Apr 20, 2017
Executives
Michael Kneeland - Chief Executive Officer William Plummer - Chief Financial Officer Matthew Flannery - Chief Operating Officer Ted Grace - Vice President of Investor Relations
Analysts
Timothy Thein - Citigroup Investment Research David Raso - Evercore ISI Joe O'Dea - Vertical Research Partners Robert Wertheimer - Barclays Capital Inc. Ross Gilardi - Bank of America Merrill Lynch Seth Weber - RBC Capital Markets Nicole DeBlase - Deutsche Bank Securities Justin Jordan - Jefferies
Operator
Good morning and welcome to the United Rentals’ First Quarter 2017 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 financial 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 turn the call over to Mr.
Kneeland. Mr.
Kneeland, you may begin.
Michael Kneeland
Thanks, operator, and good morning, everyone and thanks for joining us on today's call. Before we begin, I want to mention that our prepared remarks this morning will include some comments by Matt, and he'll talk about the field operations and give you a progress report on the NES integration.
And then Bill will discuss the numbers before we go over to Q&A. So here we are in 2017 and I'm pleased that we reported such a strong start to the year.
In January, I described 2017 as a critical period in terms of both positioning ourselves with our broader customer base and driving new efficiencies in our operations, and we're executing well on both fronts. Many of the actions we took in the quarter were designed to strengthen our earning power in future periods.
This includes finalizing the NES transaction, which we closed as planned on April 3. Internally, I'm impressed how quickly our combined workforce has adopted the mindset of a single team, and customer reaction to the acquisition has been positive.
So I want to take this opportunity to publicly welcome more than a thousand new employees to United Rentals family. They are great addition to the team.
We also got off to a solid start on Project XL in the quarter. Six of the eight work streams have now moved past the pilot stage, and we are pleased with the early progress.
We have confidence in our EBITDA run rate target of $200 million by year-end of 2018. At the same time, we are keeping our focus on immediate results.
Demand is on the rise and we captured a lot of that business in the first quarter. Our revenue increased 4.4% year-over-year on a 7% increase in volume.
That’s the strongest quarterly increase on volume we've seen in a while. We are also efficient with our fleet.
Time utilization came in at 66%, a record high for the first quarter and we generated a solid $490 million of free cash flow. Rental rates remains under pressure, down 1.4% year-over-year due mainly to market dynamics.
And while this was disappointing and a bit below our expectations, we're encouraged by the trends that continue to point to an industry-wide right-sizing of supply and demand. And this should continue to absorb excess fleet to the marketplace, which is positive for us.
Matt will talk about this in greater detail, but for a variety of reasons I want to emphasize that I am confident rates will head in the right direction as we work through our busy season. For our part, we plan to spend about $1.5 billion of CapEx this year and given the positive market trends and our commitment to growing our specialty offerings, we feel comfortable with that number and it should match up well against the demand.
As you know, we issued new guidance yesterday primarily to account for the combination with NES. It includes a nine-month EBITDA contribution of $135 million from the acquired operations.
The increase in free cash flow reflects both the impact of the acquisition and our expectation for higher cash generation in the base business. In other words, excluding NES, we are reaffirming our standalone guidance for revenue, adjusted EBITDA and CapEx and increasing our guidance for free cash flow.
Well here some of the drivers behind our expected performance. Most forecasters are looking at solid growth in the U.S.
of rental industry in 2017. Our customers and employees are very good about their prospects this year.
Our customer optimism index in March was the highest we've seen since 2014. Demand is trending up in our core construction and industrial sectors, commercial construction remained strong.
There is a nice inflection with upstream oil and gas with our macro is improving, and the worst of the drag from Canada appears to be behind us. In addition, the vertical sales strategy we put in place is working.
Infrastructure is a great example. Our revenue from infrastructure was up almost 5% in the quarter and a down sector.
Our digital presence is growing as well. In the first quarter, we had a 15% sequential growth in online rental transactions and we gained over a 1,100 new customers in those three months alone.
And finally, our specialty segment, Trench, Power and Pump continuously outpace the company as a whole. These three operations combined were up almost 17% in the quarter versus the prior year.
We opened three cold starts through March, bringing our specialty network to 217 total branches in North America, with the plan to open at least 17 branches this year. Even with the steady expansion of our footprint, the bulk of our growth in specialty comes from same-store at higher margins in our gen rent operations.
They make the strong case for continued investment in this segment. Specialty also benefits from cross-selling with our gen rent branches, specialty revenue and cross-selling to national accounts grew by almost 12% in the quarter, first quarter versus a year-ago and cross-selling our fleet started years ago as a way to boost returns on assets now has become one of our most valuable core competencies.
So in closing the year is off to a strong start. NES acquisition was finalized on schedule and integration is on track.
We have numerous avenues for growth, with positive momentum across the board. Our branches and our customers are optimistic about the prospects and our confidence on the cycle remains intact.
