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United Rentals, Inc. (NYSE:URI)

Q4 2013 Earnings Conference Call

January 23, 2014 11:00 a.m. ET

Executives

Michael J. Kneeland - Chief Executive Officer & President

William B. Plummer - Chief Financial Officer and Executive Vice President

Matthew J. Flannery - Chief Operating Officer and Executive Vice President

Analysts

Seth Weber – RBC Capital Markets

David Raso – ISI Group Inc.

Ross Gilardi – Bank of America Merrill Lynch

Ted Grace – Susquehanna Financial Group

Steven Fisher – UBS Investment Bank

Nicole DeBlase – Morgan Stanley

Scott Schneeberger - Oppenheimer & Co. Inc.

Neil Frohnapplen – Longbow Research

Operator

Good morning, and welcome to the United Rentals Fourth Quarter and Full Year 2013 Investor Conference Call. Please be advised that this call is being recorded.

Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the 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, 2013, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's earnings release, investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

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

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

Michael Kneeland

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

Last night you saw as reported a strong end to a record year of value creation. Our efforts in 2013 were defined by our discipline, our focus and our pursuit of profitable returns. All three of these qualities are apparent in our results. Our rental revenue and our EBITDA both showed substantial year-over-year improvements in the quarter and these are the key metrics of our core business and their trajectories look very good. We increased our rental revenue by a robust 9.4% in the quarter. The full year increase was 7%. So we outpaced our performance in earlier periods as expected. And our adjusted EBITDA for the quarter was $651 million at a margin of 48.7%. That’s 440 basis points higher than the prior year. These are strong tailwinds to take us into 2014.

In addition, the three drivers that underpin our revenue and margin showed solid year-over-year growth in a season challenging quarter. Our rates improved 4%. Our time utilization increased 60 basis points to over 69% and our volume of equipment on rent increased by more than 8%. The bottom line as you saw was an adjusted EPS of $1.59 per diluted share. Now Bill will discuss these numbers in more detail in a few minutes and then we’ll go into the Q&A.

So now I want to turn over to the current year. The operating environment is obviously a major factor in our outlook and we agree with the majority of forecasts, particularly more lively in rental market in 2014, with further upswings in 2015 and 2016. Now, whether the improvement this year is roughly 8% as global insight predicts, or a different number, our intention is to outpace the industry as we profitably grow the business. Now we’ll continue to execute a balanced capital allocation program, incorporating investments both organic and inorganic growth. In the process, we expect to continue to bring down our leverage and return cash to shareholders.

But the outlook we issued last night is a measure of our confidence in achieving these objectives. You can expect us to move well past the $5 billion mark in total revenue and with an even more dramatic improvement in EBITDA. To help drive this growth, we set our gross rental CapEx at $1.65 billion for 2014. That’s a big number and we spent close to that last year and we think our customer activity will support it again. Now approximately 4500 million of this capital is earmarked for growth CapEx and based on our expectations for recovery, we can adjust the throttle of this anytime depending how the year unfolds. Our agility is a major advantage from other rentals in terms of fleet management and it ties directly to scale and liquidity.

I also want to mention our used equipment margin because that’s another measure of demand. Our fourth quarter margin on new sales was more than 46%, compared to roughly 40% prior year. Now, North America is a strong marketplace for us right now and we’re in the process of expanding our export channels for used equipment to take advantage of foreign demand. So we’re thinking both in near term and long term dynamics to execute our strategy for profitable growth. I want to reiterate our mantra that you’ve heard me use before. United Rentals is not a company that chases topline at all costs. We view demand for our services and return on our capital as two sides of the same coin and we won’t lose sight of that in the recovery. Our entire company is laser focused on returns. In fact, return on capital was a substantial theme in our annual management meeting three weeks ago. We’ll be tracking returns very closely this year using metric that tied to compensation, both at the branch and executive levels.

Now I’ll touch briefly on the operating environment for the fourth quarter as we carry into 2014. We drove rental revenue growth in all but one of our regions in the quarter, with about half of our regions showing double digit growth. The southeast had the most robust performance in our general rental business. It was up nearly 21% year-over-year. Georgia was particularly strong. We serviced large capital improvement projects and plant shutdowns as well as retail. A number of these projects are ongoing in 2014 and we see good demand from oil and gas, industrial manufacturing and the food and beverage sector. Plant maintenance and retrofits continue to be a strong trend.

We’ve also recently run bids for corporate offices and data centers. So it’s an encouraging mix and the real traction in commercial construction is still ahead of us. Our specialty business has a growing role in this landscape. In the fourth quarter, trench safety revenues were up more than 19% year-over-year. The Power/HVAC revenues were up more than 15% and that growth would have been even higher without the comparison of Hurricane Sandy in 2012. Our third specialty business is called Tools and Industrial Solutions and we see an enhanced opportunity to cross sell these services based on an increasing number of tool hubs in our footprint. As many of you know, these business units speak prominently in our company’s growth strategy. We opened 18 specialty locations in 2013, 12 of them in the fourth quarter. These branches are off to a good start and we expect to realize a growing benefit from our specialty cold starts in 2014 and beyond.

