United Rentals' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: United Rentals, (URI)

United Rentals, Inc. (NYSE:URI)

Q1 2014 Earnings Conference Call

April 17, 2014 11:00 am ET

Executives

Michael J. Kneeland - President and CEO

William B. Plummer - EVP and CFO

Matthew Flannery - EVP and COO

Analysts

Seth Weber - RBC Capital Markets

Jerry Revich - Goldman, Sachs

Steven M. Fisher - UBS

Scott Schneeberger - Oppenheimer

Philip Volpicelli - Deutsche Bank

George K. Tong - Piper Jaffray

David Raso - ISI Group

Nicholas A. Coppola - Thompson Research Group

Manish Somaiya - Citi Investment Research

Operator

Good morning, and welcome to the United Rentals First Quarter 2014 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 Web-site 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, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael J. Kneeland

Thanks, operator, and good morning, everyone, and welcome. I want to thank all of you for joining on today's call. We have three topics on the agenda this morning; first, our strong performance in the quarter; second, our external environment and how that's playing out in terms of demand; and third, we'll give you an update on National Pump and some of the other initiatives that we have underway to drive growth and efficiencies. Our goal is also to provide you as much visibility as possible into how we are thinking about the rest of the year will unfold. And then after that, we'll answer your questions. So let's get started.

The first quarter is always about pushing forward against seasonal headwinds and driving year-over-year improvement, and I'm happy to say that we overcame an unusually harsh winter and generated solid numbers in every major metric. We did this by managing the business very strategically to capitalize on pockets of demand, and we saw that in the results last night.

We had a sizable increase in rental revenue and our adjusted EBITDA dollars and margin were both first quarter records for us. We also increased our volume, time utilization and rates on larger fleet, and something that wasn't in the release, we improved our rate sequentially for every month in the quarter. Frankly, that was a little better than we expected. Now Bill will discuss the numbers in a minute but that gives you an idea of how we've turned a seasonal low point into a strong start of the year. And now, I want to turn our attention to the marketplace at large.

Last year, I said that we were bullish about the impending recovery. In January, we confirmed that equipment rental appears to be in the early stages of a multiyear growth cycle. And now, commercial construction, which accounts for about half our business, appears to be in a broader recovery, and as you know, commercial construction is typically the last end market to pick up steam in an up-cycle. So any improvement is a positive sign.

Even so, the first weeks of the year were very difficult, but as we moved through late February into March, things evened out and we're now seeing near universal improvement in demand. And that's not just a 10,000 foot view. A few weeks ago, we completed our quarterly business reviews, so we have very recent input from the front lines. Reports from the field indicate more optimism than we've seen in years, and our customers are upbeat about their own business prospects. So in short, there is a widespread sense that things are back on track.

The first quarter metrics support this. For one thing, our used equipment margin was more than 5 percentage points higher than the first quarter last year, and that's another good indicator in market optimism. All but one of our regions showed rental revenue growth in the quarter and about half our regions had double-digit growth. I'll give you an idea of the scope of recovery. Our Midwest and Southeast regions turned in the strongest revenue performance. They had year-over-year increases in the range of 18% to 19%. And our Gulf, Mountain West and South regions were very close to the top. In the Southeast alone, we won bids on the City Center complex, a power plant, a pharmaceutical plant as well as two other sports facilities and a large residential tower.

We're also seeing infrastructure projects come back online both in the U.S. and Canada, and our industrial business continues to be robust, particularly with manufacturing and energy. And this kind of project diversity we expect recovery begins to take root, and we've been steadily scaling up to meet this demand, and now in the second quarter we're in an ideal position to take some significant steps forward.

First, there's our capital allocation. We plan to deploy over 40% of our gross rental CapEx in the second quarter and we'll purchase roughly $750 million of fleet against our full-year guidance of $1.7 billion. And as we noted in January, we increased our capital allocation for the specialty rentals this year with an eye towards growing these businesses. Our full-year CapEx plan for specialty fleet is approximately $240 million, and this includes capital for National Pump which we closed on April 1.

Now on the subject of National Pump, this is a new platform that has all the hallmarks of a home run. It's really put in the place as a key part of our equipment range, and the integration is doing well. We have rebranded the business as United Rentals Pump Solutions, in line with the way we market our other specialty offerings. The plan is to move the pump operation onto our technology by the end of June, and then launch a fully integrated cross-selling effort.

Our other specialty lines continue to turn in strong performances. Same-store growth for trench safety, power and HVAC was an impressive 19% year-over-year, and we're on track to open at least 18 branches this year including some for our new pump platform and our industrial tool business.

