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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the United Rentals’ First Quarter 2018 Investor Conference Call. Please be advised that this call is being recorded.
Before we begin, note that the Company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The Company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected.
A summary of these uncertainties is included in the Safe Harbors contained in the Company's earnings release. For a more complete description of these and other possible risks, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as well as to subsequent filings with the SEC. You can access these filings on the Company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
You should also note that the Company's earnings release, Investor Presentation and today's call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer.
I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.
Thanks operator, and good morning, everyone. Thanks for joining us on today’s call. So before I begin, I want to mention that my prepared remarks this morning will be followed by comments from Matt. Most of you know Matt is our Chief Operating Officer and a 20-year veteran of our Company. Last month, he assumed the additional role of President, which means he is even more instrumental in working with me and Bill to guide our Company's growth. Matt will speak about our markets and operations and then Bill will go over the numbers.
So I'll start with the dialogue by saying that I am pleased with the results we reported yesterday. Both Gen Rents and Specialty segments performed well. There were a number of positive indicators in the quarter, including a 6.8% increase in volume year-over-year and a 2.7% improvement in rental rates. These numbers are pro forma for last year's acquisitions.
Now given the importance of rates in our business, it is good to see the improvement sustained throughout the quarter. Rates remain a key indicator of the overall health of the marketplace and our industries ability to generate attractive returns. Time utilization came in at 65.2%, down 20 basis points pro forma.
That's the second highest time utilization we've achieved in any first quarter in our history. And there were some obstacles in the quarter, but we dealt with those effectively, and once again, our rental revenue growth outpaced the market.
And then there is cash generation. As you saw yesterday, our free cash flow for the quarter was $526 million after gross CapEx of $313 million. Now given the way the years unfolding, we feel very comfortable with our guidance for free cash flow in the range of $1.3 billion to $1.4 billion and we've also re-informed the rest of our full-year outlook.
So let's talk about the use of cash. Over the last five years, our business has generated $4 billion of cumulative free cash flow, some of that in markets that weren't as robust as the current year. In 2018, the cycle is in our favor with an added tax benefit from tax reform. And as we continue to explore potential opportunities to redeploy this capital, you can expect us to make the kind of thoughtful, diligent, and balanced decisions to be accretive to our shareholder value as we have in the past.
So yesterday we announced that our Board has authorized a program for another $1.25 billion of share repurchases. This will initiate when we wrap up the current program, which we would expect to finish out mid-year. And you may recall that the current program was authorized in November of 2015 for $1 billion. We paused for 13 months while we evaluated M&A and then reactivated it.
We have about $168 million left to go, and once that ends, the follow-on program will begin. Our goal is to complete the $1.25 billion of new repurchases by the end of 2019. And we have an excellent track record with these programs. Since 2012, we've returned almost $2.3 billion of cash to repurchases as a means of maximizing shareholder value.
And now over the course of 2018 and 2019, we are planning to purchase what equates to over 10% of our current market cap. Now to be clear, share repurchase is just one lever in a complex framework of decisions we make the balance growth and returns while preserving a sound capital structure. We remain open to all avenues that are strategically compelling and create superior value including further M&A.
Now before I hand it off to Matt, I want to return to something that’s always been important to me personally. That is our culture as a safety leader. Safety is the ultimate metric of operational excellence in our business. It aligns the interest of our employees, our customers, and our investors, so everybody wins.
We just delivered the 15 straight quarter of a reportable rate at or below one, and that's a remarkable achievement on the part of our team. And in the month of March, 99% of our locations had zero reportable incidents. Now this kind of culture is fundamental to success of our business and particularly when things get busy like we are doing right now. And when we’re entering our peak months in a very strong demand environment, our performance is tracking to plan and virtually all key leading indicators are positive. Now the intersection of these dynamics creates a significant opportunity for United Rentals. Our guidance reflects our belief that 2018 will be another very good year for us.
And now I’ll ask Matt to talk about the operations and share how we plan to capitalize on the months ahead. So over to you, Matt.
Thanks Mike, and good morning. I thought I'd start by commenting on the integration of NES and Neff. And both are essentially complete, and we’ve realized the target run rate and synergies in each case. NES still has a few operational ends to tie-up like centralized dispatch, which is currently in rollout. All other programs have been adopted into regular operations. So from this point forward, there's no distinction in how we talk about the company. It's all one United Rentals.
Now here’s where we stand today with the first quarter behind us. We’re a much larger and better equipped customer service network than we were 12 months ago and that's exciting for the field. It's an opportunity for United Rentals to get a bigger piece of the pie, and we did just that with a 25% year-over-year increase in rent revenue in the first quarter.
If we pull back the curtain on our results, the main drivers behind our growth fall into four buckets. One is a widespread strength in non-residential construction, particularly in the commercial and infrastructure sectors; second, is the rebound in industrial activity, including the improvement of oil and gas; and third, is our Specialty segment, which continues to deliver impressive results; fourth, is our scale. And I’ll talk a little more about scale in a few minutes.