We’ll continue our specialty offerings, both organically and through select acquisitions if the right opportunities arise. This year you can expect us to see open another 13 cold starts dedicated to Power and HVAC, Trench safety and pulls. We’ve increased our capital allocation for specialty by 44% compared to last year. These are sound, strategic reasons for our focus on rentals, specialty rentals. First, they’re an attractive high margin business that serves a range of growth markets. Second, we expect that a greater diversification of revenue streams in end markets will help us achieve our goal for return on invested capital and lessen the impact of cycles. And third, we can cross-sell these services to our General Rental customers using our existing sales structure. Cross selling for us is not just about incremental revenue. It’s a big part of our positioning as a provider of total jobsite solutions. By cross selling specialty, we deliver more value to our key accounts. Large customers want and need these services and they’re embracing the chance to access them through the one source, along with more traditional categories.

We also have good news report on safety. We ended the year with approximately 10% fewer reportables than the prior year. Our reportable rate for 2013 was 1.3, which is our best performance yet. Safety, like rental rate and cost discipline is an area where you’ll never see us become complacent and there’s always more work to be done. This mindset of continuous improvement has become embedded in our culture. We started with Operation United in 2009 for our call to the customer service excellence. It was extended to operations with our rollout of the 5S process in 2012.

And now we’re embarking on Operation United 2 which is based on a lean philosophy pioneered by Toyota and this is tremendously exciting for the company. We’ve completed 8 branch pilots using kaizen process and we’re soon beginning a companywide rollout to target nearly 200 branches this year. Our vision for lean will require financial investment and a major operational commitment, but based on the results we saw from these pilots, we believe that we can realize significant improvements in our operations over time. We’re targeting a run rate of at least $100 million in efficiencies within three years.

So in conclusion, we had a record year in 2013, but we’re still hungry. We’re still thinking about new ways and we’re also looking at our business from every angle, exploring every possibility for profitable growth. Most importantly, we’re moving forward from an unparalleled position of strength.

So with that, I'll turn it over to Bill for the financial results and then we’ll take your questions. So, over to you, Bill.

William Plummer

Thanks, Mike, and good morning to everyone. As is usual I’ll spend some time going in a little bit more detail on the quarter before I move on to our outlook for 2014. I’ll start with just an update on rental revenue for the quarter. You heard Mike say that Rental Revenue was up 9.4% in the quarter. That was very robustly driven by the increase in our owned equipment rental revenue. OER was up 9.6% in the quarter. You heard about the 4% year-over-year rate improvement. That was a very significant driver, but we also had very robust volume growth in that OER number, up 8.2% in fleet on rent in OER for the quarter.

Mix and other was a drag of about 2.6% and as we’ve talked in the past, about 2% of that drag was from the effect of inflation on our original equipment as we sold used equipment. So the remaining negative 0.6% or so was owed to mix in our period mix and other mix effects in the revenue. So, OER up 9.6% or about $86 million out of the $97 million or so year-over-year growth in rental revenue.

We also had another very strong quarter in ancillary revenue, up $15 million or so over the prior year. That’s a 15% growth rate for ancillary, really driven by better sales of our rental protection program and higher collections on delivery revenue in the quarter. So a very robust quarter in ancillary and others. Re-rent was down in the quarter. That was the main difference between the two strong growth items in OER and ancillary. But put it all together, rent revenue was up to $97 million or so year-over-year and again that’s a 9.4% rental revenue improvement.

If you move on to used equipment just real quickly, another good quarter there for us, $134 million of proceeds of used at the 46.6% adjusted gross margin that Mike mentioned. So another very strong used result. The margin mainly reflects what was a very strong retail mix in our channels yet again. We were over 60%, actually about 51% through our retail channel in used sales in the quarter. That’s up 1.8 percentage points versus the prior year and it reflects the continued emphasis that the field is putting on making sure that our used sales are really landing in the hands of the highest valued buyers for both us and for the buyer. So good used equipment sales quarter for us there again.

Real briefly, touch on profitability. Maybe I’ll do it as we’ve come to do it recently by walking through a bridge of our adjusted EBITDA performance. So we were up $98 million in adjusted EBITDA, up to that $651 million number for Q4. Of that $98 million, we were helped by rental rate increases by about $35 million EBITDA impact. So that’s the 4% year-over-year rate. Flow through is something like 95%. Volume was also strong, up $49 million over the prior year and again that reflects the 8.2% OEC-on-Rent growth that I talked about other flow through let’s call it 65%. The fleet inflation and mix impact was a negative $16 million, again reflecting the fleet inflation from used sales, along with the mix impact as we talk about. Our used sales we sold $263 million of original cost fleet at an average age of 88 months. So if you hit that with the 2% inflation factor for each year in that 88 month period, that gets you to the fleet inflation dollars within that $16 million headwind.

