聯合設備租賃 (URI) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the United Rentals 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 from those projected.

A summary of these uncertainties is included in the safe harbor statement contained in the company's press 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.ur.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectation.

You should also note that the company's press 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. Please refer to the back of the company's recent investor presentation to see the reconciliations from each non-GAAP financial measure to the most comparable GAAP financial measure.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, President and Chief Operating Officer.

I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Thanks, operator, and good morning, everyone. And thanks for joining us today. Early this month, we announced our exciting acquisition of BakerCorp. Today, the news is about our strong financial results, our continued confidence in the cycle and our many avenues for profitable growth. You'll hear us talk about organic expansion, fleet management and our sales and service initiatives. In short, we're leaving no stone unturned as we execute our strategy to balance growth and returns.

Before I get into the quarter, a quick word about Baker. This acquisition is a highly strategic move on our part. We feel even more strongly about it today, having spent an additional 2 weeks with their team. Matt will bring you up to date on Baker in a minute, and we'll be happy to address any questions during Q&A.

And just to be clear, any confusion that -- about our revised guidance, it does not include Baker as we have not closed yet. Our guidance represents our expectations for a stand-alone business. And in our press release, we give a projected impact of Baker for the balance of the year, which you can add to guidance to help you with your models.

Now let's talk about the second quarter. It was a robust performance all way around by our gen rents and specialty segments. When you look at the results, pro forma for the acquisitions, you can see the strength of the metrics behind our double-digit increase in revenue. The big drivers are 7.1% increase in volume versus 2017, reflecting an acceleration from the first quarter, and a 2.8% increase in rental rates.

Every one of our regions showed rates up year-over-year, while company-wide, our pro forma time utilization was 69.2%, tied last year's second quarter record. There's a lot of demand out there, and we're bringing all of our collective experience to bear in turning that demand into profitable growth.

That's part of the reason why we're outperforming the marketplace. And you're seeing not only the impact of a healthy cycle on our metrics, but also our experience in managing that opportunity. We believe that we can get more rate without sacrificing utilization, and we're focused on operating as efficiently as possible.

Yesterday, we raised our outlook for revenue, adjusted EBITDA and CapEx spend, 3 solid indications of our confidence in the cycle and our ability to deliver returns.

We're looking at over $7.5 billion of revenue this year, and we intend to make the most of that growth.

Another milestone in the quarter was the completion of our $1 billion share repurchase program and the launch of the new $1.25 billion program we announced earlier. So we're on track there, too. And operationally, I couldn't be more proud of Team United. We just delivered our 16th straight quarter with a record -- with a reportable rate at or below 1, and our safety record speaks volumes about the caliber of our people.

I'm talking about these things back to back to make a point. With us, it's not an either/or when it comes to our focus or the use of capital. In this case, we're being very strategic about M&A, we're flexing our CapEx to meet demand and we're on track with our share repurchase program. And we're keeping our eye on the ball with best-in-class operations.

Now Matt will go into more detail. But before I hand it off, a final word on our end markets. You see the same leading indicators we do, virtually all of which are positive. We have the additional benefit of our customer surveys plus 15,000 employees with an ear to the ground. And from where we're standing, we see a healthy level of customer activity, continuing to drive significant demand. Our performance in the first 6 months of 2018, and in particular, the second quarter, has set the stage for a strong back half of the year. We're meeting that opportunity on the front lines with size, diversification and a more customer-focused organization. And these are the pillars of sustainable growth.

Now I'd like to give it to Matt for his thoughts, and then Bill will cover the numbers. So over to you, Matt.

Thanks, Mike.

First, I'll start with Baker. And I'll echo what Mike just said, we're very bullish on the acquisition. This deal is exactly what we look for in specialty. And at a high level, Baker and United both share the same space, but we each bring something different to the table. Baker will open doors for us with their bundled solutions for fluid storage, transfer and treatment, and it promotes 2-way cross-selling across the customer base. And at the same time, it builds up our current platform for Pump Solutions and we get a small but complementary toehold in Europe.

Now our team has a long history of successful integrations, and we'll be using our playbook with Baker for another smooth transition.

Now I want to talk about the company as a whole. Mike hit the nail on its head with his comment about managing the opportunity, and I'll give you some examples of just how broad based that opportunity is. Our vertical markets are up across the board in construction and industrial versus 2017. And one big proof point is our own performance.

In the second quarter, all of our regions were up in rental revenue year-over-year, and that includes Western Canada, which was up over 12% in local currency. And nationally, Canada was up almost 15%. In the U.S., conditions are particularly strong in the Gulf, the South and the Mid-Atlantic states.

