Jan 26, 2017
Executives
Michael Kneeland – Chief Executive Officer William Plummer – Chief Financial Officer Matt Flannery – Chief Operating Officer
Analysts
Neil Frohnapple – Longbow Research George Tong – Piper Jaffray Brendon – RBC Capital Steven Ramsey – Thompson Research Group Ross Gilardi – Bank of America Larry Pfeffer – Avondale Partners Joe Box – KeyBanc Capital Markets Scott Schneeberger – Oppenheimer
Operator
Good morning and welcome to the United Rentals’ Fourth Quarter and Full Year 2016 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 31, 2016, 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 in today’s call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer to the back of the Company’s earnings release and Investor Presentation, to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP measure.
Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I would now like to turn the call over to Mr.
Kneeland. Mr.
Kneeland, you may begin.
Michael Kneeland
Good morning, everyone. Thanks for joining us on today’s call.
I’m always proud to represent United Rentals on these calls, but today as a special significance for me. Our company will turn 20 years old this year and it’s been quite a journey so far and our best years are still ahead of us.
So it’s fitting that we start the next 20 years with a major announcement to acquire NES Rentals, one of the ten largest equipment rental companies in North America. I’m not going to reiterate everything you saw in the release, because I want to leave time for your questions, but I want to emphasize how favorably we view this deal.
Both as an attractive use of capital and also as an investment that’s in lockstep with our strategy for profitable growth, our core business, our culture and our people. With NES, we’re gaining a great group of people who share our intense focus on customer service.
And when we’re working side by side throughout the integration to capitalize on the best in class expertise from both sides. And we look forward to giving our new employees even more opportunities as part of our larger organization.
I also want to mention that we’re in a – where is our own toughest customer when it comes to M&A. We look at a lot of proposals and pursue very few of them and acquisition has to make sense at every level.
In this case, we’re buying NES and an attractive multiple using available cash and borrowing capacity and gaining broad based accretion to earnings, revenue, EBITDA in free cash flow. In addition, the strategic rationale is compelling.
While NES serves the same construction in industrial markets that we do, their footprint customer base in fleet a commentary to what in many respects. For an example NES has extensive relationships with local and strategic accounts.
This will help diversify our customer base and this nicely with our go to market strategy. It should also accelerate the cross selling of our services including our specialty fleet.
And the timing is ideal to take advantage of an expanding marketplace. We’ve also identified meaningful synergies that will be pursuing to integration.
Some of this with the natural outcome of combination, of others like purchasing efficiencies that will come to scale. So this investment can be characterized as the right assets, right timing, right people, right place and the right price.
In the middle, I’ll talk more about our operating environment, but I first want to summarize 2016 and the performance of our current operations. Our financial results and our view of the cycle are both important narratives today.
The NES acquisition while important for other reasons to be seen as the latest execution of our ongoing strategy for value creation. So starting with the fourth quarter, we were very pleased with the way our business performed.
Rental revenue, OEC on rent, and time utilization, all increased versus year-ago. And while rates continue to lag that are well within our projected range.
On a monthly sequential basis, we gain momentum going to 2017, and our OEC on rent was particularly strong through December. Turning to the full year, we delivered solid results in the year that has share of headwinds, starting with the global economic concerns in the first quarter and then ongoing drags from upstream oil and gas or weak Canadian economy and industry over fleeting.
Despite these constraints, we exceeded the upper band of our guidance on total revenue, adjusted EBITDA, and free cash flow. In fact, the $1.18 billion of free cash flow we generated was a record for us.
Our results in 2016 were driven by a combination of positive internal and external dynamics. The internal push came in a large part from our strategic approach the business development.
For example, we signed new customers and targeted verticals. We grew our specialty operations and employed a surgical use of CapEx to expand our fleet, all while maintaining cost discipline.
The external pool came from broad-based demand across geographies and project types led by commercial construction. And we are pleased to see our confidence in the cycle reflected in the market behavior.
And we believe the cycle remains intact and that demand will continue to trend up in 2017. In the U.S., there’s obvious from industry optimism about the focus of the new administration.
In our opinion, it’s too early to call. It’s a government spending stimulates construction it will be incremental to a cycle that we already see as positive for our business.
I want to give you a quick rundown of the four additional factors we considered and formulating our view. First, there are number of favorable U.S.
indicators of 2017, including the Dodge construction outlook, contractor backlogs, national surveys by key trade groups, and importantly CEO confidence surveys. These are the people making spending decisions to create jobs for our customers.
IHS market, our industry’s primary forecasting firm, projects 3% to 4% growth for the U.S. rental industry this year.
Second, there – appears to be on more of a balance between supply and demand. If rental companies continue to show discipline with CapEx spending, the absorption rate for excess fleet should accelerate.
Until then, we expect to see more of our growth come from volume other than rate. Third, customer surveys in the quarter showed a positive trend.
More than half of the respondents cited an improving outlook for 2017, while only 5% pointed to a declining outlook. And at the same time, U.S.
consumers’, home builders, and small businesses reported higher confidence levels in December. So there’s no disconnect here.
And fourth, we have the benefit of almost 900 branches with connections to hundreds of local markets. This gives us an ongoing access that industries largest volume of empirical data, operating information and customer touch points.
