聯合設備租賃 (URI) 2018 Q1 法說會逐字稿

Good morning, and welcome to the United Rentals First Quarter 2018 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 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.

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

So before I begin, I want to mention that my prepared remarks this morning will be followed by comments from Matt. Most of you know Matt is our Chief Operating Officer and a 20-year veteran of our company. Last month, he assumed the additional role of President, which means he's even more instrumental in working with me and Bill to guide our company's growth. Matt will speak about our markets and operations, and then Bill will go over the numbers.

So I'll start the dialogue by saying that I'm pleased with the results we reported yesterday. Both gen rents and specialty segments performed well. There were a number of positive indicators in the quarter, including a 6.8% increase in volume year-over-year and a 2.7% improvement in rental rates. These numbers are pro forma for last year's acquisitions.

Now given the importance of rates in our business, it is good to see the improvement sustained throughout the quarter. Rates remain a key indicator of the overall health of the marketplace and our industry's ability to generate attractive returns.

Time utilization came in at 65.2%, down 20 basis points pro forma. That's the second highest time utilization we have achieved in any first quarter in our history. Now there were some obstacles in the quarter, but we dealt with those effectively, and once again, our rental revenue growth outpaced the market.

And then there's cash generation. As you saw yesterday, our free cash flow for the quarter was $526 million after gross CapEx of $313 million. Now given the way the year's unfolding, we feel very comfortable with our guidance for free cash flow in the range of $1.3 billion to $1.4 billion. And we've also reinformed the rest of our full year outlook.

So let's talk about the use of cash. Over the last 5 years, our business has generated $4 billion of cumulative free cash flow, some of that in markets that weren't as robust as the current year. In 2018, the cycle is in our favor with an added tax -- a benefit from tax reform. And as we continue to explore potential opportunities to redeploy this capital, you can expect us to make the kind of thoughtful, diligent and balanced decisions to be accretive to our shareholder value as we have in the past.

So yesterday, we announced that our board has authorized a program for another $1.25 billion of share repurchases. This will initiate when we wrap up the current program, which we would expect to finish out mid-year. And you may recall that the current program was authorized in November of 2015 for $1 billion. We paused for 13 months while we evaluated M&A and then reactivated it. We have about $168 million left to go, and once that ends, a follow-on program will begin. Our goal is to complete the $1.25 billion of new repurchases by the end of 2019. And we have an excellent track record with these programs. Since 2012, we've returned almost $2.3 billion of cash through repurchases as a means of maximizing shareholder value. And now over the course of 2018 and '19, we're planning to purchase what equates to over 10% of our current market cap.

Now to be clear, share repurchase is just one lever in a complex framework of decisions we make to balance growth and returns while preserving a sound capital structure. We remain open to all avenues that are strategically compelling and create superior value, including further M&A.

Now before I hand it off to Matt, I want to return to something that's always been important to me personally. That is our culture as a safety leader. Safety is the ultimate metric of operational excellence in our business. It aligns the interest of our employees, our customers and our investors, so everybody wins.

We just delivered the 15th straight quarter of a reportable rate at or below 1, and that's a remarkable achievement on the part of our team. And in the month of March, 99% of our locations had 0 reportable incidents. Now this kind of culture is fundamental to the success of our business and particularly when things get busy, like they're doing right now. And when we're entering our peak months in a very strong demand environment, our performance is tracking to plan, and virtually all key leading indicators are positive.

Now the intersection of these dynamics creates a significant opportunity for United Rentals. Our guidance reflects our belief that 2018 will be another very good year for us.

And now I'll ask Matt to talk about the operations and share how we plan to capitalize on the months ahead. So over to you, Matt.

Thanks, Mike, and good morning.

I thought I'd start by commenting on the integration of NES and Neff. And both are essentially complete, and we've realized the target run rate and synergies in each case. Neff still has a few operational ends to tie up, like centralized dispatch, which is currently in rollout. All other programs have been adopted into regular operations. So from this point forward, there's no distinction in how we talk about the company. It's all one United Rentals.

Now here's where we stand today with the first quarter behind us. We're a much larger and better-equipped customer service network than we were 12 months ago, and that's exciting for the field. It's an opportunity for United Rentals to get a bigger piece of the pie, and we did just that with a 25% year-over-year increase in rent revenue in the first quarter.

And if we pull back the curtain on our results, the main drivers behind our growth fall into 4 buckets. One is the widespread strength in nonresidential construction, particularly in the commercial and infrastructure sectors. Second is the rebound in industrial activity, including the improvement of oil and gas. Third is our Specialty segment, which continues to deliver impressive results. Fourth is our scale, and I'll talk a little more about scale in a few minutes.

So starting with the nonresidential construction. The leading U.S. indicators have been almost universally positive for a while now, and we're seeing this echoed in our monthly surveys where customer confidence continues to trend up. The most active geographies are the ones with the most diverse project mix. Along the Eastern Seaboard and the Gulf states are good examples. They both had double-digit increase in rent revenue in the quarter. And the wins came from a broad range of projects, including infrastructure, power, retail and commercial work.