So starting with the non-residential construction. The leading U.S. indicators have been almost universally positive for a while now, and we're seeing this echoed in our monthly surveys where customer confidence continues to trend up. The most active geographies are the ones with the most diverse project mix. Along the Eastern Seaboard in the Gulf States are good examples. They both had double-digit increase in rent revenue in the quarter and the wins came from a broad range of projects, including infrastructure, power, retail, and commercial work.
Now looking at the industrial sector, we're encouraged by the fact that we're seeing widespread activity across multiple verticals and we're tracking a number of large projects slated to start up in the back half of the year that will carryover into 2019. Also the oil and gas sector continues to be a pleasant surprise. The rise in oil prices has encouraged drilling and production companies to bring rigs back online and this adds to the broader industrial demand for our equipment.
Turning to our Specialty segment, rent revenue from our Trench, Power, and Pump operations was up more than 36% year-over-year and Specialty segment gross margin also improved up 170 basis points. And we’re currently planning to open 18 specialty cold-starts to this year and we will increase that number if this pace continues.
There are some of the market dynamics, and as we said before, we also have internal levers for growth, which brings me to the final bucket I mentioned, scale. The scale provides benefits for us under any set of conditions, including the growth environment that we're in today. And I can tell you firsthand that equipment availability is proving to be a challenge for some rental companies. Customers worry about being able to find the equipment they need to keep their projects on track and we're very fortunate to be able to give them that assurance.
We entered 2018 with a much larger fleet and footprint. Our fleet stands at almost $11.4 billion and we have about 15,000 employees serving our customers. Additionally, our digital capabilities are reaching more customers every day. All of this scale is beneficial, but it's our ability to leverage our scale that gives our customers the assurance I mentioned.
And one of the most important ways we leverage our scale is by cross-selling. When you see the rapid growth of our Specialty segment for example, it's not just because each branch operates strongly, independently. There's a significant benefit that comes from giving our customers access to our entire network of offerings.
Cross-selling is as much about customer service as it is about revenue. The customers that we added from NES and Neff are happy to keep more of their business with the United Rentals and all of our customers in the combined base are benefiting from a larger and broader fleet. And as a result, in the first quarter, our cross-selling company-wide rent revenue was up 29% year-over-year and we still have more to deliver.
Now before I wrap up, I would like to make a quick comment on Canada. Back in January, we described Canada as an outlier that showed signs of turning around. And I am pleased to report that our first quarter rent revenue in Canada was up 11% with rates positive year-over-year and signs of a continued macro improvement.
Ontario and Quebec both had big plans for infrastructure, including a massive public transit project in Montreal and Western Canada continues to rebound, so it’s a good overall story for our Canadian operations. But that’s a snapshot from the field. We have a high level of confidence in our outlook for 2018. We expanded our operations at an ideal time to leverage the cycle, and at the same time we are giving our customers and investors even more reason to have confidence in us.
So with that, I'll hand it over to Bill for the financial review and then we'll go to Q&A. Bill?
Thanks, Mike, and Matt, and good morning to everybody. As always I'll go through the results and try to do it quickly, so that we can get to the questions. Starting with rental revenue, rental revenue $1.166 billion in the quarter, that's up $293 million over last year. The key components of ancillary and re-rent will start there. Ancillary was up $32 million, so pretty robust growth there and it came across the board.
Higher delivery charges, higher fuel recovery, our rental protection program revenues were up and the impact of NES and Neff just for pure volume growth was a real contributor. So $32 million increase over last year for ancillaries, re-rent was up $4 million another robust increase almost 20% increase over last year, again helped along by the acquisitions.
The owned equipment revenue was up a total of $257 million over last year and the big driver there was volume. Our volume impact was $264 million for that 26% or so increase in OEC on rent. Rate contributed a nice component this year. $19 million of rate impact in revenue, again aligning with the 1.9% rate improvement that we saw on a reported basis.
Replacement CapEx inflation this quarter was about $15 million of headwind. That's calculated at 1.5% purchase price inflation and then that leads $11 million of mix and other headwind in the quarter for the total 257 in OER. So add that to the ancillary re-rent you get the $293 million year-over-year improvement in rental revenue. That’s as reported as I called out just to know the pro forma revenue performance was pretty robust. 9.9% increase in rental revenue in the quarter on a pro forma basis.
Used equipment was an important part of the story in the quarter. $181 million of used proceeds in the quarter and that was up $75 million over last year. A couple of comments on that used performance.
First, the overall strength of the market I think is really noteworthy. The proceeds that $181 million as a percent of the OEC that we sold came in at 52.6% that's 130 basis points higher than it was last year. That certainly reflected the strength of the market in pricing, but also in the volume that the used equipment market is able to absorb.
