Earnings Call: Q2 2015

Jul 23, 2015

Good morning, and welcome to United Rentals' second quarter 2015 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks, uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's earnings release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2014, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's earnings release investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, William Plummer, Chief Financial Officer, and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Neilon. Mr. Neilon, you may begin. Well, thank you, and good morning, everyone, and welcome. I want to thank everybody for joining us on today's call. I want to focus most of my comments today on the dynamics of our operating environment. I'll discuss how our industry is adjusting to the recovery, and I'll talk about how non-residential construction is hitting its stride, particularly in the commercial sector. Then Bill will cover the financial results, followed by your questions. First, look at the quarter. We turned in a solid performance with nice gains in profitability, margin, and returns. Our EBITDA margin increased to over 49% in the quarter, and we reported earnings per share of $1.95 on an adjusted basis. These were both second-quarter records for us. Free cash flow was very strong at $432 million through June. Taken in their entirety, these numbers reflect the fundamental strength of our operating environment. There's clear evidence of demand for our equipment, and demand is growing. However, taken individually, two of the underlying metrics reflect some challenges in our environment. They're rate and time utilization. Rate came in softer than expected at 1.5% higher year over year. Time utilization was down 150 basis points to 66.6%. It's important to understand what these numbers do and don't represent. For one thing, they do not reflect a macro weakness in demand. We spent a lot of time analyzing industry behavior, and we believe that rental demand in North America has multiple years of growth ahead. We also think that 2016 will be even stronger than 2015 for our end markets, and that the growth will be led by non-residential construction spending. That's what most industry experts believe, and we agree. Now, what the metrics point to are two dynamics that are more like microcycles within our larger operating environment. These dynamics will run their course, but right now, they're not doing us any favors. The first issue is upstream oil and gas. Last quarter, we told you this sector was a significant constraint with both a direct and knock-on effect. To give you an idea of the impact in the second quarter, if we exclude the branches with the most exposure of upstream oil and gas, time utilization was only down 30 basis points year-over-year, and sequential rates were slightly positive. In April, we said we thought this sector would continue to be a drag on numbers to at least the third quarter. It's no surprise that we're still dealing with that challenge, particularly in our pump operations. Obviously, there's not much we can do about the price of oil, but we are taking action. So far, we've redeployed over $125 million of fleet away from the upstream oil and gas markets, and we'll continue to use this lever when we see the opportunity for higher returns. The second dynamic is on the supply side, where it's more of a timing issue with our industry as a whole. Right now, Rouse will tell you that there's some excess fleet in rental yards that needs to be absorbed into the marketplace. It's not unusual for our industry to add fleet in an upturn and to do so slightly in advance of the demand. In this case, however, the imbalance was exaggerated by the decline in upstream oil and gas. This will level out, but until that happens, it continues to be a drag on rates and utilization. Our own plan is to invest $1.6 billion of gross CapEx this year, which is $100 million less than our original projection. While we've taken that number down, it still represents plenty of growth CapEx to serve our large accounts and to expand our high-margin specialty business. On the other side of CapEx management, used equipment sales, the market is going strong. Used sales continue to be an important mechanism for us in fleet management. This second quarter, our adjusted margin on used sales was a robust 50%, which is an increase over last year. Given these various considerations, we're being realistic about the short-term impact on our performance. As you saw last night, we lowered our expectation on rate to a half a percent gain. Our time utilization target is now approximately 67.5%, and we've adjusted our revenue and EBITDA ranges accordingly. At the same time, we expect free cash flow to remain very strong. I want to be clear about our sights are set higher than this outlook, as they always are with any guidance we give. I think you know by now that our nature is to be hungry for more, and in this case, if there's more rate, we're going to find it. We have a lot of runway ahead of us in this cycle. Secular penetration is still in play, and commercial construction is nowhere near its peak. Global Insight is forecasting solid growth for the U.S. rental industry this year, followed by similar increases in 2016 and 2017. Dodge sees the construction market growing for