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United Rentals, Inc. (NYSE:URI)

Q4 2012 Earnings Call

January 24, 2013 11:00 AM ET

Executives

Mike Kneeland – President and CEO

Bill Plummer – EVP and CFO

Matt Flannery – EVP and COO

Irene Moshouris – SVP and Treasurer

Analysts

Set Weber – RBC Capital

David Raso – ISI Group

Joe Box – KeyBanc

Nick Coppola – Thompson Research

Ted Grace – Susquehanna

George Tong – Piper Jaffray

Timothy Thein – Citigroup

Philip Volpicelli – Deutsche Bank

Operator

Good morning and welcome to the United Rentals Fourth Quarter and Full Year 2012 Investor Conference Call. Please be advised 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 indicated in the Safe Harbor statement contained in the 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, 2012 as well as subsequent filings with the SEC. You can access these filings on the company’s website at www.ur.com.

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

You should also note that today’s call will 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 and William Plummer, Chief Financial Officer and Matthew Flannery, Executive Vice President and Chief Operating Officer.

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

Mike Kneeland

Thanks, operator and good morning, everyone, and welcome. With me today as operated stated is Bill Plummer, our Chief Financial Officer; Matt Flannery, our Chief Operating Officer and other members of our senior management team.

Typically on the fourth quarter call, I’ll summarize the key results and then turn to the coming year and I know this is all adventurous in our operating and volume and we’ll certainly address that today. But I also want to touch on the broader invocations of our fourth quarter results. 2012 as you know it, was not a typical year for us and I think it’s important to view the quarter in that light. First, the results we reported were clearly strong finish to a very good financial year, a year which we transformed the company for superior returns.

In addition to the merger with RSC, we’re also successful executing our strategy in an expanding marketplace. Second, the numbers reflect a substantial progress, we made on the integration for the beneficial effect on margin and the alignment of our operations is now largely complete and we’re working together as one.

Bear in mind that the merger happened less than a year ago and we realized some significant efficiencies in the brief time. In the fourth quarter, we captured another $42 million of cost synergies bringing the total to $104 million for the year. Before I recap the numbers, I’ll remind you that any year-over-year comparisons I give you are on a pro forma basis, as measure against the combined results of the United Rentals and RSC for 2011.

On the top line, our rental revenue for the quarter was up about 90% year-over-year and total revenue was up more than 7%. Our adjusted EBITDA was $553 million for the quarter and a 44% margin, that’s 580 basis points higher than the same period last year. And our flow through was a very robust 125% for the quarter. These results stand on their own, but they become even more meaningful as a part of our trend towards superior performance.

Now, over the past year, as you know we’ve used these calls to explain how we’re becoming more discipline in running the business from value creation and each quarter the poof was in numbers and the fourth quarter was no different.

A number of factors worked in our favor including a modest improvement in the construction environment in 2012, a continuing trend toward market penetration, which is increasing the size of the industry pie, and a robust user core market.

Now within our won company, we had a more balanced mix of rental revenue with non-construction accounting for about 50% of our business and effective focus on key accounts with the application of our technology for their needs. A 7% increase in the volume of in our rent and a 6% increase in our rates we charged for our equipment.

Time utilization was 68.7% which although lower than last year was still very strong in our much larger fleet and the ongoing optimization or our field operations, in the fourth quarter, we closed 14 branches, nearly all of them merger related.

So we had a mix of factors, most of which were created to our own networks and some presented by the microenvironment. But in every case, we were intensely opportunistic and making these factors work to our advantage. And in the final months of 2012, our regions were still dealing with the tail end of the integration, but even so, they turned in very solid performance.

13 of our 14 regions had year-over-year growth in rental revenue for the quarter and 13 regions had year-over-year increase in rental rates. Of those 13, a 11 regions had a quarterly sequential rate increases, so demand held up going into the off season. Rental revenues from key accounts grew 14% year-over-year and within that group, national accounts grew 16%.

Another shining star was our trend, safety, power in HVAC business. It had an extremely strong quarter. Revenue from specially rentals grew 37% reflecting demand for construction, industrial and emergency response application. So, that’s a quick snapshot, and Matt is here and we available during our Q&A to answer any questions about our field operations and the integration.

I want to talk to you about 2013 and give you our insights. As you saw our outlook, we’re projecting strong growth in both revenues and adjusted EBITDA and very strong free cash flow. Our expectations for rates and utilization are in line with demand that we’re seeing for our services. And we feel confident that we can drive more improvement in rates, while increasing time utilization year-over-year. And we plan to do this, while investing over $1 billion of net rental CapEx to our fleet.

A several years ago during the worst of the downturn, it was extremely difficult to plan our current market conditions. And we’re operating in a very murky economy, but to a lesser degree that’s still true. Nevertheless our projections for 2012 were on the money and that puts exactly where we expected to be in 2013.

Now the end markets that are showing signs of growth, especially in oil and gas and power sectors and we see continued trend toward secular penetration driven by the growing appreciation for the economic benefits are raining and we have a broader deeper value proposition that we can now bring to market.

Time and again, our senior customers come to the realization that they’re wasting money by owning fleet that sits idle. And these customers see rental as a sound business strategy, which should continue to elevate demand and the recovery.

