United Rentals Inc

NYSE:URI

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, and welcome to the United Rentals Fourth Quarter and Full Year 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, 2017, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.

You should also note that the company's earnings release, investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer.

I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

[Michael Kneeland, CEO]

Hello, everyone, and thanks for joining us in the call this afternoon. I want to start the dialogue today with one word, deliver. Yesterday you saw us report a fourth quarter that more than delivered on expectations, it was a strong end to a record year. But to us delivering is more about looking forward, it's about delivering again in the months ahead. So today we'll connect a momentum we created over the past twelve months with our positive outlook for 2018.

So looking at the fourth quarter, the most prevalent tailwind was market demand; we leveraged this with two significant acquisitions and a flexible CapEx strategy. As a result our revenue growth in the quarter outperformed the market and that's on a pro forma basis which assumes we owned our acquisitions from 2016 forward. Not only did we grow rental revenue by 11.5% in the quarter, we improved all three underlying metrics; volume was up 8.8% year-over-year and rates improved 2%, time utilization was a solid 70%, up 100 basis points for the quarter. This put up for your time utilization to over 69% which is a new record for us.

Three months ago I made the observation that the industry background are made to become more constructive and that was clear in December when every one of our regions reported positive year-over-year rates for the first time in years. Our rates are a key driver of growth in returns and are continuing to be a major focus for us in 2018, and it's been a while since we've seen this window of opportunity and I can promise you we won't rest. And here is another point; almost every metric in a fourth quarter performance compares favorably to the full year. Rental revenue for the year was up 7.6% versus 11.5% for the quarter. The quarter outpaced the year on volume, rates and utilization as well. So yes, we delivered on 2017 but more to the point or poised to build on that in 2018.

Now Bill will review our guidance but I want to take a minute to comment on the free cash flow line. Like most companies we're working through the estimated impacts of the U.S. tax reform. We anticipate a meaningful benefit to free cash flow, our Board is considering the potential uses of the extra cash but no decisions have been made yet. That being said we have many options available and we're always very disciplined about our capital allocations. Any decisions we make will be consistent with our focus on balancing growth and returns to maximize long-term value.

Premise of our 2018 guidance; strong operating environment. Now frame two questions that cover the basics; first, well our core business and our specialty segment continue to see solid demand in 2018. And second, will this demand be driven by a healthy rental cycle without relying on natural disasters, legislation or other events. In our opinion, the answer to both these questions is yes. Our core general rental business is performing extremely well, commercial construction remains robust and we're seeing continued strength in rig infrastructure which has been a strategic focus of ours for more than a year. In fact, our revenue growth in this vertical has been outpacing market growth.

Our infrastructure contracts run the gamut from airport renovations in New York and New Jersey to roads and bridges in Texas, and a pipeline work in the central region. States and municipalities are finding the money to make critical infrastructure repairs, and if Washington comes up with funding for public works that money will benefit future years. In other verticals a large number of energy related projects has been at present supplies, it's encouraging to see oil prices stabilize in the 60's and corporate construction is going strong; this includes large corporate campuses and data centers. There is over $4 billion of data center construction scheduled for Virginia D.C. area alone, and tax reform encourage more corporate spending possibly as early as 2019. More immediately, there are signs of that plant turnarounds could ramp up later this year and this should benefit -- would benefit our industrial business.

Internally, all of our region submitted market outlooks that are bullish on 2018. Perhaps the most important is the customer sentiment is positive and on the rise; almost 66% of our customers surveyed in December described their outlook is improving. This was the strongest reading in almost four years and in fact, the quarter as a whole showed sizeable gains in customer confidence, both sequentially and year-over-year. In Western Canada which has been an economic outlier our team reports that customer sentiment is positive for the first time in three years.

Turning to our specialty segment; our trench, power and pumps operations gave significant ground in the fourth quarter. As reported, segment rental revenue was up almost 39% year-over-year primarily on same-store basis. The gross rental margin increased 230 basis points to 47.5% for the segment. The plan for this year is to open at least 18 specialty branches and continue to grow this very successful arm of our strategy; and this follows the 16 cold starts that we opened last year. So that's a backdrop for 2018, a number of promising dynamics underscored by broad-based demand in a healthy cycle. And this is consistent with virtually every key indicator for our industry.

By given the level of customer activity we've earmarked up to $1.95 billion of gross rental CapEx this year; and as we consistently demonstrated to our investors we maintain a high standard for the use of capital and we'll be keeping a close eye on market trends and we're not -- we won't hesitate to adjust our CapEx up or down, if necessary.

