Jan 22, 2015
Executives
Michael Kneeland - President and CEO Bill Plummer - EVP and CFO Matt Flannery - EVP and COO
Analysts
Ted Grace - Susquehanna Financial Group Justin Jordan - Jefferies Seth Weber - RBC Capital Markets David Raso - Evercore ISI Joe Box - KeyBanc Capital Markets Scott Schneeberger - Oppenheimer Joe O'Dea - Vertical Research Jerry Revich - Goldman Sachs Steven Fisher - UBS. Nicole DeBlase - Morgan Stanley
Operator
Good morning, and welcome to the United Rentals’ Fourth Quarter and Full Year 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 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 31st, 2014, as well as subsequent filings with the SEC.
You can access these filings on the company’s website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
You should also note that 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 Kneeland
Well thanks, operator, and welcome and good morning everyone. Now I want to thank everybody for joining us on today’s call.
So let’s get started with 2014. It was a great year for us and [we’ve got] another strong year in 2015.
Our message today is about progress, discipline and consistency. These fourth quarter calls tend to frame the year-end as a hard stop, but in reality our performance is a continuum and that's especially true this year, when we went into 2015 with so much momentum.
Now I’ll talk about it in a minute, but first I want to give you the last 12 months that are due, because we turned in some outstanding results. Our rates were up 4.5% in line with our guidance.
2014 was the fourth straight year we moved the rates higher and we still see opportunity for improvement. We had record time utilization of 68.8% for the full year.
And our return on invested capital was also a record of 8.8%. Together, they helped drive more than $2.7 billion of adjusted EBITDA on a rental revenue growth that outpaced the industry growth by nearly two-to-one.
And our free cash flow was a homerun for the year. This was due in part to the used equipment margin of 48.5%, another indication of the ongoing recovery.
And we set 1.7 billion on fleet and as you saw last night, our CapEx plan for 2015 is approximately the same with even higher expectations for free cash flow. Not only do we meet or beat every target in our outlook, we did it while making fundamental improvements the way we operate.
Take safety for an example. In 2014, we had the fewest number of recordable injuries in our history.
And we drove our full year recordable rate down below 1.0 for the first time. It was a 9th consecutive year of safety improvement for us.
So clearly it’s not just a fluke, it’s a progressive exchange for the better in our culture. Specialty rentals was another great story.
We grew our specialty segment very effectively last year with a disciplined mix of [NA] cold starts, new fleet and cross selling. Our full year revenue gain in specialty which includes the acquisition of National Pump in April was approximately 83% and a gross margin of almost 51%.
That's nearly 400 basis points higher than the prior year and our fourth quarter margin for specialty was up nearly 500 basis points. Company wide, all but one of our regions had year-over-year rental revenue growth for the quarter with more than half of the region showing double-digit growth.
And we had a very solid increase in key account revenue up [16%] year-over-year. National accounts which is a subset of our key accounts grew more than 18%, so from every perspective a very strong year.
We demanded a lot of ourselves in 2014, and I am happy to say that we outperformed our own expectations. Now let’s talk about this year.
I'm going to start by acknowledging the concern that's out there about the effect of oil prices on our industry. Look, we're not running this business with rose-colored glasses and we don’t plan to be caught by surprise.
We’ve dug deep into this issue and while we haven’t seen any significant attrition to date, we do expect some impact as rig counts come down. Now we're constantly pulling the field, not just to measure upstream oil activity, but also to gauge any knock-on effect.
And we’ve done a lot of detailed analysis based on conservative assumptions to identify our exposure. And Bill is going to share some of those numbers with you in a moment.
But I can tell you where they came out. Yes, we think oil prices will reduce demand for certain types of equipment in a handful of areas.
But we disagree very strongly with the idea that our growth is at risk and I’ll give you five good reasons why we feel this way. First, upstream oil and gas accounts for only 6% of our business company wide.
That's a very modest exposure given our fleet can be utilized for other types of customers. Even in the battlefield states or a state like Texas, we’ve got deep customer relationships outside of oil.
Currently more than 80% of our rental revenue in Texas comes from infrastructure, manufacturing, transportation, commercial building and a host of other industries. Second, we’ve strong systems in place for fleet management, including the relocation and the repurposing of CapEx through used sales.
And if circumstances change dramatically, we’ve the flexibility to reduce our CapEx spend for the year. We’ve done this before when warranted and we wouldn't hesitate to do it again.
Third, we believe that any drag on demand for upstream oil will be mitigated by the positive effect on other industries. Take chemical manufacturing, one of our key sectors.
When oil prices decline, manufacturing costs drop, production is stimulated and consumer purchasing power increases. The current growth rate of the US chemical industry is forecast to accelerate to at least 2016.
This is just one of many examples. Fourth, the geography plays to our advantage.
Our upstream oil exposure touches just a fraction of our footprint in any meaningful way. Now keep in mind, we serve 49 states and 10 Canadian provinces.
That gives us a lot of room to deploy our assets. The reality is the [field] has been asking us for significantly more CapEx than we spend for a few years now.
And we’ve been very disciplined in reining in that number. So if we decide to move fleet due to localized weakness, we’ve branches that are eager to take it.
And fifth, we know how to outperform our end markets as well as our industry. We’ve shown you that for years.