As we previously stated, we want to double the size of our high-margin specialty segment within five years. That gives you an idea of the importance we placed on these businesses as a lever of ROIC. Although they are unique in certain ways, our specialty operations share the same culture and sense of purpose as the rest of our organization. For example, every branch regardless of its focus understands that safety is our first priority, and in the first quarter, we worked together to drive our recordable rate below one, for the first time in our history. That's really a major victory.

Now I want to call attention to our lean initiative that we announced on our last call. Lean requires upfront investment of time and money, but we think it can generate a run rate of at least $100 million of efficiencies within three years. We have already introduced the lean process to over 100 of our branches, and while still early, we've identified what should be sustainable improvements in productivity, and we'll be able to share more about this program with you later in the year.

And finally, our entire sales force is out there talking to our customers about the benefits of sourcing their job site needs to a single provider. This gives continual cross-selling opportunities throughout the project lifecycle. It also encourages more revenue from our key accounts which were up almost 8% in the quarter versus last year, and it encourages our local unassigned accounts to stay with us and grow over time. Unassigned accounts, roughly a third of our revenue base, they were up almost 12% in the quarter. So we have a lot of momentum in a very promising year.

Now before I turn the call over to Bill, I want to share a personal observation. I believe that one of our greatest strengths as any organization is our ability to manage all the initiatives I just described, and still think about the business very strategically. We're a disciplined, thoughtful, inventive company that stays both focused and open-minded about our avenues of growth, and these qualities have given us a strong start to the year and we'll continue to make sound decisions that earn us investor confidence.

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

William B. Plummer

Thanks, Mike, and I'll offer my good morning to everyone as well. I'll try to add a little bit more color to the numbers that were in the press release last night and hopefully it would be helpful. If not, ask questions in Q&A. Starting with revenue and in particular rental revenue, a nice quarter for us in rental revenue growth. It was up 9.7% over last year. It's about $89 million of higher rental revenue, and that rental revenue growth was really driven by all components.

Within that, our owned equipment rental revenues were up 9.1%, our re-rent was up 7.8%, and our ancillary and other items were up a robust 16% over last year. So, a very nice growth in all the components of rental revenue. Within the owned equipment revenue line, OER, Mike mentioned rental rate performance was good. We were up 4.3% on our rate metric for the quarter, very nice start to the year for us.

The volume was also very strong in the quarter. We had an average of just under $5 billion of fleet on rent. That's up 7.6% compared to last year. So, a nice volume quarter for us as well. And to get those two lining up nicely in spite of the harsh winter that Mike mentioned and also in spite of what was a headwind from the Canadian exchange rate which was down about almost 9% year-over-year, it was a nice start for us.

So, those were two nice drivers. Obviously inflation and mix were a headwind, call it 2.8% headwind, on the year-over-year growth for those two components combined. So, all in all, a very nice start to the year on a rental revenue basis and carries us nicely into the start of the second quarter.

Fleet overall was up this year. We spent roughly $330 million on fleet purchases for the quarter and so our average total fleet size was up 7%. So you combine that with the 7.6% growth in fleet on rent and that gets you the 40 basis point improvement in time utilization that we reported last night. So, again, another nice start on time utilization improvement for the year.

Before I leave revenue overall, just to hit used equipment sales quickly. We generated $110 million of used equipment proceeds during the quarter, and very importantly, we did it at a very robust margin of 49.4% adjusted gross margin. We think that reflects a very, very strong demand environment which despite the harsh winter started to build momentum later in the quarter. It was down from the prior year and that 11% decline we think was heavily impacted by winter weather.

We also think it was heavily impacted by the expiration of depreciation incentives in the tax code at the end of last year. We think some people accelerated their used purchases into the fourth quarter and borrowed it out of January and February of this year. But we are encouraged by the fact that March used sales activity was very nicely rebounded and so far April feels pretty good as well. So we feel we're well on track to deliver our used sales expectations for the full year.

Let me turn to profitability, starting at adjusted EBITDA, $519 million of adjusted EBITDA in the quarter and delivered at a 44.1% margin, which is a record first quarter margin for the Company. So, a very nice improvement in adjusted EBITDA, $68 million year-over-year improved, and importantly, 310 basis points of improvement from last year.

Just to walk you through the bridge components of the year-over-year change in adjusted EBITDA, we calculate the rental rate impact at $33 million of that $68 million improvement, volume about 7.6% growth in fleet on rent translates into $41 million of the $68 million year-over-year improvement. Fleet inflation and mix was a headwind, a net of $16 million. The robust ancillary and other rental revenue growth that I referred to earlier translates into about $8 million of year-over-year improvement.