Another tailwind for us in 2018 will be the added capacity we brought on board last year. Our acquisition of NES [ph] last April gave us greater density on the East Coast, Gulf and Midwest, and further entrenched our brand as an aerial supplier. With NES, we gained a strategic position in earthmoving with almost a 40% increase in dirt equipment. Our general rent segment has been able to sell more effectively the vertical such as infrastructure and disaster recovery with this fleet. And in addition, we expanded our specialty offering with smaller acquisitions focused on power equipment and site services.

Our larger organization stands the benefit for every growth initiative we take going forward. For example, we're making significant investments in the future of customer service to innovation. Our digital technology is one enhanced the way we gain and retain customers and manage change. One major development we have underway is a single digital platform to integrate all of our customer facing technologies; this includes online ordering, account management, GPS analytics, use of equipment sales, [indiscernible] sales, total control asset management, and our United Academy training portal. We're also leveraging the data we harvest in areas like telematics and so one of the many ways we help our customers become more productive in their use of equipment.

And that's just as important as that you understand why we're making these investments. Today more than ever customer service is a moving target, the spaces we operate are constantly evolving, it's critical that we give customers multiple ways to work with us and we must anticipate the needs for tomorrow's job sites. The investments we're making are intended to deliver tangible business benefits over the long-term. So as you can see 2017 was one step forward after another, it was our busiest year but it was also our safest year on record. Our total recordable incident rate for 2017 was just 0.78 making it the fourth year in a row our rate was below 1; and this speaks to the caliber of our people and our culture.

You may have noticed that culture is getting a lot of attention lately in the business world. Lots of us talk about what it takes to achieve employee engagement and sustainability, and other attributes of good corporate citizenship. Well, I'm proud to say these are all part of our core values. United Rentals has a long history as a purpose driven company, our employees are personally invested in our vision. The last quarter I spoke about our United Compassion Fund which is the way our employees help each other. We also support the National Association of Women in Construction and we've been advocating for military veterans for over a decade lending our support to numerous causes. And just recently, we were ranked number 7 in the nation as a top military friendly employer across all industries.

Years ago when we first made culture a priority we decided that the best way to create sustainable value was to bring together the interest of our investors, our customers and our employees as one cohesive company and as a result all stakeholders are well served by our success; that's how we delivered a record year in 2017, now it's our time to do it again.

So with that I'll ask Bill to cover the quarter and recap the year and then we'll take your questions. So over to you Bill.

[William Plummer, CFO]

Thanks, Mike and good afternoon everybody. We've got a lot of topics to go over in this quarter, so I may send out some of the normal commentary we do but please if I skip over anything of interest raise it in Q&A.

Michael gave a lot of the pro forma's for the full year performance, so most of my comments will be focused on as reported data, I'll call out the pro forma's where I think it adds to the understanding. I'll start with the rental revenue as always; a $1.646 billion was the rental revenue in the quarter, that's up 27% or $348 million versus last year. The breakdown started with the ancillary and re-rent, those two combined were up $51 million year-over-year. Ancillary was the big driver and that reflected primarily the volume of delivery fuel and Rental Protection Program revenue that we had from the addition of NES and NAF. Certainly, we continue to drive delivery realization as well in the base business; those were the main drivers of that 51 increase between those two items.

OER was the remainder; within OER volume was up $322 million reflecting the nearly 29% growth in OEC on rent that Mike called out our rate was $12 million contributor as well year-over-year as positive rate of 1.1% in the quarter on as reported basis. The pro forma rate realization in the quarter is 2% and that's certainly is encouraging as we go into 2018. Replacement CapEx inflation, we call $17 million reflecting our normal inflation and mix and other was a headwind of about $20 million in the quarter as well; so the net of all of those added together gives you the $348 million change on rental revenue in the quarter.

Quickly moving to used equipment sales; another good quarter for us in the used equipment with $172 million in proceeds, that's up $37 million versus last year or 27% increase. The adjusted gross margin on that revenue was at 57.6% and that's an 8 percentage point improvement over the prior year. Key drivers there, we talked in the past about improving the realization against fair market value and our used equipment sales is one of the project excel initiatives; so that continue to contribute in the current quarter, as well though that the overall market was strong, pricing in the market was strong with pricing as indicated by our proceeds as a percent of OEC coming in at 53.6%, that's up 20 basis points over last year. And I'll remind you that's on very old units that we're selling which we sold units at an average age of about 91 months in the quarter.