On the pricing front, our pricing results in our retail sales of used in the quarter prices were up about 6% in the quarter, pretty robust for us and certainly reflects robust pricing in the overall used equipment market. And again the volume that we were able to sell was pretty strong as well in the quarter. $343 million of OEC sold in the quarter. It was underneath that proceeds result.
The other important factor in the quarter for used equipment was the impact of adopting the new revenue recognition accounting standard. This is nothing unique to United Rentals. I'm sure you all know about the adoption of ASC 606 for most publicly reporting companies at the beginning of the year. An important change in that revenue recognition standard for us was that we no longer defer revenue from used sales of equipment back to our vendors.
In prior years we would agree to sell equipment back to vendors and typically do so with an associated purchase commitment. And previously, our accounting standard would require us to defer the revenue and profit associated with those used sales until we completed the subsequent purchase commitment. The new rev standard just requires that upon the completion of the sale transaction, the delivery of the equipment, we now recognize the profit and the revenue immediately.
That impact was about $44 million in revenue in the quarter and the margins of our sales back to vendors in this quarter were not materially different than the overall margin, so call it about $23 million or so of gross margin impact in the quarter. Very importantly, this is a timing effect, nothing more. So over the course of the year, this impact will fade, but certainly, it is an artifact of the adoption of the new revenue recognition standard.
So those are the comments I wanted to make on the used equipment results. Just moving to EBITDA overall $780 million, that's up $189 million versus last year and it came in at a margin of 45%. That margin was improved by 140 basis points over last year, and again, all of this on an as-reported basis. To break down the $189 million year-over-year change, volume obviously was the major driver. We calculate that as about $177 million of volume impact and then the rental rates also added another $18 million or so of EBITDA over last year.
Ancillary was about a $16 million benefit compared to last year and then used equipment, the robust quarter contributed about $44 million of EBITDA impact. That $44 million is coincidentally the same as the revenue timing impact of the adoption of the new accounting standards.
Fleet inflation, we called out as a $13 million headwind. Merit increase is a $6 million of headwind, and then a large mix and other in the quarter of minus $47 million. The great majority of that negative $47 million is the impact of the addition of NES and Neff costs compared to last year. And it's also an artifact of how we actually calculate the volume component that I called out in the $177 million. The revenue that NES and Neff brought along in this year compared to last year came along with both variable cost and fixed costs.
The variable cost component we’ve signed up in the volume number that I called out. The fixed costs all falls to this mix and other number. So that was the biggest chunk of the minus $47 million that we're calling mix and other. There are also other timing and other effects that fall into this number as well as the impact of the synergies that we realize for Neff and NES which we would callout at a positive $18 million between the two acquisitions, 10 for NES and about eight realized in the quarter for Neff.
So those are the key drivers of the adjusted EBITDA performance on the quarter. They resulted in a flow through calculation of 50% on an as-reported basis and we can certainly go through the flow through discussion more in the Q&A. But I would just point out that if you calculated flow through on a pro forma basis, I know you guys can't do that, but we've done it. Our pro forma flow through in the quarter was 61% during the quarter.
EPS, $2.87 of adjusted diluted EPS in the quarter that compares to $1.63 last year and that increase was driven mainly by the improvement in EBITDA, but also the impact of tax reform. Tax reform benefited us something like $0.50 over last year as that single factor in Q1. So $0.50 out of the $1.24 or so that we improved year-over-year, we could put down the tax reform.
Free cash flow in the quarter was strong, $526 million when you exclude the impact of the merger and restructuring related costs, those came in at about $10 million in the quarter. So $526 million, a $36 million improvement over the same year-to-date number last year. Obviously, the operating profitability was the main driver of that improvement, EBITDA of $189 million as we talked about.
The rental CapEx story, rental CapEx is a little bit lower; the net rental CapEx was a little bit lower this year compared to last down about $14 million. That net rental CapEx was a result of higher gross CapEx spending, but also the larger used equipment sales result that we talked about previously.
Cash taxes, the cash tax is paid. We’re about $9 million higher this year compared to last year. And then we had a timing of interest expense and cash interest paid that that was a little bit of a headwind call it, $60 million or so in the quarter. The rest was working capital for about $95 million more working capital this year compared to last year.
Net debt and liquidity, our debt balance at the end of the quarter $8.9 billion of net debt that's higher than last year, but obviously reflects the increase for the acquisitions that we did last year in NES, Neff and a couple of other small ones like Cummins and others. So $1.9 billion increase in net debt, but certainly in line with the acquisitions primarily.
Liquidity finished the quarter at $1.9 billion in total liquidity. Within that $1.6 billion was availability on the ABL facility, along with about $280 million of cash on the balance sheet. Just real quickly on returns ROIC in the quarter was 9.4%. You all know that's a trailing 12-month calculation that we do that TTM was up a percentage point over the same period last year.