We had a good bad debt expense experience for the quarter. Year-over-year bad debt was favorable $4 million compared to last year, so that contributed nicely. We had our normal merit increase process. It cost us about $5 million of headwind in the quarter. And then the net of everything else we lump into other, including much of the FX impact, and all of that was a net $3 million improvement over last year. So, those are the components, and certainly if you have further questions about them, we could address them in Q&A.

Flow-through in the quarter was very robust for us, 87.2% for the quarter, and that reflects not only the underlying performance of the business but a couple of specific items that we'd call your attention to. You remember last year in the first quarter we had some one-off items that we called your attention to back then. It was $5 million to implement 5S across our branches. There was another $5 million that we spent to reduce the amount of fleet not available. So, those were one-offs, they did not recur this year, and so that $10 million year-over-year impact helped to boost our overall flow-through. We also had the bad debt experience that I talked about. It was $4 million of year-over-year improvement. So, that helped boost the flow-through effect as well.

And the last thing we'd point to is that we did have a decline year-over-year in used equipment sales. And so, we had a reduction in revenue dollars that took away roughly 49% margin dollars. So, that reduction in a lower margin item actually helped boost the remaining overall flow-through. So, we wouldn't extrapolate the 87% flow-through for the remainder of the year. We continue to believe that we'll deliver about 60% flow-through for the full-year as a total company, and I'll point out that that includes the impact of adding National Pump which adds revenue dollars at about a 50% margin. So that's going to weigh us down, but we still think that we'll deliver about 60% flow-through for the full year.

Dropping down to EPS real briefly, $0.90 of adjusted EPS for the quarter. That compares to $0.48 in the first quarter of last year. Obviously, a robust performance and it really just reflects everything that I talked about previously.

Before I go to the outlook, just real quickly on free cash flow and the capital structure. It was a busy quarter for us. Free cash flow came in very strong in the first quarter, $278 million, and that's of course after the $330 million or so we spent on rental CapEx and another $18 million or so on non-rental CapEx. So, a robust start to year on free cash flow and it puts us nicely on track for the free cash flow that we guided to for the full-year.

We had some capital structure actions during the quarter as well. We had previously announced the redemption of $200 million worth of our 10.25% notes. We made that announcement in the fourth quarter. We actually closed that redemption in the month of January and funded it from our ABL. So that transaction closed early in the quarter. And then later in the quarter we issued new notes, both to refinance another high coupon issue, the $500 million of 9.25% notes. We issued new notes there by reopening another existing issue, our 6.125% notes. And then we also issued $850 million of new notes to finance the acquisition of National Pump. And I call your attention to the fact that all of those issues happened during the month of March, the actual payments though didn't happen until the month of April. So, they actually don't show up as outflows on the balance sheet at March 31.

If you look at where we stand today, actually as of April 14, so earlier this week, on liquidity, the net of all those actions have happened and so our liquidity overall is a total of $1.35 billion. That includes available ABL capacity of $1.2 billion and net cash position of $132 million.

Just briefly to touch on the share repurchase program, we executed about $43 million of repurchases in our common stock during the first quarter. If you add that $43 million to what we did in the fourth quarter and what we've done in the month of April so far, we stand at about $90 million of shares that we repurchased against the $500 million authorization that we had. Obviously, we've said before that we expect to repurchase about $450 million of shares during calendar 2014, and we feel like we've gotten a decent start during the first quarter, but perhaps a little slower than otherwise it would be because so much of the first quarter was blacked out either for reporting purposes or because we were working on the National Pump deal.

So, you can expect us to ramp up that repurchase activity in the second quarter and we still are very committed to delivering $450 million of those repurchases in calendar 2014, and indeed getting the entire $500 million authorization done by April as we originally – April of next year as we originally announced.

Just to hit on our outlook real briefly, you saw that we didn't change any of the numbers to our outlook for 2014 last night but perhaps a slight change in tone. So just to reiterate, we expect total revenue in the range of $5.45 billion up to $5.46 billion during calendar 2014. Within that, rental revenue growth will be driven by our expectations around rental rates. We still see rental rates up about 4% for the year. Obviously, we did get off to a nice start. So, we hope that we will have an opportunity to do better and always will try to do better.

Our time utilization for the full year, we continue to expect to be up 30 basis points compared to last year, and I'd remind everyone that that would be another Company record. For adjusted EBITDA, we expect the full year to come in between $2.55 billion and $2.65 billion, and as I said before, we expect the flow-through to adjusted EBITDA to be about 60% for the full year. Our view of adjusted EBITDA is that we're not in a position where we think it's prudent to raise the range of expectation, but we have started to say that we expect to be near the top of that range, and so we'll continue to drive higher there if we have the opportunity.