So with that as a backdrop, I’m going to ask Matt to update you on the operations and also on the NES integration. So over to you, Matt.
Matthew Flannery
Thanks Mike. I'm going to start with NES, because I know there's a lot of interest in the integration, and it's obviously early days, but things are moving along, consistent with our aggressive schedule.
We believe that speed is a key to alleviate uncertainties for the team. We've already finalized the leadership decisions and incorporated the NES managers and branches and stores into our region district network.
And last only nine days after close, we converted every new location over to our Rental Management System, the acquired fleet and the customer histories are visible in the system and we're already seeing the team used this data share fleet and they're also passing along leads to meet market demand. This is very encouraging so early on.
And we're still going through a thoughtful evaluation of our combined footprint, some changes will be necessary. So we want to make sure we get it right, we're going to take some more time of that.
And most importantly, we've made the team's top priority to focus on serving our customers and they're really coming through on that front. The next several months, we'll be unlocking the full potential of the combination.
Since announcing our plan to acquire any effect January, we've been able to take a much deeper dive into their operations. And I'm glad to report that the first quarter results performed largely as we expect, we continue to feel good about the cost synergies that we put out there in January.
We believe that we're on track to deliver a run rate of about $40 million of incremental EBITDA in year two and the same goes for our revenue synergies, where we’re still targeting $35 million by year three. And then the near-term, the combined company has an immediate benefit to our business.
And as Mike mentioned, our new guidance reflects what we expect for the balance of this year. Now, I want to look back at the first quarter to give you a quick tour of our operating landscape.
There were a lot of commonalities across our regions fueled by demand in core projects. These include stadiums and resorts, data centers and factories as well as bridges and power plants.
And the demand in the quarter was not only strong, but it was broad. [ROIC] on rent trended up in over three quarters of the U.S.
states and eight out of the 10 Canadian provinces. That's a sign of a healthy operating environment.
Regionally, we continue to see the strongest growth along the eastern seaboard in the West Coast, as well as some of the South Central states. And another strong highlight was our Pump Solutions business, which grew rental revenue by more than 20% year-over-year and almost all of that growth with same-store reflecting our cross-selling efforts, our gains and market share and an underlying improvement in our end markets.
And we've been executing a diversification strategy for pump for the past two years, so it's nice to see that paying off. We’ve always had big plans for pump.
We never saw it strictly as an oil and gas acquisition. But as the upstream sector continues to recover, it's giving this business an extra bounce.
Now, I want to take a minute to discuss rates, which are obviously front and center to both our investors and our employees. While there are challenges in certain markets, on balance, we are encouraged by what we are seeing.
First, as I mentioned, demand is strong and broad-based. You could see the momentum build across the first quarter in our monthly time utilization and as best we can tell our peers saw similar strength.
We believe it's been a trend for the past six months or so and this dynamic has got that positive implication for rates going forward. Another factor is seasonality.
It's never easy to get rate in the first quarter. This is our seasonal trough in demand.
That being said, we delivered a better sequential improvement in the first quarter of this year than last year. And if you look at the trajectory of our sequential and year-over-year rates across the quarter it's certainly suggests an ongoing absorption.
And finally, and let me be absolutely clear about this, our strategic focus on rate has not changed. I personally discussed the importance of rate integrity with our field leaders and they are keenly aware of how important this is to our business and our ability to serve our customers.
All of these things taken together give me confidence that rates have the potential to get better in the back half of the year and that's the point I really want to emphasize this morning. So we are getting to gain time for our field operations.
We are entering our busiest period with a bigger talent pool, a more extensive branch network, a larger fleet and many new customers to serve. And our employees know the goal post and it's a point of pride for them to get us there.
So if you have any questions about operations, I'll be happy to answer them during Q&A. Right now, I'm going to hand it over to Bill for the financial review.
Bill?
William Plummer
Thanks Matt, and good morning to everybody. I got a lot to go through, so I’ll dive right in starting with rental revenue.
The $49 million year-over-year change in rental revenue was up 4.4% and the components of that $49 million start with ancillary and re-rent revenue that combined was up $12 million and really that was driven by ancillary revenues associated with higher volume, delivery fees in particular, but also fuel recovery for rental. So strong quarter driven by high volume and you hear that throughout a number of the comments that will make volumes a huge part of the story in the quarter.
In owned equipment revenue, volume contributed $68 million over last year, but $14 million of that went the other way against rate and then replacement CapEx inflation took another $16 million versus last year. Mix and other was relatively flat in the quarter, only $1 million of headwind, so those are the pieces of the $49 million increase and that certainly suggests and ties to the notion that volume was a very strong contributor this quarter.
If you move to used equipment sales, $106 million of proceeds in the quarter that was down $9 million from last year and that reflects just the volume of used equipment sales that we did in the quarter is nothing more than volume. Actually if you look at pricing, pricing was a positive, pricing improved, and that led to an improvement in our adjusted gross margin.
