Apr 22, 2015
Executives
Michael Kneeland - President and CEO William Plummer - EVP and CFO Matt Flannery - EVP and COO
Analysts
Seth Weber - RBC Capital Markets Ted Grace - Susquehanna Financial Group Nicole DeBlase - Morgan Stanley. Scott Schneeberger - Oppenheimer Joe Box - KeyBanc Capital Markets David Raso - Evercore ISI George Tong - Piper Jaffray Joe O'Dea - Vertical Research
Operator
Good morning, and welcome to the United Rentals’ FIRST Quarter 2015 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 to subsequent filings with the SEC.
You can access these filings on the company’s website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
You should also note that the company’s earnings release, investor presentation and today’s call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer.
I will now turn the call over to Mr. Kneeland.
Mr. Kneeland, you may begin.
Michael Kneeland
Thanks operator and good morning everyone and welcome and thank you for joining us on today’s call. Tony will talk about how we’re managing the business in light of our expectations for 2015 with almost four months of the year behind us we’ve able to draw off some conclusions of how this year is shaping up, I want to talk more about that in a minute and then Bill will cover the results and followed by your questions.
First speaking with the numbers you saw last night, we had a solid start to the year. Our revenue, EBITDA and the internal invested capital are first quarter records.
And that's the credit to our employees. Our rental revenue increased 12% year-over-year based in part on an 8% increase in volume.
We generated $602 million of adjusted EBITDA at a 46% margin. Our return on invested capital improved to 9% and our free cash flow for the quarter was $450 million more than 60% higher than a year ago.
We also reported record adjusted EPS of $1.34 for the quarter. Now we achieved these results despite some notable headwinds.
The most significant constraint was the decline in upstream oil and gas activity. The rapid shutdown of almost 50% of drilled rigs had both the direct and knock-on effect and this was felt more strongly in our pump operations.
The slowdown also happened earlier than expected and we now think slightly to continue to at least the next three to six months. We still expect to mitigate the decline within our guidance for revenue and adjusted EBITDA and will have more opportunities to do that now during the peak seasonality.
Given the timing of the impact, we felt that it was realistic to narrow the ranges of revenue and EBITDA. Our updated revenue range is 6 billion to 6.1 billion and adjusted EBITDA of 2.95 billion to 3 billion.
These two ranges still fall within our original outlook. Now in addition, in the first quarter we had a negative currency impact from a relatively weaker Canadian dollar and this will likely impact our year-over-year comparisons throughout 2015.
In the harsh winter, slow the pace of the projects in several regions or we dealt with historical cold and snow. And with that one we can safely say that's behind us.
But despite these headwinds we put a record $5.4 billion of OEC on that in the first quarter in a highly competitive marketplace. We could live with that but as you know [indiscernible] from looking at numbers from every angle.
And in the first quarter the metrics of time utilization and rate merit further discussion. Time utilization decreased in the quarter by 40 basis points to 64%.
That hasn’t changed our outlook, we are still comfortable with our full year time utilization of approximately 69% and when we look at branches without any meaningful exposure to upstream oil and gas activity, time utilization was actually up 40 basis points in the quarter. With pricing our rate increased 2.9% in the quarter first last year and that was lower than expected and we are now anticipating a very competitive rate environment going into the summer months.
But, I know that there our field management, fields like I do that these are – there are actions that we can take the [rentals] prices up. Coming off the quarter we now expect our rate increase to be about 3% to the full year instead of the original outlook of 3.5%.
Regardless of any headwinds, we will continue to transfer underutilized fleet to areas of higher demand where our sales force has more leverage to negotiate rate and we will have even more opportunity to get the equipment on rent as we go into our seasonality as it picks up. We are focused on achieving that optimal balance of metrics that we have talked about before that is where rate and time utilization intersect to drive returns.
We see this as being absolutely essential as we continue to capitalize on the up cycle. And a large measure is within our control regardless of external developments.
Now let's turn to the marketplace starting with specialty rentals the organic revenue growth in our specialty segment was 25% in the quarter and EBITDA was up 57% trench safety and power were particularly strong. Specialty rentals are a high margin business and help drive our fifth consecutive first quarter increase at EBITDA margin company wide.
We will expand all of our specialty lines this year with an addition of approximately 18 new branches. This will give us the strategic presence in new trade areas and strength in our cross-selling abilities.
From a broad perspective our operating environment continues to match up favorably against last year. Our sales force is reporting high level of project starts and if anything our customers are even more optimistic than we were in December.
And this is true of our large national accounts as well as regional operators and local contractors. We are serving a diverse customer base that has maintained a healthy balance year-over-year going into April.
Key accounts represent 65% of our base by revenue that includes national accounts at 46% of our base. And our local customers, which we classify as unassigned account picked up slightly to 35%.
Now turning to geography, on a constant currency basis, all but one of our regions are year-over-year growth and that one is nearly flat. The mid Atlantic south, mid west and mountain west regions had a particularly strong quarter.
And I want to give a nod to our industrial team which has continued to score wins in the downstream energy sector. And then she gets bad rap right now but from our perspective we are seeing some impressive numbers.
