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United Rentals Inc (URI) Q4 2020 Earnings Call Transcript

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United Rentals Inc (NYSE: URI)
Q4 2020 Earnings Call
Jan 28, 2021, 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. [Operator Instructions] 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 31, 2020, 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 the company's press release and today's call include references to non-GAAP terms, such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Jessica Graziano, Chief Financial Officer.

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

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Matthew J. Flannery -- President and Chief Executive Officer

Thank you, operator, and good morning, everyone. Thanks for joining us. As we look back on the past year, I feel that 2020 was a proven ground for our company. It gave us the opportunity to prove the resiliency of our business model and the disciplines we've engineered for more than a decade: things like capital management, cost management, operational agility and the willingness of our team to embrace change. We've demonstrated these capabilities during choppy periods in the past, but last year wasn't just a downturn, it was a sharp and significant economic disruption. And we stood up to those conditions while keeping our people safe, streamlining our operating costs, aggressively flexing our capex and managing our excess capital to reduce leverage. In addition, we kept our full year adjusted EBITDA margin to within 50 basis points of 2019, despite significantly lower market demand, and we generated record free cash flow. And now, things are getting better. Most of our end markets have been on a steady path to recovery since the third quarter, and we saw that continue in Q4.

These factors help us narrow the gap in rental revenue year-over-year from being down over 13% in Q3 to down just 10% in Q4. And as you saw yesterday, our fourth quarter results were better than our guidance for total revenue, adjusted EBITDA and free cash flow. I was also pleased that throughout 2020, we stayed laser-focused on execution, while remaining flexible and agile in a very fluid environment. And most importantly, we never wavered from our fierce determination to take great care of our employees and our customers. We didn't resort to reactive cuts in our service capacity that would harm our customer service or slow us down in the upcycle or impact our long-term earnings power. Early on, we committed to keeping the key in the ignition on capacity so we could start the engine up at any time. And as we enter '21, this has proven to be the right decision. The execution of that decision rests squarely with our people, and they have consistently delivered. They're the reason why our safety reportable rate remained below one for all four quarters of 2020.

And it's a credit to their professionalism that our COVID protocols were adopted so quickly companywide, allowing us to serve our customers safely. And the financial results you saw yesterday were generated by the talent and commitment of our people all working together as one UR. It's an exceptional team, and I'm very proud to work beside them. Now let's look forward to the current year. COVID isn't a traditional cycle, but it's a cycle nonetheless. And we believe it will continue to have an impact for the foreseeable future. As our guidance indicates, we'll continue to gain ground in '21 as we work our way back toward pre-COVID levels. Our sentiment echos the majority of our customers in our recent surveys, the comments we hear from the field and other external data points we've collected. We're optimistic of the year, while being realistic that visibility is still somewhat limited. What our guidance doesn't show is the cadence of demand this year. But once we lapped the first quarter, our toughest comp will be behind us, and then we expect to return to growth as we move through '21.

And we base this on a couple of factors. The recent spike in COVID cases is projected to settle down in the coming months, which should help reactivate some projects that were temporarily halted. And as the vaccines are rolled out, business confidence should continue to improve. And this will provide a tailwind for both capital projects and MRO spending. And as demand trends up, we're well positioned to be first call for our customers. And before I get into our operating environment, I want to mention our fourth quarter revenue from used equipment sales. It was $275 million, almost 13% higher than prior year, and it was driven by healthy retail demand. And as you know, we look at the strength of the used equipment market as a key indicator for the rental industry. And when the retail market is favorable, it tells us that contractors are projecting needs for that fleet. Another positive indicator is that our industry overall showed great discipline on the supply side in 2020, and this is a good place to be as activity ramps up. Looking at our operating environment, there are some encouraging signs.

The verticals we called out as most resilient on our last call are continuing to lead project activity in markets like power, healthcare, distribution and technology. Within these verticals, we're looking at a range of jobs, including data centers, hospitals, warehouses and even power plants. And on the other side of the ledger, petrochem continued to be soft in the fourth quarter. The good news is that we're seeing light at the end of the COVID tunnel, and we expect this sector to do better this year led by scheduled turnaround activity in downstream and chemical process. Within non-res, which is our largest revenue base, a number of new projects broke put ground in the fourth quarter and others plan to start up this year. These include some big stadium projects that were postponed when COVID hit. And the same is true of airport construction and renovation. We see a number of these multiyear projects back on the table. And to a lesser degree, road and bridge work, which generally has remained steady. Infrastructure has been topical since the election.

And while the details and the timing are unknown at this point, President Biden has been clear that this will be a priority for his administration. And as the economy continues to heal, United Rentals is in a strong position to benefit from any increase in end market spending, including infrastructure. And we've invested for years in positioning the company for this type of scenario. Our specialty segment had another good quarter, led by our power and HVAC business, which generated fourth quarter same-store revenue that was higher than the prior year. It underscores the importance of our ongoing investments in specialty operations. In total, we plan to open another 30 specialty cold starts this year, which is double the number that we opened last year. And this will bring us close to 400 specialty locations by December. Here's the main point of my comments this morning.

