Earnings Call: Q3 2016

Nov 8, 2016

Summary

Q3 rental growth in key markets and stronger pricing partly offset oil and gas weakness and divestitures. Adjusted EBITDA guidance was reaffirmed, while standalone costs and a moderating construction outlook remained considerations.

Good day, and welcome to the Herc Holdings third quarter 2016 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi, Vice President of Investor Relations. Please go ahead. Thank you, Allison, and good morning, everyone. This is Elizabeth Higashi, Vice President of Investor Relations. I'd like to welcome everyone to our third quarter earnings conference call. You should have seen the release that went out this morning, along with the slides which are available on our website. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer, and Barb Brasier, our Senior Vice President and Chief Financial Officer, who will comment on the quarter and year to date, as well as the industry outlook and our guidance. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer. Before I turn the call over to Larry and Barb, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to the slides 3 through 6 of the presentation for our complete safe harbor statement. The Risk Factors section of our second quarter 10-Q, which was filed with the Securities and Exchange Commission on August 9, 2016, contains additional information about risks and uncertainties that could impact our business. You can access a copy of the second quarter 10-Q by visiting the investors section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. On a related matter, we expect to file our third quarter Form 10-Q today. Once filed, the 10-Q can also be accessed through either website. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which were furnished to the SEC with our Form 8-K this morning and are posted on the investors section of our website at ir.hercrentals.com. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given permission for any other recordings of this call and do not approve or sanction any transcribing of the call. This concludes my comments. I'll now turn the call over to Larry. Thank you, Elizabeth, and good morning, everyone. Welcome to our third quarter call. This is our first quarter as a standalone public company since we separated from Hertz and listed on the New York Stock Exchange on July 1. I am pleased that you were able to join us this morning. As we begin, please turn to slide number seven. We are making great progress on our strategic initiatives, and we will share some updates with you as part of this call. At the same time, we are focused on building a reinvigorated customer-first culture that powers a gold standard brand in the equipment rental space. We continue to advance our new Herc Rentals brand in the market, and we expect to have most of our U.S. branch locations rebranded with the new signage by the end of November. Along with the new signage, all newly acquired gear is being decaled with Herc Rentals brands. However, our fleet will continue to include gear featuring the Hertz Equipment Rental brand for a few years until we rotate out the older equipment. We are also successfully running the business as an independent company. Our third quarter results reflect the early progress we anticipated as we began implementing our key long-term strategies and initiatives as an independent company. Now please turn to slide number eight. Third quarter results improved after a slow start in July. We reported $360.3 million in equipment rental revenue in the third quarter. Excluding operations in France and Spain, which were divested in October 2015, and the impact of foreign exchange, rental revenue in key markets improved 7.2%, and overall rental revenue increased 1.4% in the third quarter. You may recall that we define key markets as those markets we currently serve outside of upstream oil and gas markets. Pricing in key markets increased 1.8% over the prior year, supported by strong gains in renewals of national accounts and growth in local revenues. I will note that local revenue growth in part reflects the positive impact of our strategy to expand in our major urban markets. Importantly, pricing improved overall by one-half of 1% in the third quarter compared with a year ago, including our upstream oil and gas results. Let me also provide you with a bit of color regarding the growth we are seeing around the U.S. The Southeast and West reported strong rental revenue gains year-over-year. Our central U.S. regions were impacted by the continued weakness in oil and gas and underperformance by some of our branches. We took action to drive the necessary improvement in these branches and believe we are now back on track. Our strong performance was impacted by continued headwinds in our upstream oil and gas markets in Canada. However, we believe the worst may be over, as we are now beginning to lap the deep declines in revenue we experienced in those markets in the fourth quarter of 2015. Based on the contribution of our third quarter results and our expectations for the remainder of the year, we are affirming our adjusted EBITDA guidance of $520 million to $560 million for fiscal 2016. Now please turn to slide number nine. We have three major strategies. First, expanding and diversifying our revenues. Second, improving our operating efficiencies. And finally, enhancing the customer experience. During the third quarter, we continued to make progress on all three. I'll discuss a few of our key accomplishments under each