To give you another view of pricing and our used experience; if you just look at our retail sales on used equipment and compare like-for-like units that sold this year versus last year, the pricing on like-for-like units in our retail channel was up about 5% over last year. So again, a good market for used equipment pricing and the demand for volume is still robust so we're able to sell everything that we need to sell.

Moving to adjusted EBITDA; $947 million in the quarter, that was up $198 million over last year or about a 26% increase. And the margin on adjusted EBITDA in the quarter was 49.3%, that improved by about 10 basis points over last year. The components in the bridge of that $198 million increase volume was $216 million contributor on the growth that we talked about, rental rates at EBITDA contributed about $12 million of year-over-year improvement, the ancillary performance I mention contributed about $23 million of EBITDA the used sales performance was another $33 million of positive year-over-year contribution. The headwinds, fee inflation; we'll call that $13 million of headwind versus last year, our usual merit increase of about $6 million and then the bonus accrual across all of the incentive comp programs cost us about $26 million versus last year.

Mix and other accounts for the other $41 million of headwind and really that mix in other number is a little bigger than normal driven by the fact that we added Neff in the quarter, right, Neff revenue came in fully loaded with all of the costs of Neff as opposed to incremental cost for the other increases in revenue. So put it all together and it explains the $198 million increase in adjusted EBITDA for the quarter. The follow-through on adjusted EBITDA was 49.6% in the quarter; I'll remind you that that experienced the headwind of incentive comp adjustment, that $26 million I called out previously; if you take that out the flow through was about 56% for the quarter.

Just a touch on Neff a little bit more; we estimate that Neff total revenues in the quarter came in at about $115 million of which about $96 million was rental revenue in the quarter. The EBITDA contribution for Neff we're calling $62 million and that includes the impact of about $3 million in synergies that we realized in the fourth quarter from the Neff acquisition. In fact on the synergy front of that $3 million, the bulk of it came late in the quarter in December; if you annualized what we experienced in synergies, these are pure costs synergies mind you, if you annualize that December result we're at a run rate savings of about $25 million of Neff related synergies. So we're well on our way towards the $35 million cost energy that we called out when we did the Neff acquisition and we certainly expect to deliver that before the end of year two as we called out initially.

We're also on-track to deliver the procurement savings and it's still early days on all of the revenue synergies that we expect but we certainly haven't seen anything that causes us to believe we won't be able to deliver on all of the synergy targets when we acquired Neff.

Moving quickly to adjusted EPS; you saw the numbers in the press release, $11.37 for the quarter, I remind you that if that includes the benefit of tax reform we had a positive tax adjustment, I'll touch on it in a minute but if you take out that tax reform aided benefit which was about $8.03 in the quarter you end up with $3.34 on an adjusted after-tax reform basis, that's up 20% versus last year which was $2.67. If you do the same adjustment for the full year you end with an adjusted EPS after the tax benefit of about $10.59 and that's up just over 18% over the prior year. So even taking out the impact of tax reform it's very clear that our EPS performance is nicely higher.

Free cash flow in the quarter; just briefly on that, $983 million for the year that includes however $76 million worth of payments that we made for merger related and restructuring items. If you take that $76 million out obviously that leaves $907 million which is still a very robust free cash flow performance in. So we're very pleased about the free cash flow that we generated in '17 and look forward to an even more robust free cash flow performance in '18.

I'll skip a lot of the discussion I usually go through on the debt activity in the interest of time but certainly we discussed the actions in our debt portfolio in the press release, redemptions, upsizing ABO, upsizing AR facility, all of that in the quarter made for a very active quarter but the net effect was that we ended the quarter with net debt of $9.1 billion, that's up about $1 billion. Year end was very strong, $1.7 billion of total liquidity made up about $1.3 billion in ABL capacity and the remainder in cash within the business.

Briefly on the share repurchase program; you saw that we reinitiated our share repurchase activity in Q4, we bought about $28 million worth of shares, that's a little over 167,000 shares in the quarter and certainly left us with about $345 million to repurchase under our existing repurchase authorization at the end of the year. Since the end of the year I'll note that we have also bought another $45 million, so or so during the month of January to-date -- so as we sit today there is about $300 million left on the existing program and as we've said before, we expect to execute the remainder of that program during the course of 2018.

On ROIC just real briefly, we finished the year with ROIC of 8.8% that's a 50 basis point improvement over the prior year. And just to give you a sense of the impact of tax reform on ROIC, it will be significant. So if the 21% federal tax rate had been in effect for all of 2017 that 8.8% ROIC would have come out at 10.7% as calculated; so obviously a very significant impact based on the way that we calculate ROIC looking back over the prior four quarters. As we go forward through 2018 the effect of that tax reform change will gradually increase our ROIC as reported, so in the quarters coming we'll be sure to call out both the actual calculation but also the calculation assuming that the 21% federal rate had been in effect for the full period.