The margin was up 2.2 percentage points compared to last year to 50.9% in the quarter continue to market and how we're able to sell equipment that in this case was almost 90 months old at something like 51% of the original cost of that equipment, so very robust used equipment market that we're selling into. Moving to adjusted EBITDA $591 million of adjusted EBITDA $7 million improvement of last year at 43.6% margin.
The components of that change $46 million of volume, but rental rates taking $13 million against that fleet inflation down $11 million, used equipment sales you can see the GP impact was $3 million of headwind versus last year. Our usual merit increase in that $5 million to $6 million ranges so call it $5 million in the quarter and then $7 million of mix and other and included within that $7 million was about $3 million from the year-over-year increase in our bonus accrual.
I call that out, because we've talked previously about the bonus accrual in the full-year of 2017 going up materially from last year it was $3 million of increase in the first quarter, those year-over-year impacts will increase in subsequent quarters because of the timing of when we adjusted our bonus accruals last year versus our expectation that we'll continue to accrue at 100% payout for this year. So those are the pieces of the $7 million of year-over-year improvement in adjusted EBITDA, the 43.6% margin was down a point from last year and really that reflects the impact of rental rates actually if you just adjusted out the rental rate impact in adjusted EBITDA you get back to flat with last year's margin.
On adjusted EPS, we had $1.63 results in the quarter that's up from $1.40 last year and it reflects the improvement in operating performance, but also lower interest expense from both a lower debt balance and some of the restructuring that we've done. It also reflected the impact of our tax expense going down as we adopted new guidance on how we treat stock-based compensation and it's now recognized in the tax line as opposed to direct adjustments to the balance sheet item.
So that stock-based compensation guidance benefited us by about $0.09 in the $1.63 quarter. EPS was also benefit in the quarter by the reduction in share count as a result of our share repurchases since last year about 5.6 million fewer shares this year compared to first quarter last year.
On free cash flow $490 million of free cash flow in the quarter, it's a very strong first quarter although down from last year. Last year was 137 million higher in the first quarter but that change primarily reflects the difference in net rental CapEx spend in this year compared to last year.
Last year was a very, very restraint CapEx spend in the first quarter. The cash flow impact brought our net debt balance at the end of the quarter down to $7 billion and that's $520 million less debt than we had last year, so pretty significant improvement in the absolute quantum of debt that we have outstanding as a Company.
I do know that that $7 billion number had not yet included the impact of actually acquiring our NES if you add back the NES funding as we sit today we're at about $7.9 billion of net debt on yesterday's close. Liquidity finished the quarter at $2.1 billion that included $1.7 billion of ABL capacity and little over $300 million of cash on the balance sheet and again those are higher balances for our liquidity sources because it was in advance of the NES acquisition.
If you look at it today, we sit at about $1.2 billion after the NES close. Rental CapEx you saw the $219 million in the quarter that's up from a very depressed level of rental CapEx spend last year and the net rental CapEx change year-over-year just reflects the difference and that gross number plus the difference in net proceeds from used equipment sales.
Let me finish out – spend a little time on our guidance. As we noted in the press release and Michael's comments, we have updated the guidance to include the impact of NES.
For the underlying URI performance, this guidance reflects no change in most of the metrics with the exception of free cash flow, which we have increased. The changes for NES reflect – obviously owning the business for nine months and they do include the impact of synergies realized or expected to be realized in 2017, both the cost synergies and the net of any revenue dissynergies and synergies that we might realized.
So just to be clear the impacts that we added were $300 million in revenue and $135 million in adjusted EBITDA. We did put in an extra $50 million to cover gross rental CapEx for the remainder of the year at NES and those were the real changes to the exact guidance components.
On free cash flow, we added $150 million to our prior guidance that reflects the addition of NES plus some improvement in the cash tax position of the underlying United Rentals operation. So NES, if you just add the EBITDA of $135 million subtract $50 million cash flow for CapEx subtract $30 million from the incremental interest expense that we carry for the debt of acquiring NES and then add a $100 million of improvement in cash taxes, you get to that $150 million increase.
And within that $100 of cash tax improvement, about 50 of it came from the NES acquisition, either from applying the NOLs that we acquired with NES or from the deduction available for deal-related expenses that that in aggregate added about $50 million to cash tax benefit. The other $50 million is from adjustments and estimates that we've made on the underlying United Rentals business as we've gotten a sharper view of what our cash tax picture will look like on the legacy business.
So those are the pieces of the $100 million cash impact or cash tax impact that led us too partially to the increase in free cash flow guidance. Just one last point on NES, we haven't changed any of our views, as we said before about the synergies that we went into, thinking about this deal with one exception.
The NOLs that we acquired that we had announcement take that present value of about $150 million. We’ve looked at that more closely as we've worked with the NES folks in tax and evaluated the positions that they've taken and that we can take going forward.