Synergies, had another good synergy quarter this year. $59 million of synergies realized in the quarter for Q4 and that’s $17 million more in synergies than we realized in Q4 of 2012. So the year-over-year synergy impact on EBITDA was that $17 million difference. I talked about ancillary revenues being strong. So that contributed about $8 million in the quarter at EBITDA and our used sales contribution year-over-year was about positive $8 million as well.

SG&A. we had a good SG&A quarter. The impact in SG&A year-over-year was about $13 million positive, with a heavy contribution from a strong bad debt expense performance in the quarter. About $9 million of that $13 million was from bad debt expense reductions as we saw the benefit of all the good work we’ve been doing to address the longer dated accounts receivable in our overall AR balance. The remainder are headwinds. We talked in the past about our merit increases on a year-over-year basis being about $5 million a quarter. So there’s a $5 million headwind for merit. The other lines of business, new equipment, service and other and supplies accounted for about a $3 million drag year-over-year and a host of other things we lump into all other would be about an $8 million headwind. So those are the key components that add up to the $98 million of year-over-year improvement in adjusted EBITDA. $651 million is a very nice 48.7% margin in the quarter and that’s about 440 basis points better than the prior year. I think Mike said that as well.

Flow through for the quarter in total was 110.1% and that was a very nice result, obviously helped along by the improvement in the synergies realized in the quarter over the prior year. If you exclude the synergies, still a very robust 91% in the quarter and that brought the full year for flow through excluding synergies to 59.4%. Again that’s the full year. Just an aside on the synergies, we realized $236 million of synergies for the full year and we ended the year with an annualized run rate for cost synergies, these are cost synergies only, an annualized run rate of right at about that same number, right at about 238, 240. So we are very pleased with the synergy result that we’ve realized and we feel that we have now completely delivered on the synergies, the cost synergies that we’ve talked about since the RSC acquisition. So this will be the last quarter that you’ll hear us talk about cost synergies as a separate standalone item. Those saves are now baked into our business and our objective is to drive them as we go forward. So a nice synergy result and a nice flow through result in the quarter overall as well.

Just touching briefly on EPS. EPS was $1.59 in the quarter and that totaled $4.91 for the full year at adjusted EPS. So a very strong year for us in earnings per share as well.

Before I move on to the outlook, I’ll just touch on free cash flow briefly. We ended the year, the full year with free cash flow of $421 million and that includes the add-back of about $38 million of merger and restructuring related payments. You all know that we’ve been carving that out of the cash flow for the entire year, in fact since the RSC transaction. That free cash flow obviously is after the investment we made in our fleet. We spent $1.580 billion on new capital this year and obviously it nets out against the overall free cash flow that we delivered. So a very robust result in free cash flow from our perspective and well within the range that we had been guiding to afford the $500 million.

On cash structure and liquidity, just real briefly, we finished the year with total liquidity of about $1.370 billion. Within that was $1.1 billion of available capacity on our ABL and about $175 million of cash on hand. And I’ll remind everyone that a couple of days ago we did redeem $200 million of 10.25% notes that we had assumed in the RSC transaction. So continuing to focus on really optimizing our capital structure. We used our ABL to redeem those notes and we were able to do that because we upsized the ABL during the month of December. But again even after using the ABL to redeem the notes, we still had that $1.1 billion I mentioned of available liquidity on the ABL by itself. So pretty good liquidity position for the company overall.

So before we move on to Q&A, one last item to address which is the outlook for 2014. You saw it in the press release last night, but just to recap. We think our total revenue will come in the range of $5.25 billion to $5.45 billion in 2014. And within that, rental revenue will be driven by the key measures that we’ve talked about. So we expect rental rates to be up about 4% for the full year and that will be after the impact of carryover. Caveat carryover this year will be something between 2% and 2.5%. So call it 2.25% just for discussion’s sake. We do expect to improve time utilization this year. 68.5% is where we think we’ll be. That’s up 30 basis points over what was a very strong year last year and would be another record for us. So expect good operating performance to drive robust rental revenue growth.

And adjusted EBITDA, we’re calling that between $2.45 billion and $2.55 billion and we will achieve that at a flow through of about 60% for the full year. So again another year of about 60% in 2014. Net rental CapEx, we’re going to spend $1.650 billion on gross rental CapEx in the year and that will net down to about $1.150 billion in the year. Our free cash flow for the year we expect to come in between $400 million and $450 million over the course of the year and along with that, we think that we’ll end the year with leverage as measured by net debt to EBIDTA somewhere in the 2.7 to 2.8 times area. That net debt will be after we’ve executed a pretty robust share repurchase program this year. We expect to spend about $450 million on share repurchases during the course of 2014 and even with that, we expect our net debt to EBIDTA to come down to that 2.7 to 2.7 range from the 3.0 that we finished 2013 with.