Now looking at the industrial sector. We're encouraged by the fact that we're seeing widespread activity across multiple verticals, and we're tracking a number of large projects slated to start up in the back half of the year that will carry over into 2019. Also, the oil and gas sector continues to be a pleasant surprise. The rise in oil prices has encouraged drilling and production companies to bring rigs back online, and this adds to the broader industrial demand for our equipment.

Turning to our Specialty segment. Rent revenue from our Trench, Power and Pump operations was up more than 36% year-over-year, and specialty segment gross margin also improved, up 170 basis points. And we're currently planning to open 18 specialty cold-starts this year, and we'll increase that number if this pace continues.

There are some of the market dynamics, and as we said before, we also have internal levers for growth, which brings me to the final bucket I mentioned, scale. Now scale provides benefits for us under any set of conditions, including the growth environment that we're in today. And I can tell you firsthand that equipment availability is proving to be a challenge for some rental companies. Customers worry about being able to find the equipment they need to keep their projects on track, and we're very fortunate to be able to give them that assurance. And we entered 2018 with a much larger fleet and footprint. Our fleet stands at almost $11.4 billion, and we have about 15,000 employees serving our customers. Additionally, our digital capabilities are reaching more customers every day. All of this scale is beneficial, but it's our ability to leverage our scale that gives our customers the assurance I mentioned. Now one of the most important ways we leverage our scale is by cross-selling. When you see the rapid growth of our specialty segment, for example, it's not just because each branch operates strongly independently. There's a significant benefit that comes from giving our customers access to our entire network of offerings. Cross-selling is as much about customer service as it is about revenue. The customers that we added from NES and Neff are happy to keep more of their business with United Rentals, and all of our customers in the combined base are benefiting from a larger and broader fleet. And as a result, in the first quarter, our cross-selling, company-wide rent revenue was up 29% year-over-year, and we still have more to deliver.

Now before I wrap up, I'd like to make a quick comment on Canada. Back in January, we described Canada as an outlier that showed signs of turning around. And I'm pleased to report that our first quarter rent revenue in Canada was up 11%, with rates positive year-over-year and signs of a continued macro improvement.

Ontario and Québec both have big plans for infrastructure, including a massive public transit project in Montréal. And Western Canada continues to rebound, so it's a good overall story for our Canadian operations.

Now that's a snapshot from the field. We have a high level of confidence in our outlook for 2018. We expanded our operations at an ideal time to leverage the cycle, and at the same time, we're giving our customers and investors even more reason to have confidence in us.

So with that, I'll hand it over to Bill for the financial review, and then we'll go to Q&A. Bill?

Thanks, Mike and Matt, and good morning to everybody. As always, I'll go through the results and try to do it quickly so that we can get to the questions.

Starting with rental revenue. Rental revenue, $1,166,000,000 in the quarter. That's up $293 million over last year. The key components of ancillary and re-rent, we'll start there. Ancillary was up $32 million, so pretty robust growth there. And it came across the board, higher delivery charges, higher fuel recovery. Our Rental Protection Program revenues were up, and the impact of NES and Neff, just for pure volume growth, was a real contributor. So $32 million increase over last year for ancillaries. Re-rent was up $4 million, another robust increase, almost 20% increase over last year, again, helped along by the acquisitions.

The owned equipment revenue was up a total of $257 million over last year, and the big driver there was volume. Our volume impact was $264 million for that 26% or so increase in OEC on rent.

Rate contributed a nice component this year, $19 million of rate impact in revenue, again, aligning with the 1.9% rate improvement that we saw on a reported basis.

Replacement CapEx inflation this quarter was about $15 million of headwind. That's calculated at 1.5% purchase price inflation. And then that leaves $11 million of mix and other headwind in the quarter for the total 2 57 in OER. So add that to the ancillary and re-rent, you get to $293 million year-over-year improvement in rental revenue.

That's as reported, as I called out. Just to note, the pro forma revenue performance was pretty robust. 9.9% increase in rental revenue in the quarter on a pro forma basis.

Used equipment was an important part of the story in the quarter, $181 million of used proceeds in the quarter, and that was up $75 million over last year. A couple of comments on that used performance. First, the overall strength of the market, I think, is really noteworthy. The proceeds, that $181 million as a percent of the OEC that we sold, came in at 52.6%. That's 130 basis points higher than it was last year. That certainly reflected the strength of the market in pricing but also in the volume that the used equipment market is able to absorb. On the pricing front, our pricing results in our retail sales of used in the quarter, prices were up about 6% in the quarter, pretty robust for us and certainly reflects robust pricing in the overall used equipment market. And again, the volume that we were able to sell was pretty strong as well in the quarter. $343 million of OEC sold in the quarter was underneath that proceeds result.