We now believe that those NOLs will have a higher present value than what we initially thought something like $150 million instead of the $125 million that we initially thought. So that's a little nugget that we found that that gives us more confidence about the value of the NES acquisition.
I think I’ll stop there and will address either questions about these or anything else that you all are interested in hearing in Q&A. So I'll ask the operator to open up the call for Q&A.
Operator?
Operator
[Operator Instructions] Our first question comes from the line of Timothy Thein from Citi Research. Your question please.
Michael Kneeland
Good morning.
William Plummer
Hi, Tim.
Timothy Thein
Good morning. Just a first question maybe Matt, you could just put a little bit more color around your earlier comments in terms of your confidence in terms of rate improvement as you get into the second half of the year, presumably you're talking year-over-year, but maybe you could just flesh out kind of the dynamics between sequential versus year-over-year rate?
Matthew Flannery
Sure, so I think you might have seen it in the release last night, but you could see both from a year-over-year perspective and a sequential perspective, the negative tempered some as we went through the quarter and we find that encouraging when you combine that with the time utilization that we achieved and we believe that the industry is seeing a similar progression and it maybe not the same relevant number, but a similar progression all that points to the opportunity for us to be able to realize rate improvement in the back half of the year. Now that improvement, first we have to start with sequential.
We are not sure that the slow first start would allow us to get to positive rate on a year-over-year basis. But if you wanted the model what that would take and we're not forecasting, it would be a healthy half a point sequential improvement through our peak months of May through October.
So that it would take to get flat. We don't know if that's there or not, but I think the point we really wanted to get across is the demand is there, which is very, very strong and it's really about if this absorption continues and the industry continues to see the opportunity we are hopeful that will realize itself in the better rate performance than we had in Q1.
Q1 was certainly a little softer than we had expected.
William Plummer
Let me just add one factual point, I don’t think everybody has the progression of year-over-year, we didn't put in our investor deck, so January, year-over-year was minus 1.8, February was minus 1.5, March was minus 0.9, and so that progression along with the sequential progression I think is sort of evidence that we think the absorption will help move us in the right direction and supports the comments that Matt made.
Timothy Thein
Okay. Would you care to kind of extend this forward a couple weeks in terms of what you've seen thus far in April?
Michael Kneeland
As you know Tim, we've gotten out of the business of…
Timothy Thein
Yes, okay.
Michael Kneeland
Talking prospectively about rates, so we'll beg off, thanks.
Timothy Thein
Okay. Understood.
And just through more definitional, but will there be any meaning or should we expect any meaningful impact on URI rates as you fold the NES contracts or is that – is it kind of de minimis or what impact if any on URI rates will have as you fold that businesses?
William Plummer
Yes. We'll talk about that more when we got the data at the second quarter.
I don't think it's any surprise to say that when we add NES rates, we will be adding rates that are below sort of the rate level that United Rentals has historically achieved. So that will have an impact of adding lower rates on that portion of the business, but the impact we believe will lessen, as we gradually manage rates in the way that we overall manage rates at United Rentals.
So we'll talk more about the impact there to the extent that we can't once we've got the actual data in front of us, but it will be at lower rates and then migrate those rates in the way that we normally would manage them from there.
Michael Kneeland
I think additionally Tim to Bill’s comments is the opportunity to cross sell into that customer base, it can help defray some of the separation and just putting the tools, as Bill said in the hands of the employees to be able to have a broader offering to sell the customers would be very healthy.
Timothy Thein
Okay. I appreciate the time.
Thank you.
William Plummer
Thank you.
Operator
Thank you. Our next question comes from the line of David Raso from Evercore ISI.
Your question please.
David Raso
Hi, good morning. On rates geographically, the split between U.S.
and Canada. Obviously, Canada has been a drag, if you can just give us that exact split and then within the U.S.
or other territories where rate is already positive, we are just trying to figure out how much is this certain pockets are dragging the rate down or is it still very broad across the U.S.?
Matthew Flannery
Sure. Dave, this is Matt.
For your first part of your question, if we had pulled Canada out, our 1.4 year-over-year rate decline would have been 1.0, so closer to normal, what we had expected in Q1. And as far as region, I won’t guess specific regions, but we had a couple of regions that were positive year-over-year rate in Q1 and really not many of them were planned to be positive in Q1 because that's a seasonal trough.
The challenge came in some of the markets, there were a handful of markets that we're just drag this down and we – it's very – it's identifiable areas that we think seasonally we can help them improve if not we’re going to move flight out of there into the markets that can support, the environment can support a better result.
David Raso
And when it comes to the cadence of standalone URI’s CapEx, is there been any impact on trying to focus on rate on the timing of fleet going into the field.
Michael Kneeland
Not as of yet David, it's still early days to make that decision. Certainly, as Matt said, we're looking at where that CapEx goes once we spend it.
But we haven't yet got to the point of saying we need to make a significant change in the timing of the CapEx. We're going to monitor that very closely.
