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United Rentals Inc  (NYSE:URI)
Q1 2019 Earnings Call
April 18, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the United Rentals 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 press release. For a more complete description of these and other possible risks, please refer to the Company's Annual Report on Form 10-K for the year ended December 31st 2018 as well as the 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 press 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. Please refer to the back of the Company's recent investor presentations to see the reconciliations from each non-GAAP financial measure to the most comparable GAAP financial measure.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; Jessica Graziano, Chief Financial Officer; and Matt Flannery, President and Chief Operating Officer.

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

Michael J. Kneeland -- Chief Executive Officer

Good morning everyone and thanks for joining us. I have some comments to share with you on the quarter, but first I want to speak about the upcoming leadership transition. As you know, this is my last earnings call with you. And when we report our second quarter results, Matt will be standing here as CEO and I'll be behind the scenes as Chairman. It's an honor for me to take the reigns from Jenne Britell who has been instrumental in our Company's transformation. The changes take effect following our Annual Meeting on May 8th. And I look forward to collaborating with Matt on a different level in my new role. Matt and I have navigated our strategy together for years and he's been a terrific partner. We will be continuing the productive relationship between the Board and the executive team that has served our Company so well for over a decade.

Now turning to the quarter. Overall, our performance was very positive. We owe some of that -- our momentum to the operating environment. Our end markets are still growing and demand is broad based across our geographies and verticals. You saw us express our continued confidence in the cycle yesterday when we reaffirmed our guidance. But it's more than external, we are very different company today than we were a decade ago. We're far more -- we have far more resilient business model, we're more agile and innovative, with stronger differentiation and more ways to create value for our customers and shareholders. And you can see this in the growth that we've achieved, the improvements we made in margins and returns, and the free cash flow we've generated throughout this cycle. And ultimately, you can see it in our return on capital. None of this happened by accident, it's the direct result of the strategy we adopted in 2008 and our focus on execution since that time.

Finally, I'd like to thank our employees for the incredible job they've done in helping us transform United Rentals. We had a vision for what this Company could become and our people made it a reality. Now on a personal note, I want to thank you, the investment community, for your attention to United Rentals during the years I've served as CEO. There's always been a lot of respect on both sides. And I'm pleased that I'll step down following a record year of growth and another year of growth well under way.

Now I'll hand the call over to Matt, who'll talk strategy and operations and then Jessica will cover the numbers. After that, we'll take your questions. So for the last time, Matt, over to you.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks, Mike, and good morning everyone. And before I begin, I want to take this opportunity on behalf of the Company, to thank Mike for many years of tremendous leadership, hard work and his selflessness, and personally for his mentorship and the confidence he has shown in me throughout my career. Mike has always been willing to challenge the status quo and to think in new directions and always even knew to push and pull those of us around him, quite frankly, even when we didn't like it. The roles are changing, Mike. But I'm counting on the continued collaboration and very much looking forward to the next chapter of our life together.

Now let's talk about the quarter. As you know from the numbers, the year is off to a strong start. We delivered solid growth and good margins, as well as strong free cash flow, you've seen it in the results that we reported last night. And for the quarter, total revenue was up 22% and adjusted EBITDA was up 18%. And as a result, EPS improved by 15% from a year ago. This performance was underpinned by our focus on operational discipline. And it allowed the team to achieve solid flow-through and a year-over-year improvement in fleet productivity was up 2.2% on a pro forma basis. And Jess will go through the details. But bear in mind, we had multiple integrations to deal with, headwinds from the weather in Q1, and yet the team still became more efficient in capturing revenue.

Now on the topic of integrations, let me take a moment to give you an update. The BlueLine integration is on track and we'll be leveraging those additional resources in our busy seasons. And the same is true on a smaller scale of WesternOne in Canada and with Thompson Pump whose rental business we bought in January. Most of the structural integration work on these deals is behind us and we're looking forward to the seasonal ramp-up in Q2. We have entered 2019 not just as a largest solutions provider, but as a more diverse one as well, equipped to serve new types of customers and end markets. And this aligns well with our strategy and the outlook for the full year. Our branches have the best view of market activity and the teams are enthusiastic. And after some Q1 delays due to weather, projects are starting up at a good clip, and most importantly, our customers are optimistic.

Here's an overview of Q1. We saw meaningful growth in all three of our construction verticals of non-residential, infrastructure and residential. And in the industrial sector, all 12 of the verticals we track pointed to market strength, with five of those verticals generating double-digit revenue growth for the quarter. Geographically, we grew revenue in both the US and Canada year-over-year with all of our regions showing strong demand. Our specialty operations continue to be a big part of our growth strategy. And in the first quarter, our Trench Power and Fluid Solutions segment grew rental revenue by 44%. Now this reflects our two acquisitions in Fluid Solutions, but also of 12% -- 14% organic growth.

When we bought BakerCorp back in July, we gained tank and filtration expertise. This strengthened our ability to provide fluid solutions to our customers, and with Thompson Pump, we gained a leading position in turnkey sewer bypass solutions and wellpoint dewatering. In addition, we opened eight specialty cold starts in the first quarter against our planned 27 for the year. Now our specialty footprint currently stands at a record 341 locations and growing.