And this cycle stands out to me for its diversity of projects. In the South, for example, we've got equipment on all kinds of projects from convention centers to stadiums, data centers, airports, even a nuclear lab. And believe me, that list goes on. And in the Gulf, we're seeing capital projects in petrochem start up in the back half of the year, and most of these should carry out into 2019. And we talked about this timing on our call in April, and now it's great to see it coming to fruition.

In the Midwest, we've got wind energy projects underway, and infrastructure's taking off. More broadly, growth in infrastructure across our organization plays well into our focus on that vertical. Our acquisition of Neff last year added large dirt equipment to our fleet, and that's been helping us win in infrastructure.

So what are we doing to capitalize on all this? We're managing the business with a lot of discipline while continuing to make investments in long-term growth. You can see that in our specialty segment, we've opened 13 cold-starts so far this year, and we'll add another 50-plus branches with the Baker acquisition.

Specialty is something that we feel sets us apart from the rest of the pack. In the second quarter, rental revenue from our Trench, Power and Pump segment was up almost 34% year-over-year. The bulk of that increase came from same-store growth. This was driven in part by cross-selling. Our cross-selling revenue is up 28% through June versus last year.

And we're keeping the field focused on branch-to-branch collaboration, and cross-selling is one of the big payoffs. It's a key lever for us in both return on assets and customer service.

Another major lever is CapEx. Back in January, when we established our 2018 guidance, we said that we wouldn't hesitate to adjust our CapEx up or down, if necessary. Well, yesterday, you saw us respond to the high performance of our assets by increasing our CapEx guidance. And we're 7 months into the year, and we continue to see an exciting level of opportunity to put a larger fleet on rent.

Now I want to step back from the mechanics of our business and step towards the customer. Recently, we finished training almost 14,000 United Rental employees as part of an initiative we call [One UR]. We started this back in January. One UR is a platform we created to remind each and every employee that they're an important link in the value chain for our customers. Customer service has always been core to our culture, and now we're taking it to another level. We want to win our customers' hearts and minds.

So to engage our employees, we held full-day workshops with our frontline teams in every market to share best practices and explore new ways to improve our services. And One UR is a great example of how we're making investments in our people. It's key to our strategy because customer service that's consistently head and shoulders above the rest earns us more business and more customer loyalty. It's a lever that's 100% within our control. Our people get that, and they're fired up about it.

So as you can see, things have been busy around here, but we still stepped up and delivered a record financial performance. And I know Bill has a lot to cover, so I'm going to ask him to pick it up from here, and then we'll take your questions. Bill?

Thanks, Matt. Thanks, Mike, and good morning to everyone.

Just to highlight the overall comments that I'll make here. The numbers I'll refer to are typically as reported numbers to line up with what we file publicly. In a few places, if I refer to a pro forma number, I'll call it out specifically.

So with that, let's get started with rental revenue as we always do. You saw that the rental revenue result was $1.631 billion in the quarter, and that's up $264 million over last year, 19.3% as reported. Really, a series of key drivers in that result, starting with ancillary revenue, up $30 million over last year. And that's really driven by the higher delivery and fuel recoveries, primarily with the increased volume, part of which is the acquisition of Neff contributing in the quarter.

So $30 million year-over-year from ancillary revenues. Re-rent was up another $7 million again. Given the volume and the demand we're seeing overall, that drives the re-rent result.

Owned equipment revenue grew through the following drivers: Volume, OEC on rent change contributed about $187 million in the quarter. Rate was another $33 million, with a 2.8% rate result that we realized. We had our normal replacement CapEx inflation in the quarter, about 1.5% of revenue, call it, $18 million of headwind in the year-over-year reconciliation. And then that leaves mix and everything else at a positive $25 million or 2.1% in the quarter. That's primarily driven by the shift in mix of our revenue more toward our specialty regions, as Michael and Matt talked about, the very strong growth that we're seeing in specialty.

So add them all up and you get to $264 million of improvement this year over last year. That revenue performance, by the way, on a pro forma basis, was an increase of 11.4% in rental revenues, which again reflects the strong external environment as well as our investment in growth in that environment.

Real quickly on used equipment sales. The second quarter delivered $157 million of used equipment revenue. That's up $24 million or 18% over last year. The adjusted gross margin result was 51.6%. That was down slightly from last year, primarily due to a change in the mix of the equipment sold and a slight shift in the mix of channels that we sold through. It still represents a very strong used equipment market that we're selling into.

Our proceeds, as a percent of the OEC, the original cost of the equipment that we sold, was very strong in the quarter, 58.7%. And that's almost 5 percentage points higher than it was last year. If you look at it in terms of the realized price on a like-for-like unit basis of our retail sales in the quarter, our pricing was up almost 7% in the quarter. So a very strong used equipment market, and we're executing well in that market overall.