In 2014, our 15% rental revenue growth was more than three times the year-over-year growth in non-res construction in November, thanks in part to secular penetration. And it was nearly twice the revenue growth of our industry overall.
Not only is there still a lot of runway ahead in the industry up cycle, the macro economy is also trending in our favor. Many economists predict the US GDP growth will be in a range of 3 to 3.3% for 2015 with lower unemployment, more consumer spending on goods and services and a return to housing starts.
And to the degree that any uncertainty still remains in our end markets, that actually works in our favor because we offer an alternative to large capital outlays. So when Global Insight forecast nearly 8% rental industry growth for North America in 2015 and with more growth to follow in 2016, which they did on Sunday you can take that as a starting point.
But be assured we’ve bigger plans. Bottom line, this recovery has already its share of bumps, and we think oil prices will be another bump.
Given our scale and diversification we do not see this as a road block. In fact, we think the bigger picture is that low oil prices could have a significant upside for us over time.
And more immediately, we will keep moving forward in a better than expected fourth-quarter by making disciplined investment to capture profitable business. I’ve already mentioned that our specialty group is on a fast track.
Power and HVAC in particular turned in a standout performance with 27% same-store growth and a 61% increase in revenue overall in 2014. For 2015 we’ve earmarked a $170 million or about 30% of our [gross] rental CapEx to meet the increasing demand of our specialty fleet.
And we plan to open at least 16 new branches, this includes cold starts for all of our specialty lines, power and HVAC, trench safety, pumps and tools. Our growth in specialty also reflects cross-selling to our broader operations where we're seeing good diversity in large projects.
For example, our central US districts are predicting a big year with the wide range of projects underway or with the start dates in the next few months. This includes healthcare, education, hydropower, renewables, bioresearch and transportation to name a few.
Further west, we’ve got equipment on mega sites like [LAS] and a queue of major project work lined up. In the southeast are our mixed use developments, sports arenas, theme parks and airports.
And in the [northeast] our customers in the high-growth verticals are hungry to stamp up any fleet that comes available, and that's typical to many of our regions. I hope I have given you a substantial insight into our thinking on 2015.
Our outlook is positive because the facts support it. If we like what we see, we like what we hear from our customers then every indication is that the equipment rental is going to look at a multi-year up cycle with an ongoing recovery in our end markets and a tailwind from secular penetration.
But we're also agile and we are well prepared to respond to any changes in our operating environment. We plan to spend $1.7 billion in rental CapEx this year, because we believe the demand is there.
And we can adjust that number either way and regarding to at least $6 billion of revenue and approximately $3 billion of adjusted EBITDA, because we believe that we can hit these marks. We’ve done the math and we are already moving forward on our goals.
So now Bill will cover the financial results and then we’ll take your questions. So over to you, Bill.
Bill Plummer
Thanks, Mike and good morning to everyone. I’ll move through the financial results pretty quickly, so we can save some time to talk about the oil and gas analysis Mike mentioned, and the outlook which we wanted to make sure that we get.
I’ll start with revenue. Rental Revenue was a pretty strong quarter for us as Mike mentioned.
Total rental revenue increased 16.5%, that's a $187 million year-over-year in the quarter. And as usual I’ll bridge that 187 number.
Re-rent and Ancillary continue to be nice contributors to revenue growth for us. Re-rent and Ancillary combined were up 26 million year-over-year.
But the real driver is Owned Equipment Rental Revenue growth. That was up 16.3% for the quarter or a $161 million year-over-year.
Here are the components of that 161. Rental rate up 4.1%, as you saw drives about $40 million worth of year-over-year revenue improvement.
Volume was up 10.7% and that drove a $106 million worth of year-over-year revenue improvement. And that obviously includes the impact of National Pump fleet being added to the volume calculation.
Our inflation on the fleet was a headwind. It was 18 million detracting from the year-over-year change and then the [rest], we’ll call it mix and other including FX was a positive 33 million.
Within that 33 million, in addition to the volume that Pump brought along, Pump operates at a higher dollar utilization. So they had a positive impact on mix of about $28 million within the 33.
And then I would also call out the effect of FX in the quarter was pretty significant as a headwind, about $10 million of FX detraction from our year-over-year revenue performance. The other components were a sum of a whole bunch of other nips and naps in the year-over-year performance.
So those were the key drivers of our revenue performance in the quarter. For rental revenue, I would also point out that we had a very robust used equipment sales result for the quarter.
Used was up 16% over last year and as importantly, the margin was also very good, 48.7% adjusted gross margin on our used equipment sales in the quarter. Certainly helped by our continued focus on driving as much as we can through our retail channel along with the overall market price environment continues to be pretty solid in the fourth quarter.
We also just touched on and had a very good new equipment sales quarter with robust growth in new equipment. On profitability, I’ll bridge the EBITDA performance year-over-year for us.
We had a company record for fourth quarter of $775 million of adjusted EBITDA and likewise it was a company record, 49.6% margin in the quarter. So that was a $124 million of increase in adjusted EBITDA and a 100 basis point improvement in our margin over fourth quarter of 13.
Here are the components of the $124 million year-over-year improvement. The rental rate improvement that I mentioned earlier for revenue drops through the EBITDA at $39 million.
That's just using a 95% flow through on the rental rate revenue dollars. Volume contributed $74 million worth of year-over-year adjusted EBITDA.