Now I want to take a moment to talk about safety. It's our most important differentiator because it protects our most important assets, our people. And it matters to our customers. We've just completed two years of acquisition activity with one integration after another. So it makes me particularly proud when I see a safety performance like the one we just achieved. For the first quarter, team United had a total recordable rate of just 0.71. A year ago, that rate was 0.98, which is a really good result for any industry. So we were good before and now we are even better. And to top it off, two of our regions ended the quarter with a recordable rate of zero, and someday, I hope to be telling you that the entire company came in at zero because that's our goal.

So here's how I'll sum it up. The cycle still in our favor and we're looking at another year of solid growth. Most important, our people, our processes and our strategy are all aligned with the customer opportunity. You've heard us talk about balancing growth, margins, returns and free cash flow. That's our mantra. But before we do any of those things, we have to first perform for our customers. And we have to do it well enough to earn their next revenue opportunity each and every day. This unrelenting focus on the customer is at the heart of Mike's legacy as CEO. His understanding of what it takes to build an enduring company set a high bar for us and our industry. Back in '09, he had us taking the lead with innovation and rental specialization and we are engaging our employees in good citizenship and encouraging them to have an ownership mentality. And I know I speak for the entire team when I say we're excited to build on Mike's legacy for all of our stakeholders. We're eager to take on the opportunities of 2019 and the years ahead. And now, I'll ask Jess to go over the numbers and then we'll take your questions. So Jess, over to you.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Matt, and good morning, everyone. Before I jump into the numbers, on a high level, let me reiterate what Matt said, we've delivered a solid quarter, and we are positioned well moving into the busy season. Our team did a great job remaining focused on safety, and on our customers, as we continue to work through multiple integrations. As a result of all that acquisition activity, the majority of the year-over-year variances in the as reported numbers will be from adding these businesses. So while I walk you through as reported results, I'll pivot at times to speak to our performance on a pro forma basis, which includes BlueLine and Baker since that's a better reflection of how we're managing the business.

I'll begin with rental revenue where I'll also pivot to discuss the quarter in the context of fleet productivity. Last quarter, you'll recall that we said we will be providing rate, time u and mix detail, consistent with our previous methodology for a couple of quarters to provide transition to fleet productivity. You can see all that detail as well as calculations supporting fleet productivity on Pages 36 through 40 of our investor presentation that's posted on our website.

So let's get started. Rental revenue on an as reported basis grew 23% or $336 million to just shy of $1.8 billion. The increase is primarily related to the impact of both BlueLine and Baker, but I'll note here that the growth in rental revenue on a pro forma basis was a strong 7.2% for the quarter.

As reported OER growth contributed about 21% or $265 million. From a fleet productivity perspective, the change is comprised of growth in our fleet of 23.7% or about $300 million of additional revenue. We have the usual headwind of fleet inflation at 1.5% or $19 million and fleet productivity on an as reported basis was also an expected headwind, down 1.3% or $16 million with lower time utilization and mix from adding BlueLine and Baker being partially offset by positive rate. As you consider the quarter's revenue results, I think it's more helpful to consider fleet productivity on a pro forma basis, which was up 2.2% year-over-year, that came from strong -- both strong rate and mix offset partially by softer time utilization. We focused on profitable growth while balancing these metrics for the quarter. And when you add the expected integration dynamics with some unexpected weather impacts, we're pleased with the productivity we generated. Rounding out rental revenue was a combined 2.1% increase on an as reported basis from ancillary and rerent with ancillary adding $61 million and rerent adding $10 million. Again, both were better primarily as a result of adding BlueLine and Baker, but also due to better volume across the core business.

Taking a look at used sales, used sales revenue was up just over 6% or $11 million year-over-year. Adjusted gross margin on used sales was 49%. That's down from 54% and reflects the tough comp of having sold older fully depreciated NES equipment in the first quarter of '18. As we look closer at the used sales environment, it remains strong. Our sales as a percentage of OEC was 54%, which was 140 basis points higher than last year with our used pricing at retail up about 5% versus Q1'18. Used sales also benefited from the blend of equipment that we sold in the quarter.

Moving to EBITDA, adjusted EBITDA for the quarter was $921 million, an increase of $141 million or 18% versus prior year. Our adjusted EBITDA margin was 43.5%, a 150-basis point decline year-over-year, due largely to the impact of bringing in BlueLine and Baker. Importantly, on a pro forma basis, our adjusted EBITDA margin improved 30 basis points.

I'll walk you through the bridge on the as reported changes in EBITDA. The improvement in OER added $167 million, ancillary contributed $19 million and rerent provided about $1 million. Used sales were a headwind of about $3 million and SG&A expenses also a headwind of about $52 million, now $40 million of that SG&A change comes from the BlueLine and Baker cost base , net of synergies. The remaining $12 million includes volume and inflationary increases, such as higher commissions, merit and professional fees. That leaves about $9 million of benefit in adjusted EBITDA for the quarter, primarily coming from better performance across our other lines of business.

Adjusted EBITDA flow-through for the quarter was approximately 37%, that's as reported, and largely impacted by the acquisitions, so I'll isolate where the core business came in for the quarter. On a pro forma basis, adjusting for BlueLine and Baker, flow-through was about 48%, add to that the impact of Western One and Thompson Pump, which together added about $35 million in revenue and $10 million in EBITDA for the quarter and you get to 57% flow-through. Now when we adjust for the impact of new and used sales and reflect the benefit of synergies from the acquisitions, that leaves you with a flow-through of about 52% for the core business. That was as expected for the quarter and points to a really good start to the year on cost performance.