The other important factor in the quarter for used equipment was the impact of adopting the new revenue recognition accounting standard. This is nothing unique to United Rentals. I'm sure you all know about the adoption of ASC 606 for most publicly reporting companies at the beginning of the year.

An important change in that revenue recognition standard for us was that we no longer defer revenue from used sales of equipment back to our vendors. In prior years, we would agree to sell equipment back to vendors and typically do so with an associated purchase commitment. And previously, our accounting standard would require us to defer the revenue and profit associated with those used sales until we completed the subsequent purchase commitment. The new rev standard just requires that upon the completion of the sale transaction, the delivery of the equipment, we now recognize the profit and the revenue immediately. That impact was about $44 million in revenue in the quarter, and the margins of our sales back to vendors in this quarter were not materially different than the overall margins. So call it about $23 million or so of gross margin impact in the quarter. Very importantly, this is a timing effect, nothing more. So over the course of the year, this impact will fade, but certainly, it is an artifact of the adoption of the new revenue recognition standard.

So those are the comments I wanted to make on the used equipment results. Just moving to EBITDA overall, $780 million. That's up $189 million versus last year, and it came in at a margin of 45%. That margin was improved by 140 basis points over last year. Again, all of this on an as-reported basis.

To break down the $189 million year-over-year change. Volume, obviously, was a major driver. We calculate that as about $177 million of volume impact. And then the rental rates also added another $18 million or so of EBITDA over last year.

Ancillary was about a $16 million benefit compared to last year. And then used equipment, the robust quarter, contributed about $44 million of EBITDA impact. That $44 million is coincidently the same as the revenue timing impact of the adoption of the new accounting standard.

Fleet inflation, we called out as a $13 million headwind. Merit increase is $6 million of headwind. And then a large mix and other in the quarter of minus $47 million. The great majority of that negative $47 million is the impact of the addition of NES and Neff costs compared to last year. And it's also an artifact of how we actually calculate the volume component that I called out at $177 million. The revenue that NES and Neff brought along in this year compared to last year came along with both variable costs and fixed cost. The variable cost component we had signed up and the volume number that I called out, the fixed costs all falls to this mix and other number. So that was the biggest chunk of the minus $47 million that we're calling mix and other.

There are also other timing and other effects that fall into this number as well as the impact of the synergies that we realized for Neff and NES, which we would call out at a positive $18 million between the 2 acquisitions, $10 million for NES and about $8 million realized in the quarter for Neff.

So those are the key drivers of the adjusted EBITDA performance on the quarter. They resulted in a flow-through calculation of 50% on an as-reported basis, and we could certainly go through the flow-through discussion more in the Q&A. But I would just point out that if you calculated flow-through on a pro forma basis, I know you guys can't do that, but we've done it, our pro forma flow-through in the quarter was 61% during the quarter.

EPS, $2.87 of adjusted diluted EPS in the quarter. That compares to $1.63 last year. And that increase was driven mainly by the improvement in EBITDA but also the impact of tax reform. Tax reform benefited us something like $0.50 over last year as that single factor in Q1. So $0.50 out of the $1.24 or so that we improved year-over-year, we could put down to tax reform.

Free cash flow in the quarter was strong, $526 million when you exclude the impact of the merger and restructuring-related costs. Those came in at about $10 million in the quarter. So $526 million, a $36 million improvement over the same year-to-date number last year. Obviously, the operating profitability was the main driver of that improvement, EBITDA of $189 million, as we talked about. The rental CapEx story, rental CapEx is a little bit lower. The net rental CapEx was a little bit lower this year compared to last, down about $14 million. That net rental CapEx was the result of higher gross CapEx spending but also the larger used-equipment sales result that we talked about previously.

Cash taxes. The cash taxes paid were about $9 million higher this year compared to last year, and then we had a timing of interest expense in cash interest paid that was a little bit of a headwind. Call it $60 million or so in the quarter. The rest was working capital for about $95 million more working capital this year compared to last year.

Net debt and liquidity. Our debt balance at the end of the quarter, $8.9 billion of net debt. That's higher than last year, but obviously reflects the increase for the acquisitions that we did last year, NES, Neff and a couple of other smaller ones like Cummins and others. So $1.9 billion increase in net debt, but certainly in line with the acquisitions primarily.

Liquidity finished the quarter at $1.9 billion in total liquidity. Within that, $1.6 billion was availability on the ABL facility, along with about $280 million of cash on the balance sheet.

Just real quickly on returns. ROIC in the quarter was 9.4%. You all know that's a trailing 12-month calculation that we do. That TTM period was up a percentage point over the same period last year. And I will just point out again, even though we did it previously, that the way we calculate ROIC includes the tax rates that apply at the time period that's involved in the trailing 12-month period. So in this calculation, we had the new 21% federal tax rate for the first quarter of 2018, but also 35% old tax rate for the last 3 quarters of last year that were in the calculation period. If we had used just the 21% new tax rate for the entire period, our -- the ROIC calculation would've been 10.8% for that trailing 12-month period, which would've been 80 basis points higher than the prior period.