More immediately, our fourth quarter results reflected a healthy level of demand. We increased our average daily OEC on rate year-over-year in a majority of the states and provinces where we operate.
In the U.S., the coastal states continue to outpace the country as a whole. This is particularly true in the Southeast.
Our double-digit revenue growth was driven by commercial construction of warehousing, data centers, and mixed use facilities. Further up the coast we’re on a casino project, power plants, as well as the major airport expansion.
Out west, we saw nearly $7 billion of large multi-year projects start up in California last quarter, with Washington, Oregon, and Arizona expected to follow suit by March. These range from stadiums and transit projects to healthcare, solar, automotive, and corporate campuses.
And we’re cautiously optimistic that Canada has turned the corner. The fourth quarter marked a first uptick in oil and gas activity in Canada since 2014.
And GDP growth is expected to accelerate to 2% this year aided in part by the rebalanced commodity prices. Our specialty segment continued to outperform in the quarter, rental revenue for Trench, Power and Pump increased by approximately 5%, 17% and 10% respectively from the prior year.
We opened a total of 14 specialty branches in 2016 and plan to open another 17 this year. As we said in our Investor Day, our long-term goal remains to grow our specialty business to $2 billion of revenue.
Now in 2016, the bulk of specialties top line growth came from same-store performance. This was driven by standalone demand for the services and by cross-selling our specialty fleet to our general rental customers.
Cross-selling remains an important part of our company wide plan to cement customer loyalty and boost return on assets. In 2016, we generated 13% more revenue from cross-selling our fleet to national accounts versus the prior year.
And with NES on board, well thousands of new customers that can use our services. So to circle back what I said earlier, we believe that this is a critical year in terms of timing.
In addition to expanding to M&A and our specialty cold starts will be funding a series of exciting initiatives to enhance the long-term earning power of the business. We announced this on Investor Day in December under the name Project XL.
Executing this plan now, we believe, we can capitalize more fully on the cycle and realize attractive dividends for years to come. One area of investment is technology, we’ll be expanding our digital strategy and our total control fleet management software to create more of a competitive mode.
And we’ll continue to explore new verticals that offer potential synergies with our existing customer base. This year we’ll spend about $200 million more of CapEx versus 2016 based on current operations in part to serve different types of customers and markets associated with these initiatives.
And we’re focusing on aspects of the business that are within our control with the potential to permanently enhance our industry position and future profitability. These growth investments are baked into our guidance, we issued for 2017 and once we complete the purchase of NES we’ll issue new guidance for the combined operation.
So this is where we start to narrative for 2017 at the threshold of our next 20 years. Poised to capitalize on a healthy marketplace with an exciting acquisition on our doorstep and laser focus on opportunities.
The agility to adjust to sudden changes and the experience to act not just as stewards of United Rentals but as catalyst for growth. So with that, I’ll ask Bill to cover the quarter and recap the year.
And then we’ll take your questions. Over to you, Bill.
William Plummer
Thanks Mike and good morning to everyone. My comments this morning, I’ll skinny down a little bit the commentary on Q4 and the year, so that we have a little time to talk about the NES transaction as well as our outlook for the year.
So let me start as always with the rental revenue in the quarter. Rental revenue was up 1.6% over the prior year or about $20 million of total change.
Within that re-rent and ancillary, we’re basically flat with last year. So the change was really in owned equipment revenue, volume was the major positive there, OEC on rent was up nicely in the quarter 4.3% that accounted for about $47 million of year-over-year rental revenue change.
Rate was the big headwind there, down 1.8% year-over-year for the quarter accounted for about $20 million of reduction versus last year. On the CapEx inflation front usual 1.5% or so, of a headwind there, that’s about $17 billion of reduction versus last year.
And then mix in other accumulates all the other impacts within that a number of different cross currents. One is the fact that the holidays fell on maybe a little bit of a fortunate part of the week, with Christmas and New Year’s on Sunday’s this year as oppose to Friday’s the year before they hit us less than the last year in terms of what we see on rent during the work week.
So put it all together, that mix and another number was about $11 million positive versus last year. And that adds up the $20 million year-over-year change in rental revenue.
There was no real currency impact in rental revenue for the quarter. The Canadian dollar was not significantly different this year than it was last year.
As speaking of Canada, it still remains somewhat of a headwind on a year-over-year basis. Rental revenue in Canada was down double digits, if you excluded that the U.S.
only portion of our rental revenue was up 2.9% that compares to the 1.6% that we reported for the whole company. And that, that impact in Canada is basically the carryover from the decline that we’ve been talking to in Canada for the last year plus.
This real briefly on used equipment sales down $22 million in proceeds from U.S sales year-over-year down to $135 million and that primarily flex. The smaller amount of OEC on rent that we sold this year compared to last year.
The margin and price performance of our used sales were nice improvements over last year. Margin at – adjusted margin at 49.6%, 3.1 percentage points higher reflects nice price performance.
In fact, if you look at our proceeds as a percent of OEC, we realized 53.4% of the original cost back through used equipment proceeds that 60 basis points better than it was last year and reflects a pricing environment, which has turned more positive over the last number of months. So we’re encouraged by not only what that sales were used sales proceeds, but also what it might say about the direction of demand in the marketplace.