The CapEx picture is unchanged as well, $1.7 billion of growth CapEx for the full year is our expectation, and that will net down to $1.2 billion on a net basis. And finally on free cash flow, we continue to expect between $425 million and $475 million of free cash flow for the year. And I'll remind you that all of those outlook components reflect the addition of the performance that we will realize from National Pump.

I'll stop there and open it up for Q&A, but certainly do feel good about what we did to start this year and we look forward to rolling out the rest of the year hopefully into a very strong year for us overall. So with that, operator, let's open up the call for Q&A.

Question-and-Answer Session

Operator

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

Seth Weber - RBC Capital Markets

I just wanted to go back to, in your prepared remarks you talked about this $100 million of cost initiatives. Can you talk about how much of that is embedded in your guidance for this year, it sounds like not a lot, and sort of how should we be thinking about that rolling through the model over the next couple of years and kind of helping the pull-through margin, is my first question?

William B. Plummer

Seth, it's Bill. We haven't given a number for 2014. What we said is that we'll make a nice down payment on that $100 million run rate impact. We certainly think that anybody who saw the number would agree that it would be a nice down payment, but that's as far as we've gone.

Seth Weber - RBC Capital Markets

And do you think it should have been linear or you think it's more backend weighted?

William B. Plummer

You know, we're just starting to roll out the program, so logically it has to be more backend weighted. But I think we expect that it will build nice momentum as we get into the second half. I'd remind you also that it is built into the guidance that we've given, right. The assumption that we have for how much, we did put in. So it's not something that we are keeping in our back pocket, it's out there in the guidance.

Seth Weber - RBC Capital Markets

Right, but if it's accelerating going forward, could that in theory support a pull-through margin north of 60% next year, say in 2015?

William B. Plummer

I'm not ready to say that just yet, Seth. I think what we need to do is to make sure that we've got a handle on all the components that will impact pull-through next year. We certainly over the longer haul think that 60% is a good way to think about things. This could be a way to get higher flow-through, but it's maybe what we need to do in order to get to the 60% consistently. So, let us reserve comment on 2015's pull-through until we get a little closer.

Michael J. Kneeland

This is Mike. There is a level of transparency that we have with everybody in, and as I mentioned in my opening comments that as we go through the year, we'll be able to communicate more. There are several factors, it's not just the cost initiative, it's also our revenue initiative as well. So we want to be able to quantify and be able to speak clearly to everybody. So, expect to hear more as we go through the year.

Seth Weber - RBC Capital Markets

Okay, thank you. And then, Mike, if I could just follow up on National Pump, I know we're only a short time into the transaction but can you characterize any conversations you've had with customers about cross-selling between the two, any opportunities that have come up in the short time that you've owned the company?

Michael J. Kneeland

I will say that I did spend a day out at one of the branch right after we closed and I walked away very excited about the opportunities there ahead of us and also the management that we have brought on board, but I'll ask Matt to speak specifically to your question.

Matthew Flannery

Thanks, Mike. Hi, Seth. So, we obviously were very excited about the deal before we closed or we wouldn't have made that investment, but we've been even more pleasantly surprised by the reaction from our employees and our customer base. We've had strategy meeting over the last few days where Paul McDonnell and his team leading the specialty business and our national accounts team have been strategizing on cross-sell because the customers are pulling us in immediately. So, once we're all on the same platform, which will happen by the end of the second quarter, that will be even easier to do but we already are working on plans on cross-selling. Our customer base has really received very positively us filling this gap in our product offering.

Seth Weber - RBC Capital Markets

Okay, thank you very much, guys.

William B. Plummer

Before we go to the next question, I just wanted to correct one thing I said on our outlook for the full year. The total revenue range will be $5.45 billion at the bottom, $5.65 billion at the top. I think I misstated that previously. I just wanted to get it straight. So, operator, next question.

Operator

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

Jerry Revich - Goldman, Sachs

Can you gentlemen just talk about the action that you took to manage the fleet in the quarter? You alluded to it in your prepared remarks. I'm wondering if you could flush that out because you outperformed the typical seasonality from a utilization standpoint, 1Q versus 4Q, in what should have been a really challenging quarter, and then if you apply typical seasonality from here, I guess you'd get well above your utilization target for the year. So I'm just wondering if you could just step us through what went right in the quarter.

Matthew Flannery

Sure, Jerry. It's Matt. Obviously, we really were focused on not putting any undue pressure on the areas that we're having a bad weather impact, and re-shifting fleet, both new fleet and existing fleet, to the markets where we had opportunities. With that being said, the Midwest had quite a harsh winter and was one of our highest growing region at 18% growth. So there is some of this that's just penetration and the continued growth of the build we've been doing since the integration of RSC. But I would say from a macro perspective broad-based, it was how we managed our opportunities and make sure we funded our opportunities, and the rate impact came as a result of us not putting undue stress on the impacted markets. So, we're very happy with the way the team managed that.