Moving to adjusted EBITDA, $907 million, was up $160 million over last year, about a 21% increase. And the margin in the quarter of 48% was up 120 basis points over last year. The key drivers in the bridge for that $160 million increase: volume, we're calling $125 million on the volume increase; rental rates, call it, $32 million over last year contribution; and the ancillary revenue that I talked about before, we're calling $15 million of improvement over last year.

The used sales result was up about $11 million last year -- over last year, and the fleet inflation translates into about a $14 million headwind against last year for that 1.5% or so of inflation impact that we normally expect.

We did have our normal merit increase and a little bit of an increase in the bonus accrual. Those together are about a $7 million headwind. And everything else, mix and all the others, translates into about a $2 million headwind versus last year, obviously, with the positive revenue mix, offset by still carrying the Neff fixed costs, right, we haven't anniversaried Neff yet, as well as some incremental drag from the cost that we called out in the first quarter, which we will talk about a little bit more later.

So those are the key points of the adjusted EBITDA bridge from last year. It drove an EPS result that's very strong overall, $3.85 in the quarter. That compares to $2.37 over last year. And while that's supported by the change in tax law and the lower tax rate, it still represents a very robust growth. So $0.70 -- -- excuse me, $0.70 of the $3.85, you could attribute to the change in tax rate but that still leaves a very robust increase over last year, even excluding the tax rate impact. So that's the EPS story.

A few comments on our cash flow performance. Free cash flow in the quarter was very robust, leading to a year-to-date free cash flow of $703 million. That's a $74 million improvement over the year-to-date period last year. I'll call out that, that does exclude the impact of the -- excuse me, that does include the impact of the merger-related and restructuring payments. If you exclude those, which is the basis for our guidance, the free cash flow story in the first half of the year was $719 million.

Key drivers of the year-over-year change in free cash flow are as you might expect. The adjusted EBITDA improvement, offset by the increase in net rental CapEx are the main drivers and then puts and takes in the other lines of interest expense, cash taxes, working capital and everything else.

Directly addressing the rental CapEx story, we spent a total of $946 million in the quarter on gross rental capital, and that's an increase of $252 million over last year. That's pretty robust spend, and it brought our year-to-date CapEx spend to $1.226 billion, an increase of $313 million over last year. With that kind of increase in rental CapEx spend, the fact that we were flat on a time utilization basis year-over-year, I think, speaks to the strength of the demand that we're seeing and our ability to execute with that kind of growth in our fleet. It's a very robust environment, and our folks are really putting this incremental fleet spend on rent at a very high rate.

Net rental CapEx, when you exclude the impact of the used equipment sales, was about $789 million in the quarter. And again, that's robust increase from last year and supports the top line growth that we delivered.

If you look at our net debt position as a result of that cash flow performance, we finished the quarter with $8.9 billion of net debt. That's up from last year about $1 billion, and obviously, reflects the impact of the acquisitions that we've done since then, in particular, the $1.3 billion or so that we paid for Neff in the fourth quarter of last year.

Liquidity in the quarter finished at just over $2 billion, with $1.9 billion of that coming from availability under the ABL facility and the rest, cash balance of about $117 million.

Just quickly addressing returns for the quarter. Our ROIC in the quarter was 10% on a trailing 12-month basis, and that's an improvement of 160 basis points over the prior year. Now since we used the actual tax rates that were in effect during the 12-month period when we calculate the ROIC, it certainly had a significant impact. But if you assume that we have the current 21% federal tax rate in effect for all periods in that 12 month, the ROIC would have calculated out at 10.9%, and that would have been a 90 basis point improvement year-over-year. So however, you look at it, the return performance of the business is very, very strong.

On the share repurchase, we spent $168 million in the quarter on share repurchases, and that completed the execution of the $1 billion share repurchase authorization. We finished that up in the month of June. And if you look back over the entire $1 billion authorization, the average price that we purchased that averages out to $85.60. And the total shares that we repurchased totaled 11.7 million shares.

In the month of July, we started execution on the new $1.25 billion program that the board authorized earlier this year. We spent $24 million so far against that program, and we continue to expect to execute that program on a fairly steady basis to complete by the end of next year.

A couple of quick questions on the Neff -- comments on the Neff integration and Baker. The Neff integration is essentially complete, and we've taken all of the major actions that we expect to take on Neff and continue to look at how we prepare ourselves to integrate the Baker acquisition. We expect Baker to close in the early part of this quarter, let's call it the end of July, just for the sake of discussion. And we expect that Baker will then start to contribute to our performance.

You saw in the press release that we are looking for Baker to deliver around $140 million of revenue for the remainder of this year and, call it, $40 million of adjusted EBITDA in calendar '18. We also expect to spend something like $50 million of incremental CapEx for the Baker acquisition by the time the year is out.

And again, I'll just repeat what Michael said. Baker is not -- those numbers are not included in the guidance that we gave for the stand-alone United Rentals. We'll incorporate that once we actually close the transaction.