The share repurchase, just a brief update there. We bought about 1 million shares back in the quarter, $177 million of cash spent on those repurchases. And that left us, as Mike pointed out, with about $168 million remaining on the existing program.

The new program authorization will begin when we complete that $168 million, which should be mid-year. And as we've done in the past, we expect to be in the market buying back shares fairly steadily against the new program once we do start it to complete it by the end of next year.

Neff integration and synergy update, I think we've touched on, but just to put a number to it, the Neff integration, we think, resulted in realized synergies of a little over $8 million in the quarter, and the run rate we calculated at about $35 million. So right there at the total run rate of annualized synergies that we expected out of Neff. We got there a little sooner that we thought, but I think it just indicates the quality of the execution on the integration there.

Just real quickly on fleet procurement phase. We call those out in the $5 million to $10 million range, and we're well on track to deliver those as well.

You've all seen the guidance, so I won't repeat the guidance numbers, other than to say that we obviously reaffirmed all the elements on the guidance that we've given. And I think that reflects the fact that we feel good about how the first quarter of the year started out. It was certainly in line with what we expected to be able to deliver the overall guidance for the full year, and it's bolstered by the fact that the market environment we perceive as being quite strong. And our execution in that environment, we feel very comfortable with, will get us to where we need to be over the course of the year.

So maybe I'll stop there and open up the call for questions at this point. So operator?

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

Look, I think consensus was probably still baking in at 1.5% to 2% rate environment for 2018, and I just say that based on the comments that you made about the carryover into this year last quarter. I mean, pro forma pricing was up 2.7% year-on-year in the first quarter. And you haven't seen that rate of growth in a few years. So look, realizing guide on rate, when you consider how tight the used equipment market is right now, is there a credible argument for markets to go back to, say, a plus 3% to 5% rate environment in the next year or 2 like they did earlier in the cycle?

So is there a credible argument? Yes, there is a credible argument to do that. And certainly, you can make your own judgment about how likely that is to happen. Our view is that the market environment certainly would support a good rate realization. And I think the path that we're on, we're encouraged by. 2.7%, if you'd asked us before the quarter whether we'd be there, we'd probably say not yet. So that's encouraging for us, right, as we think about where things could go. So yes, credible environment. Maybe I'll take the opportunity just -- you said credible for 3% to 5%, and I'll take the opportunity, preempt maybe a question. Given the sequential path that we experienced in the first quarter, if you repeated the last 3 quarter sequentials that we achieved last year with the start that we've had this year, that number would take us to 2.9%. If you repeated sort of the average of the sequentials that we've achieved in the last 3 quarters over the last 3 to 5 years with the start that we've had this year, that sequential pattern would take us to about 2.5%. So certainly feels reasonable to say we're in that 2.5% to 3% range. And could we accelerate from here to get into year 3 to 5 range? That's not ridiculous. So hopefully, that's helpful for you, Ross.

Yes. Any signs of slippage at all in the used-equipment market?

No. It's continuing to be pretty robust, I think. If you just look at the pricing that we've realized, the about 6% that we realized this year compares to something in the neighborhood of 5% that we realized back in fourth quarter, I think that just on a price basis alone suggests that, that market's still pretty robust. And as I said, it's still demanding pretty good volumes. So that market feels pretty good right now.

And then just lastly, guys, I mean, you talked a bit about your free cash flow history over the last few years. Any thoughts on just the sustainability of the type of free cash flow that you're generating right now beyond 2018?

I think it's fair to say that if 2019 looks anything like 2018, we're going to have another very robust free cash flow story for next year as well, right? The benefit of tax reform, the strength of our overall operating profitability, the amount of capital that we would have to put into the business to kind of sustain a comparable demand environment all would argue for another north of $1 billion free cash flow year next year. And that's the backdrop that we're thinking about as we think about capital allocation decisions. So another good year next year assuming that the market continues.

Our next question comes from the line of Courtney Yakavonis.

Just curious on the equipment sales. The shift that you had into the first quarter. Have you -- do you have any guidance for us on how to think about what that means for the second through fourth quarters for this year?

Courtney, this is Matt. It does not change our full year outlook. We still expect to sell somewhere around 1.2, although we see, as we talked about January, $1.2 billion for the full year. This is just -- you folks are seeing, based on the change in the accounting rules that Bill mentioned in his comments, you're seeing more of it than you usually would. But Q1 has always been the time of the year where we sell a lot of our assets on the trade-in basis because it's our trough in time utilization, and it's the best time of year to get rid of the old fleet. Just a factoid that you folks don't know. We -- that fleet that we sold to vendors averaged 113 months. So we're really talking about a portion of that fleet's more than 10 years old. So we're selling 9- to 10-year-old fleet, and we look at the first quarter as an opportunity to cleanse that, refresh the fleet and make sure that we're giving the customers the type of products that they expect from us.