Jerry Revich - Goldman, Sachs

And given that, Bill, at which point did you start thinking about taking up your CapEx outlook for the year in the context of how strong the start has been from a utilization standpoint or which utilization level on a full-year basis would you say we probably have enough fleet on hand?

William B. Plummer

There's not a magic number on utilization where we would say, it's time to spend some more. I think it's fair to say that we have an ongoing conversation about how much we spend daily, and the question is, what's the set of circumstances that get us comfortable enough to say, yes, we'll put more fleet into the business. I think it's also fair to say that we probably want to have a good look at how the season is building, and that means that you want to see April, you probably want to see May before you start having any serious conversation about possibly raising CapEx. So, stay tuned. I think we'll talk more about it in the second quarter earnings call and have a tighter view at that point.

Operator

Our next question comes from the line of Steven Fisher from UBS. Your question please.

Steven M. Fisher - UBS

As you've been exhibiting a greater level of discipline on CapEx, as you were just talking about, but I'm curious what kind of discipline, or if relevant lack of thereof, are you seeing in the marketplace from competitors both large and small?

Michael J. Kneeland

I'll talk about the high-level. First and foremost, I think when you look at all the companies that report publicly, they are all very prudent in the way in which they are approaching the markets. They have different strategies but they are putting in the appropriate capital for their strategy, but [indiscernible] you're seeing rental rates improvement. We also subscribe to [a route] (ph), we've mentioned this before, there's about 84, 85 good companies that report as you look in the rear-view mirror for legal reasons, about a 90 day lag on it, and it gives you a sense of different [MSAs] (ph).

When we look at how we're raising our rental rates over time, we're seeing kind of the whole industry come up. So that would tell you that everyone is appropriately trying to apply rental rates wherever they can. So that's the best market data I have. Matt?

Matthew Flannery

I think Mike covered it well, and I do think more importantly the OEMs are – I think that the combination of the OEM participation and the credit markets are making people to be more responsible than maybe they did going all the way in through 2008 and spending money and OEMs producing a lot of products. So, I think the growth is smooth, steady and appropriate for the level of demand that's out there.

Steven M. Fisher - UBS

That's helpful. And then maybe just a question about the agility of your business model. You made a decision to focus on rates as you talked about [to enable to] (ph) make adjustments for weather in the quarter. Just curious, at what point in the quarter did you make those adjustments and set that strategy, and I guess the broad question is, how quickly can your ship be turned to address market conditions, and then how would you say, how would you describe what your focus is for the second quarter?

Michael J. Kneeland

I would tell you that when you look at our fleet management process, there's an evolution of the best of both worlds when we went through the RSC transaction. We took some of their operating principles, we took some of our operating principles, we bonded them together and we developed a very disciplined approach in the way in which we are going to apply it, and this is the end result. So, I think that as Matt mentioned, we have the ability to fund pockets where they were needed. Conversely, we didn't put undue pressure in areas where it wasn't required, and I think that will be an ongoing process.

As far as our agility to move, it's very difficult to move things from say Canada down to say Florida, but you can sell and you can repurpose that capital. Those are the things that we do and all of these things are how we manage the fleet on a go forward basis. And by the way, it's not just a snapshot of where we are today, we have to think about it, where are we going to be six months to a year down the road because we don't want to be moving this capital on a continuous basis in that format.

Matthew Flannery

I think the additional good news is that we have broad-based demand now. We got through the winter by maybe being a little more selective about our opportunities, but as a Mike stated in his prepared remarks, we have growth in every region except for one geographically and half of them are double-digit growth. So I don't think we'll be as challenged with where we meet the demand from a rate perspective, it will be which ones we choose to fund at a higher level than others.

Steven M. Fisher - UBS

Great, thank you.

Operator

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

Scott Schneeberger - Oppenheimer

What I would like to tackle is your sales force. You added I think 100 folks mostly unassigned accounts last year. Want to get an update on productivity there and then your plans for 2014 and which areas are you adding, the number and productivity and areas of focus.

Matthew Flannery

Sure, Scott, this is Matt. We actually have 153 more field sales reps on a year-over-year basis. So we had 100 for our goal for the second quarter last year but we built that up to 150 throughout the year, and that's where we sit today. We think that's appropriate level for OSRs other than additional reps we may bring in for our 18 cold starts, and you'll see some more there. So, we feel pretty good about the level of our sales team and we've got very good productivity out of them. As you see, our unassigned accounts grew faster than the overall Company growth in the back half of the year and for the first quarter this year, and that was really us reconnecting with some of the business we felt we lost during the RSC integration.