We currently have commitments for eight multi-billion dollar energy projects, four which are underway, two are in the [dirk] stage and the other two will kick off in 2016 and 2018, all of these are three to six year projects in Texas and Louisiana. But beyond energy we are seeing many different sectors pickup for example, our major infrastructure project – renovations in Ottawa and Montreal.
Large stadium projects in Atlanta and Fort Lauderdale and renewable such as wind farms in Kansas and I want to share something here about Texas which is a large and diversified markets for us. If you exclude pump the increase in rental revenue was in the mid teens on a year-over-year basis.
That points to a solid demand outside of upstream oil and gas. We have always have to write out some sector related cycles but the fundamentals of our markets are very strong.
We should see broad based growth well beyond 2015 as our customers take on more work and secular penetration adds an extra layer of demand. Most industry forecast supports this view.
One recent release is the consensus construction report put up by the American Institute of Architects that takes into account seven major forecasters including Dodge and Moody’s. Report concludes that commercial constructions, which is our bread and butter as forecaster remain on a strong upward trajectory hotels, office buildings, and retail are just some of the areas – just few of some of the areas projected to contribute to that growth.
And the institutional sector which had disciplined decline in 2014 appears to have bottomed out. The consensus is that institutional construction will reverse to a gain in 2015 and climb again in 2016 and that's good news for markets such as health, education and public safety.
So that gives you an idea of where we see the challenges and the opportunities in 2015 and to some degree in 2016 as well. Taking everything into consideration we remain confident in our full year guidance of adjusted EBITDA of at least 2.95 billion on total revenue of at least 6 billion.
Balancing these metrics behind those numbers in light of the market dynamics and we expect to spend $1.7 billion of gross rental CapEx this year as planned. Now in short we show that we have the right plan, we know we have the right plan in place for 2015 and our strategy for long term profitable growth remains intact.
So with that I will ask Bill to cover the financial results and then we will take your questions. So over to you Bill.
William Plummer
Thanks Mike and good morning to everyone. We have got a lot to cover here so I am going to try and streamline my comments about the actual, so we can save a little time to touch on the refinancing that we did, touch on our oil and gas experience for the first quarter and also the outlook.
Real briefly on the financials, we had a good revenue result in the quarter. Rental revenue was up by almost 12%, 11.9% as Mike called out let's say $120 million improvement and the drivers were – the ancillary and re-rent revenue performance for the quarter was good.
We had about $14 million year-over-year improvement from those two combined. The bulk of it being ancillary pickup delivery and our RPP program, re-rent was just a little better than flat year-over-year so that was about $14 million of the 120.
Within owned equipment revenue, OER, rental rate growth you saw was 2.9%, we translate that into about a $26 million improvement over the last year. On the volume front we had 8.1% volume improvement and that translates into about $72 million of volume impact which I will note includes the impact of having pump this year and not in the first quarter of last year.
Also sprinkle throughout the volume and some of the other lines is the FX impact that we experienced in the quarter. I will summarize that at the end.
Inflation, replacement CapEx inflation we called it about 2.1% for the quarter and that's the headwind of just under $19 million year-over-year, and then mix all other including some portion of FX accounted for $27 million year-over-year that includes the impact again of the pump acquisition as we talked before pump not only contributed through the acquisition but has a more attractive mix than the rest of the business. And so that was the significant part of that $27 million.
So those were the key components of the $120 million improvement and I will just call out separately if you aggregate all of the currency impacts, we estimate that currency cost us about $16 million of rental revenue year-over-year and that certainly is a significant headwind when you think about the growth that we were able to experience. The only other revenue comment that I will make is about used equipment sales, we had another good used equipment sales result in the quarter $116 million and that's up about 6% from last year and also very importantly very robust 50.7% adjusted gross margin for the quarter and as has been the case that was helped not only by solid pricing in the quarter, pricing is measured by proceeds as a percentage of OEC was just under 50% in the quarter.
But it was also was supported by our continued focus on the retail channel to get the best margin result there and so selling about 61% of our used sales through retail channel was a nice support for the results. Turning quickly to profitability at EBITDA first, adjusted EBITDA 602.2 was a company record for the quarter as Mike pointed out.
As was the adjusted EBITDA margin, 45.8% it was a very robust margin so that's $83 million worth of dollar improvement over the last year and 170 basis points worth of margin improvement as well. Flow through in the quarter was strong at 60.6% and we will certainly touch on some of the drivers there in the year-over-year EBITDA Bridge.
Speaking of which that $83 million of improvement was driven by volume, primarily volume was up about $51 million of the $83 million year-over-year improvement, rental rates contributed another $24 million toward that 83 improvement. The Cat.Class mix primarily from the impact of adding pump we would call that about $14 million of incremental improvement and then we also had the improvement from ancillary and re-rent revenues that I called out earlier that's about a $7 million improvement on the incremental of 14 million of revenue that I called out.