You may recall our mantra that figure doesn't really matter unless we're constantly driving for better. And the way we get there is by doing what we say we're going to do. 2020 did its best to challenges on that, but we came through for all of our stakeholders, and the learnings we gained from that experience have been incorporated into our operations. And we'll leverage these learnings as we return to growth. Finally, we said we would fulfill our responsibility to investors by protecting the long-term earnings power of the business, and we're doing that, too. The takeaway from 2020 isn't what went wrong in the external environment, it's what went right when we committed to a course of action and met our goals. Yesterday, you saw the results of that commitment. And today, we're telling you that we intend to deliver again in '21. So I'll stop here and ask Jess to take you through the numbers, and then we'll go to Q&A.

So Jess, over to you.

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

Thanks, Matt, and good morning, everyone. Our financial results in the fourth quarter were better than we expected, with rental volumes continuing to recover and strong used sales activity at retail, and more on both in a minute. Costs were in line and supported by -- supported solid margins in the quarter. Free cash flow for the year also exceeded expectations, and our leverage at year-end was down versus 2019. That's all good news as we move into 2021. I'll provide some color on our '21 guidance before we get to Q&A. Let's start now with the results for the quarter. Rental revenue for the fourth quarter was $1.85 billion, which was lower by $208 million or 10.1% year-over-year. Within rental revenue, OER decreased $190 million or 10.9%. In that, a 5.6% decline in the average size of the fleet was a $98 million headwind to revenue. Inflation of 1.5% cost us another $25 million, and fleet productivity was down 3.8% or a $67 million impact.

Sequentially, fleet productivity improved by a healthy 420 basis points, mainly from better fleet absorption. Rounding out the decline in rental revenue for the quarter was $18 million in lower ancillary and rerent revenues. As I mentioned earlier, used equipment sales were stronger-than-expected in the quarter, coming in at $275 million. That's an increase of $31 million or about 13% year-over-year, driven almost entirely by an increase in retail sales. That reflected OEC sold up 35% year-over-year in the retail channel for the second quarter in a row. Used margins in the quarter were solid at 42.5%. Notably, these results in use reflect our selling over seven-year-old fleet at just shy of 50% of original cost. Let's move to EBITDA. Adjusted EBITDA for the quarter was just under $1.04 billion, a decline of $117 million or 10.1% year-over-year. The dollar change includes a $143 million headwind from rental. And in that, OER made up $140 million and ancillary and rerent together were the remaining $3 million.

Used sales were a tailwind to adjusted EBITDA of $11 million, which offset a $3 million headwind from our other non-rental lines of business. And SG&A was another benefit in the quarter of $18 million, with the majority of that help coming from lower discretionary costs, mainly T&E. Our adjusted EBITDA margin in the quarter was 45.5%, down 150 basis points year-over-year, and flow-through as reported was about 66%. I'll mention two items to consider in those numbers. First, used sales made up a greater portion of our revenue this quarter, which was a headwind to margin and flow-through. Second, I mentioned on our Q3 call, back in October, that we had a benefit in bonus expense in Q4 2019 that would cause a drag this Q4. Adjusting for those two items implies a margin of 46.1% and flow-through for the quarter of just over 56%. Both results were largely as expected and pointed to continuing cost discipline even as certain operating costs started to normalize. A quick comment on adjusted EPS, which was $5.04 That compares with $5.60 in Q4 last year.

The year-over-year decline is primarily due to lower net income from lower revenue. Let's move to capex. For the quarter, rental capex was $176 million, bringing our full year spend to $961 million in gross rental capex, which was 55% less than what we spent in 2019. Proceeds in 2020 from used equipment sales were $858 million, resulting in net capex of $103 million. ROIC remained strong at year-end, coming in at 8.9%. That continues to meaningfully exceed our weighted average cost of capital, which currently runs about 7%. Year-over-year, ROIC was lower by 150 basis points, primarily due to the decline in revenue. Turning to free cash flow, which was a record for us at over $2.4 billion in 2020. This represents an increase of over $860 million versus 2019. As we look at the balance sheet, our having dedicated the majority of our free cash flow to debt reduction in 2020 resulted in a $1.9 billion or almost 17% decrease year-over-year in net debt. Leverage was 2.4 times at year-end, down from 2.6 times at the end of 2019. Liquidity remains extremely strong. We finished 2020 with just under $3.1 billion in total liquidity.

That's made up of ABL capacity of just over $2.7 billion and availability on our AR facility of $166 million. We also had $202 million in cash. Let's shift to our 2021 guidance, which we included in our press release last night. Our view to total revenue includes a return to growth in rental revenue with the season, starting in April. We look forward to getting past the challenging comp in Q1 as we lapped the start of the pandemic and move to delivering rental growth for the rest of the year. Our guidance includes a range of outcomes given our seasonal patterns and assumptions we've made on the pace of continuing recovery across our end markets. We're planning for another strong year in used sales, and we'll look to increase our capex spend to replace that fleet. Within our guidance, that reflects over $1.9 billion in replacement capex. Beyond that, we continue to be focused on absorbing the fleet we own, and we'll adjust our growth capital accordingly with total spend planned at pre-COVID levels.