Now if you with us on our Investor Day in December, you know that we feel that we’re still in a very early stage for a meaningful recovery. The macro consensus seems to be in line with global insight, which estimates the U.S. equipment rental industry to grow by 8% in 2013 and by 11% in 2014. In private non-res construction, which accounts for half of our business is projected to grow about 6% in the U.S. in 2013 with accelerated growth in 2014 and we think these are all reasonable forecasts and are supported by our own customer surveys as well as surveys from other sources that serve in the same markets as we do.

Also we agree with forecasters who think most of the market momentum in 2013 will come in the back half of the year. This is all good news, but I’ll reinforce something I’ve said in the past, we believe our strategy, our scale and our customer service will keep us growing faster than our end markets.

And I want to spend a minute on customer service because it’s – we’re very serious about service as a differentiator. We know the attributes of great service are in the rental business, and we’ve built up a lot of credibility by focusing on those attributes. We track them at branch, district and region levels through metrics that measured customer service, fleet management and process efficiencies. And if a branch starts to slip on its on-time delivery, a manager knows it very quickly or if a district is having with the particular metric, are people who are on it. We also have companywide goals in 2013, like a more streamline rental process and a metric called OEC unavailable for rent and we’re very focused on improving that number. We are also running a tight ship when it comes to the safety. And I’m proud to say that we had a full year pro forma recordable rate of 1.4 for 2012 and that’s our best safety record performance yet.

Moreover 84% of our branches had zero recordables for the year and as far as we know that’s the best safety record in the industry, and we’re going to keep driving all of our branches towards zero. So what else you see from us in 2013, great question. You will see us continue to focus on technology including total control system or identifying key accounts, we can benefit total control to help them lower their equipment costs. You also see us rule out the mature model to more markets. This model uses dedicated repair hubs and essentially managed field services to improve our margins in high density areas.

We now have 20 successful implementations of our mature model in cities in Toronto and San Diego. With another 20 – excuse me another 15 or so planned for this year. We also go hard after remain of the synergies targeted, when we merge with RSC and we continue to expect we will reach a fully developed run rate between $230 million and $250 million of cost synergies in 2014 and we have plans to reduce our leverage that Bill will discuss.

The operating cash flow characteristics of our business are very strong and the timing of the merger has dovetailed nicely with market projections. So, when our favorable position reduced our leverage. Most important you will see us continue to deliver on our promise of improved profitability and higher margins. We just with our Branch Managers at our annual management meeting in Minneapolis earlier this month. Our managers are energized by the merger and hungry for growth. I think we all came away from that meeting that we are ready to take on the world.

One year ago, I stood here and told you that 2012 was not just about the deals we would make or the forecast we put out there. I said about we are delivering on our promise and to drive returns and you saw us deliver on that promise in 2012. Now, the bar is still higher and the stakes are bigger. And you can expect us to deliver again on 2013.

Now, I close in that thought, and return it over to Bill for the financial results and then after that we’ll take your questions. So, now over to you, Bill.

Bill Plummer

Thanks, Mike and good morning to everyone. As always, I’ll try to add a little bit more color to the quarter and the year that we just reported and also spend a little bit more time on our guidance for 2013. But before I get started, let me just remind everyone what Michael said that all of our discussion here is about our pro forma forecasted or actual performance, anything that’s not pro forma, we’ll call out as we go through.

So, let me start with our rental revenue performance for the quarter, up 8.7% year-over-year with good contributions from rate and volume as always. Rates were up 6% over the comparable quarter last year, and they were up eight-tenths of a percent sequentially versus third quarter of 2012. That brought us to a full year rental rate performance of 6.9%, very consistent with our guidance of about 70%.

If you look at volume and time utilization, we had nice growth in overall volume in the year; what we see on rent, which is our measured volume was up 7.2% in the quarter, to an average of $5 billion of OEC on rent, clearly reflecting what is an overall strong demand environment and certainly reflecting the investment that we’ve been putting in our fleet over the last year, year and half or so.

Time utilization on that OEC on rent was 68.7% in the quarter and that by any measure a very strong level of utilization for the fourth quarter. It certainly consisted with the demand that we’ve seen, consistent with the ability to deliver price and certainly is a focus of how we manage our business. It is down 90 basis points from the fourth quarter of the prior year, but I’ll remind everyone that that’s less of a year-over-year decline than what we have seen in the prior couple of quarters. And again, we remind you of the discussion that we’ve had about the impact of the integration, the branch consolidations that we’ve gone through, we are continuing to call back our leveraging of the fleet from that upheaval and we’re making very good progress and I think that – that’s smaller decline in year-over-year utilization demonstrates that.

For the full year, our time utilization was 57.5% and that was down only 30 basis points from 2011 and again I’ll remind you that, that was on a larger fleet. The overall fleet, average fleet size for 2012 was up about 12% or roughly $770 million of incremental fleet and certainly putting that to work very effectively explains that 67.5% utilization across the year.

Before I move on to the profitability, just a word on our used equipment sales results for the quarter. We had a very strong quarter and indeed a very strong year for used equipment sales. In the quarter, we generated a $141 million of proceeds from used sales, had a very robust 39.7% adjusted gross margin and again that’s the adjusted margin excluding the impact of the step-up in basis due to the merger accounting.