Incentive compensation accrual for the first quarter this year compared to last year reflecting some of the headwinds that we experienced with oil and gas, weather and currency so that contributed $6 million of year-over-year improvement. Used equipment sales already called out the sales margin improvement that was about $5 million of improvement and then a few headwinds items.
The fleet inflation and mix component combined was about $13 million headwind versus last year. Bad debt expense we reverted to a more normal bad debt expense this year compared to a solid bad debt expense performance last year so that cost us about $8 million in year-over-year EBITDA and then merit increases were about $6 million of the impact this year as well at least about 3 million of all other knits and knots combined.
So all in all, a very robust EBITDA result in the quarter even in spite of the headwinds. As Mike called out on EPS, it was a great EPS result for the quarter as well a $1.34 that’s up almost 50% against the $0.90 of adjusted EPS that we delivered in the first quarter last year.
So another good result there. Moving onto free cash flow, continue the good result commentary $450 million of free cash flow in the first quarter and that’s up from $278 million in the first quarter of last year with minimal merger related adjustments showing up in the current quarters, it’s only about a million dollar worth of merger related payments.
So, the way we talk about free cash flow on an adjusted basis we would call $451 million. A variety of different drivers including the operating profitability we also had lower AR and the timing of some of the other working capital payments were also favorable for us primarily accounts payable.
Rental CapEx for the quarter was $323 million and that certainly a start consistent with the comments we have made previously about the timing of CapEx this year looking similar to last year. As you saw in the outlook we continue to expect to spend a billion seven in gross capital this year for a net of about 1.2 billion.
The net rental CapEx in the quarter was just under 210 million for the quarter. On capital structure and liquidity a busy quarter in capital structure actions, you all seen that we refinanced two of our outstanding issues we issued the calls on the [indiscernible] senior subordinated notes and the five and three quarters senior secured notes.
We refinanced those issues by issuing two new issues a billion dollars of 4 and 5As, eight year senior secured notes and then another $800 million worth of 10 year senior unsecured. Very attractive overall impact for those refinancing transactions but we didn’t stop there, we also amended and extended our ABL facility and increased this size as well so the ABL is now up to $2.5 billion we then drew on that new and improved ABL and used it to partially call the 8% and 1.25% senior notes.
And I go through all of that just to note that the timing of those transactions were split between first quarter and second quarter and so as you think about the results in first quarter and as you anticipate the results for the second quarter you have to remind yourself that we will some impacts in the second quarter from those first quarter transactions. In particular we’ll report in the second quarter about $121 million loss on the redemptions that covers both the premium of calling the outstanding notes as well as writing off any remaining deferred financing costs that will happen in the second quarter.
When you aggregate it all together we expect that the aggregate run-rate of interest expense reductions from all those transactions should come in to an improvement of about $48 million a year so that gives you a summary. And to put it even more directly our interest expense estimate for cash interest this year, excuse me GAAP interest this year we expect to be about $460 million.
So hopefully that will help you as you think through all those transactions. Real briefly on ROIC, company record ROIC result in the quarter 9% and that was a 120 basis points compared to first quarter last year and 20 basis points better than in the fourth quarter.
So despite all the headwinds as Michael discussed we continue to be on a path to improving our ROIC which has been a major focus of our efforts. And even with the revised guidance that we provided, we fully expect a very nice improvement in ROIC as we go through the full 2015 year.
Before I finish up with the outlook just real brief summary of our progress in oil and gas. We talked in the first about a downside oil and gas scenario and I just wanted to provide a couple of data points about progress against oil and gas and how we compare with that downside.
We call that about a $400 million maximum fleet size impact from the downside scenario we laid out. You’ll also recall that we said that $400 million impact we modeled it as hitting us in the second quarter.
Obviously we didn’t expect it would be zero impact until June and then 400 from June on, but we certainly modeled it that way. So that 400 maximum impact averaged out to a $200 million OEC impact over the course of 2015.
We’re about halfway to that $400 million maximum impact just based on the path of fleet in our oil and gas branches. And in particular when you look at those oil and gas branches most of the impact that we’ve seen has come from the oil and gas branches that have the highest share of their revenue from oil and gas.
If the branch has more than 20% of their revenue from oil and gas in aggregate those branches have seen about a $200 million equivalent OEC impact. For the branches that have less than 20% of their share in oil and gas there has been virtually no impact.
So, we find that to be a very interesting feature of how oil and gas is progressing throughout our branches. The thing as Mike pointed that surprises a little bit is that the impact came a little sooner than what we expected but certainly not outside the context of the size of what we expected.
But the fact that it came sooner means that it will an effect over the remainder of the year longer than the way we modeled the downside. So, when you net it all together we’re proud they’re seeing an impact through the full 2015 calendar year on something in the area of 88% of full downside impact that we talked about previously.
We call that $36 million of EBITDA as you all recall and so, we proudly say that we’re seeing something like a $32 million EBITDA impact assuming oil and gas maintains at the level that it is currently. That is not an unreasonable assumption given that when we look at our oil and gas branches we’re seeing a slowdown in the decline, in fact, if you look at all of our oil and gas branches for the months of March and so far in April, we’ve actually seen a slight sequential increase in fleet on rent in those branches.