of the three initiatives over the next few slides. Please turn to slide number 10, which highlights some of our progress in expanding and diversifying our revenues. During the quarter, we continued to expand the sales force as part of our initiative to optimize sales territories to enhance our sales effectiveness. We now have approximately 600 sales professionals, about 100 more than we had a year ago. We also continued our shift in fleet categories to expand ProSolutions and ProContractor gear, which includes an emphasis on core premium brands. In the quarter, local revenue grew to 54% share of total revenue from about 50% at the start of the year. We're making good progress in driving revenue growth through our focus on square footage under roof and achieved market share gains in urban markets year-over-year during the quarter. Ancillary revenue grew 18% in the third quarter as new programs successfully drove revenue growth. On slide number 11, we've summarized some of our key operating accomplishments during the quarter. We continue to drive improvements in fleet available to rent, reducing FRR to about 13% in the month of September 2016, compared with 13.8% in the same period last year. Our CRM system, salesforce.com, is fully operational and provides a platform for sharing knowledge and best practices, which in turn enhances our sales force effectiveness. At the branch level, we continue to implement our operating model throughout the entire organization to improve operating efficiencies and increase opportunities to say yes to customers' equipment rental needs. We expect full implementation of the operating model across our branches by the end of the year. Most importantly, in terms of safety, we are pleased with the progress we are making. We are leveraging our leading indicator safety dashboard to improve our performance and enhance our safety culture. We are also implementing a new safety management system to track and analyze leading and lagging indicators to help us further develop key safety strategies and initiatives. Now please turn to slide number 12. As mentioned, we're committed to building a customer-first culture. As part of that commitment, we've been hiring product application specialists to support our ProSolutions initiatives to assist customers in climate control, restoration, and remediation. We're upgrading our branch locations to showcase our ProContractor tool line and make it easier for customers to get the gear they need. Our technology enhancements, which are critical to enabling superior customer experiences, are also progressing. Enhancements to ProControl, our next-generation telematics system, are expected to be rolled out by the end of the year. The advanced telematics system tracks equipment and provides real-time utilization and other data that help our customers manage their rental fleet more effectively. For example, ProControl includes features like geofencing, which allows customers to set operating area parameters and alerts when the equipment moves out of a designated area. In addition, our ProControl system provides customizable dashboards and other applications for our customers to get a quick view of the metrics important for their business. Upgrades to our mobile app are also making rentals easier for customer use and support efficiency and effectiveness. Continuing upgrades and improvements on our website are also enhancing customer solutions and functions. We are committed to staying on the leading edge of technology and driving a mobility-first culture to provide our customers with the tools to improve their efficiency and effectiveness. Now, please turn to slide 13. Key industry metrics continue to be positive, although projections have moderated somewhat. Non-residential construction project delays appear to be extending the cycle. While non-res starts forecasts for 2017 have slowed to 8% from 9%, forecasts continue to be strong for 2018, up about 10% compared with projections for 2017. The ARA has also updated their forecast. Their October forecast now predicts North American equipment rental industry to grow at a compounded annual growth rate through 2020 of about 4.2%. Our focus on square footage under roof in major urban markets will diversify our customers and reduce our exposure to market volatility. In addition, continuing overall migration from ownership to rental is expected to drive revenue growth in the equipment rental industry. We believe that these factors, along with our market share gains, will continue to fuel our growth in the current market cycle. Now let me introduce Barb Brasier, our Chief Financial Officer, who will discuss our quarterly financial results in more detail. Thanks, Larry, and good morning, everyone. As Larry mentioned, this is our first quarter reporting results as a standalone company. Our GAAP results are summarized on slide 15. Our comparative year-over-year results were affected primarily by the absence of operations in France and Spain, which were divested in October of 2015, continuing headwinds in upstream oil and gas markets, and spin-off costs. Today, I plan on providing you more color on our key financial metrics and the various components that impacted our results in the third quarter. I'll start with rental revenue. Please turn to Slide 16. Equipment rental revenue declined about 4% in the quarter to $360 million. However, as you can see on the third quarter and year-to-date bridges on Slide 16, the revenue growth in key markets more than offset the decline in oil and gas for