The margin reflects really a very, very strong performance in the channel mix. We had a great year as we drove more of our sales through our retail channel, 56% of our sales in the quarter were through our retail channel and that’s up almost six percentage points from that channel share last year and you all know that we get our best results in that retail channels. So, great success there, we’re having great success in accessing overall used equipment demand and that certainly portends well for our used sales going forward, which will continue to be robust.

Let me move now to profitability and start there with adjusted EBITDA. Adjusted EBITDA for the quarter was $553 million, and that was at a margin of 44.3%, so that represents an improvement of the $104 million of absolute EBITDA dollars. And that’s 580 basis points better in margin than the prior year. For the full year, adjusted EBITDA came in at a $1.988 billion. And the margin for the full year was 42.6%. For that full year, that represents almost $500 million of incremental adjusted EBITDA, $490 million and 650 basis points more in margin than the same period in 2011, full year 2011.

Flow-through for the quarter, which we defined is the change in adjusted EBITDA divided by the change in total revenue. Flow-through was an outstanding 125% for the quarter. If you look at the full year, we had another great result in flow-through, 93% flow-through for the full year.

Then margin and flow-through performance overall reflects the strong and great environment clearly, but also obviously reflects the impacts of the synergies that we realized from the integration. Even if you exclude the synergies though, the flow-through story is still pretty robust. So, flow-through still had 74% impact in the quarter, if you exclude the synergies. And for the full year, it’s comparable about 73% flow-through for the full year if you exclude the synergies that we realized in the course of the year.

If you move down to EPS on a profit basis, our adjusted EPS for the quarter was $1.27 and it’s worth pointing out that $1.27 reflects an underlying tax rate that was just under 30%, 29.5% to be precise. If you look at our GAAP, tax provision for the quarter, you see that we actually reported a tax benefit of about 5% on a GAAP basis, but that benefit is really driven by the effect of a couple of key items in the quarter.

So, we had, you all know a refinancing of our 10, seven, eight notes during the course of the quarter and we reported a loss for the premium pay to refinance that issue, that loss was recognized in the United States as a deduction and therefore push down the U.S. pre-tax income very significantly and our tax – our effective tax rate as result mix more significantly toward Canada, which you all know has a lower tax rate.

So, that was a very significant mix impact that drove down the underlying tax rate on a GAAP basis, but it was further exacerbated by the fact that we had favorable settlements of tax audits really around the states and in particular in Canada during the quarter. So the discreet items there were very, very favorable for the tax impact in the quarter and that was a significant part of driving that 5% tax benefit in the quarter.

All in all though the EPS performance on yield basis is pretty strong. As I said, the $1.27 reflects about a 30% tax rate even if you wanted to use the 35% tax rate, our view of adjusted EPS would still be in that $1.17, $1.18 area. So, a good strong EPS performance.

Let me move to integration just briefly and talk about the $42 million of synergies that we realized in the quarter, a very robust integration performance that has been the case and we believe, we’re comfortably on track to deliver what we’ve talked about is $230 million to $250 million of fully developed cost synergies. And the contributions were pretty solid across all the different areas of synergy deliver in the fourth quarter. So, the $42 million brought us to $104 million. As Mike said, our synergies in the fourth quarter and it sets this up very nicely to continue to drive those synergies through 2013.

Before I move to the outlook for 2013, let me just touch on free cash flow and capital structure and liquidity briefly. Free cash flow, this is the only measure that, that I’ll talk about. That’s not pro-forma adjusted. We report free cash flow on an as reported basis and that number came in for the full year at $223 million of cash usage.

Keep in mind – excuse me, keep in mind that includes the impact of all the restructuring and merger related payments that we made in cash. That impact was about a $150 million at cash. So, if you net out the $150 million of merger related cost, we had a free cash flow usage of $73 million for the year and that is within the range that we guided to between minus $25 million and minus $75 million for the full year.

Turn to our capital structure and liquidity. We finished the year with the total of $782 million with total liquidity, within that $654 million was ABL capacity and the remainder was cash and our AR facility and I remind everyone that as I mentioned just a couple of minutes, during the quarter we redeemed our 10 (inaudible) notes and incurred a significant interest expense charge to do that, roughly $72 million was the impact that played through our P&L.

Before we move to Q&A just on 2013 outlook, just briefly. Since Mike hit the high numbers just a little color. We put the revenue on the range of $4.9 billion to $5.1 billion, that’s total revenue. Within that the rental revenue performance we expect to be driven by our rental rate expectation at 4.5% year-over-year that includes a carryover impact in where we finished 2012 of about 2%.

For time utilization, we are expecting about 68% for the year, that’s a 50 basis point in improvement for the year and again continues to reflect the focus that we put on driving our utilization performance. Reducing the fleet unavailable for rent as Mike pointed out will be an important focus there and certainly that will help us drive utilization more effectively without having to invest capital underneath it.

Adjusted EBITDA for the year, we expect to be between $2.250 billion and $2.350 billion for the year so midpoint of $2.3 billion. Our net rental capital expenditures, we expect to be just over a $1 billion, a $1.50 billion and that reflects roughly $1.5 billion of gross rental CapEx and the difference being proceeds from used sales.

Full year free cash flow for the year, we expect to be between $400 million and $500 million and as we’ve discussed in the past we’ll use that primarily to reduce our leverage. On leverage we certainly expect a significant move during the course of 2013, we’re right now saying that based on the guidance that we’re providing that we should finish the year at right about three times debt to EBITDA and it will be that number whether we use any of the cash proceeds to finish out our share repurchase program or not. So a very nice deleveraging coming during the course of 2013.