So that gives us some level of encouragement that the decline has slowed if not completely arrested. The question is where to go from here and that’s going to be the wildcard and we can talk more about that in Q&A if anybody is interested.
So that’s the oil and gas picture at a very high level, the last thing I would like to update is just the outlook. You saw the announcement essentially what we do is to take off the top end of the revenue and EBITDA ranges, reduce the expected rental rate realization and left everything else unchanged.
And we think that’s a very realistic view of where we will be for 2015. So, the outlook now is for rental revenue – excuse me, total revenue in the range of 6 billion to 6.1 billion and within that as I said we expect rental rates to be approximately 3% for the full year.
Time view, we’ve not changed our view 69% for the full year or an increase of about 20 basis points and an adjusted EBITDA we’re now in the range of 2.950 billion to 3 billion for that measure. We’re continuing to target a 1.7 billion of gross capital spend for a net of about 1.2 billion and we continue to expect free cash flow to be centered around 750 with 725 on the low side and 775 on the high side.
All of that will net out to our continued expectation of leverage at the end of the year at about 2.6x, net debt to EBITDA and that assumes that we complete the share repurchase program at $500 million in calendar 2015. You all saw that we did spend about $316 million on share repurchase in the first quarter that brought in 3.5 million shares at an average price of about $89.16 in the quarter and we continue to believe that spending on a path to 500 is the right place to be for right now for 2015.
Obviously we’ll continue reevaluate as we see how profitability and cash flow develop as well as how the stock price trades. So, those are the key points that I wanted to make and certainly would welcome all your questions.
It was a solid quarter for us, when you step back and look at the results with some headwinds that not only had we to deal within the first quarter we’ll have to continue deal with going forward. But, we’ve got confidence that we got a program that can get us to the outlook that we’ve given and certainly will update you as we go forward.
So with that operator I’ll ask you to open up the call for questions and answers. Operator?
Operator
[Operator Instructions] Our first question comes from Seth Weber from RBC Capital, your question please.
Seth Weber
Hi, good morning everybody.
Michael Kneeland
Good morning Seth.
Seth Weber
I’m wondering can you talk a little bit more about the redeployment, Bill I think you mentioned, you’ve seen about $200 million of fleet that’s been affected so far in the oil and gas regions. I mean, can you size for us how much of fleet you’ve redeployed year-to-date so far, where is it going, is it going into the region, is it going out of state to just to non-residential construction markets.
And I guess, can you talk, how do you think the non-res markets are going to shape up competitively, we’ve heard anecdotally about the independents kind of adding more fleet recently, I think Michael you mentioned competitive pricing so can you help us kind of frame all that stuff, thanks?
William Plummer
Sure Seth, I will start with sizing and Mike, Matt you guys if you want to chime in on words going. The way we look at it we got about $80 million of fleet that have come out of oil and gas branches going into non-oil and gas branches and primarily that $80 million has come out of the branches that more than 20% share of branches that I mentioned earlier.
So the issue has been concentrated in those high share oil and gas branches and we responded there with the de-fleeting of about $80 million so far. The challenge of course is putting that fleet on rent usefully elsewhere we think we stepped up to the challenge.
It is more of a challenge in the first part of the year than it will be in the second and third quarters in particular just given the relative busyness of those quarters compared to first quarter. So, we are encouraged by our ability to mitigate by moving fleet around as to where it’s going and so that the environment that is facing you guys want to add anything.
Michael Kneeland
Sure. Yes Seth, so we are seeing and you can look at the construction growth maps that are in the deck on slide 14 specifically of where the demand is and we are shipping the assets to where the demand is.
The good news as Bill said that demand will increase as we get into our -- the seasonal uptake will be in our favor. And as we look at our non-oil and gas branches the encouraging news is that they are acting very similar to how we expect them to act to how they have acted in the past and as we sit here today we are seeing both time and sequential rate in those non-oil and gas branches yet the ramp up that we need to hit our goal so that's where it’s going to go, the end markets and the demand tell us that the opportunities is there and most importantly we have the team and the customers and the footprint to deploy it there.
Matt Flannery
Yes, I will only add that I think you asked the question where is it going and its actually most of it is staying within the region where it’s coming off rent. We are doing transfers we are also doing sales and redeployment of capital that's an ongoing effort for us and we will continue to do that but I also want to point out one thing if you recall over the last several years we have been very disciplined in the way in which we have given our capital and over the years many of our non-oil and gas regions have been looking for fleet.
So this is their opportunity, they are taking it and we are supplying them.
Seth Weber
Okay. And if I can just on – as a follow-up to that I mean can you just talk about how deep into the year and where do you expect to make the CapEx your billion seven CapEx decision where does kind of – where do we kind of get to the fork on the road on the billion seven number is it if you don't see trends and pick up is it May or June or how deep into the construction session will you go with that versus just continue to move more fleet around?
William Plummer
Yes, I will start Seth, and the guys will chime in please. I think maybe it would be helpful to come at it from the other direction.