Our range on adjusted EBITDA considers not only the volume growth we expect in revenue, but also our continuing to manage costs tightly. We'll leverage what we've learned in 2020 using our own capacity to support our customers with less reliance on third-parties. As our business continues to recover, we'll also see a reset of costs that ran low in 2020, such as T&E and bonuses. Finally, one of the best indicators of the strength of our business model is the resiliency of our cash flow, especially as we invest behind growth. In 2021, we expect another year of generating significant free cash flow, and that's after considering a return to over $2 billion in capex spending. We'll continue to use our free cash flow to pay down debt and reduce our leverage.

Now let's get to your questions. Operator, would you please open the line?

Questions and Answers:

Operator

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

David Raso -- Evercore ISI -- Analyst

Hi, good morning. Thank you for taking my question. With the guidance, the leverage at year-end net debt-to-EBITDA is targeting about two times. Given that's a very low end of your targeted range of two to three, can you take us through your thoughts as the year plays out how to think about exiting the year into 2022 with the leverage of that level?

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

Hey, David, it's Jess. Yes. So from our perspective right now, as we think about the free cash flow, right, and that's obviously after the Capex, we're going to continue to focus on strengthening the balance sheet and continuing to pay down the debt. Now as the year moves on, our focus is going to be, first and foremost, from a capital allocation perspective, on growth and being able to fund the growth that we see, first and foremost, organically. And then in smart M&A that may happen for us. And so it's -- for us, it's not about having, let's say, an arbitrary target and getting to two times by year-end, but more being able to continue to focus on growing our business and strengthening our balance sheet to better position us for that growth.

David Raso -- Evercore ISI -- Analyst

Just taking that answer, would you be willing to do something proactively during this year before you get down to two times? I'm just trying to frame it for -- I mean, the math seems like we're ready to lean forward. Some of the economic backdrop, obviously, could dictate if that changes. But especially if we did get an infrastructure bill, you would think that could even make you lean forward even more? I'm just trying to level set where people's heads are on looking at the leverage. And if we did get an infrastructure bill, how does that also influence when you think of size of fleet and where you want to be positioned?

Matthew J. Flannery -- President and Chief Executive Officer

Yes, David, this is Matt. Your point's dead on. Right now, we're just coming out with guidance, and we understand visibility isn't as clear as it would be in a normal year. And we're not all the way through the tunnel yet, but we absolutely feel, when we get to the back half, we're going to see growth once we lap the comps of Q1 as we discussed in our release. And exiting '21, I think that's when we'll really start to see what the economic end markets look like and where the growth opportunities are. But we're certainly positioned for it, and we're not afraid to lean in.

As far as M&A specifically, since Jess touched on it, we always work the pipeline. Quite frankly, we work the pipeline through COVID. Although past six to nine months, it hasn't necessarily been a focus for Jess and I, we've been -- we've had bigger fish to fry. But we're always looking for ways to better serve your customers. And we're going to focus on organic because that's what we can control. But if we have an opportunity for smart M&A, we're always looking at that. And once we get through our bar, we certainly know how to integrate and we have the dry powder to do so. It's just not an immediate focus.

David Raso -- Evercore ISI -- Analyst

And last quick question. I assume the evolution of your capex planning obviously just takes place through the fall and to early winter. Can you just take us through how you evolved the decision to -- I assume it was lower three, four months ago, how we got to the $2.15 billion gross capex midpoint? Some of the milestones you saw, be it contractor, customer surveys and how they were thinking about the projects. You already highlighted the way used equipment markets act can help influence your thought around your ability -- your willingness to sell used and buy new for replacement, things that drove the desire to add $200 million of growth capex. I'm just curious how you went through the milestones when you went through the planning process to come up with that number? And I'll leave it there.

Matthew J. Flannery -- President and Chief Executive Officer

Sure. So we build it up from the ground up, right? So we have a very robust planning process. And I'll say, we start that process late -- probably September, October, and then we deal with it in November, December up here at corporate. But the field was pretty much where we are early then. Nowm, they're a little bit closer to it. And at some point, we thought maybe they were getting a little too excited. But as we started to look at the trends and the opportunities for us, market by market going through the planning process, we -- it is where we ended up. But this wasn't a light switch, right? Because we beat consensus. This was a build that's been coming through Q3 and Q4, and getting that feedback from our field leaders as they were going through the planning process. I don't know if, Jess, do you have anything to add?

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

No. No, I think that's it.

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

Hi, to everybody. This is a little bit of a bigger picture question. Just on your growth trajectory. If you look at the past several years, you've been, I don't know, maybe half and half acquired fleet versus organic fleet growth. And just given how much the industry is consolidated and your scale has grown, maybe acquisition's maybe a little bit less potential in the future than it has the couple of three years anyway. How comfortable are you sort of putting out more fleet organically over the next several years? And do you have a sense on when you might see the market in balance enough to really start?

Matthew J. Flannery -- President and Chief Executive Officer

So I'm going to start with the end of your question first. We actually see the market in balance almost all the way there already, which is really exciting. When I think about how the industry has responded to this downturn, specifically compared to the '09 downturn, which was quite a different scenario, the route data tells us that we're almost in balance already from a days in fleet, days on rent. We're not quite there yet, but a heck a lot closer than I would have thought. So I think we're already in pretty good shape. And now it's just about the opportunities that we can lean into.