And I'll just point out again even though we did it previously that the way we calculate ROIC includes the tax rates that apply at the time period that that's involved in the trailing 12-month period. So in this calculation we had the new 21% federal tax rate for the first quarter of 2018, but also 35% old tax rate for the last three quarters of last year that were in the calculation period. If we had used to 21% new tax rate for the entire period. The ROIC calculation would have been 10.8% for the trailing 12-month period, which would have been 80 basis points higher than the prior period.
The share repurchase, just a brief update there. We bought about 1 million shares back in the quarter, $177 million of cash spent on those repurchases and that left this as Mike pointed out with about $168 million remaining on the existing program. The new program authorization will begin when we complete that $168 million, which should be mid-year and as we've done in the past, we expect to be in the market buying back shares fairly steadily against the new program once we do started to complete it by the end of next year.
Neff integration and synergy update, I think we touched on, but just to put a number to it the Neff integration. We think resulted in realized synergies of a little over $8 million in the quarter and the run rate we calculated about $35 million. So right there at the total run rate of annualized synergies that we expected out of Neff. We got there a little sooner than we thought, but I think it just indicates that the quality of the execution on the integration there. Just real quickly on fleet procurement phase, we call those out in the $5 million to $10 million range and we're well on track to deliver those as well.
You've all seen the guidance, so I won't repeat the guidance numbers other than to say that we obviously reaffirmed all of the elements of the guidance that we've given and I think that reflects the fact that we feel good about how the first quarter of the year started out. It was certainly in line with what we expected to be able to deliver the overall guidance for the full-year and it's boasted by the fact that the market environment we perceive as being quite strong and our execution in that environment we feel very comfortable with will get us where we need to be over the course of the year.
So maybe I'll stop there and open up the call for questions at this point, so operator?
[Operator Instructions] Our first question comes from the line of Ross Gilardi from Bank of America. Your question please.
Yes, Good morning.
Hey, Ross.
Look I think consensus was probably still baking in at 1.5% to 2% rate environment for 2018 and I did say that based on the comments that you made about the carryover into this year last quarter, I mean pro forma pricing was up 2.7% year-on-year in the first quarter and you haven't seen that rate of growth in a few years, so look realizing guide on rate when you consider how tight the used equipment is right now? Is there a credible argument for some markets to go back to say a plus 3% to 5% rate environment in the next year or two like they did earlier in the cycle?
So is there a credible argument? Yes, there's a credible argument to do that and certainly you can make your own judgment about how likely that that is to happen. Our view is that the market environment certainly would support a good rate realization and I think the path that we are on, we're encouraged by that. 2.7%, if you asked us before the quarter whether we’d be there, we probably say not yet.
So that's encouraging for us, right as we think about where things could go, so yes, credible environment. Maybe I’ll take the opportunity just you said credible for 3% to 5% and take the opportunity maybe a question given the sequential path that we experienced in the first quarter.
If you repeated the last three quarters sequentials that we achieved last year with the start that we've had this year that number would take us to 2.9%. If you repeated sort of the average of the sequentials that we’ve achieved in the last three quarters over the last three to five years with the start that we've had this year that sequential pattern would take us to about 2.5%.
So certainly feels reasonable to say we're in that 2.5% to 3% range and could we accelerate from here to get into 3% to 5% range that's not ridiculous. So hopefully that's helpful for you Ross.
Yes. Thanks Bill. Any signs of slippage at all in the used equipment market?
No, it's continuing to be pretty robust. I think if you just look at the pricing that we've realized about 6% that we realized this year compares to something in the neighborhood of 5% that we realized back in the fourth quarter. I think that just aren't priced basis alone suggest that that market still pretty robust, and as I said it's still demanding pretty good volume. So that market feels pretty good right now.
And then just lastly guys, I mean you talked a bit about your free cash flow history over the last few years. Any thoughts on just the sustainability the type of free cash flow that you're generating right now beyond 2018?
I think it's fair to say that if 2019 looks anything like 2018 we're going to have another very robust free cash flow story for next year as well, right. The benefit of tax reform, the strength of our overall operating profitability, the amount of capital that we would have to put into the business to kind of sustain a comparable demand environment, all would argue for another north of the $1 billion free cash flow year next year and that's the backdrop that we're thinking about as we think about capital allocation decisions. So another good year, next year assuming that the market continues.
Thanks guys.
Thank you.
Thank you, Ross.
Thank you. Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question please.
Thanks guys. Just curious on the equipment sales, the shift that you had into the first quarter, do you have any guidance for – just on how to think about what that means for in the second through fourth quarters for this year?
Courtney, this is Matt. It does not change our full-year outlook. We still expect to sell somewhere around $1.2 billion of OEC as we talked about in January of $1.2 billion for the full-year. This is just – you folks are seen based on the change in the accounting rules that Bill mentioned in his comments.
You're seeing more of it than you usually would, but Q1 is always been the time of the year where we sell a lot of our assets on the trade-in basis because it's our trough and time utilization and it's the best time of year to get rid of the old fleet. Just the factoid that you folks don't know that fleet that we sold to vendors averaged 113 months.