How late can we go before we have to make a decision about reducing CapEx if we decide there and the answer is [indiscernible] I mean as we top it for we don't have a lot of – we don't have the cancellation penalties or lot of constraint on our ability to pullback once we placed orders up until the point that shipped we can cancel it for the most part. And so that gives us a tremendous runway to make that call.
Certainly we want to see how the second quarter ramps up and get a real solid feel for that before we start making any decisions.
Michael Kneeland
Yes, the only thing I will add to that is we are not – we don't need to make that decision and we are not trending towards that decision because as you look at the data, when you take pumps out of the equation even absorbing oil and gas we are ten bips down in the first quarter and that’s improving and when you look at the non-oil and gas branches in Q1 they were actually 40 bips up on a year-over-year basis so if we deliver 3% rate 79% time that's the good reason to spend that 1.7, we do have the flexibility in case anything changes as Bill stated but we feel good about being able to deploy that as well as 18 constructs that we are doing in the full year many of which are opened already. So actually it’s 21, its specialty and 3 general that we have already opened up.
So those are all the reasons why we feel like deploying the capital is something that we will be able to do.
Matt Flannery
Yes, it was 69% time not 79%.
Seth Weber
Thank you very much guys.
Operator
Thank you. Your next question comes from the line of Ted Grace from Susquehanna.
Your question please.
William Plummer
Hey Ted.
Ted Grace
Hey gentlemen. How are you?
Michael Kneeland
Good Ted. Doing well.
Ted Grace
I was wondering if you could walk through the sequential progression of time utilization in 1Q and then pretty much kind of like what’s happened in April, what gives you confidence that trajectory can reverse out that a lot of the challenges they are reversing out. I know you mentioned that the oil and gas branches that rate of decline has slowed dramatically but could you maybe just help quantify that with some of the time utilization data points that you can talk about?
Matt Flannery
Sure Ted, its Matt. So the time utilization in January was 63.7% and February was 63.9% and in March it was 64.9% and when we talk about April we see that gap that March was our biggest gap on the year-over-year perspective we see that gap narrowing and as we sit here today we are very close to and this is all in, this is not just non-oil and gas we are very close to being on top of year-over-year time utilization.
More importantly as we look at the OEC on rent bill, we have had a very strong two weeks and this is when we need that bill. April, May and June or Q2 is where the bill has to come and we are expecting to cross over the year-over-year time utilization somewhere in mid May that's our target that's what’s got to happen and then have some sequential improvements from there on a year-over-year basis as well as seasonal increase.
So that I don't if I answered your question that's the data that we are sharing today.
Ted Grace
Yes that's helpful. I think that helps.
People understand kind of what that curve looks like. And then I think did you mention that in the first quarter non-oil and gas branches time utilization is up 40 basis points?
Matt Flannery
Yes.
Ted Grace
Okay, versus the recorded of negative 40?
William Plummer
That's right. Correct.
Ted Grace
Okay and then okay that's really helpful. The second thing I wanted to ask is just as a follow up on Seth’s question on oil and gas exposure.
Quarter ago you walked through the frame work its very helpful you updated data the reasonable worst case scenario is 88% to that $36 million did I hear that correctly is that you still feel that the reasonable worst case scenario is that $36 million or I just want to make sure we understand what the updated kind of messages on the frame work?
William Plummer
Yes, we do still think that's the reasonable way to think about maximum downside Ted as I said the impact came sooner in the year than what we modeled certainly and then what we expected quite honestly. So but yes, I would still say that $36 million is a reasonable downside scenario.
Remember when I said the 88% the $32 million I think I said of impact is our view right now that's excluding some of the mitigation that we have been and will be doing over the course of the year. That $80 million of fleet that I said came out of oil and gas and went into other non-oil and gas branches.
We haven't given any benefit for mitigation from that fleet being moved the way it has. So that's why we think that the $36 million is still a reasonable downside for EBITDA impact from oil and gas this year.
Ted Grace
Okay and so the last thing I would ask, you squared up that against the updated EBITDA guidance 2.95 to 3.0 you kind of hit 25 at the midpoint. How much of that is the updated oil and gas expectations just to understand how that’s baked into the updated guidance?
William Plummer
We work that explicit when we set the range and therefore set the midpoint on the new guidance Ted, what I would say is that what we feel is that if oil and gas continues where it is now or even deteriorates a little bit more it would have been a part of the reduction in the midpoint of the range but not the entire reduction, right would still certainly have the impact to currency that’s continuing throughout the course of the year. We did have the weather impact and we are going to claw away back from that in the second quarter here that continue to impact the full year, so I don’t know how to categorize it numerically but I say oil and gas was part of it but everything else we experience in the first quarter was part of it.
Michael Kneeland
The only thing I would add Ted is and there is a $25 million number on rate so just absorbing that half a point of rate change is part of that.
Ted Grace
Okay. Well solid quarter guys and best of luck this quarter.
Michael Kneeland
Thank you.
Operator
Thank you. Your next question comes from the line of Nicole DeBlase from Morgan Stanley.