And then just on specialty, can you help us understand how much of the growth was related to acquisitions versus cold starts versus same-store sales? And then just on the cold starts, just give us a little bit of color on how those stores are performing in years 2 and 3, and if there's any significant difference between any of the lines.

Courtney, the bulk of the CPP segment growth was same-store. In the mid-20s percent out of that 36% was same-store growth. So a pretty robust story there, even though we had, for that business, a reasonably significant acquisition in the form of Cummins last year. So we certainly feel good about the business even on a same-store basis, but we also are growing the footprint of the business. We're going to add a total of 18-or-so cold-starts this year, the great majority of which will be specialty locations. So we'll enhance that same-store growth again as we go forward with the new footprint.

Our next question comes from the line of Jerry Revich from Goldman Sachs.

I wonder if you could talk about whether you view weather having any impact on first quarter, if at all. A number of folks on the channel have been complaining about seasonality this year more so than normal. Did you see it in your business? And as you folks think about the cadence into 2Q, I guess, should we look for stronger-than-normal seasonality utilization pickup if weather was a factor in the first quarter.

Sure, Jerry, this is Matt. I think you saw a little bit of a concern, specifically in March, that, that 40 bps pro forma drop in time utilization, we attribute it to 2 major factors for us, a little bit of weather and then the timing of the holidays. So the week leading up to Easter happened to the fall in March. So we saw a little bit of drop-off from our normal cycle. We expected to pick that up in April. And as we sit here, we're very comfortable that things have normalized for us to what more like what we expected. So I wouldn't see -- I wouldn't be concerned about that. I would also point to the balance that we have. One thing I'm really encouraged about is the rate performance in Q1. And keeping that balance of rate and time is really important to us. We talk about that all the time. And last year, quite frankly, we dug a bit of a rate hole while having very strong time utilization. We were very conscious about not digging the rate hole this year because that first quarter compounds on us. We're very comfortable with where we are right now.

Okay. And from a capital deployment standpoint, obviously, very active year for you folks last year. Can you talk about what your M&A pipeline looks like at this point? And obviously, big buyback announcement, maybe that ties into it to some extent. Bill, can you just step us through it?

I'll start, and I'll ask Bill to chime in. But I think what you're really highlighting is the strength of our balance sheet, and our cash flow gives us a lot of optionality. And acquisitions happen as they happen. Pipeline, we're always out there looking for companies that meet our criteria. And our discipline has -- we remain focused on our discipline, making sure that, strategically, why would we be good owners of that asset, number one. Two, financial, how does it affect us? And then how can we get ample return? And then third thing is culture. And we're very strict on those. And if we don't do a deal, it's because one of those that's stool -- one of the legs of that stool didn't make it, and we have the discipline to walk away. But having said that, it is our optionality that we have at this point in time.

Yes. I'll only add that we view acquisition as a higher and better use of our capital and cash flow than buying back shares. And so we want to make sure that we are ready to do those acquisitions that make the right sense. And that's partly why we take a slow and steady approach to executing share repurchase, right? We want to make sure that, yes, okay, the Board authorized a new $1.25 billion program. We don't want to go out and blow it all right now because there may be deals that come along that are really appealing. So let's be slow and steady in executing it and make sure that we're ready to go when the right deal shows up. And we'll continue to do that, right? We've established a pretty good track record in how we approach managing the repurchase program. But if we do it with an eye towards, hey, if a better deal comes along, like an acquisition, then we want to use it -- use cash flow for that rather than just buying back shares.

And I appreciate that it's in an evolving market, but the pipeline as it stands now, how active is it?

It's always active. It doesn't -- as you can imagine, specialty is an area of interest for us. It's no secret. And as we went through last year, we did a couple of fairly sizable gen rent acquisitions. We're open-minded. And -- but the pipeline is -- has always been pretty active.

(Operator Instructions) Our next question comes from the line of Seth Weber from RBC Capital Markets.

So I think what -- something that, I think, people are wrestling with is the implied incremental margin that's kind of baked into getting to the midpoint of your ranges for the year. I think even if you back out the $30 million or so of incentive comp tailwind that's '18 versus '17, it still implies a pretty healthy mid- to high 60% incremental margin for the rest of the year. So can you kind of talk us through your comfort level in that number and why it's an attainable number from here?

Sure, Seth. Really, the -- holding aside the bonus impact, it's a story of the acquisitions. NES, we anniversary in the second quarter. Neff, we anniversary in the fourth quarter. There will be a nice boost to our incremental margin. Our flow-through in those quarters just reflecting the mechanics of adding their revenue and the costs that come along with that revenue this year versus last year. It's something that's hard to quantify, but it certainly is going to be a material impact in both Q2 and, in particular, in Q4.