And then we had a couple of other positives here. Ancillary, re-rent I mentioned along with some other small pieces contributed about $16 million.
Used equipment sales, I mentioned the improvement in volume and margin there. That contributed about $14 million of improvement and then a pump, the Cat.Class of pumps because of their mixed contribution contributed about $15 million worth of positive mix impact.
Working against those positives, we had fleet inflation. That was about an $11 million headwind.
Additional incentive comp, we've very strong incentive comp year and quarter and our adjustment to the incentive comp there cost us about $10 million over the prior year. That debt expense cost us about $8 million.
We had a strong bad debt expense result in the fourth quarter of 13. We’ve more normalized result in 14 along with a larger AR balance.
So that's the driver there for that $8 million headwind. Merit increases were about $6 million and all other was the remaining one.
So those are the components of our adjusted EBITDA change for year-over-year. If you look down at EPS, we had an adjusted EPS of $2.19 for the quarter, up very nicely from $1.59 the prior year.
So overall a very, very strong profit picture for the quarter as Mike mentioned. Real quickly on cash flow, we had a great free cash flow performance in the quarter as well.
$557 million of free cash flow the way we calculated, but I’ll remind everyone that that includes merger-related cash payments of about $17 million in the quarter. So the way we look at free cash flow in the quarter or excuse me, this is full year.
The way we look at free cash flow for the full year is a $574 million result. The real driver there and it did come in stronger than we expected.
The real driver was better EBITDA performance along with really, really strong collections. We’ve mentioned that before, but our AR collections have been coming in very strong for the last number of months now and that was a big part of the betterment there in free cash flow.
Just real briefly to touch on our share repurchase program. We’ve been repurchasing shares.
We mentioned that we brought back about a $102 million of shares under the new $750 million authorization in the month of December. We add to that in the month of January.
To date in January, we spent an extra $125 million. So we're now at $227 million of repurchases against that $750 million repurchase authorization.
So that's the latest update for share repurchase. Also as Mike mentioned, I’ll just reiterate.
We had a very nice improvement in our return on invested capital, 8.8% for the full year. And that's a 130 basis point improvement over the prior year with the fourth quarter sequentially improving by 40 basis points.
So we feel very good about the return direction that we’ve the company pointed at. Now let’s talk about oil.
As Michael mentioned, we’ve done a lot of work assessing possible impacts from low oil prices. And we’ve done it in a variety of different ways.
We keep coming up with the same conclusion which is that, we think any reasonable expectation for impact is manageable. Here is one way that we have taken a look at it, we think will resonate with folks.
If we look at every branch in our company that has oil and gas revenue, we decided that the best way to look at this was to model that oil and gas revenue taking a significant hit. So in this case, we said any branch that had oil and gas revenue, upstream oil and gas revenue.
The upstream portion of their revenue stream, let’s assume it takes a 35% hit. In addition for any branch that has more than a de minimis amount of oil and gas revenue, upstream oil and gas revenue.
Let’s also assume that everything else, all of their other revenue take a 15% hit. So they get hit 35 in oil and gas upstream, they get hit 15 for everything else.
If you do that and add it up across our company, the aggregate amount of fleet that would be freed up by those kinds of impacts would total about $400 million of average annual fleet. So 400 million, you know relative to an $8 billion plus fleet, you could you know say hey, let’s dismiss that.
That's not significant, but we don’t think about it that way. $400 million is certainly a good amount of fleet to move around.
Then we further ask ourselves, what could it mean financially? And we made some assumptions, so the 400 million is the average annual fleet.
Will that kind of an impact happen over the full year? We said no.
Let’s just evaluate having that impact build over the year and say it’s fully in effect at the second half. So the second half is really where that hit would apply.
So that 400 million annual impact really in calendar 2015 would only have the effect of about 200 million on a full-year basis. We ask ourselves, how much of that kind of a downside could we absorb, could we mitigate?
And while many of us could argue that we could absorb all of that kind of a hit, we decided to be a conservative in our downside analysis and assume we could only mitigate half of that. So the 200 million annual rate, we cut down to about a $100 million annual impact that represented real exposure to our company.
How much of that $100 million of fleet worth, we assumed a dollar utilization on that. That was very high relative to the rest of our company.
We used 60% in our analysis, so 60% is at least 5% percentage points higher than the dollar utilizations that we reasonably could expect in the second half for even the highest performing regions in our company. So 60% on that $100 million annual impact gives you a $60 million revenue impact and [indiscernible] through at 60% EBITDA, it’s about a $36 million EBITDA impact.
So when you look at it in that light, it doesn’t scare you, right. It’s not the end of the world to say, there is a $36 million [holed up] that, we’ve got to figure out a way to fill.
And as we said, we think that the options are fairly conservative. The good news as Mike mentioned in his comments is that we’ve a sense that there is going to be robust demand in other areas outside of oil and gas.
And other product types that we think can help address even if this what we’ve believe is a [indiscernible] downside plays out. So that’s the way we're thinking about the risk from oil gas and if you add the $36 million impact that we just walked through to or to subtract that from what we expect for the full year, we still feel like we can deliver the range of adjusted EBITDA that we’ve given in our guidance.
Speaking of our guidance for 2015, just to reiterate the key points you have already seen, we expect total revenue in the range of 6 to 6.2 billion. Within that rental revenue will be driven by rates at about 3.5% for year and time utilization of about 69% or twenty basis points improved over the last year.