This month, next month are important month, so I would say stay tune and we can talk about in more detail in the second quarter.
David Raso
And then while you've sort of given the marching orders to focus on the right here a little bit with your branch managers and regional managers, has there been anything officially instituted on pushing rate differently than the constant tweaking that you always do on supply demand in every region?
William Plummer
Yes. There has been some strategies that we've employed, some that have been used in the past, some new and like always it's disseminating that information all the way down to the field network and I think we've done that effectively.
I think that was frankly started mid-February which when we saw January come softer that's where you saw the trend start to turn.
Michael Kneeland
Hey, David. This is Mike.
I would just tell you that we don't rest. We continually do learn through our analytics on ways in which we become better and how we manage, how we can communicate that throughout the organization.
So it is still – we'll always be whatever always hoping and looking at ways to improve it.
David Raso
And I guess lastly, Canada rental revenues for the quarter appear to may have gotten back to flattish. The rate going forward in Canada, how would you frame currently down mathematically over 5% given the impact you implied for the whole Company.
What kind of rate performance should we expect for rest of the year in Canada? I know we are not going to get back to flat for the full-year, but just trying to get a feel for Canada can get close to flat as the year goes on, maybe what the impact could be?
Matthew Flannery
Yes. Again, we've gotten out of the business of speculating too much about what rates could be, what I would say is that Canada – certainly we're encouraged by the strength that we're seeing in the eastern part of country, the flattening of what we've seen in the western part of the country, right, we believe it's trough.
And so that will encourage improved rate performance in Canada. But when you're down over 5% in the first quarter, you've got some work to do in order to flatten later in the year.
So I'd just suggested that we talk about as we go through the year.
David Raso
Okay, I appreciate it. Thank you.
Michael Kneeland
Thanks Dave.
Operator
Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners.
Your question please.
Michael Kneeland
Hi, Joe.
Joe O'Dea
Hi, good morning. Could you just talk about when you see transitions and demand historically, how you think about leading indicators and where we see the strength in the used equipment prices, we see the strength in utilization, clearly some surprise on rate, but how you think about the progression of those and a typical lag and whether rate would typically lag and how long that would be?
Michael Kneeland
Joe, this is Mike. I've always said that throughout my career that when you see these prices improve is step one and then as you look at utilization.
And as Matt mentioned about the absorption of the fleet, we all so secret that when we went to the oil and the surrounding markets – surrounding our market that was a surplus of fleet, that is being absorbed. And then as the industry begins to achieve better performance on utilization, it's confidence towards rate.
Throughout my career I've seen that. Is there any given cadence.
It's not a science, it's just something that happens that I have experienced and that's kind of what gives us some confidence based on the demand that we're seeing and how our employees who are straight on the field as well as our customers, the optimism they have for the remainder of this year into next.
Joe O'Dea
And then what is your sense for – maybe why we didn't see rate react more quickly? Is there just a general wait and see in terms of confidence and sustainability of some of the improved demand, it’s promising to see that the rest of the industry also appears to be seeing a similar progression of improving utilization, but just why the industry would be a little bit apprehensive to run with that and set to flow through rates?
Michael Kneeland
Well, again it goes back to the absorption and time utilization, they start to see it, number one, if you take a look at where we are the sequential this year versus last year, albeit some a disappointing, it still improvement. The time utilization is one that gives us better confidence and as we talk to David, the rate impact in Canada 5.3%.
Canada is on secret that as bought more commodities driven economy suffered during last year and started the level off and seeing time utilization improve there as well at the same time inflection of the rate I would say that there is opportunity as we go forward. Again it's building a confidence with inside the industry by utilizing the fleet that they have.
William Plummer
Joe, I think you hit on early on, when you said the rate is a leading indicator, it’s not – the time utilization excuse me is a leading indicator. And I think that we're seeing, you just have to remember the seasonal drop that we spoke about.
We have to go back all away to 2014, where we didn't have negative sequential rate in Q1 and even then they were fairly close to flat, when I remember looking at them last time. So it's part of it seasonal and we are really encouraged by the leading indicator that you pointed to a time utilization be enough or should help us ramp up.
Joe O'Dea
It’s helpful, and then maybe just one more on kind of end markets and specifically, anything that you're seeing in Industrial and I think that tends to be more MRO related, but have you seen some an improvement in activity there and specifically in the industries or sectors that you would call out within Industrial?
Michael Kneeland
I think within Industrial, I think we're still at the point of looking at the timing of some of the downstream oil and gas, turnarounds that may have been postponed. So I wouldn't point to improvement there just yet, but in other Industrial segments.
I think there are pockets that you can look at that it felt on a little better than they had in the past. So we continue to see some aerospace related for example and they’re probably some other pockets, but that we could call out there going to be important and try to be even talk in the same time, which is never a good thing.
But for example, paper and forest products is – power is one that, but I'd like to pharmaceuticals, biotech we've actually had couple of industrial manufacturing oriented businesses that have done better. So a little bit of green shoots in some of the industrial areas, but it hasn't developed into a powerful way just yet.