Those are the key points that I would make right here and now there are plenty of other topics that we can talk about in Q&A. So certainly look forward to your questions, we can move to that now. Operator, let’s open it for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Set Weber from RBC Capital. Your question please.

Set Weber – RBC Capital

Hey, good morning, guys.

Mike Kneeland

Good morning.

Bill Plummer

Good morning.

Set Weber – RBC Capital

I just wanted to get a sense for how committed you are to holding the line on this $1 billion net CapEx number. What sort of the optimal mix here if you can get 68.5% utilization and keep the 4.5% rate, I mean would that trigger a higher CapEx number or how are you thinking about the balance there, because your 68% number would actually be above what you’ve done the last couple of years.

Mike Kneeland

Yeah, this is Mike. I’ll answer at this way. Look we are trying to drive profitable growth, if I were to see both rate and time, start to accelerate, I have no hesitation to spend more, but I would like to see the both of those come into play. And the other thing is I would say is that – a lot of free cash flow and we’ve got a lot of blue-sky in order to meet customer demand.

Set Weber – RBC Capital

I mean as you’re looking at your guidance, would you think that there is more relative upside to the rate number or to the utilization and which would push – would you prefer to push rate I guess versus utilization if you had a choice.

Mike Kneeland

I think you know me. I would tell you that obviously rate is near and dear to my heart has the biggest flow through and the highest potential for our margin expansion. And I think that, that’s a fair statement. So, rate I think, if you go back last year, we started out the year saying 2005, we ended up just here underneath 2007. We will continue to focus on it. We are going to continue to drive it and I think the team is low equipped. We got tools. As I stated in my opening comments, we’re now a unit as one and we’re going to focus on that.

Set Weber – RBC Capital

And are you seeing anything from a competitive standpoint, are the smaller independent guys refleeting or they becoming more aggressive with pricing or is everybody kind of being rational here?

Matt Flannery

Hey Set, this is Matt. Overall, I think everybody is being very rational. And you know the national players are in much the same mode that we are and I think the rest of the industry is following suit and that’s good for the entire industry. So, I’m very comfortable and encouraged by that.

Set Weber – RBC Capital

I mean, but do you get the sense, the smaller guys are refleeting or they based on capital constrained.

Matt Flannery

No, I’ve not seen a trend there at all.

Set Weber – RBC Capital

Okay. Thank you very much guys.

Mike Kneeland

Thank you.

Operator

Thank you. Our next question comes from the line of David Raso from ISI Group. Your question please.

David Raso – ISI Group

Hi, good morning.

Mike Kneeland

Hi, David.

David Raso – ISI Group

Two bigger picture questions. You keep referring to global insights outlook for 2013, but the guidance you’re giving appears to be no better than the industry outlook, so I’m just trying to see how you’re framing the year end, you keep referring to your ability to penetrate and take share but your guidance is really only in line with – that seems like how you’re viewing the industry. So, can you just sit back for a second and explain us why you don’t think you’ll be able to outgrow the industry this year?

Mike Kneeland

I think David, the way which we look at the world, you can parse out the numbers however you want but we believe that we’re going to outpace the industry this year. As I stated, and I continue to state whether it’s driving profitable growth, but don’t lose focus on the fact that our key accounts and our national accounts grew at very nice numbers and those are the areas that we continue to focus on, and you’re going to see us put more effort on growing that segment of the business.

David Raso – ISI Group

I’m trying to backdoor and to build town as the rental revenue growth for the year, because if you look at the implied used equipment sales, which is obviously the second biggest driver to your revenues, that implied to be up nearly 13%. Total revenues were implied only up 7%. So, I’m just trying to get a feel are we thinking that rental revenues were up, 7, 8, 9, and 10, I’m just trying to get a feel for that, and then the segue question is, we’re implying the core incremental EBITDA margins, forget about the synergies, dropping at 1,000 basis points year-over-year from roughly 73, 74, down to an implied 63. So, I’m just trying to get a feel for why are the incremental margins be 1,000 basis points lower and again why the rental revenue, maybe it’s not faster than the industry, but if you can help us in any way with those two questions it would be appreciated.

Bill Plummer

So, David, it’s Bill. What I would say on the rental revenue growth is, it’s at a certain level, it’s a systematical question about outperform the industry.

We do have a rental revenue growth within that center point $5 billion revenue number that we gave. That is an excess of anything that we’ve heard from forecasting services for the industry in the year and we haven’t given the exact number, but you can back into it reasonably close. I think you would have to know a little bit more about our assumptions for contractor supplies new equipment and so on in order to get super-precise. But we feel very comfortable in saying that we will outperform the industry in the year and that’s what underlies that guidance.

In terms of the flow-through performance and the change versus last year, we view 63% as being very robust flow-through performance when you exclude the impact of synergies. That’s – if you look back over the history of the company and the industry, I think you have to say that – that’s a good level of performance, it is as good as the 73,74 range that we were in 2012, clearly not, but I think what we got in 2012, it’s hard to imagine that you’re going to be able to sustain forever.

We don’t have as much rate realization assumed for 2013 as we actually had in 2012. That backs off the flow-through impact.