Briefly on tax reform; I want to try not to get too deep into this one but just want to make sure that several things are clear. First in the impact on 2017, there was a significant tax benefit that our deferred tax liability for the new lower tax rate, that rival adjustment was about $746 million. Separately we also recognized $57 million of additional transition tax to cover the transaction payment associated with our foreign earnings, the net of those two was what you saw flowing through our fourth quarter tax line. If you take those out of our fourth quarter tax expense the full year effective tax [Technical Difficulty] to the investor deck where we added another example of a project XL initiative and how we think about the value that it's contributing, this one focused on our sales optimization effort that involves assigning more single point responsibility for key accounts.

Finally guidance; you saw the guidance that we issued in the press release -- I won't go through all the numbers but maybe it would be helpful to talk about the adjusted EBITDA guidance and give you a framework for thinking about the range that we put out. If you look at -- let's use the midpoint of that adjusted EBITDA guidance, so 36.75; and look at the components that lead you to that midpoint from our 2017 actual experience. We call it this way, the addition of any S&F for the periods that we didn't know last year would add about $180 million worth of EBITDA just from the businesses as we bought them last year; so assuming no growth they would add about $180 million in 2018.

The other acquisitions would add another roughly $10 million or so to get us to a new baseline for the acquired businesses. If on top of that you added synergies for any S&F which combined or about $50 million, call it $20 million NES, $30 million for Neff, you get another $50 million on top. Our bonus reset will be a tailwind for us in 2018, it will be about $30 million less expense than we had in '17 so added $30 million on top of that. Our used equipment sales will go up a little bit in 2018, so in our net rental CapEx guidance we called out an impact of about $600 million of used equipment proceeds in 2018. If you take a 50% margin, apply to that just as a rough estimate that adds another $25 million year-over-year.

And for the remainder, if you just assumed a simple 6% rental revenue growth at a 60% flow-through -- all of those assumptions take you right to the midpoint of our guidance range. Whether we do 6% rental revenue growth or more or less we'll leave to your own imagination as analysts but we wanted to frame the guidance range that we gave for adjusted EBITDA in a way that lets you see the broad impacts of some of the specific items and gets you in the neighborhood of what we think the year will look like.

Finally, just a comment on free cash flow and capital allocation; there is a lot of interest and what are we going to do with all this cash flow; we're guiding to $1.3 billion or $1.4 billion of free cash flow as the range for 2018. I think it's fair to say that as we look at the possible uses of that cash flow our mindset for how to make decisions about capital allocations has not changed. We still want to make sure first and foremost that the leverage of our business is appropriate for where we are in the cycle, we believe the answer to that is yes. Then we want to make sure that we're making the right decision about the amount of organic growth to put it in the business through CapEx is appropriate, we believe the range that we've given you for CapEx is very appropriate in the market environment we expect.

M&A is always part of our thinking about uses for cash flow and we certainly will be ready to do acquisitions that makes sense but they need to make sense, we've been very disciplined about that. And finally share repurchase, we've talked about completing the existing program $300 million remaining as we sit today; whether and how much more we might do beyond that is the subject of a discussion that we'll continue to have with the board as we go forward throughout the course of the year. If we deliver the guidance that we talked about here, we should finish the year with our leverage ratio of something like 2.2 times at the end of the year, that would be very low versus the range that we've historically talked about it 2.5 to 3.5 times. So we'll have a very active discussion throughout the year about where we allocate the use of this cash flow and what level of leverage we think is appropriate for where we are in the cycle.

Like I said, a lot of topics, so let me stop there but if there is anything that I missed please raise it in Q&A. So Operator, can we open the call for Q&A?

[Operator]

[Operator Instructions] Our first question comes from the line of Ross Gilardi. Your line is open.

[Ross Gilardi, Bank of America]

I just want to kick-off with the free cash question just Bill as you were going through those details; but look at -- your guidance right now, your EBITDA and free cash conversion looks like it's 35% to 40% at least for 2018 but looking further out is there any reason that you can't hold that level of conversion for the next several years because if EBITDA continues to grow you're presumably kicking off $1.5 billion for year on consensus numbers for the foreseeable future. So I just wanted to get your reaction to that thought process? Is there any reason why that cash conversion should really change materially in the next couple of years?