The adjusted EBITDA range of 2.95 to 3.05, again we feel is a range that represents the most likely outcome for the year. We do expect to spend about a 1.7 billion of gross rental CapEx and have that net down to about 1.2 billion for the year.
And free cash flow will be a very robust result for us this year, somewhere between 7.25 and 7.75 is what we expect. Obviously that's significantly higher than the about 600 number that we guided to back in our Investor Day in December.
And it really reflects the re-enactment of bonus depreciation for calendar 14, that Congress and President Obama signed just recently. So put it all together and it looks like a very robust year for us.
We wouldn’t say that, if we didn’t believe that and believe that we had the ability to manage to that, oil and gas certainly is an exposure for us, but it's an opportunity as well. And we're going to look to take advantage of the opportunities that it presents as we always have.
And if we can do that, we feel like we’ll be having a good conversation at this time next year. So with that, that ends our prepared comments and we can open up the call for questions and answers.
Operator?
Operator
[Operator Instructions]. Our first question comes from the line of Ted Grace from Susquehanna.
Your question, please?
Ted Grace
I was hoping to ask on 2015 margins. You know I know you give revenue guidance, you give EBITDA guidance.
And so we can back into kind of what’s implied on the margin in an incremental basis. But you know Bill, maybe if you could walk through qualitatively some of the key headwinds or tailwinds, we should just think about influencing where we might come out on that range.
So you know things like mix, fuel costs, incentive comp, Lean, inflation, just to help kind of give us some guideposts?
Bill Plummer
Sure. So I’ll start, but certainly Michael, please, please chime in.
As we think about top line, you know a couple of things that swirl in the background in our thinking. Obviously walk through our oil and gas risk assessment, but you know the question is, did we get it right?
Could it be worse than that? Conversely, could it be better than that?
So those are the things that surround oil and gas performance, but that may buy us the revenue one way or another. And I’ll leave you to make your own judgment about you know how much risk you think there is.
FX is another factor that we certainly need to be aware of. Yeah, the Canadian dollar has been weakening pretty consistently.
Average Canadian was down last year by about you know 6 to 7%. And right now as we said, if it flat lined from where it fits right now at about $0.81, that would be another 6% or so year-over-year headwind from the currency going down.
So that's a nontrivial amount of revenue that could -- that could erode. The guidance we gave is total revenue.
So you’ve to be mindful of used and new as well. And our plan for used equipment sales this year is a reduction over what we achieved in 2014.
You know just looking at the difference between gross CapEx and net rental CapEx, you know we're guiding to something like $500 million of used sales proceeds. That compares to 549 this year or in 14.
So that will be a little bit of you know an impact to the revenues and maybe keeps the revenue guidance from being higher than it is. And then you know there are other items that might impact at the adjusted EBITDA lines.
So for example, we had a very robust incentive compensation this year. And when we [reach] the incentive comp targets for 2015, our [base line] plan assumes that we hit target and only pay out at target.
We paid out you know nicely above target this year. So you know that will impact in a positive way, where we might end up on the adjusted EBITDA line.
And a host of other issues, you mentioned Lean. The Lean initiatives are still rolling out and building momentum.
You know we finished the quarter, still a little bit of [indiscernible] under here. We finished the year at an annualized run rate of about $30 million of Lean impact.
That's up from the 23 that we reported at the end of the third quarter. So that's another you know factor that's playing through our expectations for 2015.
So I’ll start there and again, Mike I don’t know if you guys want to say anything or if I've have forgotten anything, please jump in.
Matt Flannery
Well, I think you captured it Bill. It’s important to note the difference in used sales is really about what has reached the [indiscernible] in the year.
And we don’t have as much fleet that we have [indiscernible], so that's our, why we're guiding lower there. If retail opportunities go over and above that, you know or well we may swing, but I think it’s a good target based on what we want to move out to keep our fleet fresh and to the targets we set, yeah.
Michael Kneeland
Yeah, I would only add that you know everything that Bill and Matt said is spot on. I think that if you look at the projections of the industry at 8% for North America, is a little bit higher than what we experienced or what they projected in ‘014.
So could there be some you know on rate, could it be opportunities. It could be, I don’t know to really, we somewhat tempered it you know as we went into the oil, but that could be an upside for us going forward.
Bill Plummer
Well one other point Ted is that you know, I know where you are going, right. You are looking at the midpoints of revenue and EBITDA, and saying hey flow through there and comes out at you know pretty high level, 68 plus percent.
That's you know an artifact of the fact that we're using ranges and the fact that the flow through calculation is very sensitive. If we were asked point blank, we would still say that we think about flow through for 2015 being something like 60% with [indiscernible] toward the upside because of the net effect of all of the things that I mentioned earlier.
So if you're modeling I would say, you know get your revenue where you want it, at 60% and then maybe put your thumb up to be a little bit higher you know to reflect some of the net benefits that we expect to accrue over the course of the year.
Ted Grace
That's super helpful. The only follow up I would have is, any willingness to quantify kind of what Lean expectations are?
I now you exhibited a run rate of 30, you're targeting a 100+ through the program over a few years. But any sense, could you just calibrate us in what a tailwind might look like this year?
Matt Flannery
Well you could do the trends, the math, Ted. You could do the trends.