We aren’t putting as much fleet in on a percentage basis in 2013 as we did in 2012 and you know the benefit of flowing more fleets through the fixed cost basis pretty significant. So, that would back off your flow-through in 2013. So, when you start parsing through the things that – that we wouldn’t have there on our 2013 forecast, compared to what we had in 2012. It’s not shocking to me that our flow through ex-synergies would be down and we can have a robust debate about how much they should be down. But we feel good about 63% ex-synergies based on what we expect for the year.

David Raso – ISI Group

Yeah. I’m not denying to get absolute numbers. I was just wondering, you closed 187 stores over six months stretch. I have to believe that would hurt the flow through to some degree. But I guess you’re seeing the other items, you cited more than offset the positives of 2013 won’t have those branch closures?

Mike Kneeland

Yeah. I think along with the branch closures, there were variety of activities going on. I’ll tell you, one of the things that benefited 2012 for example is as you’re going through those consolidations and figuring out new responsibilities and how things are going to work, there is a level of uncertainty that’s introduced the cost – some people to say, you know what? I’m going to hold off on adding head count even though, I know that I might need to add head count.

So, in that environment, ex-synergies – you might actually be operating a little bit understaffed relative to where you otherwise should be. That’s not going to be as much of an impact in 2013. At least we’re not forecasting it to be. And so that’s part of the story that causes ex-synergy flow through the back half a little big. But please don’t lose sight of the fact that 63% is still pretty good.

David Raso – ISI Group

No, that’s all fair. Right, I appreciate it. And quickly just on tax rate for 2013?

Mike Kneeland

We’re saying the upper half of the 30s. So, 35, 36, 37, in that area.

David Raso – ISI Group

Thank you very much.

Mike Kneeland

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Box from KeyBanc. Your question please.

Mike Kneeland

Hey, Joe.

Joe Box – KeyBanc

Hey, good morning, guys.

Mike Kneeland

Good morning.

Joe Box – KeyBanc

Mike, question for you on your metro model. I think you mentioned earlier that you’re looking at about 20 current implementations and then maybe another 15 or so this year. I guess, one is that full opportunity and two, what percentage of your overall markets might fit within this type of model?

Mike Kneeland

I’m not sure. I’m going to ask him, because he’s deeply involved in it. So, Matt?

Matt Flannery

Great. Joe it’s – so, it’s 20 that are already implemented and another 15 that we’ve got planned to rollout. There’s probably another 10 to 12 after that. If you look at branch count, which – it is necessarily tied the revenue, it’s about 50% of our footprint. It is condensed enough to take opportunities of shared services that the Metro Model offers. I don’t know if that answers your question, but we’ve been encouraged by the results of the models we had, and obviously the longer ones, and ones that have been in place in early first quarter 2012 have significantly better metrics than the company average. So, we’re very encouraged by that.

Joe Box – KeyBanc

That’s – that’s perfect. And then I know at your Analyst Day you talked about one to three points of EBITDA improvements from this. Is that still fitting for the some of the other markets, did you plan to roll this out this out too?

Mike Kneeland

Yes. So we’re not certain yet, but if we – if we make the assumption that we took the biggest opportunities first, which would be a safe assumption, we’ve probably frontloaded that and some of the additional markets that we rollout, you don’t have as much density in. So, the scale may have some effect on where you’re going to fall between that 1% to 3% range, but we expect to be in that range.

Joe Box – KeyBanc

Excellent. Maybe one more for you real quick. Can you just dig into some of the moving pieces that would drive upside or downside to the 4.5% of rental rate guidance? And maybe just to add to that, it looks like both used and new equipment prices are well above the prior peak as opposed to the rental rates that are still below. How does new and used price play into your ability to raise rental rates, and I guess, is it normal for rental rates to lag this for behind?

Mike Kneeland

So – to your last question, I don’t feel that the new used pricing really has an effect on our rental rate whatsoever. It’s in the big scheme of things, it’s not a driver for the – for end users, so the rental still such an attractive value versus all the cost that come along with owning, I don’t think that’s part of a decision process.

Your first question was about 4.5% rate, and if I recall what the opportunity is, we’ve pegged 4.5, because that’s it we think. If you look at the 2% carryover that we referred too, and then the figure at first quarter, some of the middle quarters are where we have our opportunity, we make some sequential assumptions that get us to that 4.5% rate that we are very comfortable with. If the demand picks up sooner, Mike had said earlier, the second half of the year we feel stronger. If we see the demand in the first half of the year increase more than we’ve forecasted, we will – I think we have proven in the past, we won’t hold off on getting that opportunity. And that can very well show up in rate.

Yeah, the other thing I would say just – look we’re trying to be as transparent as we possibly can. We’re trying to make sure that everyone can try to look at how we see the world and the metrics to go behind the revenue that we’re putting out there. So to the extent, it’s a balancing act as Matt mentioned and we are going to continue to drive rate, it’s – this is an industry that has to get over its cost of capital and to the cycle, and that’s what we’re focused on.

Joe Box – KeyBanc

Sounds good. Thanks guys. Take care.

Mike Kneeland

Yeah. Thank you.

Operator

Thank you, our next question comes from the line of Nick Coppola from Thompson Research.

Nick Coppola – Thompson Research

How are you doing?

Mike Kneeland

Hi, Nick.

Nick Coppola – Thompson Research

I want to ask about the impact of Hurricane Sandy, is there anything you can quantify there.