As for adjusted EPS, $3.31 in the quarter compared with $2.87 in Q1 of '18, an increase of 15% and that's primarily from better operating performance across the business, including the contributions of the recent acquisitions.

Let's look at CapEx and free cash flow. For the quarter, gross rental CapEx was $257 million, that's about 12% of our full-year guidance at midpoint and inline with our 2019 plan. Free cash flow in the quarter, very strong, up 11% to $583 million, and just to be clear, that number excludes about $8 million in merger and restructuring payments. Our ROIC for the quarter, also strong, 10.9%, which meaningfully exceeded our estimated weighted average cost of capital. Year-over-year, our tax adjusted ROIC was down slightly 10 basis points and that slight decline is primarily impacted by the expected timing drag from the acquisitions and that's going to moderate as we get their operations more fully integrated and synergies from the deals fully realized.

Let's take a look at the balance sheet. Net debt at March 31st was $11.6 billion. That's an increase of about $2.7 billion year-over-year related to the financing of the BlueLine and Baker deals. Net debt was down about $150 million quarter-over-quarter. Our total liquidity at March 31st was a robust $2.25 billion, and that's comprised mainly of ABL capacity. Leverage at the end of the quarter was 2.9 times on an as reported basis, and as a reminder, you've heard us say that we expect our leverage by the end of the year to be about 2.5 times or -- the low end of our range.

Finally, here's a quick update on the share repurchase program. We purchased $210 million of stock in the first quarter on our current $1.25 billion program, which puts us at $630 million purchase to date. We still expect to complete this program by year end and I'll note that our diluted share count at the end of the first quarter was down about 6% year-over-year.

So as you've heard us say this morning, we delivered solid growth and good margins, as well as robust free cash flow. The operating environment is healthy, and our customer confidence measures remain positive. Our end markets are still growing and demand is broad based across our geographies and verticals. This strong start to the year positions us well as we move into the busier part of the year. We're tracking to plan and remain confident about 2019, as we reaffirmed our guidance.

Now let's move on to your questions. So, operator, would you please open the lines?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of David Raso from Evercore ISI. Your question please.

Michael J. Kneeland -- Chief Executive Officer

Hey, David.

David Raso -- Evercore ISI -- Analyst

Hi, Thank you.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hi, David, good morning.

David Raso -- Evercore ISI -- Analyst

Good morning. One operational question, one more about the balance sheet. In light of having to absorb that much fleet from the acquisitions, you got hit with weather a little bit during the quarter, if you think about the way the rates played out for the quarter, with that fleet utilization as challenged as it was, how is that coloring how you're looking out to the rest of the year? I'm just curious if you had known the fleet utilization was coming in at down 1.8 (ph) for the quarter as reported, how was that versus your expectations? And how do you respond on rate? And how is that coloring your thought looking at the rest of the year on rate and fleet productivity? I'm just curious to get an update three months later how the first quarter is coloring your view on the rest of the year operationally?

Matthew J. Flannery -- President and Chief Operating Officer

Hey, David, this is Matt. So I think you bring up a great point. And it's -- well, I'm not going to talk about the 1.5%, right, the 150 bps pro forma because that's how we think about the business. So when I think about either one of those, the time utilization performance was much more, first of all, most of it was expected, as we bought the BlueLine fleet in November. Normally, we wouldn't bring in that much capacity in November as we're getting into the down season. So we expected most of that, but then the weather did amplify it a little bit, if it was all, if it just -- if it was demand based or if it was a concern that way, then I think that rate performance would have been even tougher, but I look at it as the team did a very good job of not letting the temporary time utilization drag from the acquisition impact or influence losing any discipline on rate. So we are very pleased with that outcome. We think -- we're not, as you know, we don't forecast rate and time externally but we internally have goals and markers. And I think the team did a good job of offsetting that extra time utilization that was created by the weather drag with great discipline from a rate perspective. So we're very pleased with that.

David Raso -- Evercore ISI -- Analyst

I mean, we're all trying to figure out or we have to still assume some kind of rate, some kind of u to get to a fleet productivity number. And as the comps get little harder on rate for the rest of the year, especially if you double-stack the comps. Just trying to understand if we'll make our own assumptions about rate, obviously that the time u, it sounds like something as you absorb the fleet, we get into seasonally stronger periods, you would think that the utilization drag year-over-year diminishes. Can you help us a little bit trying to think through fleet productivity when it comes to mix? Can you at least maybe just start to trend and how you talk about the business. Can you help us a bit when we think about mix the rest of the year, how it could influence fleet productivity and the overall numbers. Can you just give us some examples or how the business is playing out? How you can position a better mix?

Matthew J. Flannery -- President and Chief Operating Officer

Yes. So obviously, two of the big drivers in mix are rate and time, but I mean, I'm sorry, not just in mix and in fleet productivity. But when you think about that mix component, sometimes it's just additive, but there are other times where it's actually influencing the other metrics. For example, if we grow specialty products more than we expected, that's going to be a drag on the time, but we'll get a positive offset to it on mix, so it's just hard for us to forecast as well we don't. These are all outputs. I would say that, as Jess said in her opening comments, we are off to a strong start of the year, we're on target and for everything that's embedded within our guidance. And if you want to go on the margins of time a little bit worse, rate a little bit better. That's fair. But how that plays out into mix is really going to depend on what assets we end up growing with the remainder of our capital guide for the rest of the year and what the customers need and how that changes.