On adjusted EBITDA going through the bridge there $749 million of adjusted EBITDA in the quarter. That’s $5 million better than last year and 49.2% margin, which is 30 basis points better.
Volume accounted for $32 million of improvement over last year and then rental rates went against that for about $19 million of declined reflecting the volume and rate environment that we talked about previously. Fleet inflation was also a headwind down $12 million year-over-year and used sales, the $5 million declined in used sales profit was a contributor of headwind.
A merit impact was the usual roughly $5 million this year and the bonus accrual was also a headwind in the quarter kind of for about $10 million of decline versus last year. When you look at the rest the remaining $24 million is a combination of other cost improvements across the wide variety of cost items and they reflect the impact primarily of our focus on cost through our lean initiatives and other areas.
So lumping the cost improvements together including bad debt improvements the little bit of an assurance reserve adjustment and other cost saves the total to about $16 million of improvement versus last year and then that leaves $8 million or so of mix and other. Regarding our lean savings and other EBITDA improvement initiatives, we had been targeting as you all know the $100 million run rate of improvement by the end of 2016, pleased to say that we actually ended the year with a run rate of $110 million on that program.
So it continues to reflect the effort of a lot of people really focusing on all of our processes across the company to drive improvement. And needless to say that focus will continue.
We’ve got a new energized set of initiatives that are part of the Project XL projects that Mike mentioned and we’ll continue to report on progress on those initiatives as we go forward. One of the standout measures for our quarter this year was free cash flow $1.182 as Mike said is a record, that $260 million improvement year-over-year roughly really reflects the impact of a couple of key items obviously it was benefited by the reduction in CapEx, but there were benefits in a number of different areas.
So it was a very robust free cash flow result and helped us drive a significant reduction in our net debt. Net debt at the end of the year was down $500 million versus the prior year about 6% and it’s very importantly reflected the impact of our free cash flow.
That in fact includes the impact of our share repurchase on the year, which was a total of $517 million in the year. Speaking of the share repurchase we are in the quarter spend about $40 million to bring that year-to-date program up to 517.
And if you look at the program to date number its $627 million, so little over $370 million remains on the program as you all saw during the earnings release. We paused purchases under the program that $40 of purchases happened in the month of October, and obviously we paused as we were considering actually several acquisitions in addition to the NES acquisition that we’ve announced.
As we complete the NES acquisition, as we start down and get deep into the integration. Our plan is to we evaluate where we are and how we want to approach the share repurchase program.
Our intend is to continue to complete the program, but we feel it’s prudent to re-evaluate where we are, see how the cash flow is shaping up as we get later in the year. And then make a separate decision about, when and how quickly we go back at the share repurchase program.
So stay tuned on that front. We did finish with significant liquidity as we always do at the end of the quarter, $1.2 billion in total liquidity and that includes just little over $800 million of ABL capacity and a little over $300 million of cash on the balance sheet.
Just real quickly on the capital structure, you’ve all seen the redemptions and new issuance that we’ve done throughout the course of the year in service of the capital structure, just to call out one specific number of the impact of that going forward. We expect that along with the redemptions and restructuring and the reduction in debt that it will have a significant positive impact on our cash interest expense for next year.
So we are expecting a reduction in cash interest of about $65 million in 2017 compared to 2016. Last two points, the outlook and the NES transactions and then we will get to Q&A.
On the outlook, you saw the numbers, I don’t feel compelled to repeat them just a couple of points. First, we have said this before but just to reiterate the outlook removes this time rate and time utilization guidance and that’s consistent with the philosophy that we’ve talked about over the last couple of quarters.
I will note that the EBITDA range that we gave, just to highlight does include some operating expense investments in support of some of the Project XL initiatives that we’ve touched on in other areas, as well as other focused areas like our improvement in digital and marketing efforts and so forth. On free cash flow the $650 million to $750 million range there reflects an increase in cash taxes that we’ve been talking about for some time now.
We expect 2017 cash tax is to be higher by about $260 million versus 2016, and when you combine that increase with the outflow for roughly $200 million more of CapEx. Those are the two significant drivers of our outlook for free cash flow coming down from the $1.182 billion this year to the $650 million to $750 million range for 2017.
We also will benefit from the cash interest reduction that I just pointed out, but working against that are the net operating profitability and working capital adjustment. So when you add all that up, you get to our outlook of $650 million to $750 million on free cash flow.
The one other point I’ll make on the outlook is that, again, I think we said this in the releases, but none of those numbers include the impact of NES, our plan is to provide combined company guidance for the remainder of the year at the point where we close NES. So stay tuned for that.
Further on NES, Mike hit the key points, but just to reiterate we think that the impact of NES with the customers that they bring the additional scale that it means for us. The improvement in the density of our network in certain key markets, the cross sell opportunities all are very key parts of the strategic rationale for doing this deal.
And then you set those alongside the cost synergies and the tax benefits and it makes we’re very powerful financial view of the deal as well. But the cost synergies we are calling out is about $40 million, roughly $30 million of that number is from good old fashioned straight ahead corporate overhead and other sort of obvious operating efficiencies.