Matt Flannery

Yeah, Nick this is Matt, we had in the fourth quarter about $6 million of revenue that was directly – was a result of the impact of Sandy. There is about a third of that, that remains on rent today. So not a large number. As far as forward looking the start have been now starting to come in as far as the construction planning starts now that the – the government since approved the funding specifically for the Jersey Shore, but we forecast maybe $20 million, $25 million of additional what we see on rent in those affected areas so it will be big in that in those communities and in that area and we’ll play a big role, but we don’t see it as a needle mover a big impact on the overall company’s scale.

Nick Coppola – Thompson Research

Okay, that’s helpful. And then can you also give us rate by month on a year-over-year basis?

Mike Kneeland

Yeah. Rates by month on a year-over-year for the month of October, it was 6.5%, for November it was 6.1% and for December it was 5.3% and for the full quarter it was 6% on a weighted average.

Nick Coppola – Thompson Research

Okay. And can you tell us anything about how things are turning into January?

Bill Plummer

Yeah. I’ll take that one, so January is tracking as we expected both for rate and fleet on rent and time utilization. It – it’s started – I’ll step back and say one of the things that you saw this year with Christmas being on a Tuesday as we saw the latter half of December, things softened up a little bit more than you normally would see, if Christmas were on a Monday or Friday or over the weekend so the second half of December was little softer. And so we started the year a little lower than we otherwise might have. But we’ve called out all that back and so January is on pace both in terms of rate and in terms of getting fleet into the market and it feels pretty good at this point.

Nick Coppola – Thompson Research

Okay, all right. Thank you.

Bill Plummer

Thank you.

Mike Kneeland

Thanks.

Operator

Thank you. Our next question comes from the line of Ted Grace from Susquehanna.

Mike Kneeland

Hi, Ted.

Ted Grace – Susquehanna

Hi, guys. Congratulations on good quarter.

Mike Kneeland

Thank you, Ted.

Ted Grace – Susquehanna

Michael, I saw in come back to some of your comments about the end markets, I know you commented oil and gas and power were strong. Could you frame kind of were those strongest in 2012 and would you expect that to carry into 2013 as well or do you see other groups maybe improving in a relative basis and kind of maybe get a little more granular about the end markets based on the client surveys or the other metrics that you’re looking at?

Mike Kneeland

I’ll start with the client survey and it’s a great point because our December survey of our customers, 62% of the key customers expect growth over 2012, which is up slightly from what we had in our last quarterly call. So, we take that as a takeaway from our customers’ confidence level is – is beginning to rein bullish and we take that as a positive.

With regard to some of the industries, the power sector is still an area, where we are – we participate in, in a broad sense and we think in 2012, it will continue in 2013. We could debate whether there is a pipeline, there is an half a lot of work is being done once we’ve got all of the – all of the wells are drilled for natural gas and for wet gas. It’s an efficient way of fuel and we see that demand.

Bill Plummer

We’re also having a colder winter than last year. Unlike last year, there was more, one of pause, because there is oversupply of natural gas.

Mike Kneeland

And given that the temperatures that were – we are unfortunately going through right now, whether it’s rather cold that’s going to I think acerbate some of the demand or the need for that fuel in energy sector.

Our power grid continues to be – needs to be refurbished, that’s underway, and it’s a long-term project. The same goes for coal and all of fossil fuel plants, their aging repairs ongoing, and then I would say that – one of the things that we’re seeing is more investment in the chemical side of the business, particularly in the Southwest or in the Gulf area and from foreign investment coming in here, but stable, and we have lower energy prices. And so we’re seeing more of that start to play out inside of our industry. Having said all that, I’ll also point out that one area that we’re looking at markets, we don’t see there is a growth in Northeast Canada, it came off of high. It’s still going to grow, but not at the rate we saw historically. Western Canada will remain strong and that’s – hope I answered all of your questions.

Ted Grace – Susquehanna

Yeah, that is helpful. And in terms of – just I was hoping to next touch on the synergies for 2013, and I don’t know if this is a Matt question or Bill question or Michael, but the guidance is for step up of, I think, $96 million. Could you help us understand what that allocation looks like between COGS and SG&A, and how the realizations in 2012 split between those two buckets?

Mike Kneeland

Ted, I’ll take a stab at it, and Matt certainly feel free to chime in. So, as we look at what’s to come in 2013, I would say there is a majority of it that comes in cost of rent, because it’s – it’s clearly become out of areas such as operational head count metrics that we track, delivery efficiencies that quite honestly we haven’t recognized any synergies for as of yet, but we know that there are some benefits that are going on, we just got – get our heads around how do we capture them and calculate them. So the majority of that incremental 96 will be in the cost of rent lines of the company, that said we still don’t have opportunities in SG&A. I think there is still some process changes to play out in some of the administrative areas, but it will be skewed toward cost of rent during 2013.

We have been more heavily skewed toward SG&, savings so far in the $104 million that we realized in 2012, and that’s just natural, right. A lot of it came out of reducing redundancies in the corporate functions, reducing sort of the management structure in the field and we’ve done a nice job of that, it’s gone very well. The stuff yet to be is going to be more – is the hardest stuff quite honestly, but stuff that’s more directly tied to operation.

Matt, do you want to add anything?