On guidance, you all saw that we increased our guidance for most of the elements of guidance that we give. I won't go through the numbers again, but we certainly did increase total revenue, adjusted EBITDA and our gross and net CapEx expectations. We did not increase the free cash flow expectation, $1.3 billion to $1.4 billion, reflecting the net impact of increased CapEx, offsetting the increases in cash from operations from the improved profitability.

So those are the key comments I wanted to make. Before I open it up for Q&A, just let me offer one personal note. As you all have seen, we announced that my retirement from United Rentals is coming up here over the course of the next several months. And this will be the last official earnings call that I do with you. Jessica Graziano will be in this seat, making these comments at the next quarterly call in October.

I just wanted to say to all of you who've been with us over the last 10 years that I've been around, thank you. It's been a great honor to work with all of you as investors and as analysts. It's been very interesting. Many of you we've seen frequently enough so that you're almost part of the family at this point. You all should know that I'll miss the interactions with you, not doing it on a routine basis. But you all should also have very high confidence that the team we've built here at United Rentals and the philosophy that we put in place here at United Rentals will continue after I'm gone.

We'll continue to take the investors' perspective. We'll continue to focus on driving top line growth with attractive returns attached to it. We'll continue to make good decisions about how we allocate capital, and we'll continue to make prudent decisions about how we use the balance sheet to support our strategy. All those things are part of my legacy at United Rentals. I'm very proud of that legacy, and I think you could all look forward to those thoughts continuing after I've left the stage.

So with that, I'll ask the operator to open up the call for questions and answers. And you guys will get your last shot at me. Operator?

(Operator Instructions)

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

I'm just trying to step back and think a little bit about the interplay between CapEx, rate and ut. I mean, this year is shaping up to be a roughly CapEx up 7% to 10%. Let's call ut flat. And rate, let's just call it 2% to 3% roughly. There was a run last -- early in the cycle, this decade, you had a 16-straight-quarter run where rates were up over 3% every quarter. You were still growing ut and you were growing CapEx. I'm just trying to get a feel for the -- how you view this cycle. I can appreciate ut on an absolute level, pretty high. The CapEx has obviously been at your discretion. And how much fleet you put in this quarter to keep ut flat was impressive. But can you -- if we kept this sort of flat ut kind of model from here for a while, and you're growing the CapEx, say, similar next year as this year, how should we think about rate in that dynamic? I mean, you can't think about rate in isolation, just is it accelerating, decelerating. It's the other 2 variables that impact it. But when I look back at the 16-quarter run where rate was above 3% and we haven't been above 3% once yet of late, just trying to make sure we frame exactly how we should think about the rate environment again if ut is sort of flattish and CapEx is growing similar to this year.

Yes. David, maybe I'll lead off here on this one. Always very difficult to say what the rate is going to be. And so I won't address the 3% specific number. What I will say is that we believe that the demand environment is robust and will continue to be so for some time to come. And as long as you're not overwhelming the rate, the demand with excess fleet, then you should be able to continue to move rates higher. For us, it's less about hitting a specific rate number like 3% and more about are we delivering a rate progression that allows us to be efficient and prudent in how we add capital to the business. And that translates into profit and margin and return performance that's attractive, right? That's really how we're thinking about it. And so, the rate environment, we think, will allow for that to continue. We had nice margin improvement and profit improvement in the quarter. We expect nice, robust margin improvement and profit improvement for the full year. And we think that will carry over into nice return performance, not only this year but next year. So I try not to get too focused in on one specific number and more, is the rate environment that we have and expect going to be commensurate with delivering the goals that we've set out.

I appreciate the answer. That's what I'm trying to not do, is look at one in isolation. But again, if I just try to think about -- if I -- again, it's all how you try to manage it. But if we're trying to think about ut as a somewhat flattish dynamic, you have the CapEx lever to pull. But when I think about the level of rates so far, would you at least go as far to -- it's your last call, Bill, you can say what you want. I mean, are we able to at least think of -- and I know those rates were also helped by your coming out of the Great Recession, so I know rates got very low back in '08 '09. But is it inappropriate for us to think if we think of the way you're thinking of the model, not saying you're going to guarantee a rate, but how you're thinking about the model going forward, if we're running it a bit as we like to bring in as much fleet as we can that can keep ut flat at a high level, that should also then spit out variable number three that rate can go back above the 3% that we saw for 16 straight quarters between 2011 and 2014? I'm just -- just how you're -- just theoretically how we should think about it.

Yes. The concept of what you're laying out is a useful concept. Where I get tripped up, David, is just the attaching a specific number to it, right? Whatever the rate environment is, is going to be okay as long as it translates into the kind of growth and profit and return that we feel is prudent and available for the business, right? So if it's 3%, great. That's -- you're getting it through a little bit more rate. But if it's 2.5% and you can manage through productivity or prudent investment in capital to translate that into profit and return performance that's attractive, that's okay, too. So that's why I'm having a hard time getting too tied into the exact formulation of the question is because the rate environment that we get depends how we view it, depends on what we can do with it at the bottom line and in return.