So I'm not trying to be avoided, so just truly those -- those are all outputs from what we expect. The good news is, we expect fleet productivity to be strong because the demand is strong and that's the correlation I draw. When we look at the data that not necessarily that everybody sees anymore. We've seen 31 consecutive months of positive balance of supply and demand, that with the overall market expectations that we have of strong end markets, we think will result in strong performance as we've guided.

David Raso -- Evercore ISI -- Analyst

That's part of the question. I'm just trying to figure something has changed in the last three months, that's maybe changing your capital allocation, be it -- where you're looking to put more capital to work even shifting fleet around the country, geographically. Just trying to get a feel for how things could change a little bit from three months ago, but you're saying doesn't seem like there's a notable change in how you think about mix and how that influences fleet productivity the rest of the year. That's all (multiple speakers) more specialty versus (inaudible) or vice versa.

Matthew J. Flannery -- President and Chief Operating Officer

No, there's no change, and to be frank, Q1, and we said this many times, Q1's way too early and too small sample set to have any change on a full year, either positive or negative, and we feel that way today. We're happy to be on track, but absolutely no change to the way we're looking at it and what we've got embedded in our guidance in all of our metrics that we get.

David Raso -- Evercore ISI -- Analyst

And my other question on the balance sheet, I mean the way you're targeting the end of the year at 2.5 turns, we can debate macro 2020 or not but if we just assume for a second, it was still a decent year. It does appear, it wouldn't be challenging, if you apply most the cash flow next year to deleveraging and you grow the EBITDA a little bit. I mean it's pretty easy to see how you can get down it to 2 turn leverage.Given your midpoint of the target, it is still 3. Can you give us some milestones to think about as the year plays out in discussions with the Board coming to a conclusion, if that's still the appropriate target, it is at that phase, I mean you're going to be a bigger company. I mean 1 turn in leverage is almost going to be like a $5 billion number. And I'm not even sure the acquisition candidates out there you could add up to anywhere near $5 billion. So just trying to get some understanding how do we think about milestones discussing this with the Board, things that we should be on the lookout for?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hey, David, it's Jess. I mean, it's a great question and a conversation that's very topical for us as a management team and also with our Board. We also -- let me say here that just in all the conversations that we also have with investors, we appreciate and we consider the feedback that we get from investors as well -- as you noted, we expect we're going to finish 2019 at 2.5 times and we feel really good about that considering the focus this year is going to include absorbing all that acquisition activity. And we -- as we look beyond that 2020 and to your point, we can debate the macro, but as we look beyond that, right now, it's really premature for us to make a call on how that could change our capital allocation strategy specifically, between now and then though, we will have a formal conversation with our Board as part of our annual review of capital allocation and while there's no news to share right now, of course, obviously if something happens, we'll share it.

What I will say, even though it's not new news, it's good news. The balance sheet right now is in a really good place, our debt maturity schedule is pushed out significantly, we're generating meaningful cash flow, so the focus is going to continue to think about the capital allocation strategy, that's going to be kind of both balanced and dynamic for us going forward.

David Raso -- Evercore ISI -- Analyst

All right. Appreciate it. 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 -- Bank of America Merrill Lynch -- Analyst

Hey, good morning everybody. I just wanted to ask about Matt your comment that industry demand growth has exceeded supply growth for 31 consecutive months. If you could just give us a little bit of flavor as to whether or not that gap has been widening or narrowing over say relative to last six months. I mean, I realized it's probably volatile month to month, but maybe on some type of take on like trailing average versus where we were, say, mid-year last year?

Matthew J. Flannery -- President and Chief Operating Officer

Yes. It's been really consistent really for the past four quarters to six quarters, I'd say, so it -- well like -- like you acknowledge in a month you may have a 10 bps here, 10 bps there up and down, but when you plot it across the last year plus, it's been -- it's been really consistent and strong, right. So it's at a good level and I think you're seeing that in the results and I think it says a lot just not about us but about the industry discipline, which we are very pleased with it.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

And Matt, just further on that, on that demand versus supply comparison, can you give us some directional view on where industry supply growth is running right now on a run rate basis?

Matthew J. Flannery -- President and Chief Operating Officer

I don't have the granularity of that data. But I -- once again, I would just say the amount of equipment that's being absorbed versus the amount of equipment that's being purchased is in really good balance right now. So the spread is healthy, I think what's why you're seeing us and our peers report the results we're reporting. And I think it's really a positive sign, all underpinned by the demand environment, which has really been very broad as we've discussed over multiple quarters.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Got it, OK. And then Jessica , maybe just a follow-up on the comments that you were just making before on capital allocation. Clearly the company is going through a lot of discussion, and you're talking to the Board, and you've got the AGM coming up and so forth. Do you expect -- can you give us any type -- sense of timing as to when you might get back to the market on any potential changes, if there are any?

Michael J. Kneeland -- Chief Executive Officer

Hi, this is Michael. Obviously, leveraging capital allocation is critically important for both the management team and the Board of Directors, something that we actually spend a lot of time on thinking about including getting investor input as Jessica mentioned about how to maximize our potential and to benefit our shareholders. Obviously, it's something that we are going through at the moment and be forthcoming in our upcoming Board meetings, but obviously, when there is nothing to announce today, but be assured that if something were, we would be definitely proactive and coming forward and making announcement. So it's very much on our radar. And we're going to be -- something that we'll tackle as a Board with the management.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks again. Thank you, Michael, and best wishes on becoming Chairman of United Rentals and look forward to seeing you at all the events hopefully. Take care.