[Michael Kneeland, CEO]

Ross I'd say that there is nothing really unusual other than the impact of tax reform, nothing else unusual driving our free cash realization. So I think that story might be told by the impact of tax reform. Remember that the 100% depreciation under tax reform goes away after five years, so at some point that benefit is going to be reduced. Remember also that they placed caps on the amount -- the percentage of EBITDA that you need to be below in order to still deduct interest expense, we are below that cap currently but that cap changes from a percent of EBITDA to a percent of EBIT at some point in the next few years. And depending on where we are in our profitability and our leverage it may have an impact as well but those are the things that I think over the future years -- the unusual things that might impact the cash conversion outside of just our normal operating performance.

[Ross Gilardi, Bank of America]

Just on the supply demand balance for rental equipment; if the market was excessively tight after the hurricanes, do you feel like we've come back into balance as you've pulled forward some CapEx and clearly it's the seasonally softer time of the year but do you feel like price momentum has got subside in the first half of '18 -- more when you get into the spring months as you pulled forward some your CapEx?

[Matt Flannery, COO]

I wouldn't say that there has been an extraordinary tightness due to the hurricanes, maybe in a few markets but we felt all year demand was -- that the combination of demand and the disciplined supply of the industry really played into the dynamic of great opportunity and better time utilization; and we see that continuing and we're forecasting that to continue throughout 2018. As far as -- we maybe a little bit lighter on the cadence of our 2018 CapEx growth; so we might bring in a little bit less than normal in Q1 just because we brought more in Q4 than we usually would but other than that no real impact on our full year thoughts about CapEx where we get back to more normal cadence.

[Operator]

Our next question comes from Rob Wertheimer. Your line is open.

[Rob Wertheimer, Melius Research]

I had two questions if I may. The first is just on dirt as a relative attractiveness; I mean there is a lot of signs with the used equipment etcetera that the dirt is maybe tight. I don't think there is any structural improvement there and obviously if you've mixed the fleet that direction with the acquisition. And then second, all the stuff from both maybe you can just respond as you choose. I love that total control chart that you've got in the slide deck. I mean can you give anecdotes around this; it would appear that you're steadily, steadily growing that base; I don't know if you're losing anybody who has installed or if there's a really good lock-in on it and what people are seeing in terms of benefits and savings as I guess as well as you guys?

[Matt Flannery, COO]

As far as the great observation on the total control value we feel very strongly about it and fortunately the customer response seems to feel strong as well; so that is organic growth and it's as you could see a couple of points higher than what our overall growth is. And I think that's important because although it's not a huge percentage of our customer base they're usually large important strategic customers and we go through that extra effort to add value to them and they do outpace our overall growth. As far as the dirt attractiveness, obviously we like the impact of the Neff acquisition, not just the talent we brought in or the fleet mix but I think the biggest opportunity are the customers that we brought with that. So adding a larger mix of dirt gives an opportunity to serve maybe a broader customer base than we had previously. The net-net impact in dirt fleet, it went from 12% of our overall fleet profile last year to 14% this year and although that is an impact, the bigger impact is the access to those customer bases, especially in key verticals like infrastructure which we're very bullish on.

[Rob Wertheimer, Melius Research]

So can we expect you to continue to invest a little bit in following along with the dirt side?

[Matt Flannery, COO]

Absolutely, especially as the demand continues and we already were to be clear set aside from the Neff acquisitions; the Neff acquisition just gave us a real boost specifically in the larger end of the dirt.

[Operator]

Our next question comes from Joe O'Dea. Your line is open.

[Joe O'Dea, Vertical Research Partners]

First question; you referenced the industrial side of the business. Could you talk about what portion of your revenues are really made up of the industrial side and then what you've seen over the past couple of years whether that's more stabilization or whether that's kind of moving off of a bottom and just trying to appreciate what kind of recovery we could see there?

[William Plummer, CFO]

So just the aggregate industrial have to pull a number together but the key areas for us as we think about growth going forward, chemical processing certainly is an attractive growth area for us. The manufacturing might be a little slower this year, metals and mining and minerals we think could be a nice growth area for us as we go forward as well. And then power pulp, paper and wood products will probably contribute as we go forward as well. Oil and gas, if you want to call that industrial has been a growth area for us, upstream activity had a nice growth in 2017 given the impact of oil pricing and drilling activity, the upstream part of that will be a growth area for us.

Midstream and downstream will depend on -- quite honestly on the timing of some of the turnarounds in the refinery complex, that timing is always a little bit of a wild card for us but certainly we have reason to be somewhat optimistic that that will be a growth area for us as well. So hopefully that's useful.