The remainder is due to operational efficiencies that require a little bit more change in process and analysis before we can call out it specifically where they will come from. But based on our experience with RSC and other acquisitions we’re very confident that the $40 million total of operating cost is very achievable synergy result.
When you synergies their EBITDA, there are $155 million of EBITDA from last year by the $40 million just to get a measure of the overall value of this deal. That $965 million purchase price divided by that synergised EBITDA comes down to a 4.9 times multiple that’s pretty attractive by almost any standard, especially when you consider the multiple that we are trading at today.
When you further add in the effect of that tax benefit, which we calculate as a present value of about $125 million that brings the adjusted purchase price multiple down to 4.3 times. That’s very attractive and that shows in the return profile of this acquisition.
We expect that from an ROIC perspective it’s going to be ROIC above our cost of capital very quickly in fact within 18 months. And that return perspective is also very powerful if you look at the internal rates of return as another way of thinking about returns.
So the financial characteristics of this deal are very attractive alongside the strategic rationale that we touched on before. Just regarding our financing plan the $965 million purchase price will be paid in all cash.
And our intention is to draw a portion of that purchase price from our ABL and the remainder will go into a new underwritten debt issue. We haven’t yet decided exactly how we might approach either, either the amount of the ABL draw, or whether we’ll issue a new debt issue or reopen an existing issue.
So more to come as we get a little bit more in-depth and get closer to close on that transaction. Regarding timing, our expectation is that the deal will close in the early part of the second quarter.
And obviously that will be driven by getting through certain key milestones like Hart-Scott-Rodino approval. But we don’t see any issue with HSR it’s just a matter of when the timing will come.
So for modelling purpose as we’ve been thinking about it as an April, 1 close obviously if we get to the point of closing earlier, we will do that. But for modelling purposes that’s a reasonable place to start.
So that’s enough of you guys listening to me. Let’s get to Q&A.
And hopefully we’ll be able to address any questions that you have, so operator?
Operator
Certainly. [Operator Instruction] Our first question comes from the line of Neil Frohnapple from Longbow Research.
Your question please?
Neil Frohnapple
Hi, guys.
William Plummer
Hi, Neil.
Neil Frohnapple
I believe the implied incremental margin on the midpoint to the sales and EBITDA guidance is around 18% for 2017. And I think you mentioned operating expenses higher to support Project XL.
But are there any other notable headwinds on 2017 EBITDA such as incentive comp or – should I not read too much than the calculations since this based on a fairly small revenue change.
William Plummer
Yes, I think it’s an important point that you’ve made right at the end there, it is a small revenue change and so the exact percent that you calculate, you can’t go too far with. But that said, you do have to remember that we do have incremental expenses like normalizing our bonus payout that’s a $27 million impact year-over-year.
If we end up paying out 100% in 2017 compared to where we paid out in 2016. So pretty significant headwind and you certainly need to keep that in mind, of course, on a year-over-year basis we always have our usual suspect like merit increases, merit accounts or something like $23 million to $25 million of headwind year-over-year as well.
So you got to keep that in mind. And then we’ve got the usual inflation on the other lines of cost that we will run hard to offset with the savings and the initiatives from Project XL beyond going mean initiatives and so forth.
So those are couple of key things that I would throughout Neil.
Neil Frohnapple
Okay, that’s helpful. And then what’s your first blush on NES rentals fleet mix composition including class, age et cetera.
I mean we will require a period of higher CapEx to improve their fleet mix. And it does look like their more crane exposure to some larger type cranes like rough train.
So this is an opportunity longer-term for United to expand more into yours, more or likely that you guys would deemphasize our products over time. Thank you.
Matt Flannery
Thanks, Neil. This is Matt.
So the fleet age is a good question and we’re going to find out whether that’s I wouldn’t necessarily go to the point saying that, that’s going to require CapEx. They as a competitor NES is very good customer service and very good customer retention.
So we’re going to learn how they have wage that fleet while keeping R&M at a reasonable cost and maybe we’ll learn something there. It is primarily an aerial fleet and we’ve always known if you can [indiscernible] aerial when you need to, but there may be some other trick that’s the great part of all of our acquisitions as we always learn something new from the new team members that we bring on board.
As far as the cranes, the cranes is a mix of some cranes that we’re very familiar with like some of the industrial cranes with Broderson Cranes that we use a lot in steel mills and car plant. And they do have some cranes that are not as compatible with our fleet.
They’re isolated in a few markets and with a couple of customers who are very familiar with. I won’t go as for yet is to say we may grow that in our – in further in our footprint.
But we certainly once again have the opportunity to learn. I think it’s important to note that just about all their cranes are bare rentals, which place pretty well for us.
So we probably have a little bit of a concern if they were all mean to rentals. So I think it’s an opportunity once again for us to learn about potential new offerings
Neil Frohnapple
Great. Thanks, Matt.
Operator
Thank you. Our next question comes from the line of George Tong from Piper Jaffray.
Your question please.
Michael Kneeland
Hey George.
George Tong
Hi, thanks, good morning. You are targeting costs synergies of about $40 million associated with the NES transaction, a big part of that is coming from operations and operational efficiency, based on your due diligence can you elaborate on the sources of savings, potential savings from operations at NES and also how much potential rental CapEx savings you can generate.