Matt Flannery

Bill, touched upon on it right, a lot of the operational efficiencies, you need to time to actually achieve right, so specifically as we report achieved synergies, you’ll see more achieved synergies from branch operations coming in 2013 than you did 2012, and we’ll get to our 200 million achieved for the full year and that bring us to a run rate of 220 by year end 2013. So most of the achievement will be done by year end 2013, to get to our 230 and 250 fully developed plan.

Ted Grace – Susquehanna

Got it. The last thing I was hoping to ask is and I apologize if I missed it earlier. How should we thinking about the cadence of CapEx for 2013? Is it falls in normal splits of 60:40or?

Bill Plummer

It’s – Ted, it’s Bill, again. We’ve thought very carefully about it this year and so I think what you will see is that the cadence by quarters in 2013, will look a little bit more like what you’ve seen in prior years like 2011 for example then what you saw in 2012.

We’re very heavily frontend loaded things in 2012 roughly I think I have got the numbers here in front of me. In the first quarter we spent about 36% of our total year spend last year in the first quarter and then another 35% in the second quarter and then it went 18% and 11%.

For 2013, I think you can look for us to be more like what we were in 2011, which was 19% in the first quarter of 2011. We’re probably going to be around that – around that level again this year. And then the second quarter may not be dramatically different than it was in the prior year, so probably 35%, 36%, 37% in that area. We’re probably loaded a little bit more of a spend in the third quarter than we normally might. So, call it 30% or so, and then remainder in the fourth quarter of this year. That’s – we think it’s important you understand the pacing, so that you get a good sense of how that capital spend will play out across the year. That helped?

Ted Grace – Susquehanna

That’s super helpful. Best of luck this quarter, guys.

Bill Plummer

Thank you.

Mike Kneeland

Thanks, Ted.

Operator

Our next question comes from the line of George Tong from Piper Jaffray. Your question please.

Mike Kneeland

Hi, George.

George Tong – Piper Jaffray

Thanks and good morning.

Mike Kneeland

Good morning.

Bill Plummer

Good morning, Joe.

George Tong – Piper Jaffray

Could you outline some of the specific steps that you’re taking to ensure rental revenue growth in 2013 will outpace the overall rental market?

Mike Kneeland

Specific steps, I think, if you take a look at our investor presentation, Juan, who is our Senior Vice President of Sales and Marketing, laid out a very detailed map of how we’re looking at the world and how we’re planned to attack it. Using total control, going after verticals, specifically and also implementing the sales force automation tools that we have out there, and – I mean, those are lot of dynamics that we’ve laid out. It’s a lot of the best practices that we’ve learned between both companies of how we’re going after the market. And core is another one that we’ve rolled out and we got to educate the legacy employees and that’s been fully laid out, and they’ve been educated on that. And 2012 was as much as really kind of integrate and learn. So that in 2013 that we could be prepared. And those are probably the biggest things that I can think off. Matt, if you want to add anything?

Matt Flannery

Yeah, I mean if you’re just talking about – talking about overall from 10,000 feet. We spent more time and energy in the past six months on preparing our sales team for sales force effectiveness through new tools in training then we have – in my 20 years in the industry and this I really think we’ll see the benefit of that. On top of the stabilization of everybody being there, new territories, there are new stores and just the overall, the full year effect of having the team together I think we will be able to achieve the growth that we have forecasted.

Mike Kneeland

I would also point out that there is going to be some things that we are going to roll out this year, that we just haven’t announced. We are going expand on some of the technology and leverage that, some of the best practices that we haven’t yet implemented, will be rolled out, and you know so to be more to come.

George Tong – Piper Jaffray

Got it. That’s very helpful. Next question is related to margins, the midpoint of your 2013, guidance suggest EBITDA margins of 46% will that be the new steady state or do you see additional upside to 46% beyond 2013.

Mike Kneeland

Well, I will be missed and tell you I think there is upside, right. Because the idea is that you know we continue to drive profitable growth. We have a lot of things that we are going to be utilizing some of what, we just mentioned some of the things around profitability by product and by customer, that technology exists rolling that out, implementing those type of tools, further capital efficiencies around, what’s not available for rent all to margin improvement. So, for me I would tell you that there is just more to come.

George Tong – Piper Jaffray

Very helpful. And then last question, could you give us some color on how much revenue synergies you expect to achieve in 2013?

Matt Flannery

Hi, this is Matt. We haven’t pegged specific number on it. I will say that we are well on target to hitting our commitment of $50 million of incremental EBITDA that we reported last year is our target. And if you recall that will come at a high flow through, because where we are getting that will be somewhere between 460 million and $70 million of additional revenue.

And I’m not even trying to avoid giving you an answer. The real challenge is unlike cost synergies, we have set things in motion to achieve revenue synergies, but we actually have to build the revenue, which is going to come throughout the year to take credit for. But we do feel that we’ve the actions in place to meet and probably exceed our plan.

Mike Kneeland

Yeah, on that point, just to point out, the harmonization of all the contracts, although we kind of, almost all being done, they are not all done. We’ve got about 90% done. We’ll get the balance of those baked into this quarter. I think Matt’s exactly right as you see the quarters unfold this year, you’ll see more visibility around those numbers.

George Tong – Piper Jaffray

Right. Thanks and congratulations on the quarter.

Mike Kneeland

Thank you.

Bill Plummer

Thanks, George.