And I think, David, just looking at those 16 quarters you referenced and not thinking in isolation of the one metric and not thinking of what was the return profile at that point is also shortchanging what we're doing today when we are getting a good return on the assets, still being very prudent about managing rates and time and everything that we do. But I don't think you can look at it without thinking about what was the return profile when we had to go after 3.3%. And the word 'had' is important.

I'll leave it at this then, would you say rate growth -- the way you're thinking of running the business, have we seen the best of rate growth? So how are you thinking about moving forward from the second quarter? Just so we're all clear because, obviously, people, they're concerned about April, May, June, the year-over-year growth rate within the quarter slowed a bit. And I'm just making sure we don't look at this as, yes, 2-way pro forma or reported. That's how we think of the strongest rate growth we'll see if we run the model even just flattish ut and growing CapEx high single digit. Just want to make sure we hear an answer on that.

So, as you know, David, those year-over-year rate increases are as much a result of the comp on last year. So it was 3% in April, where you had an easier comp last year, especially coming off a poor Q1, better than a 2.5% increase in June, while, not realized, we're actually charting -- achieving a higher realized dollar in that June number. So we don't -- we're managing the business day to day, and we've always been this way. It's not the year-over-year number that's as relevant to us that's impacted by comps as what's the sequential bill. And when we look at this year's first 6-month sequential bill of rate, mathematically and qualitatively, it is a better rate improvement for the first 6 months of this year than it was the first 6 months of last year.

David, the other thing I would say is that if the market is there and we have the opportunity, we're going to grab it. We're going to go for it. That's -- we're not shy in asking for higher rate. We pride ourselves in making sure that we are going to capture as much as we possibly can.

Our next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch.

Bill, it's been a pleasure working with you. Congratulations on all your success that you -- and all the best on your next endeavors. I was just wondering if you could quantify some of the cost issues that weighed on your incrementals in the first half. And I think you're implying something like a 75% incremental in the second half. Correct me if I'm wrong on that. But things like freight, labor, fuel, I mean, aren't a lot of these things out of your control? What gives you confidence that many of these costs won't continue to go up? Like what have you actually done to get your arms around the cost situation?

Yes. Just to -- so Ross, just a quick comment, and I think Matt will join in as well. Some of them are "out of our control" in the sense that we can't control where fuel prices go, for example. We can control how we recover fuel charges from the customers who use the fuel. So that's something that we're always looking at very carefully to make sure that if our costs are going up, we pass them along. We think that's a reasonable expectation. And so the customers usually don't kick too much. The freight costs that do get passed along to us when we use outside freight, it's hard to fight too much against that. But that said, we do have the ability to use our own internal delivery capabilities and leverage that more effectively when those costs are going up. So that's what we're doing to try and address that particular cost item. And labor costs, right, our labor challenge has been about overtime, more so than wage inflation. Wage inflation has not ticked up significantly for us, but our use of overtime is something that we have control over. And so being prudent about when we use overtime and how we arrange our drivers and our techs to use them as productively as possible and cut down on the need for overtime is something that we can do here within the walls of United Rentals. So those are the things that we're doing to address those cost items. And I think we've had some success here as we've gone through the first half and come out of it, having repositioned ourselves so that our expectation in the back half is that our costs are going to look more like what they've looked like in prior years.

Yes. Ross, Bill touched on all the key components. Just to put it from an operational perspective and from our point of view, what we've done to repair is when you think about the Q1 and some spillover into April on using third-party services for delivery, third-party services for repairs, specifically major repair, it's our slow time of the season. And if I'll be candid, I think our team overused those third-party resources, and they came with a large inflationary cost this year. That's what we needed to mitigate. We've in-sourced a lot of this work here in May and June, and we've seen the positive results of doing that where our costs look more in line with previous years as a percentage of either transactions or revenue, whichever you choose to do. And that's what gives us confidence that we've mitigated it, but it also adds capacity. So that in-sourcing has additional value longer term for growth. And our team got excited to get ready for the ramp-up for the year and wanted to get the fleet up and moving as quickly as they could, and we had to stop the outsourcing. Inflation just prohibits it from being a profitable way to get stuff done.

Got it. That's helpful. And then I just want to run through some math. When you guys are going to do -- you're guiding to $1.3 billion to $1.4 billion of free cash flow in '18. You've got about $12 billion of fleet on OEC, ex Baker. I mean, fleet on OEC is growing 6% to 7% annually at your current annual run rate net CapEx of like $1.3 billion. So you don't really have to grow CapEx in future years in absolute dollars to support 6% to 7% volume growth, just kind of like what you're growing at right now. So what I'm getting at, is there any reason to think why your free cash flow generation would not continue to grow with EBITDA in the coming years, barring any big unforeseen changes in tax items or restructuring or anything like that?