William Plummer
Yes. Hey George, it’s Bill.
So what I would say is the operational efficiencies are going to come out of just really diving deeper into their processes as well as our processes and looking for ways to improve those processes based on what either side has learned over time. The way I think about it sort of accrued way, they’re operating at about a 42% EBITDA margin, we’re operating at about 48% EBITDA margin.
So that GAAP says that we’re doing something that that they are not. Now whether they can do what we can do or not, we’ll find out more detail, but I think as we look deeper into how they do things and how we do things, we’re going to find ways to close that GAAP somewhat.
And it’s just going to take some time to get to. Regarding other savings, purchasing savings certainly are an opportunity for us I think you saw in the investor deck for the deal that we think that we can find some procurement savings just right off the back just given the greater scale that we have for fleet purchases compared to where we see them.
So that’s going to be cash save and we’ll show up immediately release then in operating expenses, but cash save that adds to the value of this deal. So we’ll be looking for other opportunities in addition to the fleet purchases to leverage that aspect as well.
George Tong
Got it, that’s helpful. And then secondly the year-over-year improvement in time utilization stepped up pretty meaningfully in December, time it was up and 1.7% in December compared to up 28% October and 0.9% in November.
The holidays falling on a weekend was a factor, but can you elaborate on how the strength in rental demand changed as you moved through the quarter?
William Plummer
Yes. It really that it – so you got the profile.
I’d say the utilization profile probably mirrors the OEC on rent profile right. So it step-up and you’re right, December was helped by Christmas on a weekend, but that wasn’t the entire story for the month of December.
And I’ll let Matt talk about specific areas of demand that we saw, but there was a general move higher as we saw little bit more activity just kind of build as we went through the quarter.
George Tong
Anything you want add?
Matt Flannery
No. I think Bill covered it, but to reiterate the demand was a bigger driver than just the holiday on weekend and that has been encouraging for us.
We didn’t have the drop that we haven’t Thanksgiving as large as we’ve had past years that was encouraging for us. So there are a lot of good things for us and I think, you hear that and see that in our guidance going into 2017.
George Tong
Very helpful, thank you.
William Plummer
Thanks, George. I think I told a couple of folks that December was 180 basis points year-over-year as 170 is the right number.
Thanks for remind me that George.
George Tong
Of course, thank you.
Michael Kneeland
Thank you.
Operator
Thank you. Our next question comes in of Seth Weber from RBC Capital.
Your question please.
Brendon
Hi, this is Brendon on for Seth. Touching on the oil and gas markets, I was wondering if there was any kind of additional color on metrics that you could provide for a performance in the quarter.
And then if you are seeing any kind of revamp in activity and if you are aware?
William Plummer
Sure, Brendon. We’ve seen some incremental improvement that would be similar to what you see in the rig count, maybe a little bit less, but I think the important point to know is that this point, the upstream is only a little over 2% of our overall revenue.
So if we see a 14%, 15% improvement will – they’ll have some impact on how much of improvement you are going to see and is it meaningful in the overall organization. That being said, if you add in the Canadian part of the business, which gets categorized a little bit in the non-drilling in the midstream, that’s another percent of our business brings the total up to three and some improvement up there would really help the team up in Western Canada.
We haven’t seen that yet, most of the improvements in the second part of your question has been out in the Permian and mostly in the drills in the U.S., but not so much in Western Canada yet and we are positioned for when we get tail.
Brendon
Okay, great. And then your guidance from the 1.4% to 1.5% growth CapEx, how are you thinking that between – splitting that between specialty and gen rent and then does the new deal do anything to slow specialty branch openings.
Michael Kneeland
On the latter part of your question absolutely not, we are still targeting 14 cold starts and specialty and actually this new customer base that we are gaining from the NES acquisition, we think and enhance our opportunity to cross sell and I think you saw that in the notes that we had. Additionally, I’m sorry, I think I said 14 – we had 14 this year and 17 planned for 2017.
Additionally, when we think about how we are going to spend the CapEx, specialty is still a top priority. That seems not only is a very accretive when we grow that business, but they continue to show the ability to grow that business.
So that will be a primary source of funding and then Bill touched earlier on the investments we want to make in Project XL and I think that a lot of the rest part CapEx will be to support getting into new verticals, such as continuing to grow our infrastructure business. That might take some unique product, some new product that we think have some great opportunity or the entertainment vertical and while the list could go on, but we do see an opportunity to broaden even our gen rent fleet or non-specialty fleet.
Brendon
Okay thanks. That’s it from me.
Michael Kneeland
Thank you
Operator
Thank you. Our next question comes from the line of Nicholas Coppola from Thompson Research Group.
Your question please.
Steven Ramsey
Hi guys, this is Steven Ramsey on for Nick.
Michael Kneeland
Hi.
Steven Ramsey
Can you talk about NES time utilization and rate trajectory in the past couple of years and how they would compare to you guys?
William Plummer
So I think if you – we put some revenue NES revenue information in the Investor Day, I don’t remember if we put fleet. I’m just trying to give you some external data that maybe can point you in the right direction.
It’s clear that what I’d say on rate is that – we know that United Rentals is a premium rate company relative to the marketplace. We’ve seen that through a lot of different data sources.