Operator

Thank you. Our next question comes from the line of Timothy Thein from Citigroup. Your question please.

Timothy Thein – Citigroup

All right. Thank you. Good morning and congrats again on a good year and in terms of the acquisition as well, in terms of your integration. Question back in terms of the EBITDA guidance, Bill and if you kind to walk through some of the key pieces, I’m trying to get a feel for how we should think about the volume impacts.

And you just mentioned that the incremental costs synergies of that’s give you call it $100 million incremental benefit. The benefit from rate should give you another call it $180 million and obviously these are not given of course. But I’m trying to think about if you assume a more weak equal weighted spent on that billion of net CapEx implies about $500 million in higher pro forma average OEC and you’re saying that utilization is up some on 12. So, what should we kind of an appropriate drop through range that we can think about on that incremental volume

Bill Plummer

Tim, so make sure I understand your question. You’re looking for the drop through of just incremental volume alone.

Timothy Thein – Citigroup

Yeah, exactly.

Mike Kneeland

So, what I would say is we haven’t parsed it at that level, we got I mean we gave the guidance that shows you the increment – the drop through for overall revenue, whether it’s price, volume, mix, whatever – fleet, whatever is implicit in the guidance. And David Raso earlier talked about 63% if you exclude the impact of synergies. We haven’t broken out the incremental impact of volume at that level of detail. So, I’d – I actually don’t even have number committed to memory that I’d want throw out there. Clearly volume is going to be a focus for us. We’re putting more fleet in. We’re going to raise utilization and certainly that’s going to be a key driver of our overall profit improvement. But why don’t we leave the discussion at the total revenue level.

Timothy Thein – Citigroup

Okay. All right, fair enough. And then, Bill, in terms of the mix impact, how should we just kind of bridging that price versus volume and then the additional kind of unknown. What should we think about from a modeling perspective in terms of what that mix factor looks like in 2013 as you’ve moved more of your business toward to these monthly contracts.

Bill Plummer

Certainly. So as we look at 2013 and what’s implicit in the guidance is a mix impact that’s somewhere around a 0.5 of headwind. So, 4.5% rate whatever your model for volume is and explicitly we’re saying about a 0.5 of mixed headwind, that will give you the high-single digits creeping upon 10% revenue growth that’s implicit in that overall total revenue growth that we’ve guided to. So, that’s how we’re thinking about it.

Timothy Thein – Citigroup

Okay, great. Thanks a lot.

Mike Kneeland

Yeah.

Operator

Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please?

Philip Volpicelli – Deutsche Bank

Good morning. I have two quick ones and then one more philosophical. The first where do we stand on the stock repurchase authorization and where do we stand on the RP basket? And then the last one is, with regard to acquisitions clearly the integration of RSC is going well. In 2013, would you consider looking at other targets of upsides?

Mike Kneeland

So on the share repurchase, Phil, we’ve got about $85 million left to do, and we will – we will manage that the way we said initially, which was we’re going to get it done over in 18-month period post – post the close, and we will just spend it as we go along. In terms of the RP basket, I’m going to look over at Irene, I’m sure she’s sitting here, and say where is that on your cheat sheet, Irene, help me?

Irene Moshouris

It’s the acquisition notes, and then the most restricted within the $50 million.

Philip Volpicelli – Deutsche Bank

I’m sorry could you say that again.

Irene Moshouris

$250 million.

Philip Volpicelli – Deutsche Bank

Thank you, Irene. And I guess Michael, maybe the acquisition question?

Mike Kneeland

Yeah, with acquisition, we always are going to be focused on driving profitable growth, I would say, and you’re going to hear me say that over and over. Strategically, it has fit, it has to – there have been a lot of rigor around this, it also has to be accretive, and the cultural fit. And having said all that, we always look at what’s out there and I think one of the areas that was very evident that we’re going to be focusing on is our specialties side of the business, which is a very high return and bodes very well with our current customer mix, as we go forward. So again opportunistic, but no need to rush out there, and we’ll continue as we stated earlier, we’ve got a lot of free cash flow and not only this year, but the years to come. So, but we’re going to be in a position.

Philip Volpicelli – Deutsche Bank

That’s great. And then maybe I can just ask, are the number of books coming across your desk, are opportunities increasing or decreasing in terms of potential M&A that you’re analyzing?

Mike Kneeland

I don’t measure it in that way. I think that people try to get into – and to talk to us to get a sense of what our thoughts are and I will tell you that I turn away as many years I open up, so I don’t measure it in that form, it’s just I think people are trying to understand what our appetite is and we’ve got this – these integrations underway that’s foremost on my radar screen. It’s delivering what we said we’re going to deliver and then some we got the best in class, we got to deliver on the best practices and then it has to be strategic. How can it fit with our long-term view.

Philip Volpicelli – Deutsche Bank

Great. Thank you very much. Good luck.

Mike Kneeland

Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraints, this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Michael Kneeland for closing comments.

Mike Kneeland

Thanks, operator and thanks, everyone for joining us today. You’ll find our Investor presentation on our website. We’ve got some updated data that we hopefully find – you find is useful for all of you and as always feel free to call us or Fred Bratman here in Greenwich and you can discuss the details in more – all of the comments in detail. And also if anyone would like to extend visitation to anyone of our sites to get a better sense of how we operate it. Thank you very much and we look forward to our next quarterly call.

Operator

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.

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