Let me address just one point that came up in some questions since the press release last night around free cash flow, the guidance of $400 million to $450 million. The questions or comments that we’ve gotten suggest that hey, your EBITDA is going up. If you use the midpoint, your EBITDA is going up year-over-year something like $200 million, but your cash flow is basically flat. Why the disconnect? I assure you there is not disconnect. We think about these things very carefully as we put the guidance out. That increase of EBITDA of roughly $200 million in the year -- assuming it all came in cash would naturally argue for $200 million higher on free cash flow. The headwinds that we have working against that in 2014 now are an increase in our CapEx. We’re $1.580 billion this year, going up to $1.650 billion. So that’s an extra $70 million of capital spending. The $200 million is now down to $130 million.

We also are going to spend a little bit more on non-rental CapEx in the year as we roll out some of the cold starts and invest in the facilities to do that. We invest in pickup and delivery fleet those new cold starts as well as to improve the [P&D] fleet around the rest of the company. So another -- call it another 10 or so of incremental non-rental CapEx eats up part of that increased EBITDA. We’ve got higher taxes coming in 2014 to the tune of about $30 million. No, we’re not done with the NOLs in 2014. That increase is really reflecting some alternative minimum tax increases that we experienced, along with greater profitability in 2014 raising Canadian and state local taxes somewhat. So that $30 million gets eaten up in higher taxes. We get a little bit of a benefit in cash interest from having redeemed the high coupon issue, call that $10 million or so of benefit, but working against that is an increase in working capital as we grow our business.

Let’s say we grow revenue roughly 8% and if we assume the same level of DSO performance, our accounts receivable will grow in that same area. We finished the year with roughly $800 million of AR. So you put 8% on AR, that’s a $50 million headwind to working capital right off the bat. Working against -- offsetting that we are looking at some benefits with larger payables in the year. So you net all that together, working capital should be a headwind of something like $60 million. And then the rest is just puts and takes in a whole bunch of areas, including perhaps a little bit of conservatism on our part. So hopefully that addresses the free cash flow outlook that we gave and hopefully that gives folks confidence that it’s fully in line with the other elements of guidance that we’ve given for the full year.

A couple of real minor points just to finish up to help you with thinking about cash flow and some of the other items next year. Our book interest expense for the year we think will be in the $450 million to $500 million area. And cash interest for the year should be in the bottom part of that range. Our tax rate, we finished the year this year with an effective tax rate that’s a little north of 36%. If you use 37% or so I think that would be a good starting point for our ETF in 2014. A little bit of pressure there from the mix of earnings between the U.S and Canada. Federal cash taxes, I mentioned that they’ll be up roughly $30 million or so over where they were this year. We spent $48 million this year on cash taxes overall. So the increase is mainly federal for 2014.

So those are some key points on the outlook. Hopefully that helps you with your thinking about the year and certainly we’ll be glad to address them in Q&A. but let me finish my comments by just reiterating what some of the comments that Mike made. We had a great year in 2013. It finished off strong and we have great momentum going into 2014. As we start the year this year, we’ve got a lot of initiatives that we think can really help contribute to a robust improvement in profitability this year as well as the years subsequent. So we’re excited about the year and we look forward to talking to all of you about the results as we go through the year.

So with that, I'll turn it over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). It looks like our first question in queue will come from the line of Seth Weber with RBC Capital Markets. Please go ahead, your line is open.

Seth Weber – RBC Capital Markets

With the free cash guidance that you just underlined, Bill, the $400 million to $450 million for ’14 on top of the $4.25 million for ’13, can you talk about your relative comfort to reaching the $1.5 billon that you talked about collectively for 2013 to 2015 and what would be the source of that large uptick -- the implied uptick in 2015 which would have to be $600 million to $650 million?

William Plummer

Sure, Seth. Thanks for pointing that out. I probably should have said it in my prepared comments, but we’re very comfortable with the $1.5 billion number that we talked about covering the ’13 to ‘15 time period. Yes. It does imply a significant uptick in free cash flow for 2015, but again we feel good about being able to deliver that. Where is it going to come from? We think robust improvement in our operating cash flow from profitability. As we continue to grow the fleet and as we see the impacts of some of the investments that we’ve made in prior years, we fully expect that we’ll have a nice improvement in profitability that will contribute to significant improvement in free cash flow overall. So that’s the biggest driver to get to that roughly $650 million number. There’s a little bit of a headwind against that as we talk about NOLs run out in 2015. And so our cash tax bill will go higher. It will be a drag of something north of $100 million, $120 million thereabouts.

But we feel like with the improved profitability and some of the other items that I’ll touch on in a second, we can overcome that. One of the other important drivers is that we don’t anticipate to continue to grow our capital spend as we go forward dramatically. In fact as we sit here and think about 2015, we think broadly speaking we think about 2015 CapEx as being comfortable with the 2014 number that we’ve seen. So we don’t expect to see a significant drag from increased CapEx in the year 2015 as well. So that helps. And then we’ve got some things focused that in the areas that I’ll broadly call working capital that we think can really help improve our working capital position in ’15 and contribute to lessen the working capital use in that year than what you might normally expect.