And so it shouldn’t be a surprise that our rate performance if you measured by dollar utilization for example is higher than NES. I think that’s about as far as I’d go on that front.
On time utilization they are a aerial, a heavy fleet and so it’s hard to compare directly their time utilization experience with ours. They’ve done a nice job in getting their fleet on rent and keeping utilizations attractive.
And that’s something that we’re pleased to see. And we want to make sure that we can support that if not enhance that going forward.
So those are the comments that I offer. Matt or Mike, I don’t know, if you guys would want to add anything else.
Matt Flannery
No, I think…
Michael Kneeland
No, I think you covered.
Steven Ramsey
Excellent. And then on the regional color, you provided which was helpful.
Is there a much of a discrepancy and this is for core United. Is there a much of a discrepancy in rates by region of the United States?
Matt Flannery
We haven’t gone into that before Steven. I mean there is some discrepancy I would say that the band has tightened over the years.
That there’s the big outlier used to be Western Canada. That’s no long, you’ve seen the Canadian rate experience.
So that’s tightened up, I think the oil and gas high rate market as we’ve discussed before as part of our headwind. That’s tightening the band overall.
And as there is not larger variances there used to be we haven’t discussed in detail but you can imagine the balance of rate and time is what everybody runs in the rental industry. So that is your – if you’re in severe cold weather markets, you’re going to need to end up in a little bit more rate because your time opportunity is lower, but not anything that I’d call out on the call.
Steven Ramsey
Excellent. Thank you, guys.
William Plummer
You’re welcome.
Operator
Thank you. Our next question comes from the line of Ross Gilardi from Bank of America.
Your question please.
Ross Gilardi
Good morning. Thanks guys.
Michael Kneeland
Hey.
William Plummer
Hey, Ross.
Ross Gilardi
Hey, I’m sorry if I missed some of this because we’re just jumping between calls. I mean you say that in upfront but clearly…
Michael Kneeland
Yes, we do hearing…
Ross Gilardi
Yes, think I guess. I think it’s a good time.
It’s a hard time to have a conference call. But look clearly you guys are very excited about your business right now, lots of optimism on the future.
But I guess when I look at it you’re still guiding the flattish EBITDA at the midpoint. So like are you seeing any genuine acceleration in your business yet or we still kind of at this plateau.
I’m trying to understand, what the offsetting factors are here, because you guys saw clearly plenty of growth opportunities that you’re excited about?
William Plummer
I think we can say, we’ve seen genuine acceleration as we talked about in fourth quarter in the overall demand. And if you dig a little deeper into that demand growth, you can point to new projects that have kicked off or that are ramping up.
That we expect will continue into 2017. So that gives us encouragement that’s one of the reasons why we put more CapEx into the plan for this year.
For example, so on that regard. Yes, we think that there’s genuine acceleration going out there from a demand perspective.
How quickly that translates into top line growth and profitability growth is part of the question that we wrestle with at this time in the year. But we think we captured that wrestling in the ranges that we’ve given in our guidance.
So I would say don’t just fixate on the midpoint. Think about the full range that we gave you because we think the full range is reflective of that momentum and how it could play out as we go forward.
Michael Kneeland
And this is Mike. The only thing I would add to that is – I’m not sure if you attended our conference in December, Investor Day.
But we laid out a very detailed strategy. And that is what we’re following.
We understand the industry. We understand the demand factors as Bill mentioned.
You know the easiest thing we can do is add capital. But we have a very, very rigorous plan of how we think about things and how we’re going to execute it.
And that’s where the capital is going to go. That’s how we’re going to apply it.
We tried to point out the discipline that we’ve put in play are in CapEx last year by increasing the contribution margin, by changing what we’re investing in. And that’s the message I would say as we go forward.
Bill is exactly right. We gave a range and that range – is one that we think is comparison to where the market is and how we see the world.
Ross Gilardi
Got it. Thanks guys.
And then just question on incremental margins going forward. I mean obviously I can see what you’ve laid out there for 2017 and it’s a pretty type range.
But how should we think more broadly about incremental. I mean in the good old days when you guys were raising prices like 3%, 4% a year you had this steady incremental EBITDA flow through like 60% plus.
I guess and just like more broadly in an environment where demands up a little bit, your growing fleet 4%, 5% in pricings kind of moving sideways. What kind of incremental margin with that sort of translate into on your view?
Michael Kneeland
It makes a little bit more challenging to hit that 60%. I think the wildcard question is how much can some of the Project XL initiatives and sort of the building momentum on our Lean and other cost focus initiatives.
How much do those support the flow through that we might otherwise experience. So a hard question, I answer without getting into too many specifics, but what I’d say is if we got to a level of revenue growth that was sort of larger right to get away from the calculation challenge of small levels of revenue growth.
Ross Gilardi
Right.
Michael Kneeland
I’d like to feel that the initiatives that we’ve got going in the business would keep us around that 60% flow through kind of area. So keep asking that question as we go forward and get a little bit more revenue growth going, but if I remodeling flow through I just start there at least and then build some sensitivities around it.
Ross Gilardi
Okay, great. That’s helpful.
Thanks, guys.
William Plummer
Yes, thanks.