Nicole DeBlase
Hi, yes. Thanks guys.
Good morning.
Michael Kneeland
Hi Nicole.
Nicole DeBlase
My first question is just clarifying Ted’s points so the 32 million and I’m sorry if we’re going on about this but the 32 million impact that you guys now expect from oil and gas, is that fully baked into your guidance, like is it in the low end, is it in the midpoint, is it in the high end of new EBITDA range?
William Plummer
It is baked into our guidance. We are not characterizing whether it puts us at the low, medium or higher.
It’s in our thinking when we set the guidance to start.
Nicole DeBlase
Okay, got it. Thanks for clarifying that.
And then my second question is it seems to me like the new 3% rate guidance is assuming that we kind of get normal seasonality from here which make sense and you guys are already trying to see a pickup in those oil and gas states, but I guess my question is what you see from a rate perspective quarter-to-date during early April, does that gel with a 3% rate guidance that you have and what’s the downside risk at that point that we could have a down revision, what would we need to see the deterioration in oil and gas prices in market for that outcome to occur?
Matt Flannery
Sure Nicole, I will take that it’s Matt. So as far as the rate guidance what we are seeing in April is that we’ve gotten back to flat and now we can get our sequential clients that we need that as you pointed out.
We usually get into season and you are looking at about six tenths a month May through November and then a small drop in December and something that looks similar to that and the good news is as we look at our history we have done that before. So between the strengthening end market and the fact that we have the tools and the capability of doing it is why we felt comfortable setting that target at 3.
Nicole DeBlase
Okay got it. Thank you.
I will pass it on.
Michael Kneeland
Thank you.
Operator
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer.
Your question please.
Michael Kneeland
Hey Scott.
Scott Schneeberger
Good morning guys. I am just curious with regard to the guidance and the softness in the quarter with regard to rate could you address 4X, I think you talked about the rental revenue impact in the quarter could you speak to EBITDA and then just other drivers of the rate guidance is it predominately the oil impact are there other things on asset class geography?
William Plummer
So on currency I called out $16 million of revenue impact in rental revenue and about $7 million in EBITDA as we look for the full year of currency stays -- you can use 60 and 30 as the full year impacts for the remainder of 2015 and that is considered in our guidance as well. So that's the currency story.
Then I am sorry what was the other part of your question Scott.
Scott Schneeberger
Thanks its helpful enough Bill, I guess just as a follow-on when moving around assets from the oil locations, could you speak to the asset classes that are being moved and what's just coming off and not going back and what are the asset classes that you are moving and what's having more success or not and how that ties the rate as well. Thanks.
Matt Flannery
Sure Scott. It’s Matt.
So as far as the assets that are moving, what you would expect rich forkless, some boom, some light towers, as well as pumps. If you ask me which one are the most challenge to move, until we further build our footprint we have headwind to move in the pumps as fast as we move the other more fungible assets but that was always our game plan when we made the pump acquisition was to grow out that footprint and penetrate other markets as well as chasing our cross sell opportunity.
You will see in the slide deck and I think its slide 35 that we have identified $80 million of cross sell opportunity. So we don't only have the strategy and the hope we actually have the opportunity to continue to move some of those pumps out of the oil and gas and into existing customers through cross sell.
So stay tuned for what our close rate will be but there is an opportunity out there that we have identified and that we are chasing and that would be the last part of the asset class that we need to move more aggressively it would be the pumps.
Scott Schneeberger
Thanks.
Operator
Thank you. Your next question comes from the line of Joe Box from KeyBanc.
Joe Box
Hi guys.
Michael Kneeland
Hi Joe.
Joe Box
Mike you said earlier that you expect the competitive rate environment as we start to get into the summer months. I am curious is that across the board or is that much more concentrated in the energy exposed markets and I apologize if I missed this earlier but do you give us a break down on rental rates within the energy markets versus outside?
Michael Kneeland
We gave the -- its hard for us to break it that way because the way in which we do the ARA, it’s a weighted average on the asset class. It’s hard to break it out that way.
With regards to the competitive marketplace I just think that typically look we all have a bad winner, we all had the oil and we see that the competitive marketplace will change as the season swings to a more seasonal opportunity. So, we just see being more competitive.
I wouldn't take it anything more than that’s a nutshell.
Joe Box
I mean do you think it’s fair to say that inside energy is negative and outside energy is kind of in-lined with that 3.5% plus that you had highlighted earlier?
Michael Kneeland
I would say that -- I would quantify it by saying that the non-ONG would be, you would see a normal trend that you would normally see that we have experienced overtime as opposed to what we with the – when you add the ONG in it gives us that full impact.
Joe Box
Understood. One last one for you.
Bill it looks like there is only about a $6 million difference between the revenue contribution that you are getting from rental rates and then the offset from fleet inflation and that doesn't give you a whole lot of wiggle room, we know what you are guiding for rental rates but what are you expectations for fleet inflation. I am kind of curious if rental rates continue to exceed inflation or if they got a parity or even negative from here?
