond. We talked about Total Control. There are a lot of Fortune 500 companies that we are engaged with and using our digital front. And that may be the impetus to get us beyond North America, but there's no foot race. And as Bill mentioned about acquisitions, they will be what they will be, and, it will be under the same scrutiny that we've always gone through. But still plenty of opportunity in North America, but we never say never. And when the time is right or when the customers are prepared, we'll be prepared to go with them.

Your next question comes from David Raso.

Just more toward Bill than anybody. I'm just trying to think about the commitment you've usually had to 2.5 to 3.5 leverage. I mean, Bill, you've been there for 10 years. And every single year you've been there, the company has never ended the year below 2.5 net debt to EBITDA. And if you look at -- logical thought of where your EBITDA is in '19, I mean, your net debt to EBITDA is going to be down to like 1.8. I mean, you're literally talking about $2.5 billion to $3 billion to put to work.

Are we still committed to where I shouldn't expect to not end below 2.5 net debt to EBITDA either of those 2 years? I mean, at this level, you could, the next 24 months, buy back over 15% of the stock. I'm just trying to understand, are we still committed to something that you've always done? You've never ended the year since they hired you in '08 below 2.5 net debt to EBITDA.

Yes, David. I think I don't -- I can't get too far out on this discussion because, honestly, I can't get that far out ahead of our board. But I think we've made a compelling case in the past that 2.5, 3.5 is a good range. We have always said that we're not afraid to go a little above that for the right deal or a little below that, depending on where we are in the cycle. So it's not like it's a religiously set number to say 2.5 is the absolute lowest.

That said, if it were Bill Plummer's world, 1.8 is too low, right. We've selected that 2.5 to 3.5 range because it represents our view of a good balance between efficiency of the capital structure and management of the risk against the cycle, right. Getting much, much below 2.5 starts to become more inefficient, and you don't get much in terms of protection against the downturn. So that would be the argument I would make to the board, but the board has their perspective on this issue, right.

And so going through that and discussing it and coming together on a point of view is what the process is that we're going to through to decide where we end up in terms of the leverage. And it's going to be livened up by the fact that there may be deals that come along or the market strength may indicate that we need to spend more on capital as we go along. So I'd say stay tuned is the way to think about it. But certainly, we're very pleased to be in a position where we can think about all these things at very large scale.

So as you said in the Bill Plummer world, this Slide 20, 2.5 to 3.5 is still the way to think about the company, and you're not going to deviate off of that for too long. And you've not heard anything from the board to suggest they want to delever the company beyond this framework. Is that a fair assessment for now?

I think the fair assessment is to say we don't live in Bill Plummer world, so at least not Bill Plummer world alone. So I'd just point you to stay tuned, David, and we'll talk about it as we develop that thought process.

Our next question comes from the line of Seth Weber.

Our next question comes from the line of Scott Schneeberger.

(technical difficulty)

Can you guys hear me?

Yes.

Yes.

Great. Good, thanks. The -- Mike, I was curious. In your comments about plant turnarounds later this year, it's kind of something that people have been waiting for. I'm just curious if you could delve into that a little bit more? And is that something that you're expecting and perhaps in guidance? Or is that something that would be upside?

Well, Scott, there's a lot of positive industrial macro indicators that are out there, number one. And I'm not going to list them all because I think you know who they all are. But they are uniformly positive, number one.

Number two, and just looking at some of the other resources, IRR, they're looking at the value of maintenance projects and capital projects as increasing. So we take those along with what we get back from the regions and our customers of what they have on their books and what they are seeing. So we take all that to frame up our comments.

Okay. And then curious on a progress report on online rental system. Just it's been, gosh, a couple of years now and wondering how far evolved is that and where that's going to go.

Sure, Scott. As far as where it is today, we feel very confident and -- about the capabilities we've built. The customer adoption, we know, is going to be a longer cycle, so it's not a big piece of our revenue right now. And it's a pretty good mix of new customers versus existing customers. What we truly believe and why we've invested in this area is this is going to be the price of entry in the future. And not just for new customers, but we think a lot of our existing customers will embrace more and more technology. So we view this as a must-have long term, which is why we made the investment. And we're seeing good early signs of the people that are adopting it. It's still a small percentage of our business.