at least the next three years. At the same time, we're careful to maintain our company in a strong position to handle any issue that could arise. We've been building our scale, technology, processes, our skill sets for nearly 2 decades, and even if the environment throws us a curve ball, we can handle it. In fact, we're better equipped to handle it now than any time in our history. From our current vantage point, the cycle is right on track. We're finding that customers are bullish about their prospects, and the level of activity seems to bear that out. In some cases, we're hearing about project backlogs that are approaching pre-recession levels. Here, I'll give you a few snapshots from the field. In our Mid-Atlantic region, where we had double-digit growth in the quarter, more on nuclear power projects, roads, bridges, and industrial manufacturing plants. In the Southeast, we're seeing government projects start up, as well as healthcare construction and highway expansion. Florida's picked up, and customers are saying they expect a strong finish to the year with upside into 2016. In the Midwest, where heavy rains and a labor shortage delayed some brick construction starts, we still had solid growth. We're now seeing a range of projects get underway, including a fertilizer plant, auto manufacturing, and commercial buildings. It should give us momentum right through the winter. Turning to our specialty segment, trench safety, power, and HVAC both had a stellar quarter. Trench safety revenue was up 15% year-over-year, and power posted 39% growth. Our specialty segment got a boost from 10 new branches we opened in the first half of the year, and we plan to open another 8 before the year-end. This segment is also generating solid growth organically. All of the 15% growth in trench in the quarter came from same-store performance, and power and HVAC had 27% same-store growth. In addition to being important revenue streams in their own right, specialty rentals have a role in strengthening our key customer relationships. The larger the customer, the more likely that their rental needs extends beyond the basics. We're doing a good job of ramping up our cross-selling efforts to serve these accounts more completely. In the process, we're building loyalty that holds up under competitive pressure. National accounts are a good example. Year-over-year in Q2, we grew our cross-sell revenue by almost 30% with national accounts. In the second quarter, we grew our rental revenue in the same group by more than 7%. So we're piloting a steady ship, and we're being extremely disciplined about our business development efforts. Finally, I want to mention our share repurchase plans. As we announced last night, we're accelerating the $750 million program we initiated last year. We now expect to complete that program before year-end, and then we'll start a new program for an additional $1 billion of share repurchases. It's a sign of our confidence in our future earning power and our commitment to returning value to our stockholders. In closing, I want to come back to our operating environment and the many levers that we have at our disposal. We use these levers and the inherent strengths of our strategy to manage our business for the best possible outcomes. In the second quarter, you saw the benefit of the organic and inorganic moves we made. Our focus on operational excellence, our efficient cost structure, and our ability to use scale to our advantage, all of which contributed to a strong financial performance in many respects. We will continue to take decisive action where we see opportunity to build on these results and generate even higher returns. With that, I will ask Bill to cover the financial results, and then we will take your questions. So over to you, Bill. Thanks, Mike, and good morning, everyone. I will try to add a little bit more color to the numbers that most of you have seen in the press release or heard in Mike's remarks. Starting with rental revenue. Rental revenue for the quarter was up 3.5% year-over-year. That is $42 million of an increase. Within that increase, owned equipment revenue represented a 3.7% year-over-year growth for about $37 million of that $42 million. The remaining rounded $4 million was ancillary and re-rent items, which were up nicely over the prior year. Within the OER growth rental rate, the 1.5% year-over-year rental rate that we delivered in the quarter equates to about $16 million of the $42 million year-over-year growth. The volume growth, 2.8% volume growth, represents about $29 million worth of rental revenue growth year-over-year. The replacement CapEx we sold, replacement CapEx average age of 86.9 months in the quarter, inflating that over the average life of the equipment that we sold, resulted in about 1.9% or $20 million of rental revenue headwind in the quarter. That leaves about $12 million of mix and other impacts resulting from the strong growth in specialty and other mix effects throughout the business. So those are the key components of the $42 million year-over-year rental revenue growth. The only other point that I would emphasize is that Canadian currency effects are at play throughout all of those lines, with the exception of rental rate. Canadian dollar was weaker by 11% in the quarter, and that resulted in about CAD 15 million of