Yes. What I'd say, Ross, is that we certainly will make our decision about how much CapEx to spend based on not only the external environment that we're seeing, but also on the needs of the fleet for refresh, right, the used equipment sales picture. And that CapEx decision will have an impact on exactly where we end up in free cash flow. That said, I think it is fair to say that we expect a very robust free cash flow environment for 2019. Almost at any level of CapEx spend that we choose, we're going to have a robust free cash flow picture. I won't go to the exact number, but it will be very strong, and we'll continue to use that very prudently as we invest for the company's future.

I wasn't trying to pin you down to an outlook. I just -- was there anything flawed in the way of thinking about it? I mean obviously, all the assumptions on CapEx are dynamic, but...

No, nothing flawed in the overall frame that you laid out. And obviously, we'll talk about more specifics in '19 as we get closer to it or I'll say, Jessica will talk about it.

Our next question comes from the line of Seth Weber from RBC Capital Markets.

Bill, it's been fun. So I just wanted to go back to the incremental margin question. I mean, just very specifically, I mean, you've talked historically about this being a 60% incremental pull-through margin business. Is there anything that would cause you to kind of move off of that number? And specifically, my question is the margins for the specialty business were down year-over-year this quarter. And so given that you're pushing the specialty business more going forward, I understand that the returns on specialty are quite -- are very attractive. But I'm just trying to understand, is this still a 60% EBITDA pull-through margin business in your mind?

So a couple of points. I'd say 60% -- and we've always said this, right, 60% is not a bad way to think about the incremental margins available in this business. So I'll say that full stop. But you've got to make sure that you understand the ins and outs. It's a very sensitive calculation. You've heard me talk about that before. That said, I think that's a reasonable starting point. It certainly is going to be impacted as we grow specialty disproportionately, and that's something that we want to make sure that we're mindful of as we think about its impact on flow-through. But the reality is specialty growth is a unilaterally or unalloyed good thing from a top line perspective, from a margin perspective, from a return perspective. So we want to keep growing it as rapidly as we prudently can. With regard to specialty's gross margin performance in the quarter specifically, it was impacted in this quarter and will be impacted to probably a lesser extent as we go forward by increased depreciation, right? It's gross margin, so depreciation is in there. That depreciation is heavily driven by the Cummins acquisition, right? We bought the Cummins assets in the second half last year, and that depreciation is showing up more and more in the TPP segment margins. That's a major impact there. We also had a lot of cold-starts, and you all know that the cold-starts' margin performance early in its life will weigh way down. So as you have relatively more of those, it tends to depress the margin results until those cold-start locations mature. So those 2 dynamics were really at play in the segment margin results. It still is a very, very attractive business in specialty I'm talking about. It still delivers incremental return and profitability and margin. And so that growth story, I think, you'll see us continue to emphasize as we go forward.

Okay, that's helpful. And then as we think about the anniversary of the Neff acquisition, which I guess is the fourth quarter, I think the number you had talked about originally was $35 million of savings on a full run rate basis. Is there any help you can give us as to how much of that you would expect to realize in the fourth quarter -- by the fourth quarter?

From Neff itself? Is that your question?

Yes. I think it was $35 million -- wasn't -- is that not correct, $35 million saving -- synergy number?

Yes, yes, that's about the number, so call it an impact in the fourth quarter of about $9 million or so from the synergies associated with Neff.

Okay. So by the fourth quarter of this year, you should be at that kind of $9 million, $10 million level?

Yes. We certainly should be there. We're not too far away from that as we speak. So I'll point out a couple of things as regards to the incremental margins in the back half of the year, just so that everybody hears it at the same time. The Neff impact of anniversarying that acquisition will be a significant boost in fourth quarter flow-through. And I'd just remind everybody of the mechanics of that, right, in the year-over-year comparison, which flow-through is, in the fourth quarter of this year, we will then have the fixed cost of Neff in both periods. And so as a result, it won't represent as much of a weight on flow-through as it has in the prior period. So that will boost the flow-through from the Neff acquisition mechanics. The other point that we mentioned in the first quarter as well is that our bonus accrual this year is going to be down from where it was last year. Last year was a record payout for us. We're accruing something that's closer to a normal payout for us this year. That impact over the entire second half is going to be something like $27 million. And the dollars will probably be about equally split between third quarter and fourth quarter. So that's going to be a boost in both third and fourth quarter just from that factor alone. So those are the things that we think will help support the back half flow-through to drive it up toward the range that we've given as our guidance.

Our next question comes from the line of Rob Wertheimer from Melius Research.