Scott Schneeberger - Oppenheimer

Thanks. And then I have a follow-up. I noticed from the presentation pack this time around, you're focusing on the specialty rental categories that you have. Historically you've also – you've been focusing on those that you were targeting and [I was just wondering] (ph) now you've achieved it. So I'm just curious, how are you thinking, is it going to be time spent on integrating or are you looking still actively perhaps at M&A and some of the other categories, liquid storage tank rental or others that you had listed previously?

Michael J. Kneeland

This is Mike. I would tell you that we are clearly focused on integrating the pump business and we've dedicated ourselves to growing our specialty business and we want to grow it, double the size of the business over the next five years. That is our main strategy. With regards to looking at other possibilities, I think it's prudent for us to always look at what the future may bring us and that is a big laundry list. So again, going back to the discipline that we've talked about numerous times, we look at a strategy, we look at the returns and then we also look at the culture, and all of those will always play into our decision-making, but right now we're focused on integrating the pump business and we see a significant upside opportunity for us to – like I said, it's got the hallmarks of a home run and that's what we're focused on.

Operator

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

Philip Volpicelli - Deutsche Bank

With the goal of doubling the specialty business, how much of that is going to come from acquisition and how much of that would come from just organic growth and capital spending?

William B. Plummer

It's Bill, Phil. Most of it is going to be organic growth. That's the way we're targeting the initiatives for the business. So if there is an acquisition, we'll re-evaluate whether we should raise that target, change that target to add on the acquired growth on top of the organic growth.

Philip Volpicelli - Deutsche Bank

Okay, as the last question, you answered the question on the liquid storage tank, obviously with National Pump you get into more of the oil and gas, is that an area of focus that you'll either spend CapEx or look to make an acquisition to kind of broaden out that pump portfolio?

William B. Plummer

So oil and gas is an area of focus just as an industry vertical for the business overall. I don't know that I'd say it's particularly a focus for acquisition as much as a focus for how do we build relationships with customers and how do we make sure that we can offer value to them. If an acquisition makes sense, right, then we certainly will look at it but it's got to hit our criteria and we're not going to do it just because we want to plan a bigger flag in the oil and gas sector. But Matt, Mike, if you want to add anything to that?

Matthew Flannery

No, I think Bill covered it well.

Philip Volpicelli - Deutsche Bank

Great, and just the last one for me. I think, Bill, on the last call you mentioned 2.7 to 2.8 net leverage by the end of the year. Is that still part of the guidance?

William B. Plummer

Yes, I mean that's still in the neighborhood. It might be a touch higher. We put in the investor deck a slide that shows 2.9 at the end of this year. I think as we've gone through some of the refinance actions, as we've gone through finalizing the Pump acquisition and just looking at how the cash flow will play out over the year, it may be just a touch higher but it's still in that neighborhood.

Operator

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

George K. Tong - Piper Jaffray

Just wanted to get some color on your capital allocation strategy. You're generating attractive free cash flows of north of $450 million per year. Once you complete your delevering plan of 2.9 by the end of this year and your share purchase of $500 million by April of 2015, what's your priority for use of excess cash beyond that?

William B. Plummer

I'm sorry, George, can you ask that question again?

George K. Tong - Piper Jaffray

So just want to understand what your priority for capital allocation is once you completed your delevering plans and share purchases to the targets that you have already issued?

William B. Plummer

Once we complete our delevering plan, that's interesting. I'd say we still believe in the leverage range that we talked about, 2.5x to 3.5x. If we get down to the 2.5x level and have completed the share repurchase program at that point and we don't have an acquisition that hits all of our criteria, then I think it's legitimate that we would talk about whether further share repurchase makes sense. That's certainly not something that we're afraid of. But we got to get through that priority of cash flow use that I just walked through.

And we've put a slide in our investor deck just trying to highlight the priority of thinking around cash flow allocation that very much reflects that order, right. First, you got to fund the organic growth of the business, but yes, that's before free cash flow. And then, once you have that free cash flow, we want to make sure that if there are acquisitions out there that make sense, that we will take a hard look at them, but if they are not lined up, share repurchase makes a lot of sense. That helps?

George K. Tong - Piper Jaffray

Yes, very helpful, thank you.

William B. Plummer

Let me go back to Phil's question just real quickly. The 2.7, 2.8 leverage ratio was before Pump. So when you include the acquisition of National Pump, the 2.9 is our view currently of where we'll end the year, just to clarify that.