So those will detail more as we go forward. But if you broadly say working capital improvements, that will be a nice slug of the incremental cash flow in 2015 and then we’ll get a little bit of benefit as well from the non-rental CapEx. I mentioned that we’re investing a little bit more in non-rental CapEx this year. We should be able to dial that back in ’15 as well. So those are the big things I’d point to. There are a tonne of moving parts in that outlook, but we feel like we’ve been pretty good in delivering what we’ve said over the long haul and the short haul and we’ve got a lot of confidence that we can hit that roughly $1.5 billion number that we’ve talked about. That help?

Seth Weber – RBC Capital Markets

Yeah, that’s helpful. Thanks. If I could ask a follow up on the CapEx discussion, did I hear correctly that specialty CapEx is up 40 something percent in2014? Multi core question, how should we think about CapEx cadence through the year? Should it be normal? And if specialty CapEx is up that much, where are you deemphasizing CapEx I guess?

Matthew Flannery

Seth, this is Matt. Good question. As far as the specialty CapEx, think of our CapEx as two thirds replacement and one third growth within that 50 number roughly. And if you think about the growth capital, the number that you’re referring to, we’re going to spend about 45% of that growth capital on specialty. It’s a major strategic advantage for us with our key customers and as well as to fund all cold starts that Bill and Mike had referenced. Within the other two thirds of the capital, we will continue to mix even with major cap classes. So we have a focus on making sure there’s three levers that we focus on, customer demand, first and foremost we have to meet their demand. But within those major cap classes of aerial, reach forks, and earthmoving, there’s different mix we can get to meet the demand and at the same time improve our returns and that’s what our team is focused on as far as CapEx spend for ’14 and beyond.

Seth Weber – RBC Capital Markets

Should the cadence through the year be pretty traditional or do you think it will be more front end loaded or back end loaded this year relative to historical?

Matthew Flannery

We expect it to be similar to what we did in ’13.

Operator

It looks like our next question in the phone queue will come from David Raso with ISI Group. Please go ahead, your line is open.

David Raso – ISI Group Inc.

I know it’s a little bit of you can’t please everybody, but trying to balance growth and hitting the cash flow and return on capital targets, when you speak to CapEx, best case flattish in ’15, utilization this year you’re looking at 68.5. How are we thinking about growth though in ’15 with a flat CapEx? I’m just trying to make sure yes clearly the re-rating stock giving away a little bit of growth is worthwhile for an improving return on capital and cash flow, but at the same time if I don’t have CapEx growth in ’15, structurally how are we thinking about where rates can go in that somewhat restrained CapEx environment. Where can utilization go? I’m just trying to make sure we don’t lean too far to the cash flow return on capital story and forget about leveraging the cycle bit.

William Plummer

Thanks, David. I guess I’d point out that if we spend let’s say $1.650 billion again in ’15, we’re still growing the fleet, right? That’s still mid to upper single digits growth on the fleet overall and if you layer on top of that a little bit of improvement in utilization, that’s a nice level of growth -- basis for growth even before you get any rental rate increases on top of it. So I guess I wouldn’t despair of growth in 2015 with that level of capital spend and what we want to do is to make sure that we’re leveraging the capital we already have plus any new capital that we spend as much as we can. And so we balanced it maybe a little more toward profitability improvement and return improvement than some would like, but I think it’s going to really bear fruit as we go down the road in improving the returns and profitability of our business.

Michael Kneeland

David, I just want to add two other things to that that Bill highlighted on and I agree with what Bill said. These other avenues that -- we’re taking off a lean process. We changed our processes to figure out how we can make sure that we can grow our revenues by expanding our time utilization and also getting our OEC not available down. So that to us is also another way in which we can get that trap cash and have it start working for us.

David Raso – ISI Group Inc.

And related to this, on page 52 the bridge to the higher returns speak to 6% growth in rental CapEx per year. So it is safe to assume trying to model out a few years there’s going to be some growth in CapEx even if you flatten out in ’15 to hit this 10.8% hurdle for return assume there’s some pickup in CapEx if you look further out. And what are the EBIDTDA margins that are baked into this return analysis on page 52? Just so I can get a feel structurally where you think the incremental margins are from here to there, call it 2017.

William Plummer

So I’ll leave the exact margin numbers to your imagination, but I think it’s fair to say that they continue to improve throughout the timeframe that we’re talking about here. Yes, as you look further out we probably would add a little bit more growth CapEx beyond ’15. I’m talking a little bit more in CapEx assuming the market continues to move positively just to sustain a decent level of growth for the business overall. Incremental margins as we go forward, again as the modeling exercise right now I’d say just keep using 60%, the number right around 60%. That’s probably a fair way to think about incremental margins going out.

Operator

It looks like our next question in the phone queue will come from Ross Gilardi with Bank of America. Please go ahead, your line is open.

Ross Gilardi – Bank of America Merrill Lynch

Just I wanted to if you could elaborate, given your focus on returns in your comments on continued deleveraging and returning cash, should we assume that large acquisitions have moved lower on the priority list?