Michael J. Kneeland -- Chief Executive Officer

Thank you. Thank you.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks, Ross.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Ross.

Operator

Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question please.

Rob Wertheime -- Melius Research -- Analyst

Yeah, hi, I had a question just on specialty and it's -- I guess using Baker as a platform. Can you talk a bit about how your operational improvement your tool kits, all the things you do to make businesses better have gone at Baker, are they working just as well or given that that's a little bit of an extension, is there less real improvement that you bought, and then maybe if you could talk about cross selling as well in that context?

Matthew J. Flannery -- President and Chief Operating Officer

Sure. Rob, this is Matt. So in the scheme of things, it's still early, but I will say in the past seven months, eight months, there's been a lot of work done and it's really not just Baker that the Fluid Solutions team is dealing with, they're dealing with Thompson as well. So what they're really working on is the consolidation of offering, not necessarily even stores, but the consolidation of offering to become a true Fluid Solutions provider. And as I mentioned in my opening remarks, Thompson's added to that with some more expertise in sewer bypass and wellpoint dewatering. So there -- I'd say the biggest change that we're seeing is the ability to enhance the go-to-market strategy. So we think that's going to be received very well by the end markets. As far as the tactical integration piece is, the team has been ahead of that, and as I said, most of that's under way, now it's the go-to-market strategy, how do we get the customers to understand this new and in many ways unique provider in that space is really the strategic reason of why we did these deals and the opportunity ahead. So we feel good about it. It's on target and -- but we think there's a lot more room on the customer facing side to the change the game.

Rob Wertheime -- Melius Research -- Analyst

And if you look at kind of what you can bring the acquisitions, obviously in the core general ones, you're exceptionally good at it. Do you feel like the value that you can bring in different fields within specialty whereas you expand out in specialty, it's just as large or is it that the end market has to be more attractive to sort of make the math work out evenly between the two options?

Matthew J. Flannery -- President and Chief Operating Officer

So we think the opportunity is large, right. So one of our core competencies, is to take the relationships, the right of way the goodwill that we have as a strong provider for our customers and expand on and that's really how has been a big part of the growth of our specialty business. Then as far as where and what is both opportunistic and then strategically, we have to make that build versus buy decisions every time that we look at a deal, but I think it's safe to say whether it's additional products or services in specialty or another adjacencies of the business, there's a lot of growth opportunity for us and something strategically that we continue to evaluate.

Rob Wertheime -- Melius Research -- Analyst

I'll stop there. Just to say once again congratulations to all of you and to you Michael for a wonderful tenure.

Michael J. Kneeland -- Chief Executive Officer

Thanks , Rob.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Rob. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Your question please.

Joe O'Dea -- Vertical Research Partners -- Analyst

Hi, good morning.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hi Joe.

Joe O'Dea -- Vertical Research Partners -- Analyst

First question just on CapEx. I think you touched the amount that you spend in the first quarter, it was a little bit lighter than what you normally do. I think if we go back over time you normally spend at least 50% of the full year CapEx, usually closer to 60% in the first half of the year, which would suggest something like $1 billion in 2Q. And so I wanted to get a sense of whether or not that's kind of a reasonable target or whether the spending plans for the year might shape toward the lower half of guidance?

Matthew J. Flannery -- President and Chief Operating Officer

Sure. Joe. So to be clear, the Q1 CapEx was a shade lighter than what you'd see standard, but that was really planned and it was because of the BlueLine acquisition. So as you can imagine with working that extra capacity, which was very heavily aerial weighted, we didn't buy as much aerial in Q1 as we may have in past years because we had the extra capacity. So that's just smart fleet management. Your number in Q2 is not far off the pace and whether we go above or below that number, it will be directly correlated to how fast we move that extra fleet through the network. But overall, we have no changes to the full year CapEx guidance. And within that range that we've given in CapEx this year, you could think about the faster we move the BlueLine fleet through, right, then we'll be on the higher end of the range, and the slower we move it through, it would be on the lower end of the range. So it's really going to be responsive. We think that's how we always look at CapEx and no change to the full-year plan.

Joe O'Dea -- Vertical Research Partners -- Analyst

And so the toggle there is really more around replacement spend and growth spend, then presumably is still kind of in line with initial expectations?

Matthew J. Flannery -- President and Chief Operating Officer

Yeah, that's fair. We're definitely in line with initial expectation, nothing's changed from that perspective, the end markets are still there for the opportunities that -- and frankly specialty continues to show really strong growth. If there is extra capacity, that doesn't mean that they won't try to take more of the new CapEx because they have been very effective at turning it into growth and profitability.

Joe O'Dea -- Vertical Research Partners -- Analyst

Perfect. And then just moving on to BlueLine and Baker, two quick questions. One, if you could just talk about the cost synergy kind of target for 2019, and how much of that was achieved in the first quarter? And two, if you could talk about BlueLine rate harmonization, obviously the timing of acquiring that maybe shifts a little bit of the opportunity set more into kind of 2Q 3Q'19 for some of that harmonization, but just to understand, kind of what that looks like?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hey, Joe. Good morning. It's Jess. So the -- what we have realized in synergies in the first quarter is about $16 million, total, between BlueLine and Baker together, and when we look at it on sort of full year '19 we're looking at something like $45 million incremental total.