Operator

Our next question comes from the line of David Raso from ISI Group.

David Raso - ISI Group

Quick question on the guidance what's implied. It sounds like you're pretty focused on pushing rate and the rate started the year above the full-year guide. It appears April is off to where you run – you're running even higher above the guide on rate, and obviously your rate is pretty powerful on drop-through for incremental EBITDA margin. So just so I'm clear, the rest of the year, let's say the high end of the range for EBITDA and that means 2.625, just for argument sake, it implies the rest of the year incremental EBITDA margin base of only 50. If you want to pull out National Pump, 51. And I'm just trying to make sure I understand, is the focus still on pushing rates, because if it is, the 51 would be one of your lower incrementals in a while, so I'm just trying to understand is there something implied in that incremental margin that there is a little more of a utilization push versus rate, I'm just trying to understand what does it imply?

William B. Plummer

So we don't spend a lot of time thinking about the incrementals by quarter or by half. And so, it's not something that I'm as faceted with the numbers as maybe you are, David. I think as we do think about the full-year, we think that we want to make sure that the 60% or so flow-through that we've been talking about is a high probability, we believe that it is, and there are some things that in the second half may represent a little bit more of a challenge than we saw in the first quarter of the year.

So for example, we're going to ramp up our used sales activity. As we add more used sales in the back two quarters of the year, we're going to be adding revenue dollars at something like 50% EBITDA dollars. That will weigh out us a little bit more than it did in that first quarter. I don't see anything in particular that's a concern for the remaining part of the year, but I do think that we want to be a little cautious in terms of how we guide you to think about flow-through.

One other thing I'd point to as well is that bad debt expense, it was a very nice experience in the first quarter, $4 million benefit year-over-year. As we think about the full-year, we don't expect to see that kind of a benefit in every quarter this year. We're doing a lot of good work around bad debt to reduce the amount of aged receivables but as we sit here today we're not forecasting that benefit to continue at the level that it started out the year.

So, it's things like that that as we think through the remainder of the year in more detail, we say let's just make sure that we've got a handle on it before we get too aggressive in where we're going to end up for the full year.

David Raso - ISI Group

I appreciate that, Bill, but even if you pull out the $4 million benefit from bad debt, the incremental goes from 87 for the quarter to 82. I mean obviously it wasn't that big a number. So again, I'm just trying, bigger picture, trying to understand, are you implying something or is it, it is what it is and we can model as we choose, but I'm just trying to understand, is there a shift in what you're focusing on or would you argue, no, it's still a little more rate than it is utilization as your focus the rest of the year?

William B. Plummer

I think it's fair to say that we think about it more of it is what it is. We certainly are going to push rate. We think that we've got an opportunity. Whether we'd actually be able to execute and get better than the above 4% rate that we are talking about, we'll see how it plays out as the year goes on. Let me go back to the first quarter flow-through, that 87% was really aided by a few things, and if you take out the bad debt, if you take out the impact of those one-offs that we had last year, and if you restate used sales revenue to the same level as we had last year, so by taking out those special items that I mentioned earlier, that drops that flow-through down into the high 60s, low 70s kind of area. So, it's those kind of things that we look at and we say, okay, let's just make sure that we've got a good handle on things before we start changing and raising our guidance on EBITDA or flow-through or any of the other measures.

David Raso - ISI Group

I can appreciate that. Okay, thank you very much for the detail.

Operator

Our next question comes from the line of Nick Coppola from Thompson Research Group.

Nicholas A. Coppola - Thompson Research Group

End markets, what are your customers telling you about their expectations for 2014, and I saw your slide showing your customer survey results were very positive, so any further color you can add there about what they are saying and also what type of [indiscernible] activity maybe picks up after you rebound through this tough weather [indiscernible]?

Michael J. Kneeland

This is Mike. Let me just give you a few data points, one of which would be the AGC which is the Associated General Contractors came out with an outlook survey recently and they compared it to 2013 and they broke it down into numerous categories for manufacturing, retail, private office, all the way down through to marine construction. And then after that was they had how were you rating it, expect your dollar, volume or project you complete in 2014 to be either higher, lower or the same. When you aggregate all those numbers, it's a pretty interesting chart that they mapped out where manufacturing, retail, private office, hospital, power, sewer and highway were all double-digit in comparison to 2013. So that would be one data point.

The other one would be Global Insight. Global Insight is another one that we work with, particularly with the American Rental Association, and they are seeing spending in commercial construction, office construction, lodging, retail, manufacturing and healthcare. Again, when you compare the two different ones, there are some similarities that kind of all fall altogether.