William Plummer
Yes, the expectation is for fleet inflation to continue sort of the trend that has been, we are replacing something like 15% of our fleet every year and we continue to experience inflation on new purchases at something like the couple of percent a year so when you aggregate that over the average life what we are replacing we are going to stay in that 2% area for fleet inflation going forward and so if we deliver the above 3% that we are talking about for rental rates we still got a spread. My expectation is that the inflation won't change dramatically and I certainly expect that that will continue to drive rates as hard as we can, so I won't give you a long range forecast, we talked about delivering 3% a year rental rate improvement over the long haul for a long time that’s been our long term view.
Oil and gas has made that challenging this year but I don’t see a reason to change that longer term view as we said right here.
Michael Kneeland
Yes, Joe. I would only add that aside from just rate is not the only thing that we are leaning on, we are also looking at driving efficiencies in our process improvements.
We continue to march down that path and so we are looking at ways in which we can become more efficient and driving not only our fleet but also our cost structure around that process.
Joe Box
Understood. Thanks guys.
Operator
Thank you. And your next question comes from the line of David Raso from Evercore ISI.
Michael Kneeland
Hi, David.
David Raso
The rest of the year guidance that the first quarter incremental EBITDA number was some and margin was pretty healthy, it was 61% but when you look at the rest of the year guidance it requires a bit of step up with the incremental EBITDA margin has to be around 76% ahead of the year. So I’m just kind of walk through either some cost reductions that we can think about to expect the incremental EBITDA margin to accelerate that much as the year goes on or mixed issue, I think you can just dive into that a little bit of more.
William Plummer
Yes, thanks David. So I called out the impact of one particular item bonus accrual difference year-over-year was $6 million in the first quarter, if we continue on the path that we are on that’s going to continue to contribute as we go throughout the rest of the year.
In fact the contribution will increase because last year we increased our bonus accrual as the year were on second half we ran very strong versus our plan and so we accrued up to a much higher level for last year’s bonus. This year assuming we stay and deliver the guidance that we have given it’s going to be less and so that $6 million will go up a little bit in future quarter.
So that will help and as you know the incremental margin calculation is very sensitive even to reasonably small dollar amount. So, I think that’s one example to Mike’s point we got very intense focus on productivity overall, we realized what was the number 7 million of year-to-date impact of our efficiency our main focus and that set a run rate of $42 million.
So, we will continue to drive that run rate higher and the realized about higher as we go forward as well. So that’s going to contribute and help support the incremental margin and then I say that debt expense is always a little bit of wildcard but we think that there could be an opportunity in that debt expense as we drive some process changes internally to focus on how effectively we collect.
So, I think those are the things that I point to you that give us some confidence that the 60% flow through margin are flow through that we talk about is very realistic for the year.
David Raso
Would you – given it’s -- your control for something really could just make confident if you need to can you help us a little bit more in quantify the potential benefit from the accrual on the bonus because this quarter say you need another $20 million of help year-over-year on accrual bonus to get to the 76% incremental for this quarter that’s a pretty healthy jump this quarter the benefit was only six. So just give us more comfort that that is a lever that you could pull, I mean can that add not 6 in the second quarter and third quarter could it be 20s and 30s I mean, is it that significant a number?
William Plummer
It could be, right now if you are looking for a number I’d say something in the neighborhood of just I’m hesitating, I’m going too far here but in the middle to upper 30s it could be.
David Raso
On the year-over-year benefit? Okay that’s something under your control, I am sorry was that full year or per –
William Plummer
That's full year. And it could be a little bit more depending on how the year plays out.
Again that's – it depends on how the year plays out and how we do versus the target that we set for the year.
David Raso
Okay. Alright.
Then on the rate the comment Matt about 60 bips per months get you to the I am not sure if you are quite get there but when you get close I guess more for the cadence even if we can do that there appears the rate for the second quarter would still be lower than the 29 we just printed. So I am just trying to get a sense of the cadence when do you expect quarter to show above 3, I am just making sure we – I’m trying to figure out when do we make that harder decision on CapEx utilization, rate and I would think you need to make that decision probably as you said by the end of the second quarter if not maybe a little earlier.
What’s the cadence or rate increase this year-over-year that we should be thinking about to help think about that trigger decision on CapEx?
Matt Flannery
So if you do the math you will see that you don't cross the 3 – you don't get the three threshold until the second half of the year. So we understand that.
We understand that the headwind that we got in Q1 compounds and has the carryover effect to our Q2 results when you look at the year-over-year and that's within our modeling and where we are expecting so you are talking towards the end of the third quarter and then moving on from there.
David Raso
Okay that's helpful. Okay I appreciate it.
Thank you.
Operator
Thank you. Our next question comes from the line of George Tong from Piper Jaffray.
Your question please.
George Tong
Hi, good morning.
Michael Kneeland
Good morning George.
George Tong
I want to drill into the downside scenario. In your prior earnings calls you noted 400 million of fleet would be affected by oil and gas and then you assume you could mitigate half of that by redeploying the fleet so that's about 200 million of fleet affected and then previously you had assumed, you expected only half year impact so that worked out to be 100 million of fleet affected.