Okay. And then how should we think about the incentive comp kind of cadence through the year as a tailwind year-over-year?

The main impact is going to come in Q3 and Q4. So in the first quarter, the year-over-year comparison was basically flat. That's probably going to be the story in the second quarter, right, assuming that we don't have a surprise in the performance and, therefore, have to adjust the accrual differently than what we've got in mind right now. So it'll be basically flat effect for Q2. It's really about $15 million of impact in Q3 and Q4 each that we're expecting right here and now based on the pacing of how we adjusted the accruals last year versus what we think we're going to do this year.

Okay, Bill. Yes, it does. But the numbers that we're talking about, the mid- to high 60% incremental, that's the right way to -- that's how you're thinking about it. That's an accurate characterization?

Yes. The timing is certainly skewed toward the back-end of the year. It's going to be more a second -- or, third and fourth quarter, second half of the year event than second quarter. But we expect to see some fairly robust impacts in the back half of the year to the incremental margins because of those factors that we talked about.

Okay. And then I'm sorry if I missed it, but given some of the weather disruptions and whatnot that you experienced in March, can you give us any feel for how April is going? And it's obviously an important month, kind of kicking off in the construction season. So any color on April trends would be great.

I think Matt touched on those.

Yes, so I touched on it a little bit. But just to repeat, we don't give the specifics of interquarter, but we wouldn't have pointed out that the 40 bps in March was due to weather and holiday unless we felt that it remedied. And you can take that the guidance that we're giving to reaffirm means that we feel like that temporary time utilization lapse that we saw in March has remedied, and demand continues to be strong for the balance of the year.

Okay. So that's -- those projects have restarted, the branches are reopened, that's the right way to think about it?

Yes, just a delay in the cycle. We don't expect to have the closures that we had in Q1. And once again, a little bounce back that you get the first week after Easter as opposed to before, just a timing issue. But it got our attention, we dug into it and we feel comfortable with it.

Our next question comes from the line of Kathryn Thompson from Thompson Research.

This is Steven Ramsey on for Kathryn. You guys previously had talked about raising the target for Project XL. Obviously, you didn't raise it, but had said this may be a possibility. Any update on Project XL?

Sure, Steven. So we've been sharing with you the -- a few of the projects underneath Project XL in our quarterly investor decks as we've gone the last several quarters. And Project XL is a complex topic to try and talk about, but we try to simplify it by just focusing on a few of the projects underneath it. So those 4 projects that we've shared actual data on, what we would say is that the metrics that those projects are tracking have already gotten us to about a $200 million run rate for those projects. Now I hesitate to say that because, as we said again and again, the metrics that those projects are tracking, you should not think about as incremental EBITDA. Certainly, there is incremental EBITDA in there, but there are duplications between the project, and there are certain components of those projects that would have been there anywhere -- anyway without Project XL. But in terms of the $200 million run rate of the metric that the Project XL projects are tracking, I'd say we're pretty doggone close to the $200 million run rate already, and that's what led us to say that we were thinking about increasing the target that we talked about. But just as we've gone deeper and deeper into looking at the performance of these Project XL projects, it's become just much more clear how difficult it is to have a conversation with you guys in the outside world without diving into huge complexity. So we just simplified it and said, "Look at these 4 projects. They're delivering something in the neighborhood of $200 million run rate of impact." By the way, when you look at the entire list of Project XL initiatives, it's still, in aggregate, right around the $200 million impact. So it's not like we're cherry picking those 4 projects. It's just those 4 are easy to talk about to the outside world. But we feel good about Project XL. We feel it's delivering very much in line with what we expected. And we think it's an important part of how we continue to drive productivity improvement in our business. And so we'll keep running that.

Excellent. And then with the energy end market starting to recover, are you changing or editing your plans to invest in that market more aggressively as oil prices and rig counts move up? Or is it planned expansion same as in the past?

So Steven, when thinking about the upstream, the exploration and the rig counts improving and based on the oil prices, as I referred to in the opening comments, we're certainly participating in that. We've had really nice growth there. But most of the growth has been through our pump business that, as a matter of fact, more than half of our growth in Q1 was through our pump business, where we held onto some specialized products to serve that end market. So we didn't have to invest any incremental capital there, which we're really pleased with and kind of validated the decision the team made to hold onto those assets. With all that being said and with the strong growth that we've had in the upstream business, it's still less than 6% of our business overall as compared to peak, where it was almost 11% of our business. So we're encouraged. We're pleased we kept our footprint there to serve that market. But I don't think it's going to get as big as it did at one point in time in the history.

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

Within the overall guidance that you maintain, the high-level metrics, was there any change from the start of the year in your thought on rental rates and your thoughts on time utilization?