both the quarter and nine months. In the quarter, rental revenue increased 7% in key markets, excluding divested foreign operations and currency, and represented about 84% of the total. ProSolutions and ProContractor tools are gaining traction, and along with positive gains in the rental of our core equipment, helps to offset the declines in oil and gas markets. Equipment rental revenue in upstream oil and gas markets declined nearly 22% in the quarter and represented about 16% of the total, a percentage that is consistent with our customer diversification target. You may recall that in 2015, third quarter rental revenue in upstream oil and gas markets declined 26% and that the fourth quarter declined 32% compared with the same periods in 2014. We are now beginning to lap those quarterly declines, which extended through the first nine months of 2016. We continued to realize good pricing gains in the third quarter, with an increase of 1.8% in key markets and a half a percent overall. Ancillary revenues rose nearly 18% in the third quarter compared with the prior year, as sales incentive programs drove revenue growth. While our focus is rental revenue, I'd also like to explain the change in total revenues for the quarter. Please turn to Slide 17. Total revenues for the third quarter were $404 million, compared with $432 million in 2015, a decline of 7%. As you can see from the slide, two of the items that reduced revenue related to strategic initiatives that we implemented, namely the divestiture of operations in France and Spain and the de-emphasis of lower-margin new equipment sales. We believe these decisions have positioned us better for the long term. The quarter also reflected a decline of over $5 million in sales of revenue-earning equipment over the prior year because we sold less gear at OEC, original equipment cost, which was a function of our equipment rotation. Please turn to Slide 18. Adjusted EBITDA for the third quarter was $152 million, down $8 million from 2015, due primarily to divested foreign operations and currency. Slide 18 shows the bridge for adjusted EBITDA from 2015 to 2016. In the third quarter, gains in key markets more than offset the decline in upstream oil and gas markets. You should also note that we increased the proportion of used equipment sales through retail and wholesale channels in the third quarter compared with the second quarter, which reduced the losses incurred. Adjusted EBITDA margin of 37.7% in the third quarter also reflected an improvement over the first and second quarters. Slide 19 bridges the change in net income from 2015 to 2016. Net income was $3 million in the third quarter of 2016 compared with $21 million in 2015. Please note that to show the full impact of the foreign divestitures, the bridge shows interest expense and losses attributable to those operations included in the category labeled France and Spain in currency translation. The increase in interest expense of $25 million reflects the first full quarter of interest expense as a standalone company. We also incurred an increase in spin-off costs of nearly $7 million in the third quarter over the prior year. This year's third-quarter spin-off costs totaled $11 million and were composed primarily of IT and professional expenses. You can calculate the implied per-share impact on the quarter. I should note that during the first half of 2016, when we were a division of Hertz, certain costs, such as corporate staff salaries, were categorized as spinoff costs. Since July 1, 2016, the same costs are no longer considered spinoff costs as they represent our ongoing public company costs. We expect that it may be difficult for you to forecast trends in some of our expense lines since 2016 year-to-date results are a combination of our carve-out financial statements for periods prior to July 1, 2016, when we were a division of Hertz, and standalone results, including the additional costs associated with being an independent public company. As we go forward, we will strive to provide transparency so that you can evaluate our trends and prospects. Income tax expense in the third quarter declined by $11 million year-over-year due to the reduction in earnings before taxes. Federal cash taxes will benefit from approximately $184 million in net operating losses that are available to us. Slide 20 summarizes our net fleet CapEx. We spent $445 million on the acquisition of revenue-earning equipment for the first nine months of 2016, with proceeds from disposal of $84 million, resulting in net capital expenditures of $360 million. Net fleet capital expenditures declined $62 million during the nine months of 2016 compared to the same period in 2015. During 2015, we purchased more revenue-earning equipment as part of our strategy to refresh the fleet and invest in higher quality equipment. However, we also sold more equipment to reduce fleet in upstream oil and gas markets. With these actions, we believe we have right-sized the fleet in line with our long-term strategy, and we are making progress in shifting the fleet into higher dollar utilization categories. We increased our investment in ProContractor and ProSolutions equipment by 18% in the third quarter compared with last year. These categories now represent 18% of our fleet as of September 30, 2016, representing steady progress toward our target of 25%-30% of total OEC. We are tracking within our net fleet CapEx guidance for the full year and are affirming our net fleet expenditures of $375 million-$400 million for the full year 