I mean we would expect it to follow that trend, right. So we’ve said external targets, I mean internal targets above that 14.
We put even extra emphasis on it this year, but I feel very comfortable that we're, we will keep at steady pace towards that $100 million by the end of 16.
Operator
Thank you. Our next question comes from the line of Justin Jordan from Jefferies.
Your question please?
Justin Jordan
I just wanted to talk about the nice problem of having extra free cash flow and what that might mean in terms of changes or the board’s thinking about the capital allocation in calendar 15. Because obviously, relative to the guidance you gave on December 4th, essentially you’ve increased free cash flow guidance by you know 25% overnight.
Now I appreciate there’s a tax implication here that's not really, you know that much of a percentage again. But is that changing how you think about potential specialty M&A?
Is that changing how you think about you leveraging or potentially changing how you think about the amount of stock repurchasing you might do in 15?
Michael Kneeland
Yes. No, that is --
Justin Jordan
You might like to give a bit more [color] on that.
Michael Kneeland
No, you get one question. I think what we’ve done with M&A is that we're always looking at M&A opportunities.
And I'm flipping, but I don't think it changes how we think about M&A. If we found the right M&A opportunity, then we would go ahead and do that, whether we were at you know 600 or 700 or 775 of free cash flow.
So M&A wouldn't change. I think it is fair to say that, you know as we look at the share repurchase program, if you got more cash flow and you want to pass the leverage and you know we’ve already said, we expect to be towards the low end of the leverage range that you know that we want to operate in by the end of this year.
Right, we’ve called 2.6 as the leverage ratio we expect before the increase in free cash flow. So I think we would be more inclined to say okay let's not go crazy and go below the 2.5 kind of leverage ratio this year now that we’ve got more cash flow coming in.
So that may change how we think about the timing of the share repurchase program. And I think that's a sensible way to think about it.
So that's all still to be discussed and certainly we will talk about more, when we make more decisions. But I think M&A doesn't change, but everything else we kind of put in the mix and say okay, we got an extra $100 million.
What do you want to do with it and we will make that call.
Operator
Thank you. Our next question comes from the line of Seth Weber from RBC Capital.
Your question please?
Seth Weber
I wanted to talk about your CapEx commentary, specifically you know the comments around flexibility around CapEx. And you know you kept the 1.7 billion gross number for the year.
Should we think about cadence this year being similar to how it's been in the prior years of 60-65% in the first half? Or do you hold back some of the spending you know to wait and see how the markets evolve?
That's my first question. And then kind of as add-on to that, I mean it sounds like your specialty as a percentage of growth capital is down.
You know I think last year, it was something like, I don't know 270-280 something like that and now it's 170, I think you said. Is that reduction primarily focused on the Pump business or how should we think about you know your growth capital going towards the specialty category?
Thanks.
Matt Flannery
Sure, Seth. I will answer both questions.
The first as far as the cadence, if we plan out to being similar to this year, you know that we have a really strong flexibility as far as we don't need to make a decision if we're going to ship until literally a week before it's going to ship. So the second quarter, by April I think we will get a very good feel of it, the second quarter is going to be more or less and it will all be demand driven.
The first quarter is light already which is good for us and right now we are restricting the inflow of CapEx obviously in the markets that we think may have a little bit softening in demand in the back half of the year. So I really think we will get a better picture on how much we adjust from our norm.
And I would call last year’s cadence a new norm, depending on what the demand is and where we're getting our returns and where our customers need our services. So that's how we feel about the cadence.
As far as the specialty, we spent, we plan on spending over 30% of our growth capital on specialty. You're talking about more of a gross number when you are referring to last year’s number.
And a lot of that was, I would say re-fleeting our Pump, right so we need that acquisition to grow. And fleeting up the many cold starts that we have done in our other specialty segments, these specifically power even the year before.
So they were now ready to absorb scale. So we really pushed a lot into the cold starts over the last couple of years and we will do some more cold starts this year, but not at the scale that we did over the past few years.
Seth Weber
Okay sorry, Matt. So my, was my math incorrect.
I thought that your specialty last year represented, you know like half of the growth capital or something like that of the --
Michael Kneeland
This is Mike. You are closed down that number.
The Matt’s point, if you go back to ‘013, we had a significant amount of our cold starts stop, that were in the later part of the fourth quarter. That a lot of that CapEx ran into 2014 and then the cold starts that we had through the course of the year, and then treating all of those as we went through the year.
So in total numbers, it's down. You are right, but it hasn't changed our view on specialty.
We do reserve the right on you know Pump to understand what impact upstream could or could not have as we go through our cost opportunities. And as I mentioned, we will do cold starts with Pump to broaden their reach.
And that was one of the key aspects of the acquisition, was making sure that, if you recall 6% of their business was only in our commercial and industrial space. So we see that as a significant opportunity, so it's kind of more of a tempered look if we take a look at it.
And as I also mentioned, if there is a need for more growth capital, we’ve got it and we will do it. And flexibility is built into our model.
Seth Weber
Okay and then Matt can you, have you seen anything, can you make any comments on used equipment pricing because I think that’s something that people are increasingly you know nervous about?
Matt Flannery
Well other than that [indiscernible], so we enjoyed a real robust fourth-quarter from a volume, a little bit more than we even expected in the month of December and with margins holding flat. So and flat at a very high level, so we are seeing still a robust used equipment market.