So we're really talking about a portion of that fleet more than 10 years old. So we're selling nine to 10-year old fleet and we look at the first quarter as an opportunity to cleanse that, refresh the fleet and make sure that we're giving the customers the type of product they expect from us.
Great. Thanks. And then just on the specialty, can you help us understand how much of the growth is related to the acquisitions versus cold starts versus same-store sales? And then just on the cold starts, just give us a little bit of color on how those stores are performing in years two and three and if there's any significant difference between any of the lines?
Courtney, the bulk of the TCP segment growth was same-store in the mid-20% out of that 36% was same-store growth. So a pretty robust story there, even though we had – for that business a reasonably significant acquisition in the form of Cummins last year. So we certainly feel good about the business even on the same-store basis, but we also are growing the footprint of the business. We're going to add a total of 18 or so cold starts this year, the great majority of which will be specialty location. So we will enhance that same-store growth again as we go forward with the new footprint.
Awesome. Thanks guys.
Thanks.
Thank you.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.
Hi. Good morning, everyone.
Good morning.
I’m wondering if you could talk about whether you view – whether having any impact on the first quarter, if at all, a number of folks from channel have been complaining about seasonality this year more so than normal. Did you see it in your business? And as you folks think about the cadence into 2Q, I guess, we look for stronger than normal seasonality utilization pick up if weather was a factor in the first quarter?
Sure, Jerry. This is Matt. I think you saw a little bit of a concern, specifically in March, that 40 bps pro forma drop in time utilization. We attributed to two major factors for us, a little bit of weather and then the timing of the holiday. So the week leading up to Easter happened to fall in March. So we saw a little bit of drop off from our normal cycle, which we expected to pick that up in April, and as we sit here we're very comfortable that that things have had normalized for us to what more or like what we expected.
So I wouldn't see – I wouldn't be concerned about that. I’d also point to the balance that we had. One thing I'm really encouraged about is the rate performance in Q1. And keeping that balance of rate and time is real important to us. We talked about that all the time. And last year, quite frankly, we dug a bit of a rate hole while having very strong time utilization. We’re very conscious about not digging the rate hole this year because that first quarter compounds on it. So we're very comfortable with where we are right now.
Okay. And from a capital deployment standpoint, obviously very active year for you folks last year. Can you talk about what your M&A pipeline looks like at this point? And obviously, big buyback announcement maybe that ties into it to some extent? Bill, can you just step us through it?
I'll start and then I’ll ask Bill to chime in, but I think what you're really highlighting is the strength of our balance sheet and our cash flow gives us a lot of optionality. And acquisitions happen as they happen. Pipeline, we're always out there looking for companies that meet our criteria and our discipline – we remain focused on our discipline, making sure that, strategically, why would we be good owners of that asset, number one. Two, financial, how does it affect us and then how can we get an ample return.
And then third thing is culture, and we're very strict on those. And if we don't do a deal is because one of those – one of that legs of that stool didn't make it and we have the discipline to walk away, but having said that, it is our optionality that we have at this point in time.
And I’ll only add that we view acquisition as the higher and better uses of our capital and cash flow then buying back shares. And so we want to make sure that we are ready to do those acquisitions that make the right sense. And that's partly why we take a slow and steady approach to executing share repurchase, right.
We want to make sure that, yes, okay, the Board authorized a new $1.25 billion program. We don't want to go out and blow it all right now because there maybe deals that come along that are really appealing. So let's be slow and steady in executing it and make sure that we're ready to go when the right deal shows up, and we will continue to do that, right. We've established a pretty good track record in how we approach managing the repurchase program. But if we do it with an eye towards, hey, if a better deal comes along like an acquisition, then we want to use it the used cash flow for that rather than just buying back share.
And I appreciate that it's an involving market, but the pipeline as it stands now how active is it?
It's always active. It doesn't – as you can imagine specialty is an area of interest for us and there is no secret. And as we went through last year, we did a couple fairly sizable Gen Rent acquisitions, where we're open minded, and – but the pipeline has always been pretty active.
Thank you.
Thank you.
Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question please.
Hi, Seth.
Hey, good morning, guys. So I think what something that I think people are wrestling with is the implied incremental margin that's kind of baked in the getting to the midpoint of your ranges for the year. I think even if you back out the $30 million or so of incentive comp tailwind that's 2018 versus 2017. It's still implies a pretty healthy mid-to-high 60% incremental margin for the rest of the year. So can you kind of talk us through your comfort level on that number and why that's an attainable number from here? Thanks.
Sure, Seth. Really – holding aside the bonus impact is the story of the acquisitions. NES, we anniversary in the second quarter. Neff, we anniversary in the fourth quarter. There will be nice moves to our incremental margin our flow through in those quarters just reflecting the mechanics of adding their revenue and the cost that that come along with that revenue this year versus last year. It’s something that’s hard to quantify, but it certainly is going to be a material impact in both Q2 and particular in Q4.