Michael Kneeland
Thanks, Ross.
Operator
Thank you. Our next question comes from the line of Larry Pfeffer from Avondale Partners.
Your question please.
Larry Pfeffer
Good morning, gentlemen.
Michael Kneeland
Yes, good morning.
William Plummer
Good morning.
Larry Pfeffer
So into your point on, you wish went through on kind of the acceleration is some of the increased CapEx in gen rent going to opportunities that maybe you weren’t able to serve last year.
William Plummer
Yes. I think that’s fair, right.
I think we climb down pretty hard on CapEx in 2016. And there were certainly numerous cases.
I know because every time I went out in the field people accosted me about capital. Numerous cases we’re focused on that, it would be a good idea to invest more capital to go after some of the business that we just couldn’t when we were constraining capital.
So if you read that constrain a little bit then you can get that business and you can support the initiatives under Project XL and some of the verticals that we’re going after as Matt mentioned. And so that’s part of what we’re trying to accomplish with a little bit more capital in 2017.
Larry Pfeffer
Got you. And then just on the acquisition front obviously large deal here with NES.
How does that change your thinking if it all on kind of the pipeline as we move through 2017?
Michael Kneeland
This is Mike. We always have a pipeline.
I think that as Bill went through his opening comments, he talked about how our trend – in the transaction, how we think about our M&A strategy. First start strategically, I mean look at the financial aspects, and then cultural is also another one.
It’s very important to learn. This one here happens ahead all of them.
And there are numerous deals that we have looked at and we just continue on, they will make the card. And that’s how we – that’s the discipline in rigor that we put in play.
We have a pretty high bar and that’s not going to change. So if they hit all three of those buckets then we are very interested, but much beyond that we have the disciplined at to walk from.
William Plummer
And the capacity if we do find one that lines up right, this deal will only take us to little under three times leverage right at the close, by the end of the year that leverage is going to come down, depending on what we end up doing with the share repurchase for example to nicely below three times. So we’ll be in a position where of another deal lines up and it’s available later this year.
We’re ready to go.
Larry Pfeffer
Got you. Thanks for taking my questions guys.
Michael Kneeland
Yes.
William Plummer
Right. Thanks, Larry.
Operator
Thank you. Our next question comes from the line of Joe Box from KeyBanc Capital Markets.
Your question please.
Joe Box
Hey guys.
Michael Kneeland
Hey Joe.
William Plummer
Hey Joe.
Joe Box
So Mike over the last couple of years, you’ve talked about steering the company toward higher returning items like specialty. I know you’ve left the door open for really any deal, but maybe if you could just highlight the top one or two things that really made you comfortable with going with a big gen rent deal.
Michael Kneeland
Well. Joe I think I just outlined transaction with NES I think is a way of looking at it strategically.
And as you think about it, when I will just check – go through the check list. It accesses to new customers.
It supports growth in attractive markets. And enhances that cross selling that specialty side of the business.
And we give market density. From our financial, as Bill outlined, we get growth returns free cash flow without significantly impacting our leverage to getting a cost synergies.
And then the cultural aspect of when [indiscernible] going back strategically as Matt mentioned, and here’s a company that as older assets, but their churncustomer was relatively low, which is peaks volume about how they focus on the customer. That along with safety is something that both of those items are a part of the United Rentals’ culture.
So those are things that we look at and those are the things, how we would look at all every one of these. From a timing perspective, you talk about large one.
We have to look at leverage. And those are all the components that now we look at and again I can only tell you that we have the courage not to new deals.
Matt Flannery
Yes, just from the finance section of this room the tax benefit is no small thing as well. That’s very important value for us as we move into being a pull cash tax payer to be able to realize that $125 million present value, with a pretty high certainty is pretty attractive.
So just one more piece of that puzzle that Mike just step through the said a lot of things lined up to make this deal attractive.
Joe Box
Got it. Thanks for that.
And then maybe switching gears, can you guys just give us a feel for maybe how the OEC on rent or the rental rate trajectory seems to be looking into January? I guess I just want to be cognizant of the favorable weather that we saw in 4Q and the timing in the holiday relative to what seems like could be a ramp in overall activity.
William Plummer
Yes, Joe. So to be consistent with our approach have not giving guidance or going into too much debt about rate and time utilization, I won’t answer that question directly, all update is that we’ve giving you the guidance for the full year, we haven’t seen anything that would cause us to change that guidance, obviously, because we just gave the last night.
So that as far as would ready to go and comment about January.
Joe Box
Fair enough. Thanks for taking my questions.
William Plummer
Thank Joe.
Operator
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs.
Your question please.
Unidentified Analyst
Hi this is [indiscernible] on behalf of Jerry Revich. I know that you won’t comment on pricing and better than in your guidance.
But can you way on in your view that is broader pricing cycle, we’ve had a positive about past years. But with your CapEx announcement should that be an indication that you expect for market to return to pricing growths.
William Plummer
I won’t directly address pricing other than to say that I do believe – we do believe that there is a very good argument that the overall cycle is in good shape. And will continue on and upward path for some time to come, whether that manifest itself in rates going back up and sort of the 4%, 5%, 6% a year kind of frame that they did.