William Plummer
Yes, when you look at the 7% growth obviously any offsets to some of the verticals and industrial that that might have depth and some one that might have call flat overall, really the non-res market pick it up strong and that really help drive that 7% volume growth.
Joe O'Dea
Got it. That’s really helpful.
Thanks very much.
Michael Kneeland
Thank you.
William Plummer
Thank you.
Operator
Thank you. Our next question comes from the line of Robert Wertheimer from Barclays.
Your question please.
Robert Wertheimer
Yes, good morning. I wonder if you just go back to SG&A for a minute and you talked about some of the compensation increase SG&A where you've had it that high and past 1Q is relative to sales was a little higher than we thought.
So wondering can you maybe clarify how much of the compensation bump was unique to 1Q versus evenly spread throughout the year and was there anything else in 1Q really that you would call on SG&A that may that higher than you might have thought?
Michael Kneeland
Yes, so what I get just a couple of pieces out. So the $16 million if I recall year-over-year increase.
Within that I called out the $3 million bonus and in addition to that, there was 7 million of stock compensation expense increase separate apart from the bonus that the cash bonus that we pay out. And again that $7 million reflects the change in accounting guidance about how the stock compensation expense is treated.
But it also reflects, primarily reflects the fact that our stock price went up tremendous amount in quarter and so that increase shows up as stock compensation expense in the quarter. Now it comes out of adjusted EBITDA, it's wide and called out as a component of year-over-year change in adjusted EBITDA, but it was about $7 million of the $15 million, $16 million increase that we saw in the quarter.
The other $4million, $5 million or so were really timing items among pro fees, T&E and some other in this and that, but those are the big jump.
Robert Wertheimer
Thank you. And then it does.
But I'm sorry for not understanding, but does that stock compensation increase repeat across the quarters or is it more lumpy in 1Q due to timing of grants or exercises or accounting?
Michael Kneeland
It's more lumpy in 1Q just because of the timing of when our stock compensation awards are made and when they vest, you have to adjust for the stock price at that point, at the vesting point. So the bulk of that $7 million impact will be in the first quarter, been this and that as we go through the rest of the year just based on other awards that are granted, yes, that's going to be the biggest jump.
Robert Wertheimer
Yes. That’s helpful.
Thank you.
William Plummer
Thank you.
Operator
Thank you. Our next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch.
Your question please.
Ross Gilardi
Yes. Good morning.
Thanks guys. I just want to ask about the Project XL and the $200 million of savings.
Are you having to put costs into the business to generate those savings, we would look at that as a kind of a gross or net number?
William Plummer
So the $200 million run rate is going to be a net number. We do have to put some cost into the business in order to achieve some of the initiatives that we do, but when we talk about that run rate achievement, it's going to be the net.
So for example, if we're focusing on another service line to our customers, customer equipment – servicing customer equipment is one example. You got to have service tax able to do the work.
So that's an example of the expense that will come in, but the net impact is what we're tracking in that $200 million.
Ross Gilardi
When do you think we'll see it, I mean is it going to be like heavily kind of weighted towards the back half of 2018, is that more of like a run rate by the end of 2018 or should we – and where should we see, as you see our SG&A all the sudden start to go down of the fair amount?
William Plummer
So for the win I think, well, first to be exclusive the $200 million is the end of 2018 run rate, that's how we're stating the impact of the program overall, but you'll start to see impacts as we go through 2017, and it will be weighted a little bit more heavily in 2018 than it is in 2017, but you'll start to see some impacts later this year and those impacts should show in a variety of areas. A number of the initiatives are revenue driven and so you would see the impact in topline, but we do have initiatives.
For example, we've got a G&A focused initiatives that is pure cost that would show up in SG&A and have others that are mix of revenue and costs. So, I think it would be best – let us get more data out there and then we can talk a little bit more specifically about where to see the impact.
And that will come later this year as we get the reporting package defined in the way that we feel confidence talking about externally.
Ross Gilardi
Okay. In the past you guys have expressed some confidence that you could still do like a 60%-ish type incremental margin in a flattish rate environment.
Not to put words in your mouth, I wanted to just clarify that first. And do you still – if I have that right, you still sort of feel that way on the back of this quarter.
William Plummer
Yes, I think if we had a flat rate environment, I think we could be in the neighborhood of 60%, it requires us to be able to do some other things in the business that improved productivity. But I think we've be within hailing distance of 60% just with pure flat rate.
So still feel that there are opportunities in the business to do that especially you would have to have a business growing for example. Right, you can't say that when the business is declining.
You would have to have some productivity focused initiatives, you can't just rest on your laurels and say 50% is going to fall in your lap, but flat rate gets us in the neighborhood.
Ross Gilardi
And just lastly, what are you assuming on the high-end and low-end of your EBITDA guide in terms of the NES cost synergies that you've outlined over the next several years for 2017?