Okay. And then how should we think about the incentive comp kind of cadence through the year as a tailwind year-over-year?
The main impact is going to come in Q3 and Q4. So in the first quarter, the year-over-year comparison was basically flat. That's probably going to be the story in the second quarter right assuming that we don't have a surprise in the performance and therefore have to adjust the accrual differently than what we've got in mind right now. So it will be basically flat effect for Q2. It’s really about $15 million of the impact in Q3 and Q4 each that that we're expecting right here and now, just based on the pacing of how we adjusted the accruals last year versus what we think we're going to do this year.
Okay. But – the numbers that we're talking about the mid-to-high 60% incremental that's the right way to – that's how you're thinking about and that's an accurate characterization?
Yes, the timing is certainly skewed toward the back end of the year. It's going to be more third and fourth quarter, second half of the year event than second quarter, but we expect to see some fairly robust impacts in the back half of the year to the incremental margins because of those factors that we talked about.
Okay, thanks. And then I'm sorry if I missed it, but given some of them whether disruptions are one not that you experienced in March. Can you give us any feel for how April is going and it's obviously an important month kind of kicking off in the construction season so any color on April trends would be great?
I think Matt will touch that.
Yes, so I touch on a little bit, but just to repeat, we don't give the specifics of into quarter, but we wouldn't have pointed out that the 40 bps in March was due to weather and holiday unless we felt that it remedied and you can take that the guidance that we're giving to reaffirm means that we feel like the temporary time utilization lapse that we saw in March is remedied and demand continues to be strong for the balance of the year.
Okay, so that's – those products of restarted. The branches are reopened. That's right we think about that?
Yes, just a delay in the cycle. We don't expect to have the closures that we had in Q1, and once again a little bounce back that you get in the first week after Easter as opposed to before just a timing issue, but it got our attention, we dug into it, and we feel comfortable with it.
Okay, guys. Thank you. I'll get back in queue.
Thank you. Our next question comes from the line of Kathryn Thompson from Thompson Research. Your question please.
Good morning. This is Steven Ramsey on for Kathryn. You guys previously had talked about raising the target for Project XL. Obviously, you didn’t raise it, but it said this maybe a possibility. Any update on Project XL?
Sure, Steven. So we've been sharing with you the – a few of the projects, underneath Project XL in our quarterly investor decks as we’ve gone the last several quarters, and the Project XL is a complex topic to try and talk about, but we try to simplify it by just focusing on a few of the projects underneath it, so those four projects that we've shared actual data on. What we would say is that the metrics that those projects are tracking have already gotten us to about a $200 million run rate for those projects.
Now I hesitate to say that because as we said again and again, the metrics that those projects are tracking you should not think about incremental EBITDA. Certainly there is incremental EBITDA in there, but their duplications between the projects and there are certain components of those projects that would have been there anywhere, anyway without Project XL.
But in terms of the $200 million run rate of the metrics that the Project XL projects are tracking, I say we're pretty doggone close to the $200 million run rate already and that would led us to say that we’re thinking about increasing the targets that we talked about.
But just as we've gone deeper and deeper into looking at the performance of these XL projects, it has become just much more clear how difficult it is to have a conversation with you guys in the outside world without diving into huge complexity. So we just simplified and said look at these four projects. They're delivering something in the neighborhood of $200 million run rate of impact.
By the way when you look at the entire list of Project XL initiatives, it’s still in aggregate right around the $200 million impact. So it's not like we're cherry picking those four projects, just those four easy to talk about to the outside world. But we feel good about Project XL, we feel it’s delivering very much in line with what we expected, and we think it's an important part of how we continue to drive productivity improvement in our business and so we'll keep running that.
Excellent. And then with the energy in market starting to recover, are you changing or editing your plans to invest in that market or aggressively as oil prices and rig counts move up or is it planned expansion same as in the past?
So Steven when thinking about the upstream exploration and the rig counts improving and based on oil prices as I referred to in the opening comments, we're certainly participating in that. We’ve had really nice growth there, but most of the growth has been through our pump business that as a matter of fact more than half of our growth in Q1 was through our pump business where we held on to some specialized products to serve that end market.
So we didn't have to invest any incremental capital there, which we're really pleased with and kind of validated decision the team made to hold on to those assets. With all that being said and with the strong growth that we had in the upstream business, it's still less than 6% of our business overall as compared to peak where it was almost to 11% of our business. So we're encouraged, we're pleased, we kept our footprint there to serve that market, but I don't think it's going to get as big as it did at one point in time in the history.
Excellent. Thank you.
Thank you.
Thank you.
Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question please.
Hey, David.
Good morning. Within the overall guidance that you maintained the high level metrics, was there any change from the start of the year in your thought on rental rates and your thoughts on time utilization?