And we do see growth headroom over the next few years. This year may be a little less than what we'll see in the future years, but I'll also say that this headline growth that -- let's use the midpoint of 3.5% is a little bit misleading because it's having to absorb what is a tough comp in Q1. And when you model that out, you see the quarters two through four are actually significantly higher than the 3.5% average you see. So we're already leaning into growth, and we feel excited about it for '21 and beyond.

Rob Wertheimer -- Melius Research -- Analyst

Thanks, Matt.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from the line of Mig Dobre from Baird. Your question please.

Mig Dobre -- Baird -- Analyst

Good morning, Matt and Jessica. Thank you for taking the question. I guess I want to go back to your outlook again. And as I look at your mix on slide seven, I'm wondering what sort of general assumptions have you baked in for resi, non-resi and industrial that underpin your revenue outlook for '21?

Matthew J. Flannery -- President and Chief Executive Officer

So I think we all see the macro data points. They're prevalent. We're all looking at the same stuff, and they're choppy. You see some are more positive than others. And whether you're looking at Dodge Momentum Index, or whether you're looking at APC backlog, contractor backlog. So we're all looking at the same data set. There's a couple of things I'd point to. First of all, within non-res, there are certainly winners and losers. And the ability we have to -- and we're planning for this, to outpace the end market growth is by using those fungible assets and moving them from the weaker market to the stronger markets. So that's always been our mantra.

And I'd say the rental industry overall usually has the opportunity and the ability to outpace the end market growth. And you'd see that historically. I would also say that in the industrial side, although there's still some negatives, and I pointed to oil and gas, they're off a pretty deep floor right now, and we see there could be some opportunity in specifically downstream and chemical processing. So we feel good overall about the backdrop stabilizing, and we think with the scale and size that we have, that we'll be able to outpace the end market growth.

Mig Dobre -- Baird -- Analyst

I see. Then also looking at your capex. You're obviously planning on spending more than replacement in '21. I guess, I'm wondering how you're thinking about the progression through the year? At what point in time do you expect to have fleet stabilized on a year-over-year basis? Is this a second half event? Do you think it can happen a little sooner than that? How are you thinking about it?

Matthew J. Flannery -- President and Chief Executive Officer

Yes. So we'll be -- so we're down about 5% in fleet as we end the year. And that will -- I won't use the word, stabilize. That negative will decrease throughout the year. Our cadence -- think about our cadence as being a normal capital spend cadence, maybe a little lighter in Q1. As you could see from our fleet productivity, we still have some extra capacity to absorb. But when we get into the peak seasons, starting Q2 and Q3, that's where we typically spend 75% to 80% of our capex in the year.

It's also important to note that we plan on selling $1.7 billion worth of fleets in '21 because of the robustness of the end market, and that's a great way to not only take care of our customers that want to buy fleet, but refresh our feet. So when you inflation adjust that, that's $1.95 billion of replacement capital. So depending on where we end up in the range, you have anywhere from $50 million to $350 million of growth capital. And we'll meter it in as we earn it, as we absorb it and we see the opportunity.

Mig Dobre -- Baird -- Analyst

That's very helpful. And then lastly, maybe for me. I guess, maybe a little more color on the tenure of business through the quarter if early versus late quarter and the fourth quarter look maybe a little bit different. Because, obviously, the COVID cases have progressed not linearly as the quarter developed.

Matthew J. Flannery -- President and Chief Executive Officer

Yes, great point on the cases and the positivity rise. It didn't really impact the business. There were -- one province had some issues and maybe two markets had some delays related, but very, very small in the big scheme of things. So the cadence was pretty steady as you saw it throughout the quarter.

Mig Dobre -- Baird -- Analyst

Thank you.

Matthew J. Flannery -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Ross Gilardi from Bank of America. Your question please.

Ross Gilardi -- Bank of America -- Analyst

Hi, guys. Thank you. Matt, I was just wondering, you talked about some of the -- can you hear me OK? My line is...

Matthew J. Flannery -- President and Chief Executive Officer

Yes, you're good. I hear you well. How you doing?

Ross Gilardi -- Bank of America -- Analyst

You can. Okay. Sorry about that. When you talk about the winners and the losers on the non-res side, is it possible to just kind of break out the portion of the business that you classify as non-res is actually growing now and the portion of it that you think will grow in 2021?

Matthew J. Flannery -- President and Chief Executive Officer

Yes. It's -- I won't get a proportion of each vertical and each end market because that gets a little bit too competitive for me to do on open mic, but I will tell you that get outside of the Gulf space, which is obviously a little more weighted toward petrochem, which we've called out as a challenging area, the winners and losers are spread out geographically, right? So all end markets have the opportunity geographically, but it's just thinking about things that are struggling, like as you could imagine, anything travel-related, anything entertainment-related, lodging. I'm certainly not expecting us to be on any hotel projects as we get through '21. And then even retail, right? So we're a little worried about retail.

But on the flip side of that, when we get back to the winners, distribution and warehousing and logistics are hot right now because that's how consumers are buying products. So that's just an example of where we can move our fleet out of what might be retail growth and into warehouse and distribution growth. And this is the flexibility of the model with a very fungible asset. So geographically broad, and I think we could all talk to the markets that are winning and losing: healthcare, technology, pharma. Probably what people may not realize this power has been strong, not just conventional power plants, but even solar and wind. So there's plenty of work out there, we feel, to fortify this guidance.