Michael Kneeland

This is Mike. I’ve always said this, that there’s a lot of opportunities and growth opportunities out there. We’re in a position where we don’t have to do anything to execute our strategy of going profitable. We always have a hurdle; I’ll just say simple hurdles. We call it the three legged stool around here, the strategic fit. Financially does it make sense from the benefits we yield and a cultural fit. I would say that the bar has been raised and will remain high on those three hurdles and we’ll have a very disciplined approach. We’ve had opportunities and we passed on. So could it be something in the strategic or in the specialty side? I mentioned that we’re looking at both organic and inorganic ways of growing that business. Could it? I don’t know, but rest assured the bar is high and it has to hit those three hurdles.

Ross Gilardi – Bank of America Merrill Lynch

And then just wondering if you could comment what you’re seeing out of the major OEM dealerships with respect to rental. Clearly the rental channel is growing very fast. Your average OEM dealership amongst the majors is not seeing that level of growth right now. So are you seeing the OEMs respond aggressively by adding more to the rental fleet? Any color there would be helpful.

Matthew Flannery

Sure, Ross. This is Matt. We haven’t seen a major expansion there maybe. Any growth at all would be significant because most of the OEMs don’t have large rental fleets. I think their participation selling into the rental channel will continue and I think -- as I think about our top vendors, it’s already a large part of their business and maybe some of the next tier vendors for us might get more into the rental channel. I don’t anticipate dramatic changes in any of those results.

Michael Kneeland

I would also add that most of the OEMs he’s talking about from a dealership standpoint would be earth moving and that is an area of our sector that we have grown. We’ll continue to invest in, but the heavy side of it is something that we’re not --- we have a big footprint on. So they may expand their rental portfolio, but it’s probably going to be within their core competency.

Operator

It looks like our next question in queue will come from the line of Ted Grace with Susquehanna. Please go ahead, your line is open.

Ted Grace – Susquehanna Financial Group

Congrats on a great quarter. Mike, could you just talk about your views on macro? I know you touched on it initially, but what is the most important metrics you guys are looking at internally, whether it’s rate or time utilization to feel as good as you do? The customer survey is in the flavor they might provide on either growth by vertical so retail, lodging, office. Where do you see the best opportunity for you from an end market perspective and then regionally how are you feeling about it?

Michael Kneeland

I’ll take the high level and the detail on retail I’ll give over to Matt. So let me just say that within our investor presentation, I think it’s page 12 we have our customer survey. This survey that we just performed in December comes at the strongest results that we’ve ever seen. We only have 2% of the more than 228 customers we surveyed. Let’s see, 2014 going down. 98% see 2014 going up or equal to 2013. So that’s probably one of the strongest results that we’ve seen since we started this survey process. From an external data, we do listen and we talk to and follow the global insight. We follow obviously the GDP. The ABI index I know there’s some -- I guess some questions about the ABI.

The one thing I would just ask anyone to take a look at, if you go back to 2010, we had nine months that were negative and 2011 we had five months that were negative. In 2012 we had four months and then last year 2013 we only had three months. So you can see that trend continues to improve which goes back to our comments, you don’t see this as being a hockey stick, but a gradual improvement and I think that’s playing out. All indications are for all external resources that private non-res is starting to come back. Again we don’t see it being a very -- a big uptick or a hockey stick, very gradual. So I’ll shift over to Matt and let him talk from a regional perspective.

Matthew Flannery

Thanks Mike. Yes, Ted. So when you look at it from a region perspective, we had very broad based growth. 13 of our 14 geographic regions had year-over-year growth and half of those had double digit growth. If we wanted to round up a couple of cents of a point, we’d actually add a couple of more regions into the double digit category. Eastern Canada remains -- we talked about it a little bit and the team up here is working hard, but they’re not getting any macro tailwinds up there. So they’re not in a growth mode, although their real results, their actual results are still very good results for the organization. We’re seeing the hot spots where you would imagine. Oil and gas is a hot sector. Anywhere where there’s power is hot and we’re seeing our double digit growth in those segments. But when you look broadly overall and you look at the way we closed the fourth quarter on our key metrics of time utilization, rate improvement and used sales improvement in both margin and volume, specifically the retail portion of our volume which we really put an emphasis on and the demand is there. It really has us feeling very bullish on 2014 demand.

Ted Grace – Susquehanna Financial Group

That’s great. And then the follow up if I may to tag along on David’s question, if the market were to be up 8% hypothetically and URI outgrows it and that CapEx is up let’s say 5.5% just looking at the simple numbers, would it be fair to infer that the time utilization improving 30 basis points may be conservative or is there something I’m missing just in the high level math?

William Plummer

Ted, I always hesitate to say things are conservative, but that improvement that we’ve talked about is not huge and particularly should be gauged on what the market is doing, but also on what we’re doing inside the company. Lean initiatives that we’re implementing could give us the opportunity to do better than that. I certainly wouldn’t go lower than $0.03 improvement in 2014. If you’re having a problem reconciling something, then -- and if increasing the year-over-year improvement in utilization helps you reconcile, then if I were in your shoes I’d probably advice to bump it up.