No significant change, David. As I mentioned before, I think the rate result in the first quarter is probably better than what we expected coming into it. And so that's a good starting point for the year. And we'll see -- we'll have to see how it develops from here. I think we feel good about the way that we've been able to position the fleet and the fleet on rent for the remainder of the year. There were some puts and takes in the utilization of that fleet in the first quarter. Matt touched on March in particular. But nothing that's concerning to us as we look at the rest of year. And as we said, I think April feels like it's positioned us well to continue to say that about the rest of the year.

So that said, it seemed like 3 months ago, maybe there was an upward bias if there was going to be a change to your CapEx. But you chose to maintain the CapEx guidance at least at this point. Can you give us a little update on how you're thinking about the CapEx budget and relative to those other 2 metrics? Obviously, the interests lie between all those 3 decisions.

Yes. It's certainly is an interplay. And what I would say is that we gave a pretty broad range for our gross capital spend this year, right, $150 million range, I think, gives us plenty of room to respond to the upside if, indeed, it looks like we should be spending more. So I don't think we need to say that we're thinking any differently about our capital plan. It is still pretty early in the year to be talking about either increasing or decreasing, for that matter. And so what I would say is let's have this conversation again at Q2, and we'll be able to make some more definitive statements about how the second quarter fleet on rent built and how that feels relative to our capital plan, and we'll make a more definitive statement at that point.

And the availability from your vendors to get ironed if you need it, just given some seasonality, it appears your CapEx is a little bit stronger in the first quarter than initially thought, which for more months to utilize that bigger fleet, it's good to get it early. But if there was a decision to add fleet, would you have ample availability to get it in time, so to speak, if you wanted it June, July, late May? Just kind of getting a feel for the supply chain availability.

Yes, David, this is Matt. We feel comfortable that we've got enough of a pipeline built that we could accelerate and move in some assets. So it would be more of an acceleration and then backfilling Q3 and Q4, is usually the way we do it when we make the decisions to change any capital either timing and/or increase. And we believe we still have that flexibility, and we're very fortunate to have good partners that understand, keeping their share of United's business has value for both of us, and we give them as much foresight as we can.

And what drove the decision or whatever caused a little more fleet coming in, in the first quarter than maybe was originally planned?

Part of it is that we still felt the demand. First of all, we sold at a decent amount of used equipment, number one. So when you look at net-net, our fleet size overall is not outside of where we expect it. We sold a hair more, and we replaced a hair more. We made an active decision throughout March not to slow down because we still saw the demand that was coming forward. We were talking to our customers and our field leaders, and we didn't think there was any reason to slow down the flow in March because we expect to have a strong second quarter.

Well, that's why I'm trying to understand, what drove the decision. A strong used market, let's hit it and sell used, and then we need to backfill with new? Or was it confidence in utilization to provide the new? I just want to make sure we understand what's driving what.

No. So to be specific, confidence in the overall balance, right? So sometimes, it gets parsed out time and rate too much. The overall balance of what time and rate is doing for us, do we feel good about that, the answer was yes. Do we think our customer demand is going to be able to absorb the fleet that we were letting flow in, not just in March, but what we plan to bring in, in April, May and June? And the answer was yes. So I would say, those really what we expected, the trend that we expected. We just continued the flow.

Okay. So it's a utilization confidence driving the fleet decision? It wasn't...

No. Let me touch on the used sales. So I know the first quarter looked a little lopsided. Much of that appearance had to do with accounting recognition. But we always sell our used equipment especially to vendors in Q1. It's the best time for us to get rid of older fleet. And I said it earlier, but just to remind you, the average age of that fleet that we sold to vendors in Q1 was 113 months. So when we're talking about 9- and 10-year-old fleet, Q1 is a great time to get it out of the door because it's sitting in the branches. It's low peak season -- low season of time utilization. And it's easier for the branches to get it out during that period. When we get busy in Q2, Q3, we're more focused on our retail. But our used sales is always strong to vendors in Q1. That's our opportunity to get it out. And then the back-end in Q4, we'll get rid of some -- any remaining vendor sales that we had planned on. That's kind of the way we've always operated our business. You guys just have between being a bigger company and the accounting change, it just probably gave a little bit of a different look from the outside world. But nothing changed internally.

Our next question comes from the line of Neil Frohnapple from Buckingham Research.

Bill, just to be clear, on the run rate commentary you gave in response to Ross's question. So if you repeat the sequential rate improvement that you did over the last 3 quarters of last year, that would take United to plus 2.9% for the full year. That's a pro forma basis correct?

Yes, that's correct.

Okay. And are you seeing any other cost creep that's weighing on the incremental margins such as higher delivery costs that you'd call out or you'd have to manage through? And I guess as a follow-up, is there a risk that you'll see greater than previously anticipated equipment inflation due to higher steel costs? I think the vast majority of your purchase -- is under contract that you negotiated in the prior year, but just want to confirm that.