Operator
Thank you. Our next question comes from the line of David Raso from Evercore ISI.
Your question please?
David Raso
Hi, on the oil downside scenario, I was just curious what percent of your entire fleet is captured on what you're considering you know at-risk territories? And then secondarily just trying to think through rental rates in that scenario, just trying to capture if you feel there is any potential knock-on effect to rates and territories where other equipment might be going into or you know essentially just even the rates pressure you may see in those weaker energy sensitive markets?
Bill Plummer
So, I will tackle the rate one first. The 3.5, about 3.5 guidance that we gave is lower than where we were thinking about rates you know, call it a month ago or two months ago.
And so in that sense you know we have included some conservatism to you know to a flat effect, that rate could be pressured as that oil and gas dynamic plays out. And yet we still say 3.5, could it be worse than that, obviously it could.
But again, we think we have got opportunities to respond and manage it down. I don't remember off the top of my head, the first question of what percent of the fleet.
Michael Kneeland
Well if you just do the math, right. So we said the 35% knock-on, I mean a 35% upstream would net in about 400 million.
So it's over a billion, I would say it’s somewhere in the billion and 1.2 billion, I don't have the number right handy in front of me. But I think that, well actually, it’s probably 1.2 billion of fleet that we think will be impacted and those are markets that have oil and gas upstream business today.
David Raso
Okay, I mean I maybe oversimplifying it. Because that's not everything in these states are driven by energy.
But I'm just thinking about 29% of your branches and all branches aren’t the same, I know that. But just going with the data we have, 29% of branches are in what I would consider nearly somewhat energy-sensitive states in the oil sands.
And in your analysis, you're saying kind of roughly half of that’s at risk, I guess right because 1.2 of the 8.44 billion of fleet is about 14%. Is that the right way to think of it roughly, half of the branches in those states in the oil sands is sort of at risk?
I am just trying to understand the analysis.
Bill Plummer
Yeah, it's hard to do the analysis based on branches in states and get anything useful in our opinion. That's why we went to the individual locations and tried to reason from what business they have that’s exposed right here and now.
So we didn’t do it, to you know to go to great levels of detail on you know how much fleet that at, you know how many branches or in which states. We have that, I don't know that it's something we want to go through in great detail.
But just the $400 million impact, I think really it does capture a pretty good view of what the exposure might be. But if you don't believe it, okay make it a $500 million impact.
Let's say we are off by 25% or even a $600 million impact and say we're off by 50%. You know, the end result doesn't change dramatically, right.
It’s a still a 35-40-45-$50 million kind of risk, even with conservative assumptions about how far down it goes and how much we can mitigate. I like our chances with that kind of risk scenario.
David Raso
Yeah, no I appreciate. I think the issue is, is there more territory at risk than solely branches that happen to have upstream oil and gas in that region?
I mean you know it's just, it's obviously just a debate right now about contagion beyond just those direct areas? And also on the rates, I mean you have done a great job this cycle on saying that, well we're not going to throw capital off the fleet just to grow.
We're going to focus on better returns. Should I expect if, you know if I'm thinking maybe a little more cautiously about the impact in broader contagion, you are going hold the rate before you try to hold utilization?
I mean if I had the model from downside sensitivity, should I be taking it more down on utilization, you would argue or taking down on rates. I'm just trying to get a feel for philosophically if things got weaker than your forecast thing?
Matt Flannery
It will depend right on what the demand is and what we are seeing. But I would say that we are going to have utilization at the levels that it needs to be at because we can do, we can manage that.
We can manage how much fleet we put into the market and how much fleet we remove out of the market. So I think we will be very diligent on those rates in time, but time is much more easily manageable.
And I think as Bill stated, we built in a little conservatism on the rate because moving the fleet from higher rate areas and you grow fleet into areas that aren’t your top 10% is going to have some knock-on, whether it's a quarter point or half a point, I don't think we really know yet. But I think we captured it in our guidance.
Michael Kneeland
And I guess I will [indiscernible] in that then, as we feel that utilization is coming under some pressure, while you want to hold the rate, it might play with it a bit. But the key is, you also have the outlet [indiscernible].
I mean I guess that's the idea. If used prices hold up, you can manage utilization also by just simply shedding some fleet.
And I think that's a key issue of used prices. If they hold up, you can do that relatively profitably, but that's you know obviously a part of the debate.
So we should think of let’s just trying to move the fleet, you also can tap you know the retail market the best you can on selling used.
Operator
Thank you. [Operator Instructions].
Our next question comes from the line of Joe Box from KeyBanc Capital.
Joe Box
I got a question on your construction pipeline on slide 13. And I just want to tie that together maybe with your methodology on guidance.
So how should we be thinking about the $370 billion pipeline and how you incorporate that into your guidance? And then maybe just you know to take it one step further, what are your guys on the ground telling you for some of these you know energy sensitive projects that have already started or maybe are just a few months away from breaking ground?
Are they concerned about this, or are they you know thinking everything kind of moves forward as planned?
Matt Flannery
So this is Matt, Joe. So we do have some key account managers that specifically just call on oil and gas.
So obviously they are hearing the most noise about whether it’s future concerns or some job cancellations. But even in that space, the pipeline was so robust that individually they may have opportunities.