2016. As of September 30, 2016, fleet at OEC, as measured by the ARA definition used in the industry, was approximately $3.62 billion. Average OEC for the third quarter increased 4% compared to the same period in the prior year. Overall dollar utilization in the third quarter improved 190 basis points to 35.4% from the second quarter of 2016. Please turn to slide 21. Total debt was $2.16 billion as of September 30, 2016, relatively unchanged from the end of the second quarter. We maintained ample liquidity during the quarter, and availability under our asset-based revolving debt facility, along with cash on hand, was $927 million as of September 30, 2016. Our free cash flow for the first nine months was $130 million and benefited from working capital initiatives we implemented this year. In summary, our balance sheet and financial flexibility provide a strong foundation from which to fund our strategic growth and to create value for our shareholders. Now I'll turn it back to Larry. Thank you, Barb. Turning to slide 22, before we begin our Q&A discussion, I wanted to leave you with some of the reasons we remain confident that we're on track to achieve our long-term operational and financial targets. We're excited about the traction that we've achieved in new products. We're making great progress with our ProSolutions and ProContractor tools and other equipment that we've added to the fleet. Our acceleration in branch performance in urban markets is just beginning, but it's proof that the business model is working. We are improving operating efficiencies at the branch level and continuing to improve FIR. We're tracking improvement in sales force effectiveness through training and productivity tools and expect those results to accelerate as the average tenure of our sales organization increases. Our ancillary revenues are increasing, as you can see from the 18% increase in the third quarter. Although it's a small portion of our revenue, don't forget that most of the gain in ancillary revenue falls straight through to the bottom line. Finally, we're continuing our focus and our commitment to a culture of safety, which remains our number one priority. Before we take your questions this morning, I'd just like to remind everyone to go out and vote if you haven't done so already. Now what I'd like to do is turn it over to the operator to open up the lines and let's take some questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. Our first question will come from Joe Box of KeyBanc Capital Markets. Please go ahead. Hey, good morning, everyone. Good morning, Joe. How are you? Doing well, thanks. I wanted to dig into the 93% sequential incremental EBITDA margins in Q3 from Q2. Just digging through that, obviously we had less negative used gross profit, and we had, it looks like, favorable mix of revenues. I am curious, were there any costs maybe in the last quarter that didn't repeat this quarter or that stepped down to drive that 93% incremental margin? I think it's just really a function of higher revenue and the scale. Okay. From a cost standpoint, no good guys that positively contributed. It was just literally operating leverage in the business. That's right. Okay. How much were the rebranding costs this quarter? We don't report those, and we're tracking those as part of our whole budget in terms of the restructuring of the business, and we're not tracking those separately or independently or reporting on those separately or independently. Okay. I appreciate that. I just want to drill into the used equipment margin. It looks like nice sequential improvement. It sounds like that might have just been a channel switch to- Yeah more retail and wholesale, or was there any actual change in the amount of oil and gas equipment sold? Any clarity there would be helpful. You are absolutely right, Joe. It was really a direct effect of the switching to more retail and wholesale channels from auction channels. I think we are at a historic period where we feel pretty good about used equipment prices in terms of selling at a reasonably high level. A majority of the shift that we saw was related to the channel mix change. Hey, Joe, just one more question. Just one more question, Joe. We have got some other folks in the queue. Okay. Here is one for you. Just from a modeling standpoint, can you walk me through how you are calculating the 35.4% dollar utilization? Well, dollar use- We use the standard ARA calculation, Joe. Right calculation, Joe. Okay. Well, let's just walk through it then. So you've got $360 million of revenue, rental revenue. If you multiply that by four, I'm coming up with $1.44 billion, and then divide it by the $3.62 billion of OEC, I'm getting a 39.8%. If you guys are using a Sorry, go ahead. Well, dollar utilization, you need to check the calculation. It's not based on total revenue. It's based on pure rental revenue, which is not a figure we disclose. Okay. But if we are looking to build out a model, do we need to use a different OEC number? What should we be using to come up with that rental revenue number? Well, we are not providing forward guidance on what that rental revenue will be from a guidance standpoint. I think you have to use the forecast that we have provided publicly already around our EBITDA and what we have been trending to. But Barb, do you have any other suggestions for Joe? Um- Joe, this is Bruce Dressel. Hey, dollar utilization is calculated off of pure rental revenue, and the rental revenue that we are providing you includes ancillary revenue along with