Ted Grace – Susquehanna Financial Group

And so if you roll that forward to David’s question and you’re in a flat CapEx environment in ’15, can you talk about where you think you ultimately can get some utilization too over the next -- I guess whatever is embedded in page 52 in the return profile.

William Plummer

Sure. We can --

Ted Grace – Susquehanna Financial Group

Can we get to the low 70s? Is that -- could we be calibrated there or --?

Michael Kneeland

Ted, this is Mike. And I’ve said this before both on the road and what not. In my 35, 36 years in the industry I would have told you that where we stood being around 70 would be probably a threshold. Having said that and gone through the kaizen event which I actually spent a week out on the road in Atlanta, it opened my eyes as it did the management that there is opportunities to exceed that. We are putting in investment to roll out 200 branches this year in our largest key areas to touch them to roll out our lean process. It’s hard to quantify right here and now. We’ll update as we go forward, but I would tell you that I can see areas where we can do over 70%. How far up between 70? I don’t know right here and now, but I can tell you that it can go up. The headwind we would only have, as we grow the specialty side of the business, that’s a business that time utilization is not really a big component to get those returns. But I can tell you that intentionally we’ve got it baked in there’s going to be higher time utilization opportunities.

Matthew Flannery

Ted, just to add a little bit more; the improvement in utilization that we assume on the RIC Bridge Slide 52 obviously doesn’t get you there. It doesn’t get you to 70% if you just had 20 basis points a year over even five years. So we are putting in a number there for discussion purposes. To Mike’s point, the opportunities will play out as they play out. We’re optimistic on our ability to drive utilization. And so we certainly feel like there’s an opportunity -- relative to Slide 52 there’s an opportunity for us there.

Operator

Next question in queue comes from the line of Steven Fisher with UBS. Please go ahead, your line is open.

Steven Fisher – UBS Investment Bank

Just on the rental rate growth going forward, how much do you think is tied to the extent of underlying non-residential construction market growth? Obliviously you grew just over 4% on flattish markets in 2013. I’m curious how much is company specific rate initiatives versus underlying market growth.

William Plummer

I would broadly characterize it as a mixture of both. We had carryover that was somewhere between 2% and 2.5% just coming in and certainly the market helped carry us up to the 4.2% that we realized for the full year. But we’re very focused on making sure that we manage rental rate actively. So it’s hard to separate it out and say half of it is from this and half of it is from that or 30%, 70%. That’s a very difficult split to make, but I do think that both are contributing and both will continue to contribute as we go forward. And in fact if the market accelerates as many forecasts has it doing in ’14 and ’15, then you would think the share from market dynamics gets greater and we can continue to drive the specific rate management initiatives that we have and we hopefully can realize even better than the 4.2% that we got in ’13.

Steven Fisher – UBS Investment Bank

Okay, that’s helpful. And then on sales of used equipment, is that more a pool where clients are coming in specifically looking to buy used equipment or a push where you’re diverting people to used equipment? I’m just curious wondering what your interpretation of increasing used equipment sales does to that market conditions.

Matthew Flannery

Sure Steven. This is Matt. It’s definitely a focus for us pushing our reps to participate more in retail sales. But I don’t think that’s converting people from rental to own. As a matter of fact every other metric that we measure in our business and with our existing customers tells you otherwise. I think folks were buying through other channels and we just needed to brand ourselves and position our self as a leader in used equipment opportunities for our customer base. So it’s really just selling into our existing customer base who are also growing their rentals at the same time. As their demand picks up, it will continue to grow both the rental and the used equipment side.

Steven Fisher – UBS Investment Bank

Okay. It can coexist. That's great.

Matthew Flannery

Yes.

Operator

Next question in queue will come from the line of Nicole DeBlase with Morgan Stanley. Please go ahead, your line is open.

Nicole DeBlase – Morgan Stanley

Just another question on rate, how should we think about 1Q rates given that I think you’re facing a little bit of tougher comps. So should we expect lower rates in the first half of the year and acceleration into the back half of the year?

Matthew Flannery

Sure Nicole. It’s Matt. Actually when you look from a year-over-year perspective, you’re not going to get -- we don’t anticipate getting major swings within that 4% guidance. If we’ve got upside then you’ll see more swings in Qs 2 and 3 as our peak demand period let’s say May through October is where our opportunity to get sequential improvement always lie. But from a year-over-year perspective, although there’s a choppiness in comps, we’re not forecasting or planning for anything more than 10 or 20 bps of variance quarter-to-quarter.

Nicole DeBlase – Morgan Stanley

And then now that you’ve moved past the period of negotiation on price with various suppliers, what are your expectations for fleet inflation next year, this year I guess?

Michael Kneeland

This year? It’s somewhere between 1% and 2%. Call it 1.5% just for discussion’s sake.

Operator

It looks like the next question in queue will come from the line of Scott Schneeberger with Oppenheimer. Please go ahead, your line is open.

Scott Schneeberger - Oppenheimer & Co. Inc.