headwind in the quarter compared to last year. So a significant component to the overall performance. That said, we still delivered the 3.5% in spite of that particular challenge. Moving to used equipment sales, we generated $124 million of proceeds from used sales in the quarter. That is down about 10% from the second quarter of last year. Even though the total revenue was down, the margin performance was very good. 50% adjusted margin for our used equipment sales activity. That is 140 basis points better than the prior year. We are particularly proud about the fact that we were able to do that while still supporting the overall fleet strategy of selling the oldest fleet, as I mentioned earlier, just under 87 months of average age for fleet sold. We continue to do a good job of disposing of used equipment through our retail channel. Retail represented just over 60% of our sales in the quarter, and that was about 1% better than the share that it represented last year. A good used equipment result, even albeit with a slight year-over-year decline. If we move to adjusted EBITDA, we delivered $706 million of adjusted EBITDA in the quarter. That is at a margin of 49.4%, both records for the second quarter for our company. That is $43 million of improvement year-over-year and 200 basis points of greater margin from second quarter last year. The components of that $43 million improvement year-over-year are as follows. The rental rate improvement resulted in about $15 million of year-over-year EBITDA improvement. Volume is about $20 million of improvement. And the ancillary that I called out earlier, all of that $4 million revenue improvement drops to an EBITDA improvement. A nice result there. Working against us, fleet inflation resulted in about $14 million of impact at EBITDA. And used sales year-over-year was about $5 million of impact at EBITDA, both representing headwinds. We also had a year-over-year bad debt expense increase. That was a headwind of about $10 million. It did not represent a problem or a challenge in bad debt collections this year. It is just that the comparison period last year was so strong. Last year, we had a really nice collection result, along with an improvement in the aging buckets of our accounts receivable that really took down our bad debt expense last year. Incentive compensation was one of the adjustments that we have made in order to offset some of the challenges that Mike mentioned. Our incentive comp benefited us year-over-year to the tune of about $18 million for the cash incentive compensation programs across the business. That was an $18 million benefit, and it helped offset some of the headwinds that I mentioned previously. Merit increases are always there. They were about $6 million of headwind for the quarter. And the remainder, which is about a total of $20 million, represents mix and other benefits. Of that 20, about 10 is pure mix, whether it is mix from growing specialty, Cat Class mix, day, week, month mix, all of those mix factors net out to about $10 million of benefit year-over-year. And that leaves about $10 million of all other, which encompasses a wide variety of net benefits. So within that all other, we had fuel cost saves with the lower price of diesel and gasoline. We had lower professional fees year-over-year, lower T&E, and that is where you would see the benefit of our lean and other productivity-focused programs. Those are the pieces of the $43 million of year-over-year improvement in adjusted EBITDA. And here again, I will call out the impact of currency, which is scattered throughout a number of those lines. When you step back and aggregate it all, currency cost us in an unfavorable impact in the quarter about $7 million versus last year. Flow-through for the quarter, the top-line number was very robust, 143%, but I will remind you that does include the impact of the incentive compensation. If you adjust for that incentive comp, $18 million, you get that flow-through down to about 83%. I will also point out that the flow-through was helped by the fact that our year-over-year used equipment sales were lower. We are selling used equipment at roughly 50% margin. That is lower than our margin for the rental business. So when you take out used equipment, you are actually helping the overall flow-through. If you adjust for that used equipment effect, you get flow-through that was down around 70%. Still a nice result of 70% in any given quarter is more in line with the roughly 6% that we've guided to for the full year. Looking at adjusted EBITDA, we delivered $1.95 of adjusted EPS for the quarter. That compares to $1.65 in the second quarter of last year. That's an 18% increase year-over-year, and as I pointed out for the other measures, it also includes the impact of currency. Absent currency, it would have been about $0.04 higher. Moving to free cash flow. Year-to-date, we've generated free cash flow of $432 million. That includes $2 million of merger-related payments, and that compares to $240 million on a comparable basis for the first six months of 2014. The driver of the increase was largely a result of the year-over-year improvement in EBITDA performance, as well as some benefits in other lines, including a variety of other items. CapEx in the quarter was $693 million, and that brings the total first six months