100 million of fleet assuming 60% dollar utilization gives you $60 million of revenue impact and then $60 million revenues on 60% EBITDA flow through gets you to the $36 million EBITDA downside. So it appears your prior downside 36 million assumes a half year impact and assumes you can mitigate the downside by redeploying the fleet.
So given the greater part of the year has been affected by oil, does that increase the downside beyond 36 million?
William Plummer
Yes. That's what I was trying to call out.
The fact that we’ve now experienced the equivalent of $200 million decline for now it’s going to be three quarters assuming it doesn't get any worse or doesn't get any better it will be three quarters of 200 of impact and one quarter at an average of zero to 200 so call it a net affect of $175 million of impact before mitigation and then the math flows through from there to that 88% or $32 million number that I gave earlier. But the mitigation I want to point out, the mitigation is not included in that calculation on the 80 million of fleet that came out of oil and gas and with somewhere else.
We would have to do a separate calculation of the mitigation impact of that and that's why I said that I don't believe that there will be a full $32 million impact that we will experience but something less than that. And I try to range it between 18 and 36 and you probably say 18 and 32 as the realistic range.
So that's how we are thinking about it this year and obviously it requires us to continue to mitigate pretty aggressively with the fleet that does come out of oil and gas and as I pointed out that's harder to do in the first part of the year in the first quarter that it is when things get busy in second and third quarters so we are encouraged by our ability to mitigate even more effectively as we go forward. Hopefully that answers if not ask again George.
George Tong
Yes. No, okay.
That makes sense. If I look at your updated guidance range for revenues and EBITDA at the midpoint of the range EBITDA flow through works out to be 70%, you are still maintaining 60% flow through target for the full year so this addresses either EBITDA will be below the midpoint or revenues will be above the midpoint or both.
Can you comment on which of these you are thinking about as you target 60% there?
William Plummer
Yes, this is where the range is always make life challenging. I mean what I – I don't want to go further than just the ranges that we have given and the fact that we believe that revenue and EBITDA will fall within the range given the sensitivity of the calculation the combination of those two will get you at least to the -- about 60% flow through that we expect and not going further than that George otherwise we might as well give you the whole forecast right.
George Tong
Thank you.
William Plummer
That might be happy for some of you but not for us.
Operator
Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research.
Michael Kneeland
Hi Joe.
Joe O'Dea
Hi. Good morning.
First on just on end markets. It sounds like non-res feedback that you are getting through the market remains pretty constructive because you talk about with the 8% or so fleet growth that you have baked in on the current CapEx guide, what the underlying breakdown is on say a non-res growth that you anticipate to drive that versus the industrial growth that you anticipate within that?
Michael Kneeland
Well, I don't know that we break it down specifically in those two categories. There is two pages on our deck that parses it out by state.
The forecast and industrial growth rate for 2015 is 3.3 and the non-res construction is 6.2. So it gives you a lot of detail by state within those two categories.
Beside from that some of the macro things the [eye] index just came out that's another positive by the way that's 11 of the last 12 months that shows a positive trend and it seems to have build particularly in construction and industrial and it was 50.9 in January. It was 51.2 in February and in March its 53 so you continue to see that momentum that's building and that is the future leading indicator and then when you couple that with housing and the conscientious report that I mentioned those are some of the backdrops for some of the leading indicators that we are thinking about.
Joe O'Dea
Got it. Thank you.
And then just back on rental rate given some of the details you have provided and I guess but without knowing exactly where March wound up are you able to just sort of frame what the rental rate for 2Q would be if you see the sort of typical sequential climbs through the course of the quarter?
William Plummer
Yes, Joe its Bill. It would be below the 29 year-over-year for the full quarter that we achieved in Q1 so I mean you can do the math.
It comes to about 2.5% in the second quarter just on the sequential month the way Matt described it and that certainly reflects the strong second quarter that we had last year making for it.
Joe O'Dea
Great and on that I mean with the tougher comp in the high flows through I mean I know 60% is a full year target so it seems like that there is a little bit harder comp on getting that 60% incremental maybe in 2Q and it gets better into 3Q, 4Q you have better rental rate support?
William Plummer
You got it. It will be more challenging in the second quarter and then it gets better in the back half.
Joe O'Dea
Okay. Great.
Thanks very much.
Michael Kneeland
Okay.
Operator
Thank you. And due to time constraint this does conclude the question-and-answer session of today's program.
I would like to hand the program back to management for any further remarks.
Michael Kneeland
Thanks operator and by the way I want to thank everybody for joining us on today's call. I hope we have given you some insights into our current operating conditions and what we expect in the months ahead.
Please be sure to download our updated investor presentation and also feel free to reach out to Fred Bradman in our Stanford office anytime for any additional questions that if we can be of assistance or align up any presentations and/or some field site visits. So thank you very much and operator you can end the call now.
Operator
Thank you. And thank you ladies and gentlemen for your participation in today's conference.
This does conclude the program. You may now disconnect.
Good day.