[Michael Kneeland, CEO]

I would just add additionally that the capital spending forecast for what is the largest part of our industrial business is petrochem are both positive for 2018 and 2019; so we're encouraged about that as well.

[Joe O'Dea, Vertical Research Partners]

Michael, you're occasionally asked about interest in expanding internationally; I think you usually address that is something down the road but certainly don't eliminate the possibility. And when you think about the kind of cash that you're looking at generating over the next few years, does that in any way influence how you think about the timing of potentially -- expanding some of your growth to overseas?

[Michael Kneeland, CEO]

The fact that we've had the capital available to us, not only coming into this year in 2018 but we've had it for quite some time. It really to me is going to be predicated on our customers, the customer demand and wanting us to go beyond. We talked about total control, there are a lot of Fortune 500 companies that we are engaged with and using our digital front. And that may be the impetus to get us beyond North America but there is no footrace and as Bill mentioned about acquisitions, they will be what they will be and they would be under the same scrutiny that we've always gone through it. But still plenty of opportunity in North America but we never say never and when the time is right or the customer is prepared, we'll be prepared to go what them.

[Operator]

Our next question comes from David Raso. Your line is open.

[David Raso, Evercore ISI]

I'm just trying to think about the commitment you've usually had to 2.5 to 3.5 leverage. I mean, Bill you've been there for 10 years and every single year you've been there the company has never ended the year below two and a half net debt to EBITDA. And if you look at logical thought of where you're EBITDA is at '19 -- I mean your net debt to EBITDA is usually down like one-eight. I mean you're literally talking about $2.5 billion to $3 billion to put to work; are we still committed to where I shouldn't expect to not end below $2.5 billion net to EBITDA either of those two years? I mean at this level you could -- the next 24 months buyback over 15% of the stock. I'm just trying to understand are we still committed to something that you've always done, you've never ended a year since they hired in '08, below 2.5 net debt to EBITDA.

[William Plummer, CFO]

David, I think -- I don't -- I can't get too far out on this discussion because honestly I can't get that far ahead of our board but I think we've made a compelling case in the past that 2.5, 3.5 is a good range; we have always said that we're not afraid to go a little above that for the right deal or a little below that depending on where we are in the cycle. So it's not like gets a religiously set number to say 2.5 is the absolute lowest. That said, if it were Bill Plummer's world, 1.8 is too low, right; I believe we selected that 2.5 to 3.5 range because it represents our view of a good balance between efficiency of the capital structure and management of the risk against the cycle, right. Getting much, much below 2.5 starts to become more inefficient and you don't get much in terms of protection against the downturn.

So that would be the argument I would make to the board but the board has their perspective on this issue right, and so going through that and discussing it and coming together on a point of view is what the process is that we're going to go through to decide where we end up in terms of the leverage. And it's going to be live and up by the fact that there may be deals that come along or the market strength may indicate that we need to spend more on capital as we go along. So I'd say stay tuned is the way to think about it but certainly we're very pleased to be in a position where we can think about all these things at very large scale.

[David Raso, Evercore ISI]

So as you said in the Bill Plummer world, this Slide 20, 2.5 to 3.5 is still the way to think about the company and you're not going to deviate off of that for too long and you've not heard anything from the board to suggest they want to delever the company beyond this framework; is that a fair assessment for now?

[William Plummer, CFO]

I think the fair assessment is to say we don't live in Bill Plummer world. So at least not Bill Plummer world alone; so I'd just point you to stay tuned David and we'll talk about it as we develop that thought process.

[Operator]

Our next question comes from the line of Seth Weber. Your line is open. [Operator Instructions] Our next question comes from the line of Scott Schneeberger. Your line is open.

[Michael Kneeland, CEO]

Scott, you're on mute or operator are we have any difficulties?

[Operator]

No. Please standby. Mr. Schneeberger your line is open.

[Scott Schneeberger, Oppenheimer]

Mike, I was curious in your comments about plant turnarounds later this year; it's kind of something that people have been waiting for -- I'm just curious if you could delve into that a little bit more and is that something that you're expecting and perhaps in guidance or is that something that's -- that would be an upside? Thanks.

[Michael Kneeland, CEO]

Scott, there is a lot of positive industrial macro indicators that are out there, number one. And I'm not going to list them all because I think you know who they all are but they are uniformly positive, number one. Number two, just looking at some of the other resources – IR [ph], they are looking at the value of maintenance projects and capital projects as increasing; so we take those along with what we get back from their regions and our customers -- what they have on their books and what they're seeing. So we take all that to frame up our comments.