that. So there is a small back down of that out of what would be the calculation for pure rental revenue. So rental revenue that we generate off of our owned equipment. Okay. Yeah. And the other thing, Joe, is that we're using average OEC for the quarter, not the ending point, which is the number we gave you. Okay So if you utilize rental revenue and assume some decline for ancillary, then you would divide. So that's it. If that's okay, Joe, we'll move on to the next question. You can get back in the queue. Operator, do we have the next Certainly. Our next question will come from Nick Coppola of Thompson Research Group. Please go ahead with your question. Hi, good morning. Good morning, Nick. How are you? Good. Just wanted to ask a thematic question here about the non-res cycle. Where are you seeing pockets of strength? What are your expectations in terms of demand? What have conversations looked like with customers and the like? Yeah, good question. As I said in my initial talk this morning, we're sitting really favorable along the East Coast and the Southeast and the West Coast. A lot of that has really been very strong. Obviously, our urban market activity that we've recently been working on developing has been fueling that growth in the non-res area. That's where we're positive about it, and that's where most of the key growth and activity in non-res is happening. Bruce, you want to add anything to that? Yeah. The only thing I would add is, as we focus on all of these kind of large urban markets, whether it's in the Southeast or the West, or even markets like a Chicago or a Houston, the activity levels there are strong in non-res, but also as we execute on our strategy of kind of touching out in what we call square footage under roof and reaching other types of customers within these large populated urban markets, we feel pretty comfortable about the kind of runway that's in front of us for opportunity. Okay, that's helpful. Any comments you're willing to provide about what October looked like, in terms of rental revenue and rate? Any kind of inflection to the up or down side? No, I think we're going to stick to reporting on the quarter and talk about the results for Q3, and we'll talk to you about Q4 at our next call. Okay, fair enough. Thanks for taking my questions. Our next question will come from Neil Frohnapple of Longbow Research. Please go ahead. Hi. Good morning, guys. Good morning, Neil. How are you? Doing well. The nearly 22% decline in upstream oil and gas markets this quarter, how is performance in this market versus your expectations, say, 3 months ago? Larry, I think you mentioned you believe this market's reached a bottom. Can you just provide some thoughts on what gives you confidence in that view, if you're seeing volumes at least increase sequentially or bottom out? Any help there would be great. Yeah. We are seeing the sequential, what I'll call less worse, if you will, over the last 5, 6 months on a monthly basis. While the business is still providing some headwinds to us, it's in what I'll call a slower trajectory down than we've seen. We feel at this point in time, as we go into the fourth quarter, we're lapping the results, the strong decline results from Q4 of 2015. We expect to still see some headwinds through the quarter, but not as deep as it was certainly a year ago. Any other comments, Bruce? No, I think that the market, I would say, you could call it's stabilizing. As every month we move forward, we have less headwinds and we're lapping those large declines of the quarters past and the months past. I wouldn't go as far to say that the market's building any kind of momentum. But like Larry Silber said, every month it's less worse. But just to clarify, Bruce, is it still declining month-over-month? Do you see what I'm saying? Yeah. Currently right now, we are declining month-over-month compared to where we were. So if I'm looking at September year-over-year, yes, we declined. We showed that in the numbers. We won't fully lap that for, I would say, the foreseeable future. Right. I guess my question is third quarter this year versus second quarter this year, was revenue higher or lower? You're saying the same year? I don't want to quote it on a quarter-over-quarter, but versus the prior year quarter, it was improved a bit. But it still declined in the quarter from the prior quarter. Okay. My follow-up question, with adjusted EBITDA, I'd call it $390 million for the first 9 months. The full year guidance of $520 million-$560 million implies a fairly wide range for the fourth quarter. Could you just talk about if you have a bias to the low end or high end, or at least can you provide some main puts or takes we should be thinking about to drive to each end of the range? No. I think we're going to stick to the range that we've put out there, and I think we've affirmed that the guidance is there, and we'll stick to that and not provide any broader color for the fourth quarter at this point. Okay, thanks very much. I'll pass it on. Thank you. Our next question will come from Robert Wertheimer of Barclays. Please go ahead. Hi. Good morning, everybody. I hope you can hear me. We can. I wonder if you could just talk. Oh, beg your pardon. I wonder if you could just talk a little bit about telematics, and what impact do you see on your revenue model and business model coming out of this? It seems like data that is going to come out of it. I do not know whether that means your customers will use equipment radically differently or whether you will approach