Earlier in this recovery I leave it to you to put your own estimate on that. But the cycle has legs to go is our view.
And so that will support demand and depending on, how the market dynamics respond to that demand, it will have an impact on where rates go.
Unidentified Analyst
Thank you, and then as you evaluate the NES business model. Can you talk about what you see as the drivers for there, lower dollar utilization and EBITDA to OEC.
And then like how much of that GAAP is operational verse requiring equipment refresh to read this might spending?
Matt Flannery
So I would this is Matt, I would say that it’s probably when you compare it to our overall dollar utilization. The first of significant driver is the fleet next.
So they are primarily an aerial company at doesn’t bring even for us as high dollar utilization as our average, but also doesn’t bring the cost associated with it. So there’s a lot of opportunity for us that help bolster their dollar utilization through our processes and by serving additional products to their customers.
And that’s one of the reasons why we think we’re a good owner for that business. As far as their fleet age, I don’t think that really plays too much into the dollar utilization it may add some incremental cost.
But we feel when we put these two companies together in some of these markets we’re going to have the opportunity to get a better net return than we get today.
Unidentified Analyst
Okay, great. And one more if I can.
On RSC you reduced cost by 16% of the acquired company sales. Here you’re implying that 11% of EMEA sales, what’s driving that difference and is that maybe something just being a little conservative.
Matt Flannery
Other than the fact that we’re buying both companies they don’t have that many similarities. RSC was a public company had a lot more overhead costs that we could – that we’re duplicative immediately.
So that was a big driver. At the time of the RSC acquisition a lot of the savings were driven by branch closures, because we both had extra capacity in existing facilities.
As a result to the RSC facility – acquisition, we don’t have a lot of excess capacity in our facilities right now. So store consolidation is not the opportunity it was.
We actually see the footprint and the employees and the talent in this acquisition as a potential growth platform. So this is not strictly a cost play here and those would be the significant drivers to why that number is different.
Unidentified Analyst
Okay, great. Thank you.
William Plummer
You’re welcome.
Operator
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer.
Your question please.
Scott Schneeberger
Thanks. Good morning guys and congratulation.
William Plummer
Hey, thank you.
Scott Schneeberger
In Canada, let’s speak there, its sounds like you had really nice rental revenue growth in the U.S. with Canada dragging and if you could just touch on that.
And then going a little deeper, what’s underlying in the guidance for Canada for the upcoming year. It seems like you are optimistic in the industrial area in Canada and the U.S.
So if you could just elaborate there please? Thanks.
Matt Flannery
Sure. I would say that overall, we’re looking at Canada to be flat to slightly up and that varies greatly by provinces, even our experience in Q4.
Six of the 10 provinces did have growth – did have volume growth and there are some robust markets that are doing well. It’s all dragged down by the big rock in Alberta for us with such great penetration and market share in Alberta and that’s where the country has taken its biggest hit.
So it’s a little bit of a balancing act. I will say that we’re positioned well enough in all 10 provinces that whatever opportunity it comes.
We can exceed what we have planned right now and some of that growth capital could shift up there, should they get any tailwind like what you’re referring to is almost 5% industrial growth forecasted. Those forecast always exchange throughout the year, but if it holds true I would imagine that we’d end up putting some of that growth capital into Canada.
We’re also continuing some cold start growth in our specialty business in Canada, so there’s more penetration there as an opportunity. So I would say flat is maybe the implied guide, but if that shifts in the opportunity shifts will accordingly shift fleet up there.
Scott Schneeberger
All right, thanks Matt. Bill just a quick follow-up on the CapEx.
You address the buckets before, thanks for that and if you want to go maybe to re-magnitude those that will be appreciated. But this question is really more about cadence and what type of pattern we should see through the year as we enter.
Thanks.
William Plummer
Thanks, Scott. I won’t go any further on the buckets but regards cadence, you recall the last year, we clamp down pretty hard in the first quarter.
So we won’t be that aggressive in the first quarter relative to the rest of the year. This year, if I remember the number from last year was about $100 million in Q1 with the overall increase and with a little bit of a shift in timing.
You could see a spin in the neighbourhood of twice that in Q1 this year. The second and third quarters will be up dollar wise.
But not dramatically so maybe a little bit more of an increase in the third quarter than the second. And then the fourth quarter will be up just a little bit over fourth quarter of 2016.
So that some broad guidelines for you to get started and if that doesn’t help ask again in April on the next call.
Scott Schneeberger
All right, great. Thanks guys.
William Plummer
Okay.
Operator
Thank you. And this does conclude the question-and-answer session in today’s program.
I’d like to hand the program back to Mr. Kneeland for closing comments.
Michael Kneeland
Well, thank you. In closing, I want to remind everyone that there’s a new Investor Presentation on our website.
That contains more details about the acquisition, if you haven’t seen it already. You will also find seven decks and a webcast from our Investor Day, including more about Project XL.
So there’s a lot going on. And we look forward to sharing our progress with you in the next 90 days.
In the meantime feel free to reach out to Ted Grace, who is in-charge of our IR. And if you have any questions, follow-up and/or would like to see a facility.
We welcome that. So thank you very much and look forward to our next quarterly call.
Operator
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program.
You may now disconnect. Good day.