So my question is on learnings from acquisitions. You touched on Neff kind of enhancing a little bit the dirt or the infrastructure position. And I wanted to see how you felt about the strategic attractiveness of that industry for redeployment of future capital in whatever form. I mean, just whether that looks good and whether it's more attractive than maybe what you would have thought 2 or 3 years ago. And maybe the same question on Cummins and mobile power gen stuff that you did there.

Sure, Rob. This is Matt. So we absolutely learned a lot through the Neff acquisition there. They're deeper and broader a fleet and expertise in dirt and even some of the verticals that would come along with that, as I referenced, infrastructure in my opening remarks, have really given us great learnings. And then we could spread those learnings across our footprint. This is not dissimilar to what we've done with many of our acquisitions. And they're more readily apparent in specialty, where you broaden your product offering or your solution offering. So -- and we expect Baker, by the way, to do that where we can create a full fluid solutions business even on top of what's been a great pump business through our acquisition of National Pump a few years ago. So we absolutely have learnings from that. And as far as the other value of it, other than the learnings, the expertise or even the additional capacity, right, of talent is the extra customer base that comes with it to sell to. So there's a lot of reasons why we decide to do M&A and acquisitions. It's not just speed, although that's part of it. It's the expertise, the capacity, the additional knowledge and the access, and that's been a big growth driver for us.

And so infrastructure as a theme or as a segment, seems like, as attractive a market is or worthy of continued investment, having had this experience?

Yes. And we've been investing in positioning ourselves. And should we find how it's going to get funded, that will be even icing on the cake upon what we see today. But this is something we've been building up for. And when we were reviewing the Neff acquisition, it had an additional boost to not just that vertical, but that vertical was an additional boost to that acquisition.

If you take a look at the end market -- this is Mike, just for a moment. If you take a look at the infrastructure market, we can always debate where it stands right now, but I don't think there's any argument that the need for infrastructure needs to improve. It's not a question of if. It's a question of when. And then we just -- the learnings help us become better prepared for when that comes. And it's -- as Matt mentioned, take that aside for a moment, it's still a growth opportunity for us.

Would you mind touching on what you've seen from the Cummins assets?

Oh, thank you. I knew you had a second question. The Cummins assets have gotten us into the larger end of power, and the team's done a great job with it. That has been a home run acquisition. I know we referred earlier some of the drag of the depreciation on the margin, but Cummins -- don't confuse that with the value and the accretiveness of the Cummins deal. It's been a great deal that the team members that came with it, the assets that came with it have really deepened our penetration into the power space in a big way.

Our next question comes from the line of Joseph O'Dea from Vertical Research.

First in terms of -- and we see good sequential rate trends in the quarter for you, I think, in terms of what you're seeing for the broader industry and insight that you get through data that Rouse collects and just whether or not you've seen any cracks in the industry's commitments rate thinking, and so the end of last year, first half of this year, still hearing about a really strong focus on rate. Maybe some of the concern out there is that some of that could be easing a little bit. But through the end of the quarter and even now, just what you're seeing not only internally but in the broader rate environment?

Actually, quite the opposite. So we've seen, what is it? 22 consecutive months -- 24 consecutive months of positive absorption in that Rouse data that you referred to, which is very important for rate integrity. But just as importantly, as we've seen the rest of the industry and admittedly, tracking about 40%, 45% of the industry, which we think is a great sample size, is acting very similar from a rate perspective that we are. So we're very encouraged with that. And I think it points to not just the robust demand, but also the discipline of the industry. And that's something that we're happy to see.

And then just following the Baker deal and thinking about the pipeline and specialty opportunities. How does Baker kind of stack versus what other things that you see in the pipeline? Do you see a healthy kind of portion of opportunities to a $300 million of revenue? Or is that something that's pretty high relative to what you see out there? Just trying to understand what the M&A kind of outlook looks like as it relates to specialty?

Well, I would tell you it's very robust. The teams out there, I give them a lot of credit. They've been very busy as you can see by our announcements over the past 18 months. They're out there. They are doing as much diligence as they can to understand industry dynamics. But it follows along the lines of our strategic -- around our return metrics that Bill mentioned and around the cultural aspects of it. So all 3 of those, we take a look at. We don't look at size. We just look at the principles that we have out there. We're in a good place because we can be selective. And we're going to continue to monitor, be active and be good stewards of the capital and spend it in the right way.

Our next question comes from the line of Courtney Yakavonis from Morgan Stanley.

Just when I'm looking at your gen rent margins, obviously, they picked up versus a decline last quarter. Can you help us understand how much of that was just from the lapping of the NES acquisition and whether that was weighing on your margin. Should we see an acceleration from here and then, obviously, an additional one in 4Q when Neff rolls off? Or was that more just the cost management that you were talking about with Ross and getting freight and some of the other third-party costs under control?