Ross Gilardi -- Bank of America -- Analyst

What do you say to the view that the non-res activity that we're seeing now is largely just completion of existing projects? The pipeline of new projects is drying up. I mean, you even explain some of the pickup you're seeing is just resumption of airport activity and deferred maintenance and so forth. Do you feel like there's enough completion that needs to happen with your customers to just carry you well into 2021 -- '21, '22 without being necessarily a big pickup in new project starts?

Matthew J. Flannery -- President and Chief Executive Officer

Well, that's a difficult question to answer because I don't believe there won't be new project starts, nor do our customers guiding us that there won't be new project starts. So our guidance implies -- first of all, yes, we feel that's the trend of stability. And to your point, finishing up, resuming some old projects, there's a portion of that, that will carry us through the first half of the year. But then, we're also seeing green shoots in some of the end markets that I talked about.

So it's not like we haven't had a new project, we've even had new projects throughout the back half of '20. So it really just depends on what end market vertical you're serving. So we absolutely feel comfortable that there will be enough new work to support the business.

Ross Gilardi -- Bank of America -- Analyst

Got it. Okay. Thanks, so, I'll turn it over. Thank you.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks, Ross.

Operator

Our next question comes from the line of Tim Thein from Citigroup.

Tim Thein -- Citigroup -- Analyst

Great. Thank you. Good morning. I just...

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

Hi Tim.

Tim Thein -- Citigroup -- Analyst

I just -- first, I just wanted to follow up on the earlier discussion on capital allocation. And just given the decline in your cost of capital over the past couple of years, does that impact your thinking on hurdle rates and the returns you'd potentially target for M&A? And maybe how you think about the trade-off between buying your own stock versus M&A? I guess, taking the Fed with its word would at least seem to suggest rates are likely to stay low for quite some time. So I'm not sure this is a transitory thing, but just curious how you look at this.

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

Tim, it's Jess. Yes, there's actually no change for us. As we think about the process that we use to complete deals and do M&A, it really is sort of a well-honed set of considerations that we have across strategic, cultural and financial hurdles. Those hurdles haven't changed outside of, I would say, the financial hurdle getting a little bit higher, less so as a result of the WACC and more so as a result of continuing to fill capacity with every additional deal that we do. But as we look at it, we're looking at the merit of the deal itself and looking at across those three categories, our spending that capital toward a deal that we know ultimately will be a better owner of.

Tim Thein -- Citigroup -- Analyst

Okay. Interesting. All right. And then the second question is just on the components of fleet productivity and maybe how that shakes out here in '21. My assumption would be -- maybe it's wrong, but that maybe absorption is less of an opportunity as it was in '20? Maybe we can start with if that's right. And then I guess part two is just that how rate and mix would potentially interact should we see a backdrop in which your industrial markets grow faster than construction. And maybe that's a wrong assumption, but just again, I really -- the question -- the spirit of the question is kind of that rate mix dynamic in an environment where oil and gas maybe isn't shrinking and you get some pickup in those larger industrial end markets? How those two would kind of interact?

Matthew J. Flannery -- President and Chief Executive Officer

Sure, Tim. So I'll start with the first part of your question. I'm glad you said maybe you're wrong, because we think you are. We still do have opportunity in time utilization.

Tim Thein -- Citigroup -- Analyst

That's the first time.

Matthew J. Flannery -- President and Chief Executive Officer

So we're not going break down the individual components, but absorption was a great opportunity for us and remains an opportunity for us. And that's the main driver. It was the driver in our sequential improvement Q3 to Q4. And it's what's going to turn us positive by second quarter next year. We'll still have negative fleet productivity here in Q1. We've already told you guys about the tough comps. So think about that in a high-single-digit range tough comp in Q1. And what that portends then once we get past the comp in Q2. You model that against our midpoint of 3.5% and you see some significant growth. And that will play through fleet productivity similarly. So we think that, that all portends to great opportunity and absorption remains our opportunity.

Once we do that, we'll start to meter in the growth capex, as I had said earlier. As far as mix, mix is an output, right, to what the customers end up renting from us. To your point, we could have more broad usage in petrochem if that comes back than maybe we had this year, and that could help. But the interplay of mix and rate is more of an output of what products you rent than really a designed outcome, which is why we don't forecast.

Tim Thein -- Citigroup -- Analyst

Okay. And just so I'm clear, Matt, the high-single-digit range in first quarter, was that directed absorption? You're not referring to fleet productivity down...

Matthew J. Flannery -- President and Chief Executive Officer

No. No, I'm actually referring to -- we talked a lot about the comps, so just to be direct for everyone. When we think about even with the good trajectory of the business and you think about a normal seasonal build to our revenue this year, it's going to output in a high single-digit year-over-year negative revenue for Q1, and that's really because we want people to -- we don't want to give quarterly guidance, but we want people to understand the 3.5% headline growth at the midpoint is a little bit of a misnomer. And then that will place your fleet productivity. We have one -- for example, we have one less billing day in Q1 because of leap year. That will have an impact on fleet productivity, oddly enough. But there are little mix and match that are tough comps. Once we get through them, we feel really good about the growth prospects for '21.

Tim Thein -- Citigroup -- Analyst

Very good. Okay. Thanks for all the time.