So again, it's not a perfect science, it's another data point that we look at in comparison with [indiscernible] reports and all the other reports that come out. But those are the things that we're seeing as far as our end markets and the optimism in what our customers are telling us.

Nicholas A. Coppola - Thompson Research Group

Okay, that makes sense, that's helpful. And my second question is on used equipment margins. They were up a real strong 520 basis points year-over-year on an adjusted basis. How much of your used sales went to the retail channel this quarter relative to last year, just trying to kind of parse out [mentally] (ph) how much was from the [shift] (ph) – the more retail [indiscernible] strong performance in used [indiscernible]?

William B. Plummer

Nick, it's Bill. So operating from memory here, 55% or so was through our retail channel this year, and so that's still a fairly robust level of retail and that certainly helps support the margin. But we've also been focused on the market which is pretty robust. The pricing was pretty solid. And you combine those two things and it really does help drive the margin. So we'll continue to emphasize our retail channels, continue to try and take out as much of the auction sales as we can, continue to tap into the overall strong market pricing. There is a mix component to our margins on a year-over-year basis as well, right, the mix of units that you sell that can move things around. So that was probably part of what played into the significant increase in margin in this quarter as well, but channel mix and overall price environment were probably the bigger drivers.

Operator

Our next question comes from the line of Manish Somaiya from Citi.

Manish Somaiya - Citi Investment Research

Congratulations on a strong quarter. Michael, I just want to go back to your opening remarks on the cycle and I guess as we kind of see the cycle play out, how are you thinking about the up-cycle? I mean you said multi-year, but are you thinking like three-year, five-year, maybe if you can just kind of give your thoughts on that?

Michael J. Kneeland

Look, I have learned that my point of view, I look at the next several years. That's probably after that it gets a little foggy. But all indications are, Manish, that when you look at the Global Insight, when you look at some of the other projections that are out there, 2014, '15 and they go into '16, show nice improvement on a year-over-year basis, with 2015 being one of the strongest. I think it really what is, it's convergence of all the projects coming together in 2015. But again '16 and '17, they still remain very positive but not as great as you would see in 2015.

All-in, they are looking at about 8% growth from Global Insight, 8.8% CAGR growth, which I think is very respectable, and those are kind of the things that we look at, but for me, I look at the next two years and I say to myself, what is it that's on our plate and what can we focus on, and do I look at the outlook outer years, absolutely, but as we get closer and closer then you get the metrics to come in and you try to validate whether those numbers are going to be plus or minus in any direction.

Manish Somaiya - Citi Investment Research

And then, maybe a question for Matt, I guess to support this growth, organic growth, Matt, are you finding that the kind of people that you want to have on your team out there? I mean what kind of issues are you having, if any, supporting this growth via hiring the right folks with the right skills?

Matthew Flannery

That's a great question. We're having great success. We have a very active recruiting team out on the field that works with the regions. Sales, management, that type of talent is readily available. We've become as we've grown into the largest in the industry quite a big draw in our space. I would say, if there was anything that I worried about long-term, it would just be, like every trade, it would be the technical expertise, but we do a real good job of home-growing that talent and we've invested a lot of money in the last two years in training because we do see that as a longer-term concern about making sure we have got the skilled labor to keep this equipment running. As far as management and sales, we are very, very well set. We're fortunate, Manish, to have low turnover for about the last five years and that's really played into our favor as well. So, I don't think people will be an issue but we are always focused on it.

Manish Somaiya - Citi Investment Research

Thanks. And then just lastly for Bill, obviously Bill, with performance having improved, with cycle showing good strength, I guess I'm trying to figure out why there is a two-notch differential in the ratings that Moody's has for senior unsecured versus S&P, and are there any discussions that you plan to have to kind of hopefully fix that?

William B. Plummer

We are trying to figure that one out ourselves. We have an ongoing dialog with both of the major rating agencies and both regular structured calls that we do on a quarterly basis and also ad hoc calls as things change around acquisitions or any other key items in the business. You'd have to ask Moody's how they are thinking about the rating directly. Our view is that we've delivered a capital structure and approach to managing the business that is pretty robust, but I'd point you to the Moody's folks and ask you to come back and tell me what they say.

Manish Somaiya - Citi Investment Research

Okay, thank you so much.

Operator

Thank you. 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 Mr. Michael Kneeland for closing comments.

Michael J. Kneeland

Thanks operator. I want to thank everybody for joining us today. I just want to remind everybody that we were off to a strong start in 2014. When we look at the demand that we are seeing in almost every one of our markets, the confidence and the field is going upbeat, and you always find the new investor presentation on our Web-site, and as always give us a call here in Stanford if there is something that you want to discuss. And with that, we'll end the call. Thank you very much.

Operator

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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