Joe O'Dea -- Vertical Research Partners -- Analyst

That's helpful. And then on the --

Matthew J. Flannery -- President and Chief Operating Officer

As far as -- yeah -- so as far as the rates, I mean, as I said about really much of the integration, and as you saw in the numbers Jess just gave you as far as the synergies. Most of the structural work done, meaning territory realignment, customer harmonization, at this point, whether it's a Baker or United legacy or BlueLine legacy customer , we've got them all in our rate zones, we've got them all through our methodology, how we move -- how we move suggested rates and opportunities in rate management through our sales teams, they're all one right now. So it's probably structurally under way. And as far as where the opportunity is, I think you've seen a little bit of it. You look at the pro forma versus the as reported rate improvement, it was a little bit higher than the pro forma, that's a tip to the half with teams already started, and we think we'll see that kind of pace continue through the back half of the year when you look at pro forma versus as reported.

Joe O'Dea -- Vertical Research Partners -- Analyst

Got it. Thank you. And Michael, congrats to you and best of luck moving forward.

Michael J. Kneeland -- Chief Executive Officer

Thank you. Appreciate it.

Operator

Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question please.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good morning guys.

Matthew J. Flannery -- President and Chief Operating Officer

Hey, Seth.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hi, Seth.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, So, Matt, I think you commented that you're starting to see, there were some projects that may have gotten pushed due to weather here in the first quarter that are you don't know were kind of restarting in the second quarter. I'm trying to kind of just tie your confidence -- the confidence that you're talking to, in the end markets against like the ABI that came out yesterday that showed some softness, the first softness in a while. So maybe can you just give us what's -- any more detail on kind of how much visibility you feel like you have and what's really supporting your confidence through the full year, frankly? Thank you.

Matthew J. Flannery -- President and Chief Operating Officer

Sure. Well, first and foremost, what gives us that confidence is the 1,200 touch points we have in our branch network with a couple of thousand reps that talk to customers every day. So that is always going to be primary. But then most every macro data point supports that feeling and even within the ABIs that was released I think it was even noted in the report that they believe that it was due to weather. I mean February was a tough weather month for us and for the industry and for job starts.

So we're not surprised by that, but also what came out this morning is the ABC's construction backlog indicator, which was up 8% month-over-month. So in balance we say all the macro indicators are positive even in spite of the ABI number that just came out. So we feel really good about it. Our customers feel good about it. And as we've said before, we think we have good strong visibility 12 months out and that's because of our connection to the end markets and to our customers. And I don't see anything that points to a concern within that visibility that we feel we already have. So I get the point about ABI that one dataset, we'll see where that ends up in the oncoming months, when the February weather hangover goes away, but we still feel good about the end market.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, thanks. And then maybe just going back to the mix discussion, is there anything you'd call out there from an energy market perspective, that's disproportionately helping the mix, either from a rate or utilization perspective, or how would you kind of characterize energy markets at this point, I know you mentioned Canada overall -- anything else you could add? Thanks.

Matthew J. Flannery -- President and Chief Operating Officer

I call the energy markets steady and certainly they didn't have any impact on mix, as far as the way we categorize mix. When we think broadly, the interesting thing about this last couple of years is that whether you look at geography, vertical, product lines, the growth has been very broad. There's no hot pocket we're relying on and and we feel good about that and and we're forecasting that to continue throughout the year and most of the backlog information and the customer information fortifies that.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, thank you very much guys. Appreciate it.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks, Seth.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Seth.

Operator

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

Steven Fisher -- UBS -- Analyst

Thanks, good morning guys.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hi, Steven.

Steven Fisher -- UBS -- Analyst

Hi. Just on the flow-through, curious what the expectation is that you have for the balance of the year. Should we assume that 60% is achievable on a quarterly basis or will that drag from some of those acquisitions linger on for a little while?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hey, Steve, it's Jess. Yeah, I mean, when we look at the flow-through that we generated in the first quarter, it was actually a hair better than what we expected. So if I go back to the conversation we had at Investor Day when we talked through full-year guidance, we still feel really comfortable that we'll be able to do something kind of give or take 60% on the core, if I adjust for the acquisitions and for the synergies. So yeah, we feel really good about 60%.

Steven Fisher -- UBS -- Analyst

Okay, that's helpful. And then if you could just talk about your bid pipeline a little bit, particularly in terms of large projects, it seems like maybe following up on Seth's question there, there should be some larger industrial projects that are taking shape at the moment and I know in the past you've also had some chunky CapEx put out there for specific airport projects. I'm just curious what your bid pipeline looks like for some of the larger projects at this point that you see coming over the next year.

Matthew J. Flannery -- President and Chief Operating Officer

Sure, Steve. It looks robust, our national account team and our strategic account teams, which are really the large or half of our account profile, backlogs are strong, and they're the ones that are going to be working on the major projects. LNG is still strong. There's still a lot of infrastructure work, major capital projects remain robust and and it's coast to coast. I mean there is strength throughout our network and then when you even think about some of the midstream work that needs to get done to help move some of the energy, is really an opportunity for us and we're very well positioned with the contractors that are going to be doing that large work through our scale and through our broad foot print.