No significant change. David as I mentioned before, I think the rate result in the first quarter is probably better than what we expected coming into it. And so that's a good starting point for the year. And we'll have to see how it develops from here. I think we feel good about the way that we've been able to position the fleet and the fleet on rent for the remainder of the year. There are some puts and takes in the utilization of that fleet in the first quarter. Matt touched on the margin particular, but nothing that’s concerning to us as we look at the rest of the year. And as we said, I think April feels like it’s positioning us well to continue to say that about the rest of the year.
So that said, it seems like three months ago maybe there was an upward bios if there was going to be a change to your CapEx, but you chose to maintain the CapEx guidance at least at this point. Can you give us a little update on how you're thinking about the CapEx budget relative to those other two metrics? Obviously, the interests lie between all those three decisions?
Yes. It’s certainly is an interplay. And what I would say is that we gave a pretty broad range for our gross capital spends this year, right. $150 million range. I think it gives us plenty of room to respond to the upside, if indeed it looks like we should be spending more. So I don't think we need to say that we're thinking any differently about our capital plan. It is still pretty early in the year to be talking about either increasing or decreasing for that matter. And so what I would say is let's have this conversation again at Q2 and we'll be able to make some more definitive statements about how the second quarter fleet on rent build and how that feels relative to our capital plan and we’ll make it more definitive statement at that point.
And the availability from your vendors to get ironed if you need it, just given some seasonality, it appears your CapEx was a little bit stronger in the first quarter than initially thought which for more months to utilize that bigger fleet it's good to get it early, but if there was a decision to add fleet, would you have ample availability to get it in time so to speak, if you wanted to in June, July, late May? Just coming to getting your feel from supply chain availability?
Yes, David. This is Matt. We feel comfortable that we've got enough of a pipeline built that we could accelerate and move in some assets, so it would be more of an acceleration and then backfilling Q3 and Q4 is usually the way we do it when we make the decisions to change any capital either timing and/or increase. And we believe we still have that flexibility and we're very fortunate to have good partners that understand keeping their share of United’s business has value for both of us, and we give them as much foresight as we can.
And what drove the decision or whatever caused a little more fleet coming in, in the first quarter than maybe was originally planned?
Part of it is that we still felt the demand – first of all, we sold the decent amount of used equipment, number one. So when you look at net-net, our fleet size overall is not outside of where we expect it. We sold hair more and we replaced a hair more. We made an active decision throughout March not to slow down because we still saw the demand that was coming forward. We're talking to our customers and our field leaders and we didn't think there was any reason to slow down the flow in March because we expect to have a strong second quarter.
Last, I am trying to understand what drove the decision? A strong used market, let's hit it and sell use, and then we need to backfill new? Or was it confidence in utilization to buy the new? Just want to make sure we understand what’s driving what?
So to be specific confidence in the overall balance, right, so sometimes, it gets parsed out time and rate too much. The overall balance of what time and rate is doing for us that we feel good about that. The answer was yes. Do we think our customer demand is going to be able to absorb the fleet that we’re letting flow in not just in March, but we planned to bring in April, May, and June? And the answer was yes. So I would say those – really what we expected, the trend that we expected we just continued to flow.
Okay. So it's a utilization confidence driving the fleet decision that wasn’t…
Now let me touch on the used sale. So I know the first quarter looked a little lopsided. Much of that appearance had to do with accounting recognition, but we always sell our used equipment especially to vendors in Q1. It's the best time for us to get rid of older fleet and I said it earlier, but just remind you that the average age of that fleet that we sold to vendors in Q1 was 113 months. So when we’re talking about 9 and 10 year old fleet. Q1 is a great time to get it out of the door because it's sitting in the branches. It's low peak season – low season time utilization and it easier for the branches to get it out during that period.
When we get busy into Q2, Q3, we're more focused on our retail, but our used sales as always strong to vendors in Q1. That's our opportunity to get it out and then on the back end in Q4 will get rid of some any remaining vendor sales that we had planned on it. That's kind of the way we've always operated our business. You guys just have between us been a bigger company and the accounting changes, it just probably gave a little bit of a different look from the outside world, but nothing changed internal.
Thanks for the detail.
Yes.
Thanks Dave.
Thanks Dave.
Thank you. Our next question comes from the line of Neil Frohnapple from Buckingham Research. Your question please.
Hi, guys.
Hi, Neil.
Bill, just to be clear on the [indiscernible] commentary you gave in response to Ross's question. So if you repeat the sequential rate improvement that you did over the last three quarters of last year that would take United the plus 2.9% for the full-year that's a pro forma basis, correct?
Yes, that’s correct.
Okay. And are you seeing any other costs creep that's weighing on the incremental margin such as higher delivery costs that you call out or you have to manage through and I guess is the follow-up is there a risk that you'll see greater than previously anticipated equipment inflation due to higher steel costs, I think the vast majority of your purchase is under contract that you negotiate in the prior year but just want to confirm that? Thank you.
Thanks, Neil. On the cost question, I would point delivery cost in the quarter is something that has a focus from our management team. You guys have said this, you guys read the paper like we do and I'm sure you read about freight cost increases as fuels costs go up and as it becomes harder for the delivery companies to find track as well.