Operator

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.

Matthew J. Flannery -- President and Chief Executive Officer

Good morning, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

Matt, just I know you and the team have been focused on delivering a strong performance in a downturn. With 2020 now in the books, can you just talk about how you and the Board are thinking about the strategy over the next cycle since you proved out what the performance can look like at the downturn? So if we can count on mid-40s EBITDA margin at the trough, how does that impact how you're thinking about things like capital allocation, leverage and potentially restarting the buyback program in light of the performance at the trough? And I know you addressed the near-term buyback question earlier. I'm just thinking about, as we think about United over the next four or five years, what should we be thinking about given the performance that you've proved out in '20?

Matthew J. Flannery -- President and Chief Executive Officer

Sure. I'll start, and I'll let Jess speak to some of the great work that the team has done in putting us in this position. But we are 100% aboard with aligned -- we are 100% aligned with our Board, if I get my words out of my mouth, that we are focused on growth. We've done all the hard work to build out this strategy coming out of '09, to make sure we were resilient, that we could do -- we could generate positive free cash flow through the trough. Now we're going to do it.

So we're excited about that opportunity now that we're given a chance to prove it in 2020. And there is no lack of alignment issue for growth. And whether that comes through organic; growth, which is the part we can control, or opportunistic inorganic growth, adding new products, whether they be specialty products or new products to sites that we don't supply right now. We've -- at less than 15% market share, there's ample opportunity for us to grow in the coming years. Jess, anything to add?

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

Yes. I think the one thing I'd add is really the beauty of what is the resiliency of our cash flow. And as we think about looking forward, near term and even longer term, right, the opportunity to continue to support the growth that we believe we're going to see. And then as we think about the free cash flow, that we'll have choices, frankly, with, right, the opportunity that we'll have to continue to manage our leverage optimally and then look at additional opportunities to return excess cash to our shareholders.

As you mentioned, Jerry, right now, we're comfortable continuing to pay down debt with that free cash flow, but it's a topical conversation with our Board and something that we review with them officially several times a year. And so that's always -- as we're talking about growth as a priority, we're also talking about the actions that we take in capital allocation that are also going to be value generative for the shareholders.

Jerry Revich -- Goldman Sachs -- Analyst

And then just to shift gears, your fleet productivity is down about, call it, 7% to 8% off of the highs, and that's mostly utilization. So as we look at the sales guidance of just 3% growth in '21, and with some level of growth capex, can you just talk about how much of that's, "Hey, look, it's early in the year, we're coming out of a pandemic. So if we deliver upside to the sales guidance, that's great." Is that part of the conversation? Or is it the type of fleet that we're allocating funds to have lower utilization rates, and so there is a mix factor we should be thinking about there? Can you just expand on that -- on those two pieces, please?

Matthew J. Flannery -- President and Chief Executive Officer

So you packed a lot in there, but I think I got it, Jerry. I'm assuming you're asking about the rate of our growth and which fleet productivity is an output, right? So that will be part of the growth story. So I'll touch it in a couple of pieces. As I said earlier, Q1 will have the tough comps, and that will play through in the fleet productivity and overall revenue number. That will still be negative, right? We don't expect to go backwards from where we were in Q4, but you're not going to get that continued progression linearly -- linear progress in Q1.

Once we lap that, frankly, we're going to have an easy comp in Q2. So fleet productivity is going to turn positive. Revenue is going to turn positive. So call those two netting out to a normal seasonal pattern, then the growth opportunities in the balance of the year, after we get to Q2, is higher than that 3.5%. I don't want you to -- that's why we're giving that little lean of a guide in the headwinds in Q1, so people don't look at that 3%, 3.5% at the midpoint and think it's underwhelming. Fleet productivity is going to be a big driver of that. And as I answered Tim's question earlier, we feel absorption is one of the big opportunities there.

Jerry Revich -- Goldman Sachs -- Analyst

Thank you. You did not. Thanks.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question please.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey good morning everyone. Thanks for taking the question. So I just really quickly wanted to touch back on the inflation question from earlier. It was good color on the cost side. But obviously, steel has increased at a faster clip in recent months. And I think one of your suppliers yesterday was highlighting some impacts in the next couple of quarters. So any color on how you're thinking about inflation flowing through the revenue growth number, whether that's on the rate side or via used equipment?

Matthew J. Flannery -- President and Chief Executive Officer

So we'll guide everyone -- I don't think we did it yet today, but we're going to plug the same 1.5%, right, as our inflation for fleet repurchase. Just to be clear, that's not a pricing inflation, it's the replacement inflation on the asset. So when you hear us talk about the $1.7 billion we sell is going to cost $1.95 billion to replace, it's not the pricing increase 15% this year, it's the aggregate of selling seven-year-old fleet what we bought it four years ago. So that's the only point of inflation that we've actually guided to.

Your point about just overall natural inflation that comes in through all the business and how do we outpace it, it's got to be in fleet productivity. That's why we set that bar of -- that hurdle rate to make sure that we continue to drive fleet productivity, efficiency in our operations to overcome the natural inflation in the business. Depending on the end market, it could show up the rate, it could show up in efficiency. It's -- you're really -- we're going to go after it and manage it through all functions of the operations to make sure that we can offset our inflationary costs. I don't know if you had a bigger point.