Steven Fisher -- UBS -- Analyst

Is there any particular timing that you see for some of those projects coming through?

Matthew J. Flannery -- President and Chief Operating Officer

That's probably a little too precise for us right now, but I would say the pace of how our our teams are building their revenue and what our expectations are for the year which obviously informed our guidance, is on track as far as where that moves, does Q2 get a little hotter or as as expected, it's probably too early for us to say.

Steven Fisher -- UBS -- Analyst

Okay, thanks a lot.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Tim Thein from Citi. Your question please.

Timothy Thein -- Citigroup -- Analyst

Great, thank you and good morning. So the first question is just on operating costs and how that is impacting the margins here for 2019. This point last year, it was more of a challenging backdrop in terms of your pickup and delivery and some of the other operating buckets, as you've highlighted in the flow-through bridge, so just curious how much of the improvement that you have seen, how much of it is just that maybe some loosening of the LTL capacity versus some of the things that maybe you've done internally to recover some of that inflation that you've faced?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hey, Tim, good morning. So I don't have that number isolated. But what I can tell you is, as we looked at cost performance through the first quarter, we were very pleased. The performance came in pretty much as expected across those big categories of cost that gave us a little bit of heartburn first quarter last year like delivery was one and we had also talked about some higher overtime that we expected. So the team has done a great job in managing through that and managing through some of the integration (technical difficulty) concern for us as we're going into the busy season.

Timothy Thein -- Citigroup -- Analyst

Okay. I mean, there was -- it's also just in the context of some fairly sizable percentage growth and not a huge driver for URI on the whole but the ancillary was up quite a bit as in percentage terms, so I guess I was just curious if there is -- if there were things that have been done there and that may be helping you recover some of the inflation?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

So a big chunk of that increase comes from better delivery recovery through ancillary and that is really the recovery of the cost that you would see within cost of rentals. There's two things going on there. One is that with the acquisitions, we've now modified processes, we've updated technologies, in bringing those businesses in, they're now using that same discipline that we've developed around delivery recovery being obviously an important part of our overall revenues. So that's part of it. The other part of it is that the team broadly continues to be really focused on making sure to have delivery recovery as appropriate across our sales. So it's -- it's good discipline and it's bringing in those two businesses that's driving growth in that line.

Timothy Thein -- Citigroup -- Analyst

Got it. Just following back up on rates just in the quarter, was there or were there any regions or geographies that stood out in terms of it being stronger versus softer, that just curious about anymore, whether it's by geography or vertical, any more color in terms of just rate performance and how that just in -- likely informs you about the rest of the year?

Matthew J. Flannery -- President and Chief Operating Officer

Tim, as you could imagine -- this is Matt, as you could imagine, the rate follows the demand, right. And it was equally as broad, every operating region had positive rates in the quarter year-over-year, so it should and did follow the demand environment, as that's really the driver for the opportunity and the team did a good job capturing that opportunity broadly.

Timothy Thein -- Citigroup -- Analyst

Got it. Thank you very much.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks Tim.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Tim.

Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Jerry Revich -- Goldman Sachs -- Analyst

Yes, hi , good morning everyone. I'm wondering if you can talk about -- I'm wondering if you can talk about the Total Control rollout on the acquired businesses and BlueLine, what's the timing, as we look at Total Control now, it's a quarter of your business, five, six years ago was half that, as we continue the new migration toward more customers using Total Control. I guess what are the implications for the margin profile for your business, can you just step us through that opportunity set please?

Matthew J. Flannery -- President and Chief Operating Officer

Sure. Jerry. This is Matt. I'd say that the -- most importantly the team responded quickly to those customers that Baker was doing business with that were already on Total Control. So the first step was to make sure that we got those assets integrated in and that's some work and I want to get into the details, a part of that work actually has to happen on the customers' end as well, because they build processes through to their vendors, so they had the more fad over. And then in BlueLine deal, you had a little bit of as well more influenced by Baker than BlueLine, but certainly an opportunity for us to continue to be a full provider to those Total Control customers and I wouldn't say there were any material changes especially when you look at the pro forma growth. But what I would say is broadly regardless of integrations and acquisitions, we continue to get further adoption and usage of Total Control as a tool to help our customers solve productivity issues and that's always what it's been built on and as we put it along our footprint and get more and more of our employees and therefore customers educated on the opportunity, that's how we've driven that growth in Total Control.

Jerry Revich -- Goldman Sachs -- Analyst

And Matt, could you comment on part of the question related to the margin opportunity sets where obviously you're getting benefits of digital transactions and also better customer stickiness as the Total Control part of your business grows. Can you just address that part of the question in terms of opportunity set if we're sitting here in five years and it's 40% of your business, can you just help us understand what that means from a margin standpoint?

Matthew J. Flannery -- President and Chief Operating Officer

Yeah, neither one of the digital channels or any kind of automation is really done as from a cost to margin perspective, it's really done for meeting the customer where they are, the customers that want to interact with us in that way, we're going to support that and that's why we're building the digital platforms that we are, so we don't see this as huge margin accretion opportunity as much as the other half of your point which is accurate is the stickiness, right. And we've got to -- we've got to transact with customers in the way they will process this and comfort in transacting and that's more of why you'll see this us do that. What it does give us the opportunity to do is maybe reach some broader customers that we weren't reaching before. This technology gives you a wider net to cast. So I'd say it's more from that perspective than a cost to margin translation.