it differently. I know it is very early stages. I am just curious what your big picture thoughts are on that. Thank you. Are you referring to the political climate? What are you referring to? I am not quite sure what the- Oh, I am sorry. The enhanced telematics that you are putting on machines. The- Yeah, I think that the industry, as the industry moves forward with this new type of technology, I think it is going to drive a higher level of service. I think we talked about this last time on the call. It is a real differentiator, I think, between kind of the top-tier players in the industries and the others. The customer will demand it. Everyone is coming out at the top level. Everyone is coming out with something that is going to enhance the customer's experience and make the customer more efficient in renting. I also think that it will help drive this conversion from ownership to rental, because you will be able to prove to the customer that you can help them become more efficient with the products that they are renting and they are using, and work in a more efficient, effective, and safe manner. It's almost become a requirement for the top-tier players in the industry to have this kind of capability. I equate it to like airbags in cars, right? It's almost a requirement to have it. The top-tier players, ourselves included, will have it, and that'll differentiate us from the also-rans in the industry. See that differentiation potential clearly. Is there also a potential to generate revenues through better management of the fleet for customers? Is that still unclear exactly how, aside from the gain, which I understand how you monetize? Yeah, look, certainly there potentially could be a revenue-generating opportunity. But I think our approach right now is really to improve productivity, to improve effectiveness and efficient operation of the fleet to help us from a maintenance standpoint, to identify when equipment needs maintenance ahead of time, and to really perhaps help drive the customer towards better utilization of the gear that they have on hand within their operating site where the equipment is on. So could be a, and should be a cost savings opportunity for our customers not to have to rent more gear than what they need, which on the one hand you would say is counterproductive to what we want to do. But we also believe that that's an opportunity to embed ourselves as an important and viable partner to that customer when we look to improve productivity within a job site. Great. Thank you. Our next question will come from Brian Sponheimer of Gabelli. Please go ahead. Hi, good morning, everyone. Hi, Brian. How are you? Hi. I'm good. A couple of questions. One, separate from the business. Having read your separation agreement, it appears your liability fencings with HTZ are pretty well defined. But just about cross liabilities with Hertz related to debt. They spoke on their own call this morning about their own issues, but if they were to trigger covenants on their own revolver, would that affect HRI in any way? We are two separate companies as of July 1, 2016. We operate independently and separately, and there are no cross ties that I'm aware of that connect any of that. But just to be clear, matters in lawsuits that would have some sort of liability for both, it's 85/15. Is that correct, Barb? Everything is defined in our information statement and in our 10-Q around the liabilities and responsibilities of both parties. Okay. All right. On the business, as you look at rate for oil and gas heading into next year, are you able to quantify the drag on a full-year basis? And how should that evolve if we're thinking about it? Well, look, I think we're best case is expecting oil and gas to flatten as we enter into next year, and we're not predicting any incremental improvement in our revenue stream from that. It has basically held steady since 2014 Q1, and we expect it to stay in this trough for a period of time. I think if you go back to some of the statements we've made in the past, we're not incorporating any significant improvement in our results coming out of any change in the oil and gas market. Okay. On the used equipment side, the ability to get more equipment through retail and wholesale channels as opposed to auction, what was it about those particular end markets that allows you to do a better job of that in this quarter? Well, I think I'd rather back up to why we used auction earlier in the year, was because we had an abundance of equipment coming off of oil and gas. In order to dispose of that quantity of equipment in an expeditious amount of time and generate the cash for that, we were required to go through the auction channel. We haven't necessarily done anything different to improve or increase our ability through retail and wholesale. What we've done is just the volume of equipment going through has been reduced, and we're able to revert to what we've done in the past, and the amount of equipment coming out of oil and gas has just been reduced. Okay. One more, if I may. Any pricing dynamics for your major competitors that you're facing that may be a little bit different than what was in the original plan? Well, we do not really comment on anything that our competitors do. I think you will have to ask them what their dynamics are. We have continued, and as we reported here, we reported positive pricing improvements in our business, and we will strive to continue to do that. All right. Thank you very much. Good luck. Thanks, Brian. Thanks, Brian. Our next