Congratulations guys on your year. Bill, you mentioned no longer discussing cost synergies from RSC. Could you address revenue synergies? That is something we haven't touched base on in a while.

Michael Kneeland

Sure. Actually, Matt you want to try that?

Matthew Flannery

Sure. We have -- once we’ve got to our fourth quarter run rate, we feel very comfortable that we’ve achieved our $50 million EBITDA goal. Remember that that’s an EBITDA goal, not a rent revenue goal of our revenue synergies and that is net. The (inaudible) synergy that we had of almost $40 million early on during the integration from the store closures, it’s mostly been driven by cross selling of our specialty products, in Trench, Power/HVAC as well as cross selling the total control solution service that we got with the RSC acquisition. So we feel comfortable that we’ve achieved our revenue synergy. We’ll build it into our plans. As a matter of fact it’s built into our guidance going forward and we’re excited that we reconnected with the local customer base. When you look inside, just to give a little color, when you look inside the customer base numbers, our unassigned accounts which was the area that we lost the local customers when we closed those stores, we put over 100 more sales reps on the streets to reconnect with those customers and when you look at our fourth quarter results, those customers grew at 12.6%. So we’re encouraged that we recaptured those lost synergies. That was -- the leak in the bucket was really our largest concern and we’re feeling good with that.

Scott Schneeberger - Oppenheimer & Co. Inc.

And then following up on the prior question with regard to used sales, Bill or Mike, I think you mentioned expanding international distribution for used sales. Could you please elaborate on that? Thanks.

Michael Kneeland

Sure. Right now that whole channel market is really a collection of various brokers and then it goes through the auction channel. We’re establishing specific areas where we think that there’s growth opportunity in foreign environments that would benefit. We’ve made sales. We continue to make sales. We’ve had used sales that go overseas and we’re expanding on that by building new relationships in a much broader base. We want to make sure that it’s an avenue or a channel. As we grow, we’re going to be -- we are the largest producers of used equipment, quality used equipment and we think it’s prudent for us to think through that growth down the pike and we are putting a capital investment and they’re yielding benefits from the records already.

William Plummer

Just to add to that, we’re hiring dedicated sales reps and focusing them on different regions around the globe. We know that there has been the demand for our equipment offshore. We’ve just been reaching it through brokers and we think there’s an opportunity for us to do a direct sale. We’ve got a focused effort as Mike said and we expect that to continue to support our focus on driving used sales through our direct channels and realizing the benefit thereof.

Operator

Our next phone question will come from the line of Neil Frohnapplen with Longbow Research. Please go ahead, your line is open.

Neil Frohnapplen – Longbow Research

Thanks. Congratulations on a great quarter. Did you guys re-price a lot of your national accounts that you only negotiate annually during the fourth quarter? And if so, were you able to increase rate more than in recent years that gives you guys confidence in the 4% price realization for the full-year?

Matthew Flannery

Neil, this is Matt. We don’t want to speak specifically about any customer segment. I would say that broadly all of our customer sets are routinely under review. We did go through a major contract harmonization as you all know during the integration. That’s 100% complete and now will just be part of our regular negotiation cycle with our contractual accounts specifically and they’ll mostly be in the first quarter. It varies by customer and some of them are actually quite rigorous and long negotiations and contractually obligated or done through an RFQ system. but overall we don’t see a lot of variability within customer sets and I think you’ll see a similar result within all our customer sets that we had guided to that I answered when Nicole asked the question about seasonality.

Neil Frohnapplen – Longbow Research

And then, Mike, just going back to your commentary on the ABI, it's declined the last two months and just wondering if you're seeing any slowdown in quoting or anything that gives you concern that the non-res recovery will be slower than expected this year?

Michael Kneeland

No. again as I outlined, the pattern from 2010 to 2013, we’ve had less and less negativity. It goes back to I don’t see this being a hockey stick. I see this as a gradual improvement. I think that we’ll have to see how 2014 plays out. My sense is that we’ll still have a positive outcome. Nothing’s changed in my mind. I expect some volatility or some changes between month to month. If you go back, you had four months in 2012, consecutive months. But yet 2013 was a pretty good year for everybody. So again it continued to trend. Overall trend continues to improve and we had a diversified portfolio, about 50-50 industrial and then construction. So I think we’re well positioned.

Operator

That does appear to be our time for questions so this will conclude our time for questions. I'd like to turn the program back to Mr. Michael Kneeland for any additional comments.

Michael Kneeland

Thank you, Operator. I just want to tell everybody that first and foremost, thank you for joining us today. I urge you to get the latest presentation on our investor website. It’s been completely refreshed and a lot of new content. I think you’ll find it most intriguing and helpful. We also launched our first national advertising campaign this week and customers will see a powerful message about our commitment to their success and you can watch the commercials on our website as well. If you have any additional questions or have any opportunities to visit any of our branches, please reach out to Fred Bratman. And as always, we look forward to the next quarter call. Thank you.

Operator

Thank you, presenters and thank you, ladies and gentlemen. Again, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect at this time.

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