William Plummer
So I think a reasonable range to think about for NES cost synergies realized this year is in that $10 million to $15 million range. So the range that we've given should encompass that kind of range on cost synergies.
Ross Gilardi
Got it. Thank you.
William Plummer
You bet.
Michael Kneeland
Thank you.
Operator
Thank you. Our next question comes from the line of George Tong from Piper Jaffray.
Your question please.
Adrian Paz
Hi. This is Adrian Paz on for George Tong.
In regards to the NES synergies, can you provide a bit more detail on where the synergies will come from and also perhaps timing on how you expect those synergies to ramp?
William Plummer
So maybe I will start on the cost side and Matt if you want you can address the cross-sell. Yes, on the cost, it's good old fashion cost synergies, right, it's about G&A expense represented by wage and benefits and pro fees and T&E and all the basic things that you get at that are duplicative between NES and legacy United Rentals, so we will be addressing those as we go through the year.
There's also – the 40 million that we guided to fully developed run rate or fully developed synergies. There's also some branch consolidations that's included in there.
And as Matt said in his comments, we want to be very mindful, and thoughtful about when and where and whether we have been branch consolidations, but we assume there would be some just because of the overlap of the network. So those are the main sources on the cost side.
And on the revenue side, Matt if you want to offer anything?
Michael Kneeland
I would just say that in the revenue side, certainly you could see from more commentary that it’s more back loaded. It will take more time to cross sell into the customers.
The first step is to stabilize the customers, make those that have any overlap with us, feel comfortable that they don't need a second supplier and then after that we'll start selling our additional product offerings to the team. So that's why you'll see the revenue synergies be more back loaded.
Adrian Paz
And on timing, how do you expect those synergies to ramp in 2017 and also 2018?
Matthew Flannery
You mean, metric or you mean timing?
Adrian Paz
On timing, when you expect to see the synergies go through.
Matthew Flannery
So embedded in the updated guidance that we just gave including NES is how we see this will play out for this year. And then from there we probably will hold until we absorb a lot of the opportunities and challenges and give you more information maybe in the next quarter.
The $195 million EBITDA that we gave out as the thesis for the deal still stands firm in our minds.
Adrian Paz
And in regards to rate, do you believe rate pressure is the largely reflecting the energy headwinds, or do you see them as maybe the industry adding fleet too quickly, any additional context on fleet dynamics would be helpful?
Matthew Flannery
Well, I actually think the industry has done a pretty good job on the absorption and not bringing the fleet to quickly. If that continues, that's why you'll hear on more positive tone on us about the forward look as opposed to what we experienced in Q1.
So I'm not worried about that. And I mean we spoke about it.
Demand is what we think is going to drive this thing. I don’t know Bill if you have anything to add.
William Plummer
That’s it.
Adrian Paz
Thank you.
Matthew Flannery
Thanks.
Michael Kneeland
Thanks.
Operator
Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets.
Your question please.
Michael Kneeland
Hey, Seth.
Seth Weber
Hey, good morning, guys. How are you?
Michael Kneeland
Good.
Seth Weber
Sorry, going back to the confidence and the rates moving in the right direction, again? Do you anticipate any change in project type, more project versus MRO?
Or any change in customer mix on national versus local that's helping you get more confidence in that or is it just really to appear I think demand is good, supply-demand balance is going to get better throughout the year?
Michael Kneeland
We may get some lift from it. We may even get some lift from product mix, which is a continued focus of ours as you see through our specialty growth.
But I would say the big driver here is the basic blocking and it’s not tackling of selling the full product offering in the demand gives us that opportunity. So demand will be a big one that will move that and we really feel good about that.
William Plummer
I would say its broad based.
Michael Kneeland
Yes.
Seth Weber
Okay, sorry, just going back to the cost side, the bonus accrual discussion. I mean is that – so I think a mobile, you called out $3 million in the first quarter.
So I think that's going to get larger as we go through the year. I mean it sounds like you're going to get some benefit from Project XL and things like that.
So I'm just trying to kind of net all these things together. At the end of the day, does some of this XL benefit get wiped out by some of these other costs that are going to be accelerating in the model this year or just is there any way to kind of understand the slope of some of these costs that are coming in versus the savings that are going the other way?
Michael Kneeland
Yes, hard to guide you at precise level here is that on the bonus accrual I think the answer. I said that it will be expanding as we go forward.
I think we said in the first quarter that the full-year impact if we finish this year at 100% payout over last year would be $27 billion if I remember correctly. And so we got three of that in the first quarter.
So I think if you started out just saying, okay the remaining $24 million will come equally over the next three quarters that will give you at least a starting point on that line. Stock compensation expense, we talked about that being heavily focused on first quarter, so you might just assume a smaller amount in subsequent quarters.