[Scott Schneeberger, Oppenheimer]

And then I'm curious on the progress report on online rental systems; just -- it's been a couple of years now and wondering how far have all decided [ph] and where that's going to go? Thanks.

[Michael Kneeland, CEO]

As far as where it is today we feel very confident and about the capabilities we've built, the customer adoption we know is going to be a longer cycle; so it's not a big piece of our revenue right now and it's a pretty good mix of new customers versus existing customers. What we truly believe and why we've invested in this area is this is going to be the price of entry in the future, and not just for new customers but we think a lot of our existing customers will break more and more technology; so we view this as a must have long-term which is why we made the investment and we're seeing good early signs of the people that are adopting it, it's still a small percentage of our business.

[Operator]

Our next question comes from the line of Jerry [ph]. Your line is open.

[Unidentified Analyst]

Pricing was stronger than normal seasonality for you folks; in the fourth quarter I'm wondering if you can talk about how broad-based was -- it was the pricing strength versus normal seasonality and can you give us some context in terms of feedback you're hearing from the marketplace into January?

[Matt Flannery, COO]

I think you can look to Slide 7, we actually give you a three-year sequential pricing grid there if you want to get into the detail later but you're correct, it was better than 2016, we're very encouraged by that. I think it plays off of the demand that we've been discussing on the call today and really throughout the calendar year '17 and we expect that to continue. If you want to delay over or carryover, so -- and we're going to talk about rate pro forma because we think that's the important way to think about it and it's the way we manage internally. We've got a 1.65 carryover going into 2018 -- pro forma. If you overlay the exact experience of sequential rate performance that we had in 2017 over that that would get you to about a 2% year-over-year rate improvement pro forma for '18.

So we feel that's a good anchoring point; all I would say is that we haven't had a Q4 in a while where every single region had positive sequential performance and we're very pleased with that. Even Canada got to almost flat year-over-year in Q4 which is great for that team that's been fighting headwinds for a few years now.

[Unidentified Analyst]

And Matt, it sounds like that momentum is continuing in the early part of the year based on your comments just now and earlier in the call, is that a fair assessment?

[Matt Flannery, COO]

I would say it's as projected, we're not giving in quarter guidance but Q1 always has -- it will be your toughest sequential but it's the year-over-year that we're focused on and trying to maintain that momentum and you know, that's embedded in our conversation, stay tuned for April, you'll get the exact update.

[Unidentified Analyst]

And on your digital platform, can you talk about what kind of recurring business you're getting out of it? So is it truly transactional one-off new client signing up or what do the usage statistics look like for you on that presumably? With your footprint you folks are better positioned than most in that platform and I'm wondering if you're seeing the level of statistics on the recurring business that are supportive or is it mostly transactional?

[Matt Flannery, COO]

So as far as recurring, as I stated to Scott it's about 50-50; existing account customers and new customers joining in and they overtime convert to account customers but it is very broad geographically, product mix and even duration of rental. I would -- it's certainly a higher percentage of transactional than our overall base business because we have such a large base of key account business but I'm very surprised by how much recurring business and long-term rentals we're getting through that as a percentage as well.

[Michael Kneeland, CEO]

The only thing I would add to that is, the digital era is here and it's going to grow overtime. And if you take a look at the total control, order entry for our customers and even internally for -- whether it be our sales force, the digital component is going to grow. What we've been doing is we've put everything under one unified platform so everything comes together in a more customer-friendly environment; so it's not only -- like I said in my opening comments, it's not just a digital -- if they want used equipment, if they want to go into safety training, rent equipment -- find information on their fleet through telematics, this is all coming together under one uniform platform that we have built and we're rolling out. There will be more to come and more update as we make progress but it's an investment that we're making for the future.

[Operator]

Our next question comes from the line of Steven Fisher. Your question please.

[Steven Fisher, UBS]

Just talk a little bit more about what's driving the shift to positive pricing year-over-year? How much of that is mix including the oil or activity or recovery versus just general tightness for all the across the market versus some of the analytics approaches that you've been doing or anything else?

[Matt Flannery, COO]

Steve, it has been very broad, it is not any one segment, any one geography, any one vertical. Although we have had oil and gas growth to put in perspective it's still less than 5%; the upstream is still less than 5% of our overall revenue and I don't think it has -- certainly hasn't yet and I don't truly think that will ever get to the rate levels that it had previously, right; we're not going to have that oil rush in upstream again. I think everybody understands including the operator -- that wasn't a healthy way to operate and I don't see that recurring. So it's really been lifted by just -- by broad-based demand and as I mentioned, every region in the company had sequential positive rates in Q4.