When we use outside hollers, we face some of those same dynamics in the quarter that's not to say that we didn't have opportunities to manage better, our use of outside haulers that something that we were very heavily focused on but that was the dynamic that’s played out in Q1 and then that we're going to be focused on for the remainder of the year.
The other operating cost items I put in the category of just sort of normal management operations focus right of that. We had little bit more over time in the first quarter than maybe we expect to coming in, for example. Well, that's just something that we can put some management elbow grease to and address as we go forward.
So those are probably the cost items that I would say we're focused on right here now as for equipment purchase price inflation and commodity prices, our purchases, the vast majority of them are covered by supply agreement that have fixed pricing over the course of this year.
And so we would expect that the commodity prices won't drive very much in the way of inflation this year for us, obviously next year when we negotiate the terms for next year that will be a discussion point with the vendors and it will be a good old-fashioned arm wrestling match and we know how to do that and will do it vigorously from the time.
Great. Thanks very much Bill.
Thank you.
Thank you.
Thank you. Our next question is a follow-up from the line of Ross Gilardi from Bank of America, your question please.
Yes, thanks guys. Just from that note the higher delivery costs over time – great equipment costs, lot of costs pressures out there. They've got to be impacting the smaller independent rentals chain is – in particular doesn't have your scale advantage. So are you seeing anything out in the field, which we believe that the smaller chains are almost being forced to raise prices higher than they might have otherwise going into the year, just to offset the cost inflation?
Ross, I don't know that I would could tie it directly to why they're making those decisions, but I would say what we're encouraged about is the industry seems to be acting as we are, right. The industry seen better rate improvement, the industry seen better time utilization.
So we see those as positive indicators and certainly costs pressures are something that everybody has to deal with right just merit increases and everything. So I would say you'd hope that informing them, but the result is what we can really comment on when the results are looking like the industry is acting in a responsible manner when it comes to rate and getting some time utilization.
And any sense of just broader market acceptance for some of these equipment surcharges that have been announced by your aerial suppliers?
I'm sure that those are being impacted by. I'm not opening their arms to it. But there's no real commentary that I could give you that would be – that I think would be that helpful for you.
Thanks for that.
Thank you.
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer.
Hi, Scott.
Good morning. Mike or Matt, you mentioned a large projects that you're eyeing in late 2018 that should benefit 2019. Could you just give us some perspective maybe comparing it to past years, how sizable that looks, and your ability to win those, are they already in hand, are they bids to come and also just a feel for your win rate on bids, just if that's something you measure and something you can share? Thanks.
Sure, Scott. So I'll just mention the win rate, it's something that we measure internally not something we talk about externally, but I would say as for as project pipeline, I specifically make comments about the industrial projects because that's a significant change on a year-over-year basis. We're seeing some nice industrial projects that are carrying over from last year, but that's pipeline seems to be increasing a little bit in the back half of 2018 on a year-over-year basis.
As far as commercial, I wouldn't tie just a major projects, I think it's broad geographically; broad by project mix and the demand is brought by product type and sector. Every vertical, every meaningful vertical that we track of end markets is up on a year-over-year basis. So the project commentary specifically that you heard was more about the back half of the year in the industrial sector, but overall I’d say the pipeline is a strong and a little bit stronger in some areas this last year.
The other thing I would add that is if you take a look at all key indicators, they’re positive. And if you take a look at the associated builders and contractors, backlog in the fourth quarter expanded to [9.67] months, which is the highest level ever achieved. So in Dodge Momentum Index is positive. The highest level in cycle, I can take through all of these items, but the bottom line is all of the key indicators remain positive. And as Matt mentioned, it's very broad, nothing specific, but we have the footprint and we have the equipment and the people to tackle the task.
Thanks. I appreciate that. And just real quick here at the end, I'm envisioning you have a very large Specialty and Gen Rent pipeline and you don't size it, but just curious, obviously you have a great opportunity throughout North America? Are you looking at anything outside of North American and just contemplation of that? Thanks.
Look, we've said at some point the company will look beyond when that time is, we haven't pinpointed an exact date, but I think the key point is, one, North America is very strong. There is still – we have – as far as market opportunities remain very high here for us to capture more and that's what we're doing and that's why when you take a look at the specialty businesses and the growth that we're seeing, that is really to me a no-brainer. Why would we go after the current market that we are in where we have the biggest strength, but going beyond North America at some point yes and more than likely with our customers.
Okay. Thanks guys.
Thanks Scott.
End of Q&A
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back for any further remarks.
Well, I want to thank everyone for joining us on today's call. Thanks again for your participation. We always welcome the opportunity to share your thinking and hear your feedback. Please, if you haven't, download our revamped first quarter investor deck and feel free to reach out to Ted Grace, our Head of IR with any questions. Operator, you can end the call. Thank you.
Thank you. And thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.