I think more importantly the other 90% of our key accounts managers are extremely encouraged. Because we’ve always sent the fleet to the highest return opportunity and oil and gas was pretty hot for a while.
You could argue we may have underserved a lot of other opportunities that will give us very good returns and a little bit more geographically diverse. So I think that, what we are hearing on the ground is encouragement and opportunity in markets like the West Coast, even the Northwest, the Southeast, the mid-Atlantic where you could see the map that we have on the investor deck and I think it was slide 14, where you see there’s some real opportunities.
So that's what we're hearing, that's why we feel very strong about our guidance, our customers have the demand and our boots on the ground are seeing it.
Operator
Your next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please?
Scott Schneeberger
I will follow up on Joe's question. On slide 14 that is, it's a nice add.
It says construction overall, is that non-res construction, could you specify. And then could you speak to the end markets in those six or seven states where you see the double-digit growth?
Thanks.
Matt Flannery
So would you want to know about the verticals that are or where the opportunities are in those states or just the specific states?
Scott Schneeberger
No, you would see the states on slide 14. The vertical opportunities in those states and what type of construction specifically?
Matt Flannery
So I think Mike covered a little bit of it in his opening remarks. When I say it’s broad, it’s broad.
I mean there is multiple stadiums, multiple car plant expansions, manufacturing. I say the single largest vertical would probably be chemical.
Chemical plants have shown robust growth. Even in the state of Texas, right, we talk a lot about the contagion impact in Texas.
We have a very large portion of our business in Texas that's chemical related. And that's forecast to be 26% growth in Texas.
So we think that there is many verticals that are positive and places that we are going to serve in 2015. And it is that broad base, just why I am not, I mean chemical stands out.
It's just how much growth there is, which is why I'm not holding in on the other vertical because it's very broad.
Scott Schneeberger
Okay thanks. Just following up on that, how much of that is forecasted and how much of that do you feel is in hand at this point of the year?
Thanks.
Matt Flannery
So I don't have place in front of me right now, but you could think about it as the pipeline through the seasons of the year. And certainly there is less dark right now, although our time [indiscernible] remain very strong.
I would say by mid-summer you're going to see at least half of that pipeline materialize in rental opportunity. So and then it's just a matter of how quick things move from it and that's standard with the construction cycle that we have been experiencing throughout my career.
Operator
Our next question comes from the line of Joe O'Dea from Vertical Research. Your question please?
Joe O'Dea
A question just on the potential risk of accelerated fleet growth across the industry with, you know what is a pretty strong backdrop. And really, you know your ability to monitor what your competitors are doing and if there is any particular competitor segment, whether that's by region or size of competitor, that you think would be the largest risk to maybe over accelerating fleet growth and adding some rental rate price pressure?
Bill Plummer
So yeah, I’ll start. You know the ability to monitor is pretty good, right.
We're everywhere and we touch I won’t say every customer, but a lot of the market. And so we’ve got real time intelligence on what our competitors are doing.
And we feel we’ve the ability to respond if we think responding is appropriate. And that's one of the advantages of being who we are.
In terms of you know what competitor might be most at risk. I won’t name names here, I’ll leave you to make your own judgment about that.
All we can say is that United Rentals is going to be very conscious about any [CapEx] decision, whether it’s to increase or decrease. And it’s going to be driven by what we’ve taken in from the market.
Operator
Thank you, our next question comes from the line of Jerry Revich from Goldman Sachs.
Jerry Revich
Can you gentlemen talk about what you are hearing from your refining customers? I think there was one of RSC’s bigger industrial end markets if I remember their disclosure is right.
We’ve seen them you know cut back in CapEx, but I think their equipment spend more on the maintenance side of every day type work. Is that right, can you just give us an update for that end market?
Matt Flannery
Certainly, so we’ve heard of some CapEx cutbacks and I would say probably more severe in the oil sands than anywhere else. And there have been a couple of projects in the Gulf that have cancelled.
But I would say overall, that pipeline is still robust and you are accurate. The large amount of onsite relationships that we acquired during the merger with RSC really, really gives us a strong base to work from.
We're not seeing any slowdown of that maintenance at all. As a matter of fact, our industrial region is showing the highest time utilization we’ve in the company right now, and the highest year-over-year growth.
So and they are primarily on-sites and what I would call a downstream oil and gas and chemical plants. And we're just seeing a real strong growth there and I don’t think the maintenance is going to take a hit here.
I think it’s mostly capital spend, which if we really wanted to be rosy, you could say there’s an opportunity there for us to get more penetration as capital continues to get cut from some of the end markets.
Bill Plummer
Yeah just, I was going to just say, also on our slide, you know our customer confidence index, you know reaching. We only, only of the 170 key accounts that we reached out to, only 1% saw a slower growth in 2015.
We spent an awful lot of time in preparation for this call, reaching out to our customers, reaching out to our employees. You know I know more about oil in the last two weeks than my 35 years in the industry.
And you know I would tell you that, you know we haven’t seen any significant impact, talking to our customers, steel erectors. Steel erectors and you take a look at our book of business and bidding.
Not one of the projects I saw had any relationship to oil at all. And it was, they would say it’s a record opportunity and year for them coming up on their bidding requirements.