Our next question comes from the line of Jerry Reverich (sic) [Jerry Revich].

Pricing was stronger than normal seasonality for you folks in the fourth quarter. I'm wondering if you can talk about how broad-based was the pricing strength versus normal seasonality? And can you give us some context in terms of feedback you're hearing from the marketplace into January?

Sure, Jerry. This is Matt. You can look to Slide 7. We actually give you a 3-year sequential pricing grid there, if you want to get into the detail later. But you're correct, it was better than 2016. We were very encouraged by that. I think it plays off of the demand that we've been discussing on the call today and really throughout the calendar year of '17, and we expect that to continue. If you wanted the layover or carryover, so -- and we're going to talk about rate pro forma because we think that's the important way to think about it, and it's the way we manage internally -- we've got a 1.65% carryover going into 2018.

Pro forma.

Pro forma. If you overlay the exact experience of sequential rate performance that we had in 2017 over that, that would get you to about a 2% year-over-year rate improvement pro forma for '18. So we feel that's a good anchoring point. All I would say is that we haven't had a Q4 in a while where every single region had positive sequential performance, and we were very pleased with that. Even Canada got to almost flat year-over-year in Q4, which is -- it was great for that team that's been fighting headwinds for a few years now.

And Matt, it sounds like that momentum is continuing in the early part of the year based on your comments just now and earlier in the call. Is that a fair assessment?

I would say it's as projected. We're not giving in-quarter guidance, but Q1 always has -- it will be your toughest sequential, but it's the year-over-year that we're focused on and trying to maintain that momentum. And that's embedded in our conversations. Stay tuned for April where you'll get the exact update.

Okay. And on your digital platform, can you talk about what kind of recurring business you're getting out of it? So is it truly transactional one-off new clients signing up? Or what do the usage statistics look like for you on that? Presumably with your footprint, you folks are better positioned than most on that platform, and I'm wondering if you're seeing the level of statistics on the recurring business that are supportive? Or is it mostly transactional?

So as far as recurring, as I had stated to Scott, it's about 50-50 existing account customers and new customers joining in. And they, over time, convert to account customers. But it is very broad geographically, product mix and even duration of rental. I would -- it's certainly a higher percentage of transactional than our overall base business because we have such a large base of key account business, but I'm very surprised by how much recurring business and long-term rentals we're getting through that as a percentage as well.

Jerry, the only thing I would add to that is the digital era is here, and it's going to grow over time. If you take a look at the Total Control, the order entry for our customers and even internally for -- whether it be our sales force, the digital component is going to grow. What we've been doing is we've put everything under one unified platform, so everything comes together in a more customer-friendly environment.

So it's not only like I said in my opening comments, it's not just the digital. It's if they want used equipment, if they want to go in to do safety training, rent equipment, find information on their fleet through telematics. This is all coming together under one uniform platform that we have built and we're rolling out. There'll be more to come, and we'll update as we make progress. But it was a -- it's an investment that we're making for the future.

Our next question comes from the line of Steven Fisher.

Can you just talk a little bit more about what's driving the shift to positive pricing year-over-year? How much of that is mix, including the oil activity recovery versus just general tightness broadly across the market versus some of the analytic approaches that you've been doing or anything else?

So Steve, it has been very broad. It is not any one segment, any one geography, any one vertical. Although we have had oil and gas growth, to put in perspective, it's still less than 5%. The upstream is still less than 5% of our overall revenue. And I don't think -- it certainly hasn't yet, and I don't truly think that, that will ever get to the rate levels that it had previously, right. We're not going to have that oil rush in upstream again. I think everybody understands, including the operators, that, that wasn't a healthy way to operate, and I don't see that recurring. So it's really been lifted by just broad-based demand. And as I mentioned, every region had -- in the company had sequential positive rates in Q4.

Yes; and this is Mike. I would say that it's also -- the industry overall is reacting positively. So I think that -- I've mentioned in several calls in the past that our industry is becoming more sophisticated and smarter and knows about returns, and so that's a good sign. And I think you'll probably hear others as well talk about it.

Agree.