Jerry Revich -- Goldman Sachs -- Analyst

Okay, thank you. And then your used pricing, you mentioned that retail was up 5% in the quarter, which is really good performance compared to what we are seeing for the industry overall in that auction results. Can you just talk about what you're seeing in the used market is the soft spot really just Tier 4 equipment that you're now not transacting because all of your sales are to Tier 3, can you just talk about your views of the used market and how you folks were able to deliver such better retail sales performance compared to what we're seeing in the channel?

Matthew J. Flannery -- President and Chief Operating Officer

Sure, this is something that we've been very proud of and we've worked hard on to build over multiple years. So this isn't a new thing for us. It's that our sales folks were involved in retailing equipment. We have a firm belief that we want to solve all of our customers' problems and just because we're rental company the customer wants to buy a piece of equipment, we've got good quality, well-maintained used equipment to sell to them and we use the retail channel to do that and I think that is the single-digit biggest differentiation between our margins and those that don't do that, but even within the auction results, you see, that it was a little bit of a drag. When you look at the aerial products reaches, they were still pretty strong. So I don't see Tier 4 as the big mover here. I see this is strictly as our channel and the products we sell giving us a good opportunity to keep margins strong and pricing strong.

Jerry Revich -- Goldman Sachs -- Analyst

I appreciate the discussion, and Michael, congratulations, it's been quite a decade, and Matt, congratulations and best wishes as you formally take the CEO seat. Thanks, everyone.

Michael J. Kneeland -- Chief Executive Officer

Thanks.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks, Jerry.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thanks, Jerry.

Operator

Thank you. Our final question comes from the line of Chad Dillard from Deutsche Bank. Your question please.

Chad Dillard -- Deutsche Bank -- Analyst

Hi. Good morning, everyone.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hi, Chad.

Chad Dillard -- Deutsche Bank -- Analyst

So I just want to tie a couple data points together from the call, so I mean it sounds like you guys are seeing -- you saw some pushout of activity from 1Q in 2Q, that impacted your utilization and also it sounds like that you may be able to catch up CapEx kind of -- like your seasonally normal CapEx schedule. So like against that backdrop, how should we think about the cadence of fleet productivity as it goes in the balance of the year?

Matthew J. Flannery -- President and Chief Operating Officer

Chad, this is Matt. I just want to correct one thing in case we misspoke or you misheard. The slower time utilization in Q1 was primarily due to -- we did the second biggest acquisition in our history in November, which was going into the seasonal down curve, right, of demand. Not macro activity, not anything like that, just working that fleet through and all the other integration processes that are normal for us, and if we could have bought that fleet in April, we wouldn't be -- you wouldn't even see it, but the truth, we had the opportunity to buy in November, by the way, we do that all over again. We're very pleased with the BlueLine deal, that's what we did -- the two things that you referred to, dampen time utilization, which we expected in Q1 and we'll see that play out through the first half of the year and a tick down, maybe $20 million, $25 million less capital spend than we would have had we not done that deal. I just don't want anybody misunderstand and think that we were -- we are blaming that activity, we think the demand is robust and we'll just work that through the system. So I just wanted to correct that. And then as we think about fleet productivity, as I said in the earlier point, I think it was Ross who might have asked the question earlier, or David, the fleet productivity metrics and output. So not anymore than we could forecast rate or time which are the two biggest inputs to fleet productivity will we be able to have the ability to forward forecast that metric, but we do think that demand environment's and what's embedded within our guidance will net us positive operating metrics and we'll report them accurately as we get through the quarters.

Chad Dillard -- Deutsche Bank -- Analyst

Got it, OK. And also can you give us your updated thoughts on your philosophy and current decision on whether to potentially implement a dividend, by the end of the year, I mean you will be at the lower end of your leverage target and sounds like M&A or probably more tuck-in (inaudible) transformational, so just kind of help me think through where could the balance of excess cash go between maybe dividend or more buyback?

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Hey, Chad. I'll actually come back to the question that David asked and my answer around, there's really no new news for us right now as far as changes to our capital allocation strategy and as we continue to have conversations internally and with our Board about that and we consider dividends as just one part of an overall strategy, we will obviously update everyone accordingly.

Chad Dillard -- Deutsche Bank -- Analyst

Great, thank you.

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

Thank you.

Matthew J. Flannery -- President and Chief Operating Officer

Thanks, Chad.

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.

Matthew J. Flannery -- President and Chief Operating Officer

Actually operator, this is Matt, and I just want to thank everyone for joining the call and remind you all that our Q2 (ph) investor deck is available for download and it had some really good information on much of the stuff you asked about today, fleet productivity, that's worth a look. So please reach out to Ted Grace, our Head of HR, if you have any questions. And I look forward to sharing more of our progress with you in July. So with that, operator, please go ahead and end the call.

Operator

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Duration: 59 minutes

Call participants:

Michael J. Kneeland -- Chief Executive Officer

Matthew J. Flannery -- President and Chief Operating Officer

Jessica T. Graziano -- Executive Vice President and Chief Financial Officer

David Raso -- Evercore ISI -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Rob Wertheime -- Melius Research -- Analyst

Joe O'Dea -- Vertical Research Partners -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Steven Fisher -- UBS -- Analyst

Timothy Thein -- Citigroup -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

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