Ken Newman -- KeyBanc Capital Markets -- Analyst

No, that's helpful. That's good color. The follow-up here is you talked a little bit about your petrochem markets kind of expecting to remain weak. And I did want to touch a little bit, if you could just give some color on the midstream portion of your business. I know you've done a lot to deemphasize that in recent years. But just with the headlines we've seen about KeyStone permits getting canceled, just how you think about that end market and the exposure today?

Matthew J. Flannery -- President and Chief Executive Officer

Yes. So midstream would be the smallest of -- when you go through upstream, downstream, midstream, right? We're down under 2% midstream. We're disappointed because it's not good for the sector. But overall, oil and gas, even when you count the downstream, it is only 8% of our business, and midstream being the smallest part of that 8%. We think downstream will still be in good shape.

This could have some knockdown effect on upstream, but we're not really -- we're not banking on a bunch of LNG projects coming up this year. So we -- it's already embedded in our guidance. We're not happy for the sector, but it's not a meaningful issue for us overall as a company.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Helpful. Thanks.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks, Ken.

Operator

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

Steve Fisher -- UBS -- Analyst

Great. Thanks. Good morning. Wondering if -

Matthew J. Flannery -- President and Chief Executive Officer

Hi, Steve.

Steve Fisher -- UBS -- Analyst

Hi. How much growth are you guys anticipating deriving from the specialty cold starts in 2021? Can you quantify that? And it's just generally the difference between, say, growth in your revenues and flat or slightly down? And then as you look beyond '21, based on the experience you have with all the cold starts you've done already, what's the typical kind of year year revenue ramp on those that we can kind of think about acceleration into '22?

Matthew J. Flannery -- President and Chief Executive Officer

We haven't really broken it down like that, Steve, I think the important thing to remember is we're just leaning in to -- continue to lean into specialty. We continue to have white space there. And this is important because the more products and services we offer to our customers, right, the more value we add to them. So the one-stop shop, especially for our larger customers, is something that's really important to us. And that's why we're going to keep filling the gaps wherever we have them, whether that's by geography or whether that's by product penetration. And that's really what these 30 cold starts are about. As far as year one, year two revenues, we haven't disclosed that type of information.

Steve Fisher -- UBS -- Analyst

Okay. Fair enough. And then I think in 2020, mix and rate within your fleet productivity, were generally offsetting each other. To what extent is that something you would anticipate in 2021 as well?

Matthew J. Flannery -- President and Chief Executive Officer

As I said to the earlier point, it's really an output. It depends on what we rent, and that's why we bundled these together in fleet productivity. We're anticipating the needle mover to be more of absorption. That being said, I also told you that we feel really good about what the industry has done and how they've responded to this sharp decline that we had this year in purchases. So supply side is good, and responsible management of fleet productivity and all the components. So how it shakes out? We don't really try to predict You could just rest assured that we manage -- just because we don't disclose, we manage the individual components of rate and time very much so on a daily basis, all the way down through the branch level.

Steve Fisher -- UBS -- Analyst

Got it. Thanks a lot.

Matthew J. Flannery -- President and Chief Executive Officer

Thank you.

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

Thank you.

Operator

Our next question comes from the line of Steven Ramsey from Thompson Research. Your question please.

Steven Ramsey -- Thompson Research -- Analyst

Hi, good morning. I'll start with in-sourcing. Just any more detail you can provide on the benefits being greater to gen rent or specialty fleet now, or if that changes in the future. I guess what I'm trying to get at, thinking of 2021 and beyond, if in-sourcing provides greater margin benefits to gen rent or specialty?

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

Steven, so we haven't gone as far as to calculate exactly what that benefit looks like. You really have to get into a situation where you've got normal levels of activity to be able to really understand the financials behind what that benefit could look like, right? Just thinking about the learnings that they developed in 2020 and our continuing to take those learnings forward into the way that we're managing the business. For us, it's less about the finite calculation or what the impact is as much as it is continuing to optimize the way that we're managing the ebbs and flows of activity through each of the branches.

So as we're thinking about that going forward, it's a benefit that in our business has impacted the gen rent and the specialty segment. So It's continuing to be a focus for both, but I don't have a number I can share with you now that quantifies either by segment or for the business as a whole, that benefit in 2021 and even going forward, what we would expect. It's safe to say that we're focused on making sure that those learnings are something we're continuing to lean into all of this year.

Steven Ramsey -- Thompson Research -- Analyst

Okay. Just a quick one on the specialty cold starts, to follow up on that. Are the new openings this year similar flavor in the past as far as location and densification? And then at 400 cold starts or specialty locations now, one three of total locations, how high do you think that can go over time?

Matthew J. Flannery -- President and Chief Executive Officer

That's a little bit too competitive for me to share, Steven. I'll just say that we continue to feel that the overall business, once again, we're less than 15% market share. But the specialty business specifically, not as broadly penetrated as our gen rent business, certainly has headroom to grow. But we believe all business has had headroom to grow. So we're not going to give individual components to that, but thanks for your question.

Operator

Thank you. Our next question comes from the line of Chad Dillard from Bernstein. Your question please.

Chad Dillard -- Bernstein -- Analyst

Hi. Good morning, everyone.