question will come from Steven Fisher of UBS. Please go ahead. Thanks. Good morning. Hi, Steven. Hi. On slide 11, your fleet unavailable for rent. Last year, there was a pickup in the fourth quarter. Is that just seasonality, and would you expect the same trend for 2016? If so, would it be sort of a more- Yes and yes. Yes, it is seasonality. Yes, we would expect it to pick up in the fourth quarter. What we'll do is we'll manage the readiness of that fleet depending upon the environment in which the fleet comes back in, meaning what the marketplace is relative to whether it's a cold weather market or a warm weather market and what that equipment is. We'll make sure the readiness of the fleet is available for when we come back off of the holidays and need that equipment to go back to work. But traditionally, during a holiday period, you'll see a lot of call-offs, and that will drive or spike the number. I'd say overall, operationally, we're working to improve that metric to come down a notch. You'll still see the spikes and the cycles, but operationally, it's our intent to drive that down to a lower level but still experience the cycles during those peak periods. Okay, that's helpful. In terms of your pricing growth, do you have any sense for how that compared to the market levels that you serve, versus how much was a result of your company's specific improvements that you've implemented this year? Let me answer it a little bit differently. Hopefully, I can come to a bit of what you're trying to get at. Pricing for us is a combination, a bit of a low-hanging fruit, a bit of confidence in the organization that we've been able to develop over the last 14-16 months. A bit of fleet mix change in terms of what we put in terms of fleet that produces a higher price or higher dollar utilization in the market. You couple all of that with the pricing tools, the Optimus pricing tools that we've put in place to drive the behavior of our salesforce.com to achieve higher pricing levels. All of that wrapped together has been the effect of the positive pricing that we reported this quarter. It's not any one particular item of that, but a multitude of things that we're doing to change the behavior of the organization. Okay, thank you. Our next question will come from James Kahler from Bank of America, Merrill Lynch. Please go ahead. Hi, all. How are you doing? Hi. Good morning. How are you? Good. I guess, first question, while I appreciate that you don't want to tighten the EBITDA guidance for the fourth quarter, can you maybe just give us what the 4Q 2015 number was so we have sort of a starting point? Let me look for it. Don't know if I have it right at our hands, but it would be reported- It's on a different basis. It would be reported on a different basis, and it's not something that we're prepared to give out. Remember, we were a division of Hertz in the fourth quarter of 2015, and it would've been reported on a different basis. I think you'll have to go back to the information statement and extrapolate that out. Okay, fair enough. My only other question was just on fleet age. I didn't see the fleet age in the slide. I'm not sure if I missed it, but just if you could give us an update on where the average fleet age and what your target is, and over what time frame? Well, this is Bruce again. We ended the quarter with an average fleet age of 47 months. We're not really giving guidance on where we think that fleet age will go, but I think you can expect us to stay somewhere within that range. Okay, I guess just the one follow-on, and it might be too early, but do you have any sort of early thoughts on what the CapEx will look like in 2017? Have you started that planning process? I guess, without giving a number, maybe directionally sort of roughly the same, more or less than this year? Yeah, look, we're right in the middle of that planning process right now as we speak. We're working with our field organization to do that build-up from the ground up. I don't think we're prepared at this point to give you a directional on that. We will buy fleet next year. We'll buy a lot of fleet, but I'm not prepared to give you a number at this point until we complete our roll-up from our fields. Okay, very good. Thank you. Our next question will come from Sean Wondrack of Deutsche Bank. Please go ahead. Hi there. Good morning. Good morning. Thank you. When I look at your net fleet CapEx guidance, could you parcel out for us how much of that is actually maintenance CapEx versus growth CapEx? This is Bruce again. It's difficult to look at it that way. If you're looking for which CapEx is purely replacement of the same product, because that would be pure replacement, right? Which we're buying all these different types as we're diversifying the different product mix that we carry. I think you're going to have to just kind of back into that based on what the overall average fleet growth has been, right? Then kind of back into in the net, then you see what our proceeds are, and then you're going to have to make some assumption on what we're getting per OEC dollar in proceeds, what percentage as we sell out. Then you've got to build some kind of inflation built into that, right? That the equipment I'm buying today costs more than the equipment I'm selling that I bought nine years ago or eight years ago or seven years ago. Okay. We don't really think about it that way, to be honest. Okay. All right. We don't have to get into that then. Have you guys divulged any kind of a leverage target, either on a net basis