Yes. Courtney, I don't have a specific breakout. It's clear that both factors were at play. I do think it's critical for us to have a better sense of where we are in the cost front. And as Matt said and I think I tried to indicate, we're better positioned now as we look at the second half against those cost items. So both were at play. I couldn't give you a breakout of how much is costs versus how much is acquisition impact without going and doing some additional work.

Okay, understand that. And then you had also just spoken about ancillary being, I believe, $15 million year-over-year. I believe that's where you pass through a lot of these freight and fuel costs. So I just wanted to understand, did that directly offset one-for-one this quarter? Or was there a lag? And how should we be thinking about that kind of for the rest of this year? And was -- and maybe just how big of a factor was that in the revenue guidance increase that you have?

Yes. Good question. The fuel component, we have a fairly automated process for how we adjust our fuel pricing and fuel recovery as a result. So I hesitate to say it's one-for-one, but it's closer to one-for-one when fuel prices go up. The delivery charges are a little bit less direct. And so there's probably somewhat of a lag there as we have to get the entire organization to adjust to sort of higher targeted delivery charges as those costs go up for us. So yes, fuel, closer to one-for-one; delivery is somewhat of a lag.

Okay. And was it a large factor in -- part of the $150 million, kind of, revenue increase?

In the guidance?

Yes.

It was part of that story. It's something that we think we have to continue to chase after in order to deal with the increases in costs that we are seeing in the rest of the business.

Yes. And just additionally, Bill covered it accurately. When you think about if we have an outside hauler that's charging us $50 more on a trip and we pass that $50 more on, it is going to move the top line. One of the things that you see playing through temporarily here is that incremental $50 is going to come at 0 flow-through. So that's just something that we have to work through, and we'll continue to work with the team to catch up on it. But you saw a little of that play through in the first half.

Our next question comes from the line of Tim Thein from Citigroup.

Maybe a bigger picture one for Michael or Matt. Last quarter, you had talked about more optimism regarding the large project pipeline and what you guys were seeing in terms of quoting activity. I'm just curious given what's transpired since then with regards to all this tariff noise and potential policy uncertainty, have you seen any change or shifts in terms of the tone of your customer discussions?

No, Tim, we haven't. And we talked about that. Obviously, we have our customer confidence index and we track -- that remains robust. More importantly, we talk to our field leaders and field sales teams, specifically the strategic teams that are engaging with the large customers on large projects. And I can't point to one project that's been canceled because of any kind of tariff concerns, inflation concerns or anything else. So it's still robust. We still feel really good about the end market. And as you can see through all our actions, we feel that this -- that we have legs left to this cycle, and we're excited about that.

Okay. And then, Matt, just on the sequential rates, just to circle back on that, can you give us any color even if it's just kind of directionally with respect to how rates have performed between the transactional business versus your longer-term contracts? And basically the spirit of the question is if -- as you continue to grow specialty, does that at all mask how much we should expect to see in terms of a monthly sequential change just as you naturally have less business that's repricing every month?

No. No, not really. And you have to remember, so much of the specialty growth is in cross-sell that it's going to act very similar from a pricing mechanism to the rest of our business because we're negotiating with the same customers. And as far as -- I guess, also part of that question is, and we've been asked it so I'll answer it, is how are your national accounts versus your transactional accounts. And we see a very similar pattern and have for a while about pricing behavior and opportunity in both, albeit at a lower base, right? As you would imagine, our national accounts leverage their spend, they have a lower realized cost versus a transactional customer. But this is across-the-board effort of rate management, not just us trying to find [honey] holes to get some rate. And we're very disciplined about our rate management.

Our final question for today comes from the line of Stanley Elliott from Stifel.

You guys have done such a good job on the speed of which you can integrate a lot of these deals. Looking at the Baker assets, have a look to be -- maybe little bit larger. Is there anything from a real estate perspective that would keep the Baker integration from not tracking kind of at this accelerated pace from what we've seen in the recent deals?

No, the team has been working on it this week and last week, actually, and doing a lot of strategy work before close. The good news is we don't need a lot of store closures, that kind of integration. So they have ample real estate. We even have the opportunity to grow that footprint over time, similar to what we did with the pump acquisition. Although there are some synergies in the model and in our communication, I think it's important to note the real win here on the Baker deal is the cross-sell. It is a growth opportunity that we feel is there where we can capitalize what's a 76-year-old business, a lot of institutional knowledge and expertise and how we can bring that into our portfolio and capitalize it for growth. That's the play here for the Baker acquisition. And there's nothing that makes us feel as if we'll have to move slower than our normal rapid pace on integration.

I think that's it. Operator? As always, you can always connect with Ted for the -- heads our IR, if you have any additional questions, and our investor deck is out on the -- our website. So look forward to talking to you again in 90 days. Thank you.

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