Matthew J. Flannery -- President and Chief Executive Officer

Good morning, Chad.

Chad Dillard -- Bernstein -- Analyst

So it sounds like your revenue cadence is a little bit more back-end loaded than usual. So just curious to get a little more color on like what's driving that? Is it more of the industrial or the non-rent construction that would drive that above seasonal growth?

Matthew J. Flannery -- President and Chief Executive Officer

Yes. Let me be clear so that I didn't confuse anybody. The cadence is not really going to be too different than what we expect and certainly not back-end loaded. It's all about the comp. So if you remember, COVID hit us mid-March last year. It really didn't have much of an impact on Q1. It had a significant impact really on Q2, specifically April billings was the largest hit by far. And we also got off to a really good start, so in January and February of '20.

So I just -- the actual cadence of the progression of the improvement of the business seasonally is really -- we don't plan on that being too different. This is all about the comp on the previous year. And that's the only reason why we guided people to that -- to explain that, that 3.5% at the midpoint is really a bit of a misleading headline. Does that make sense to you, Chad?

Chad Dillard -- Bernstein -- Analyst

Yes. No, that's helpful. And then just the used equipment market has this proved to be a lot more resilient in this downturn versus prior years? Why do you think that's the case? How sustainable is this? And maybe you can talk about like what the average age is of the equipment that you plan to hold in this coming year versus last year? And if I can just tack on one more question about just how you're thinking about repositioning costs just given that you're going to be, I guess, shifting fleet around between some end markets?

Matthew J. Flannery -- President and Chief Executive Officer

Sure. So first off, on the the retail, admittedly, it surpassed our expectations, but on new sales -- and it was driven by retail. And the reason that is very important, is because I've been doing this 30 years, I will promise you there's no contractor that's going to buy a piece of equipment to sit in the dark. So it underlies what we're seeing in our customer confidence index, what we're hearing from our teams, that our customers are going to have work. So that's first and foremost.

I think what we've done that's unique is we've built that retail sales engine direct to customers versus relying on trades or auctions, and that's really benefited us. We are pleasantly surprised as well. As far as the viability of it, well, if it just grew this year, the back half of this year was 35% over a very robust '19, I don't see how it would continue on as activity picks up, as demand overall picks up. So we feel good about the resiliency there. And it's a great way to refresh the fleet.

The repositioning I mean, we'll -- it's what we do. We manage the business. It's part of the advantage of having a very broad end market we serve in a very broad geography. So we don't have to move because our network is so dense. We don't have to move equipment across the country. So the repositioning, it happens on a daily basis. And it's really just moving it to where the customer needs. And it's not something that we're pulling out any exceptional costs or anything like that for.

Chad Dillard -- Bernstein -- Analyst

Great. Thanks. I'll pass it on.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks, Chad.

Operator

And our final question for today comes from the line of Nicole DeBlase from Deutsche Bank. Your question please.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah. Hi, guys. Thanks for fitting me in here. I actually only have one left because I feel like we've gotten through a lot on this call, so I'll keep it quick. I guess maybe could you guys talk about the drop-through that you've implied in 2021 is a bit lower than you would normally see in the course of a recovery. I know obviously, there's the 1Q comps dynamic. But can you maybe talk about what you've embedded with respect to some of these temporary cost actions coming back? And so -- and maybe bonus accrual, to what extent you have kind of these like more exogenous headwinds impacting drop-through?

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

Nicole, yes, sure. I'll actually use the midpoint even though I usually -- my standard is not to anchor to the midpoint. I'll use the midpoint right now just to walk through. If I think about flow-through at the midpoint for guidance, it is 31.5%. We -- the biggest costs that will reset in the business in 2021 are our bonuses. And that is going to be about a $50 million headwind at target, and that translates into about 50 basis points of margin. So absent that bonus reset margins at the midpoint year-over-year would actually be flat. And then from a closing perspective, if I adjust for that same $50 million, it's a flow-through ex-bonus of about 50%. So that's the largest one factor I would point out.

The other factor I'd point out is the resetting of some of the other costs. So we mentioned T&E. I would also say some of the variable costs that will flex with the increase in the activity and just getting the business back to a normal flow of operating costs that's also built into the guidance and the flow-through that you see. We haven't quantified or really identified beyond some of the obvious ones, right, like T&E, some of our professional fees, we haven't quantified what that looks like. We've built into our range expectations of some of those costs coming back at a slightly higher pace than the overall revenue growth in the year.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it. Thanks, Jess. I'll stop there.

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

Thanks, Nicole.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Matthew J. Flannery -- President and Chief Executive Officer

Thanks, operator. And thanks, everyone, for joining the call today. You'll find our updated investor deck online, so please take a look at that. And as always, Ted is available for your questions. And we look forward to sharing the progress on our call in April. So with that, operator, please go ahead and end the call.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Matthew J. Flannery -- President and Chief Executive Officer

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

David Raso -- Evercore ISI -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Mig Dobre -- Baird -- Analyst

Ross Gilardi -- Bank of America -- Analyst

Tim Thein -- Citigroup -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

Steve Fisher -- UBS -- Analyst

Steven Ramsey -- Thompson Research -- Analyst

Chad Dillard -- Bernstein -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

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