or kind of through the cycle on where you'd like to get net leverage to? Yeah, we have. We've said we would like to be in the 2.5 times to 3.5 times leverage cycle. We want to get a bit lower than we came out of the gate with our- Okay, great. That's helpful. Then when I look at your EBITDA, obviously, you just went through a massive spin-out. You're a separate company now, but you're going to have some of these spin-off costs continuing. I think there were about roughly $10 million this quarter. Should we expect that to be the run rate going forward? Do you expect them to tail off into 2017? How should we think about that? Yeah, it's a little bit messy. You got to remember, first of all, that some of the costs that were spin-off costs in the first half of this year are no longer spin-off costs because now they're costs of us being a standalone public company. So that makes it a little tricky. I would tell you that our public company costs are tracking as we thought they would. And for a rough number, if you looked at SG&A for Q3, that's probably a rough approximation of those ongoing public company costs. Okay. But did you also say that some of these spin-off costs have become kind of public company costs, so wouldn't they be continuing? Well, not necessarily. If you think about last year, myself and Barb Brasier and the other members of our leadership team were part of spin-off costs as we were beginning to stand up a company capable of operating independently on its own. So we were additive and treated as spin-off costs a year ago. And as of July 1, we are no longer spin-off costs. We're operating costs of this business. Okay, fair enough. Thank you very much. Our next question will come from Michael Cohen from Opportunistic Research. Please go ahead. Hey, Mike. Hi. Thank you so much for taking my question. I was wondering if I could just follow up, I believe, on Joe's question in terms of calculating the utilization. Could you provide a description of what the ancillary revenues are? Perhaps, is that something that might be broken out in the 10-Q? This is Bruce. I am not quite sure if it is broken out in the 10-Q, but ancillaries are internal transportation, so transportation with our own vehicles, rental protection plan, and any kind of additional charges like environmental charges or DOT charges that we apply to invoices that go along with the renting of our equipment. That's also the pure rental revenue. Right. And that's kind of the, I believe it's the ARA definition of rental revenue. Then anything else like accessory sales, parts sales, all these labors all fall down into that total sales number that Barb walked through on her bridge that showed how some of that we're reducing due to exiting the dealer market where we were actual dealers for certain types of equipment for new resale. Understood. Whatever disclosure you can provide around that would obviously be very helpful to being able to track rental utilization. Shifting gears, in terms of used equipment sales, it seems like obviously the margin was obviously much better this quarter. Do you expect the volume to continue to be at these lower levels? Meaning, is the repositioning of the fleet largely complete? And what should we think about in terms of an ongoing, maybe on an annual basis as a percent of the fleet, or how should we think about that in terms of what your disposals will be year to year? Yeah, look, I think that really is a function of rotation and age of our fleet as our fleet ages. If you think back seven, eight, nine years ago, there was very little equipment purchased during the 2008, 2009, 2010 downturn in the economy, which means we'll probably turn out less equipment in the upcoming year or two as a result of normal rotation strategies. I think what you saw earlier this year was our reaction to the downturn in oil and gas and what we needed to do to rightsize our fleet basis the activity or lack of activity in the oil and gas market. So I think that is really what you ought to be looking at. We believe we're rightsized today and don't expect Any significant amount of fleet like we saw earlier in the year. But overall, I think you ought to look at what the CapEx. Go back in time, look at what the CapEx was seven, eight, nine years ago for us, and you can estimate what the rotational requirements are going to be going forward. Great, thank you. One last question relating to oil and gas markets. Is there a point at which you think it will no longer be a drag, obviously, given the easier comps? Is it sometime in 2017? How should we think about that? Yeah, look, if I was able to forecast that, we'd probably all be doing something different. But we are hopeful that as we roll into 2017, oil and gas will not be a drag on us and that the comps will be at least even and not have a negative impact on our business going forward. We still expect to see a bit of a headwind, but as we roll into the new year, we're hopeful that that'll change. Great. Thank you again. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mr. Larry Silber for any closing remarks. Well, first of all, we want to thank everybody for attending our first call as a truly independent company, and we look forward to following up with many of you over the course of the next couple of days in individual sessions. We appreciate your time this morning. Again, a reminder, I'd like to encourage everybody, if you haven't done so, please go out and vote today. Thanks, and have a great day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.