So you know that along with Jerry, the feedback that we're getting from ARA and the Global Insight, which by the way you know has been inside this industry for close to 7 years, maybe longer working with our industry, refining the nuances of their model on you know how this industry reacts to things. When they come out with 8%, you know we take that at the heart.
And that's not soft, that's not easy, and we think that that's a good indication of where our industry is going.
Jerry Revich
Thank you and Matt, just a clarification if you don't mind. The cancellations that you mentioned, was that ground up projects that you are referring to, or is that just brownfield type work?
Matt Flannery
The ground up projects, and so there were a couple of plants. I mean the pipeline that we went through in our fourth quarter QBRs with our regions, we saw more projects start with a billion than I’ve seen in the last couple of years combined.
And candidly, if half of those projects cut, I think it will be more robust pipeline than we had over the past few years as far as large projects. And we’ve seen you know maybe 10% of those get cut off the table right now.
Because of the concerns that everybody has, so they will hold up on some of these new construction, new capital projects. But and I still feel that the pipeline as Mike stated and we all stated is very robust and the Global Insight survey just kind of supports what we're hearing from our customers and from our boots on the ground.
Operator
Thank you. Our next question comes from the line of Steven Fisher from UBS.
Steven Fisher
How would you guys describe your expectations for Canada overall in 2015 relative to the US? I know you just mentioned some oil sands, a weakness, but just Canada overall.
And then how easy is it to reallocate equipment from Canada to the US or would you more envision reallocating amongst the provinces? Thank you.
Michael Kneeland
I’ll start and I’ll ask Matt to tie in. But you know as part of the overview with ARA, they are looking at a little over a 3% growth for all of Canada.
That combines with the 8.5% they are projecting for the US and it would give them just around 8%, 8.1% of growth for North America. I actually think that Eastern Canada, which you know by the way has been down over the last several years, we’ll see some activity there, and you know come forward.
The only headwind we would have as Bill mentioned is the currency exchange from our revenue, but in constant dollars we would expect that to grow. So we see that the Canadian market grow and then probably less growth on Western Canada than we have experienced in the past.
Matt Flannery
Yeah, I would agree Mike. You know we’ll just stay in the same currency right, because that's how I would manage those businesses and judge them.
We’ll see growth in both of those, in both Western and Eastern Canada regions next year. And like all of our regions, we do zero growth CapEx budget, so we're going to have to earn their growth as they stack ranked against their peers.
And they fared pretty well in the past and I expect them to fare pretty well in the future, specifically Western Canada.
Steven Fisher
And in terms of reallocating equipment between Canada and the US, is that something that you would envision doing and then how easy is that?
Michael Kneeland
I think because we have, when you think about the 1.7 billion of new capital that we spend, you know that's 20% of [8.4] base, if we start with this year’s base. We historically have been able to re-shift geographically by utilizing equipment sales and either not replacing in that market or not putting growth capital in that market.
So we’ve been able to geographically remix through that. If we had to put trucks under fleet we do that, and there are some intricacies of doing it from Western Canada.
But if it was really dropping, that's not something that we would do. The cost are minimal compared to the opportunity you would have by reallocating.
But right now, they are running high time utilization and we're just going to manage the influx into any of these oil and gas markets first. And I think that will prevent them from having to move fleet, but we can react very quickly, whether it’s Canada or somewhere else to move the fleet.
Operator
Thank you and our final question due to time constraints comes from the line of Nicole DeBlase from Morgan Stanley. Your question please?
Nicole DeBlase
So just, most of mine have been answered, but just you know one on utilization. So I was kind of surprising to see that you are guiding for [indiscernible] utilization in 15.
Is that also conservatism around oil and gas risk, or are we kind of at the high water mark for utilization, the [cycle]?
Bill Plummer
I wouldn’t say we're at the high water mark. We still feel we’ve got opportunities to continue to drive utilization.
We’ve talked in the past, you know of all three of us, probably reading that we can get into the 70s if the market holds and if we do the things that we think we can do. You know the 69% would be up 20 basis points, so I guess you could call that flat if you like.
But that is tempered somewhat like the rate discussion, it’s tempered somewhat by our concern about oil and gas and about, while we think we could mitigate, we don’t know that we will be able to mitigate 100% of any oil and gas quite often. And so we backed off a little than where we were a month or two ago when I talk about 2015.
But we still think that’s a very robust performance on utilization and Matt’s comments earlier, you know utilization is something that we certainly have a lot to leverage that we can use, right. If it’s falling down, you can’t sell more or you can buy less and as for as the business you do have over [indiscernible] fleet.
So you know we think that we can pull all the appropriate levers and deliver that about 59%. And we think that's, you know that's on the way towards better utilization over the next several years.
Nicole DeBlase
Okay thanks, Bill, that's really helpful. And then just for my follow-up, I am taking about 1Q, you know as far as what you guys have seen so far quarter to date, shall we expect to see like normal seasonality this quarter?
Michael Kneeland
Yeah, I would say so. We're experiencing very similar metrics that we did till last year when you look at the rate in time utilization, maybe up [ahead] in time for a couple of weeks.
But it’s early, I think it will fall right in line with our usual cadence.
Operator
Thank you. This does conclude the question-and-answer session of today’s program.
I’d like to hand the program back to management for any further remarks.
Michael Kneeland
Well thanks, operator. I hope we’ve gone some distance in bringing clarity to what we see as favorable operating environment in 2015.