[Michael Kneeland, CEO]

I would say that it's also as you know -- the industry is overall is reacting positively; so I think I've mentioned this in several calls in the past that our industry is becoming more sophisticated and smarter, and knows about returns and so that's a good sign and I think you'll probably hear others as well talk about it.

[Steven Fisher, UBS]

And then if I could just follow-up on a question that Joe O'Dea asked earlier; if you could talk a little bit more about the process industry activity in the Gulf Coast, specifically in 2017 versus 2016? How did that look on a year-over-year basis for rental? And then I know you mentioned there's a number of petrochemical projects that you see in the works out there -- what have you embedded in your guidance for sort of the timing of all that happening and Gulf Coast '18 versus '17?

[Matt Flannery, COO]

So specifically in the Gulf Coast I would call the first half of '17 was a little bit tougher than the back half; we actually saw improvement in Q4 in petrochem. I think going forward more importantly the capital spending forecast are up in both, higher in chemical, I mean we're talking about plus 30% capital project spending in chemical and almost double-digit in refining and those are really the two big buckets of business that we focused on in the Gulf Coast industrial business. So I think it's -- we can call it flattish to slightly up overall in '17 over '16 but encouraged and planning to do better in '18.

[Operator]

Our next question comes from the line of Rob Wertheimer.

[Rob Wertheimer, Melius Research]

I just wanted to ask a philosophical question on investment in technology. I mean do you view this is something that you keep spending as a constant percentage of sales? As you're seeing -- I mean your scale is obviously growing a lot with the acquisitions and the growth we're doing. And so you keep spending and see a widening gap versus folks or do you accelerate it maybe because it just enhances the sustainable margin/locking advantage you have versus folks or is there eventually scale on the technology spend that you've been ramping up for the past two or three years.

[Michael Kneeland, CEO]

Well, I think it will be a combination of all of the above. For example; the investment we made in telematics and now educating the end user on the benefits of what they can get out of it and making that information for them available in a format that they can get and manipulate as need be, that'd be one. With regards to companies trying to find ways to control their cost, drive better time utilization or efficiencies in their plants or on those job sites; that's another form by which we do. And then you know we talk about safety, our United Academy of making sure that we're connecting not only equipment but people as well, that I think is going to pay dividends for us as a company in entangling our customers in a way that I don't know what my competitors are doing but what we know is that you know the digital communication is important, it's real-time, is giving them data, it requires them just to log-on where -- I'd far as I know were one of the few if not the only that you can order deliver, return and never talk to anybody and for some people in programming their jobs that's very attractive. Not everyone has a staff. So we're trying to touch as broad audience as we can and we're specializing in areas like -- we talked about total control but there are benefits that we think that will yield us a lot more in the longer term.

We will continue to invest, the board is very supportive of thinking about digital and how we can think differently and helping our customers become more productive. That's what we do for a living, that's our job.

[Operator]

Our next question comes from the line of Stephen Ramsay Your line is open.

[Unidentified Analyst]

I guess I'm just thinking about your expansion plans for specialty for the next year and maybe even beyond; is the competition in this segment getting intense enough as more rental companies try to execute growth here. Is the competition making Greenfield expansion or bolt-on expansion harder or less attractive?

[Michael Kneeland, CEO]

This is always competition. I think it makes us smarter, makes us more customer-centric, makes us have to think about what we bring to a value proposition. I never assume anything and so we have to make sure that we're listening to the customer and making sure we're meeting that demand. Some of our competitors are doing some other similar things that we're doing. But it's up to us to sting out how we can make a smarter or better mousetrap to capture that customer. We're broad, we have a broad customer reach and how we can leverage our customer through our cross-sell I think is something that we are doing exceptionally well and we'll continue to leverage on that.

[Matt Flannery, COO]

I would only at now certainly remains attractive and a prioritized focus for us in investment. We're going to do another 18 cold starts in specialty in 2018 and that's on top of the sixteen net we did this past year, so it still remains very tracked and I'll make sure that's clicker. But if the competition is getting stronger we're getting better because our growth rates are still pretty robust.

[Operator]

Thank you. At this time I'd like to turn the call back over to management for any closing remarks.

[Michael Kneeland, CEO]

Thanks, operator. I want to thank everyone for joining us today, as you can see we're excited about 2018, we expect to report solid progress in the coming quarters. In the meantime, as you -- you can always call Ted Grace, how is our Head of IR with any questions you may have and I urge you also to go on the website and download or look at our investor presentation that we have online. So that wraps up for today, so operator you can please end the call. Thank you.

[Operator]

Certainly, ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.