The timing items pro fees, T&E and some others, it's hard to figure out how to give you much guidance on what to do with those items as we go through the year because there will be some impacts on Project XL probably not huge, but some. And it certainly is something that's hard to figure out how to give you more guidance.
All of that's embedded in our guidance overall, the total Company guidance that I understand your question is being more focused on the particular line of SG&A and maybe some other particular line.
Seth Weber
Yes, okay, we can follow-up on off-line. And then just one last one, now that the deal is closed, any thoughts about the share repurchases if you restart that or do you kind of need to get through more of this integration before you feel comfortable doing that?
Michael Kneeland
Yes, get through more of the integration will come back to as we get probably, I’ve talked about this, so I'm living dangerously right now, but probably get through the second quarter and it's sort of in the third quarter when we can reengage the discussion. I think that will give us a good four months of seeing how the integrations going and making sure that it's played out the way we thought getting a better handle on how cash flows evolving this year and then we'll consider it and decide whether we want to do something where we want to wait a little longer.
Seth Weber
Okay, thank you very much guys. Appreciate it.
Matthew Flannery
Thank you.
Operator
Thank you. Our next question comes from the line of Nicole DeBlase from Deutsche Bank.
Your question please.
Nicole DeBlase
Yes. Good morning, guys.
Matthew Flannery
Good morning.
Nicole DeBlase
So just one, I need to go back on rate because it sounds like that you’ve been spending a lot of the Q&A on this. But I guess the one thing that I didn't hear you answer, it is just from a competitive perspective, what you guys are seeing on our peers or competitors behaving rationally or are you seeing some increased competitive pressure, which is adding to the rates decline?
Matthew Flannery
It depends on the market in the markets where we're seeing the demand being the strongest and our performance being stronger. We're seeing similar behavior by most of our competitors.
And in the markets where it's a challenge and we're not able to get what we want, I’d say it's exacerbated by the other folks that are living through that same reality. So it's not really too different from what we've experienced in the past, the difference that we feel this year versus let's say last year is the demand is much stronger.
This feels like a much different although numerically, you can look at sequentials and talk [yourself into] it similar, this feels much different coming out of this Q1, coming out of Q1 last year and I don't imagine that same dynamics not playing through for our competitors. I think it is.
I think they probably feel much better coming out of Q1 this year as well.
Nicole DeBlase
Okay. Thanks, Matt.
That's helpful. And then just nitpicky one, your tax rate was low this quarter and you talked about stock comp is the reason why.
I know that the stock comp is a lumpy issue and SG&A for the first quarter. Is it also a lumpy issue in the tax rate and we should expect a bump up again in the second quarter and beyond?
Michael Kneeland
I think if you look at the full-year, we still think that we'll be somewhere in that 37%, 38% tax rate. So it will be more of an impact in the first quarter than it will over the remainder of the year.
Nicole DeBlase
Okay. Got it.
Thank you.
Matthew Flannery
Thank you.
Operator
Thank you. And our final question comes from the line of Justin Jordan from Jefferies.
Your question please.
Michael Kneeland
Hi, Justin.
Justin Jordan
Good morning. Just one thing just going through the slide decks, on Slide 15 you change the basis of which you are showing your top 1000 accounts, the diversified account base slide.
I'm just curious; it looks like key accounts are 71% of revenue. I'm just curious what you've done there and equally – I know we’re [indiscernible] about regular time, but within what you're seeing in terms of the rate development is difference between rates that you're achieving on key accounts versus the unassigned accounts.
I'm sort of implying a greater pressure within rate on key accounts?
Michael Kneeland
Yes. Justin, this is Mike.
I am going to ask Ted to start – answer part of your question, and we are going to ask Matt, so Ted.
Ted Grace
Yes, just as it relates to the slide deck, the way we used to present it, it was actually measured a little differently it look at the sub accounts and so what we've done is actually aggregated on the sub accounts. So and actually now that the 10-K, I think the possibility of that nothing has changed except reporting it.
I think as people want to interpret it before there was some confusion on whether just sort of what we in child accounts obviously more defuse in the parent accounts. Is that makes sense.
Justin Jordan
Yes, that’s right. Thank you.
And just on the rate pressure by key accounts versus other side?
William Plummer
It's more – you'll see variance by geography more than by account type. I think that’s I have been pointing it to earlier.
So when you look across the account type along the whole network, it's fairly similar by whether it's our national signed or we call territory accounts.
Justin Jordan
Got it. Thank you.
William Plummer
Thanks. End of Q&A
Operator
Thank you. This does conclude the question-and-answer session of today's program.
I'd like to hand the program back to Mr. Kneeland for any further remarks.
Michael Kneeland
Thanks, operator. We look forward to speaking you again when we ramp up the second quarter.
In the meantime, feel free to reach us to Ted Grace, Head of IR to ask any questions or feedback and as always, as you pointed out our Investor deck has been posted out on the Internet. So thank you very much and we can end the call.
See you next second quarter.
Operator
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program.
You may now disconnect. Good day.