That's helpful. And then if I could just follow up on the question that Joe O'Dea asked earlier. If you could talk a little bit more about the process industry activity in the Gulf Coast, specifically in 2017 versus 2016, how did that look on a year-over-year basis for rental? And then I know you mentioned there's a number of petrochemical projects that you see in the works out there. What have you embedded in your guidance for the timing of all that happening, and Gulf Coast '18 versus '17?

So specifically in the Gulf Coast, I would call the first half of '17 was a little bit tougher than the back half. We actually saw improvement in Q4 in petrochem. I think, going forward, more importantly, the capital spending forecasts are up in both, higher in chemical. I mean, we're talking about plus 30% capital project spending in chemical and almost double digit in refining. And those are really the 2 big buckets of business that we focus on in the Gulf Coast industrial business. So I think it's -- we can call it flattish to slightly up overall in '17 over '16; but encouraged, and planning to do better in '18.

Our next question comes from the line of Rob Wertheimer.

I'm sorry, I just snuck in while everybody was having trouble with the phones. I just want to ask a philosophical question on investment and technology. I mean, do you view this as something that you keep spending as a constant percentage of sales as you sit -- I mean, your scale is obviously growing a lot with the acquisitions and the growth you're doing. And so you keep spending and see a widening of the gap versus folks? Or do you accelerate it maybe because it just enhances the sustainable margin/lock-in advantage you have versus folks? Or is there eventual scale on the technology spend that you've been ramping up over the past 2 years or 3 years?

Well, I think that will be a combination of all of the above. For an example, the investment we made in telematics and now educating our -- the end user on the benefits of what they can get out of it and making that information for them available in a format that they can get and manipulate as need be. That would be one.

With regards to companies trying to find ways to control their cost and drive better time utilization or efficiencies in their plants or on their job sites, that's another form by which we do.

And then we talk about safety or United Academy of making sure that we're connecting, not only equipment, but people as well. That, I think, is going to pay dividends for us as a company, entangling our customers in a way that -- I don't know what my competitors are doing, but what we know is that the digital communication is important. It's real time. It's giving them data. It requires them just to log on. As far as I know, we're one of the few, if not the only, that you can order, deliver, pay, return and never talk to anybody. And for some people in programming their jobs, that's very attractive. Not everyone has a staff.

So we're trying to touch as broad an audience as we can, and we're specializing in areas like we talked about Total Control. But there are benefits that we think that will yield us a lot more in the longer term, and we will continue to invest. The board is very supportive of thinking about digital and how we can think differently and helping our customers become more productive. That's what we do for a living. That's our job.

Our next question comes from the line of Steven Ramsey.

I guess just thinking about your expansion plans for specialty for the next year and maybe even beyond, is the competition in this segment getting intense enough as more rental companies try to execute growth here? Is the competition making greenfield expansion or bolt-on expansion harder or less attractive?

This is Mike. There's always competition. I think it makes us smarter, makes us more customer-centric, makes us have to think about what we bring to a value proposition. I never assume anything and so we have to make sure that we're listening to the customer and making sure we're meeting that demand. Are some of our competitors doing some of the similar things that we're doing? Sure. But it's up to us to sting out how we can make a smarter or better mousetrap to capture that customer. We're broad. We have a broad customer reach. And how we can leverage that customer through our cross-sell, I think, is something that we are doing exceptionally well, and we'll continue to leverage on that.

I would only add, Steve, that it certainly remains attractive and a prioritized focus for us in investment. We're going to do another 18 cold-starts in specialty in 2018, and that's on top of the 16 that we did this past year. So it still remains very attractive. I want to make sure that's clear.

If the competition is getting stronger, we're getting better because our growth rates are still pretty robust.

Yes.

At this time, I'd like to turn the call back over to management for any closing remarks.

Thanks, operator. I want to thank everyone for joining us today. As you can see, we're excited about 2018. We expect to report solid progress in the coming quarters. In the meantime, as you always -- you can always call Ted Grace, that's our head of IR, with any questions you may have. And I urge you also to go on the website and download or look at our investor presentations that we have online.

So that wraps it up for today. So operator, you can please end the call. Thank you.

Certainly. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.