Yes. Thanks, Neil. On the cost question, I would point to our delivery cost in the quarter is something that has a focus from our management team. You guys -- I've said this. You guys read the paper like we do, and I'm sure you read about freight cost increases as fuel costs go up, as it becomes harder for delivery companies to find drivers as well. When we use outside haulers, we pay some of those same dynamics in the quarter. That's not to say that we didn't have opportunities to manage better our use of outside haulers; that's something that we're very intently focused on. But that was a dynamic that played out in Q1 and that we're going to be focused on for the remainder of the year. The other operating cost items I'd put in the category is just some sort of normal management operations focus, right? We have a little bit more over time in the first quarter than maybe we expected coming in, for example. Well, that's just something we can put some management elbow grease to and address as we go forward. So those are probably the cost items that I would say we're focused on right here now. As for equipment purchase price inflation and commodity prices, our purchases, the vast majority of them are covered by supply agreements that have fixed pricing over the course of this year. And so we would expect that commodity prices won't drive very much in the way of inflation this year for us. Obviously, next year, when we go negotiate the terms for next year, that'll be a discussing point with the vendors, and it'll be a gold old-fashioned arm wrestling match that we know how to do that, and we'll do it vigorously come the time.

Our next question is a follow-up from the line of Ross Gilardi from Bank of America.

Just on that note. The higher delivery costs over time, freight, equipment costs, a lot of cost pressures out there, they got to be impacting the small, independent rentals chains in particular, that doesn't have your scale advantage. So are you seeing anything out in the field, which we believe that the smaller chains are almost being forced to raise prices higher than they might have otherwise going into the year just to offset the cost inflation?

Ross, I don't know that I would -- could tie it directly to why they're making those decisions. But I would say what we're encouraged about is the industry seems to be acting as we are, right? The industry's seeing better rate improvement. The industry's seeing better time utilization. So we see those as positive indicators. And certainly, cost pressures is something that everybody has to deal with, right, just merit increases and everything. So I would say you'd hope that's informing them, but the results is all we can really comment on, and the results are looking like the industry is acting in a responsible manner when it comes to rate and getting some time utilization improvement.

And any sense of just the broader market acceptance for some of these equipment surcharges that have been announced by your aerial suppliers?

Well, I'm sure that those are being impacted by them are not opening their arms to it. But there's no real commentary that I could give you that would be -- that I think would that be helpful for you.

Our next question comes from the line of Scott Schneeberger from Oppenheimer.

Mike or Matt, you mentioned large projects that you're eyeing in late 2018 that should benefit 2019. Could you just give us some perspective maybe comparing it to past years how sizable that looks? And your ability to win those, are they already in hand, or are they bids to come? And also just a feel for your win rate on bids, just if that's something you measure and something you can share.

Sure, Scott. So I'll just mention the win rate. It's something that we measure internally, not something we talk about externally. But I would say as far as project pipeline, I specifically made comments about the industrial projects because that's a significant change on a year-over-year basis. We're seeing some nice industrial projects that are carrying over from last year, but that pipeline seems to be increasing a little bit in the back half of 2018 on a year-over-year basis. As far as commercial, I wouldn't tie it just to major projects. I think it's broad geographically, broad by project mix, and the demand is broad by product type and sector. Every vertical, every meaningful vertical that we track of end markets is up on a year-over-year basis. So the project commentary specifically that you heard was more about the back half of the year in the industrial sector, but overall, I'd say the pipeline is as strong and a little bit stronger in some areas as last year.

The other thing I would add to that is if you take a look at all key indicators, they are positive. And in particular, if you take a look at the associated builders and contractors' backlog in the fourth quarter, it expanded to 9.67 months, which is the highest level ever achieved. So in Dodge Momentum Index, it's positive. It's the highest level in its cycle. There's just -- I can tick through all of these items, but the bottom line is all the key indicators remain positive. And as Matt mentioned, it's very broad. Nothing specific. But we are -- we have the footprint, and we have the equipment and the people to tackle the task.

Appreciate that. And just a real quick one here at the end. I'm envisioning you have a very large specialty and gen rent pipeline, and you don't size it. But just curious, obviously, you have a great opportunity throughout North America. Are you looking at anything outside of North America and just in contemplation of that?

Look, we've said that at some point, the company will look beyond. When that time is, we haven't pinpointed an exact date. But I think the key point is, one, North America is very strong. There's still -- we have -- as far as market opportunities, remain very high here for us to capture more, and that's what we are doing. And that's why when you take a look at the specialty businesses and the growth that we're seeing, that is really, to me, a no-brainer. Why wouldn't we go after the current market that we're in, where we have the biggest strength? But going beyond North America, at some point, yes, and more than likely, with our customers.

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

I want to thank everyone for joining us on today's call. Thanks again for your participation. We always welcome the opportunity to share your thinking and hear your feedback. Please, if you haven't, download our revamped first quarter investor deck, and feel free to reach out to Ted Grace, our Head of IR, with any questions. Operator, you can end the call. Thank you.

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