capital spend for this year to just over $1 billion. That leaves our net rental CapEx for the second quarter and first six months at $570 million and $776 million respectively. If we move to capital structure and liquidity, as you know, we took several steps to improve our capital structure in the first quarter with refinancing issues. We issued two new notes totaling about $1.8 billion, and called a comparable amount of notes out of three different issues, either fully or partially, during the first quarter. As I noted on the first call, the actual settlement for those transactions would happen in the second quarter. Indeed, in this quarter, we did record a charge of approximately $121 million to cover the redemption and write-off of other amortized costs in the quarter. The details of all those transactions are in our 10-Q, and I'll refer you there if you'd like to see more. As of June 30, our total liquidity sat at $880 million, and that included an ABL capacity of about $680 million, along with a cash balance of right at $200 million. So we feel we're very well positioned with liquidity. Mike mentioned the share repurchase program, but just to hit a couple of points there. We did continue to execute under the 750 current authorization during the quarter. We bought $155 million worth of shares, and that brings our total purchases against that program through June 30 up to $573 million, which leaves us with about $177 million to complete that program. Our initial target was that that program would run until about April 2016. Given our performance, especially the robust cash flow performance as it's rolling in this year, we accelerated our timeline and now expect to finish that program by the end of this year. As Mike also mentioned, we have announced that our board authorized a new $1 billion share repurchase program. That program will begin after we've completed the current $750 million program. We put an 18-month timeline on execution of the $1 billion, so the 18-month clock will start once we start purchasing under this program. One thing to mention regarding our share repurchase program, we do have to be mindful of limitations on restricted payment transactions that are inherent in many of our debt notes. As I'm sure most of you are familiar, RP limitations are typical in these notes, and typically, they give you a basket which builds with net income. As you grow net income, you build up that basket. The basket gets depleted with RP transactions, of which share repurchases represent one type. At the end of June, we had roughly $400 million of available capacity for executing repurchase or other restricted payments. That 400 includes the RP basket along with the cash capacity that we have at the holding company level, which is outside of the restricted payment limitations of the operating note issues. We have plenty of room. The short and sweet is we have plenty of room to complete the $750 million program this year and to get deep into the billion-dollar program as we execute it over the course of the next 18 months plus. On ROIC, the ROIC result for the quarter was 8.9%, and that was an increase of 80 basis points over last year, although down slightly from the first quarter sequentially in this year. The decline really was a result of the way that we calculate ROIC. We use a five-point average for the IC component in the denominator, and as you cross over the quarter that includes pump in that five-point average versus doesn't include it had a slight impact on our ROIC on a sequential basis. Certainly, we continue to be on the path as the year-over-year number indicates toward improving our ROIC performance. As all of you know, that is a very intense focus of our company. Regarding the outlook for 2015, Mike hit most of the key components, but just to add a little bit more color, our total revenue range is now $5.8 billion-$5.9 billion. Within that, rental revenue will be driven by the rate and time utilization assumptions that we've revised. Rate, we now expect up about half a percent year-over-year. That rate assumption reflects very heavily the experience that we've had so far this year. Time utilization also reflects that experience. We now expect the full year to come in at about 57.5%, and those will result in an adjusted EBITDA range of about $2.8 billion-$2.85 billion. We have reduced our capital spending plan for the year by $100 million. Net gross capital, we now expect to spend about $1.6 billion. We think this change is in line with what we've been focused on very recently, which is to be very disciplined around our CapEx spend. Free cash flow, we've maintained our range there at $725 million-$775 million. If we deliver that, we expect the year to end with adjusted debt to EBITDA of 2.8 times. That's slightly higher than the 2.6 times that we've shared in the past. It clearly reflects the decrease in adjusted EBITDA, but it also assumes now the accelerated completion of the $750 million share repurchase program by the end of this year. Those are the key comments I wanted to make. I just wanted to reemphasize a couple of the points that Mike made. It is a solid quarter for us, albeit with some headwinds that were more challenging than we certainly expected. Upstream oil and gas, that impact will continue to work through, but it is a matter of working through it rather than it being a major impact to the company's longer-term future. The supply dynamic across the industry is one that we're also focused on and making sure that we're focused on adjusting properly to what we see as a short-term supply dynamic. Of course, currency is another effect that will continue to play in our future coming up. But with all of that, the results that we delivered in the quarter represent what I think are a really solid performance. Record revenue, record EBITDA, record EBITDA margin, record EPS, all put us in a great position for the future. With that, I'll ask the operator to open us up for questions and answers. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Ted Grace from Susquehanna. Your question, please. Hey, guys. This is Tim Robinson on for Ted. Thanks for taking my question. Thanks, Tim. First question I had was, I was wondering if you could provide us with a framework for how you see the industry supply situation currently, and how you see that unfolding over the next three, six, nine months. Tim, I'll start, and please, Mike and Matt, chime in. I think framing it, I hit on it in my comments, and Mike did as well. The dynamic of oil and gas is a major factor that we continue to work through, but we feel like we are making good progress in working through it. The industry as well is working through it, and I think over time they will, as long as there's not a major down leg on oil and gas drilling activity. Given what we've seen, and we put some more information in our investor deck to share with you the trends that we've seen in oil and gas activity. We think that the impact from oil and gas is stabilizing, and even if it goes down a little bit more, it's not going to be a major change from here. The supply dynamic is one that I think we're also very focused on. Some of the mid-size and smaller players, according to data that we've seen from Rouse and elsewhere, have been growing their fleets in the early part of this year. What we've seen and heard more recently, let's call it over the last couple of months, is that they are much more attuned to the challenges that the oil and gas dynamic have put to the industry, and people are now focused more on making more disciplined decisions, we believe, around their supply in the current environment. That's what frames our thinking that we can work through this supply excess, if you will, in the relatively near term. Couple that with the overall demand backdrop that we've talked about, says that we'll get through this, and times should be better going ahead. I don't know if you guys want to add anything, Mike or Matt. No, I think, Bill, you covered it well. When Mike referred to the time utilization in the non-oil and gas stores only being down 30 bips, imagine how much that they've had to absorb into those end markets that they're participating in from the oil and gas dislocation, as well as everybody getting a little bit ahead on their fleet purchases, that's an encouraging sign that bolsters our opinion. I would only add that the one data point that I pointed out too in my opening comments was Rouse. They've got a wealth of information on this particular subject. If Gary was here on the phone, he would probably say exactly what Bill mentioned, that as we went through the seasonal side, it is being absorbed, and that the utilization and the OEC on rent is increasing. Got it. Can you just give us an update on July trends for rate and time? Sure, Tim. The way we characterize it is that July rate is very much in line with our expectation for the remainder of the year. Time and fleet on rent growth are a touch ahead of our expectation for the remainder of the year. Maybe I'll offer up a little bit more here. Your natural question is, "Well, what is that expectation, Bill?" We're not going to give the exact number for the month of July, but our expectation for rate sequentially over the months remaining in this year are flat to down slightly in each of the remaining months. So that gives you a little bit better frame for the rate expectation. When you think about the flat to down slightly for rate sequentially, how would you compare the rate expectations for the non-oil and gas exposed places as opposed to the oil and gas branches? Tim, this is Matt. That's a great question. I would say they would fare better, as they have. They've been a little over a half a point better through the second quarter, and we'd expect to see that combination. The flat to down, there could be some lumpiness in there, but if you do the math, that needs to happen for us to reach our current guidance. If there's more to be had out there, as Mike stated, we will go after it, and we do think the opportunity will be in the non-oil and gas sectors. Thanks, Tim. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Hey, Seth. Hey, good morning, guys. Morning, Seth. I want to go back to the CapEx discussion. I appreciate that the company wants to be positioned for an improving environment, but I am really kind of struggling with the way that you frame the second half for rental rates and fleet utilization. I am just struggling with why you cannot bring the second half CapEx number down. Do you have line of sight that you really feel like you need the equipment for the start of next year? Given the rate and the utilization outlook that we are looking at for the third and fourth quarter, I am just trying to reconcile why you would not bring the CapEx down further, at least for the second half of this year. And as a tie into that question, you brought your longer term rate guidance down from 3% to 2%, and I would think that one of the ways that you could ensure that the rate stays higher is with having upward pressure on fleet utilization. I'm just trying to tie all this together, if you could. Yeah. Seth, this is Mike, and it's a great question. It's one that we've been debating internally here for the last few weeks, and actually, I would say the last few months. I think we have to start. Let me break down the CapEx for you to begin with. Of the $1.6 billion of rental CapEx, if you take away the inflation-adjusted replacement CapEx of $114, that leaves you with a growth capital of about $460 million. This is all seen in our investor deck that we have out there. Yep. Of that $460, we'll spend $70 million of that this year to refurbishments for our rental assets and the investments in our GPS, our telematics for the fleet. Let's just round it, and that leaves us about $400 million. That is split evenly between our specialty business and our Gen Rent business. As I mentioned, our specialty business is doing quite well. And we're funding the 10 cold starts that we started, and we have 8 more to go this year. That's a high margin business, high return, and it also provides an entanglement with our customer base. Now we're talking about roughly $200 million for the Gen Rent. And we're funding the growth really goes into our national key accounts business, where we've had some new wins. And we're also investing in high time utilized assets. When we think about the investment, we don't think about it just as a point in time. We invest in what we think is a cycle that has multiple years of growth ahead of us. I want to also point out that you mentioned of dropping our CapEx this year. I'll point out in the investor deck that we also dropped it going into next year. That's always subject to change. Just as we go through this year and we think about next year and we go into December and we come out to the investment community, we'll update you. If we think that the worst is behind us completely and there's some rational behaviors going on and we can see more, we're going to post more. That said, we're actually very comfortable with our investment plan. As far as the rates are concerned, just to address that, you are right. It declined. If I recall, when I talk about rate, people used to ask me when we were coming out of the recession, "Mike, how do you see this?" Well, used price margins improve, then you see utilization, then rate. Our rate has been impacted by time utilization because of the influx. We are working through that as we go through the back half of this year. I will tell you, quite honestly, Seth, if we have to adjust next year, we will. But I just do not think about it as a point in time. I think it as a continuum, because we buy these assets for their life cycle. It comes down to a judgment call, and this is how we have debated this, and this is where we came out. We are comfortable with it at this point in time. No, I appreciate that, Mike, but when we used to talk about the business, we would talk about, so you did almost 69% utilization last year, and we used to talk about line of sight or runway to pushing that over 70%. It just seems like with adding this fleet, you are moving away from that objective. In conjunction with that, the rate is coming down. So it seems like there is, at a minimum, an opportunity here for the second half of the year to take CapEx down, and just sort of wait and see how things progress, because really, nobody knows how the oil is going to play out and whatnot. So are you locked into contracts that are this $200 a Gen Rent, are those deals that you cannot get out of? Or you really feel like you have line of sight to things getting better in the early part of next year that you need this for? Or is there specific customers that are teed up for this equipment? Well, I'll start part of it, and then I'll ask Matt to chime in. Our national accounts represents about 40% of our total business, and it's up 7% in the quarter. These are contractual long-term obligations for us. So line of sight on those is pretty long in comparison to the rest of the industry. I'll ask Matt to talk about the time utilization and some of the dynamics. Yeah, sure, Seth. As Mike said, that additional $200 million, the flexibility to take that away would have to come at the risk of long-term relationships and long-term revenue, accretive, positive, good return revenue. So that's why we came to that decision. But when you parse out the gap year-over-year between, which is about 130 basis points, if you look at our full-year guidance this year versus our full-year actual this year. Half of that is a call that we made to continue our path on pump. So we've got a little over $70 million in pump assets that with that business being down, we could monetize if we thought that was the right long-term decision. But we want to fund the additional cold start growth as well as candidly not fire sale assets that have plenty of tread left on them and will have value for us long term as we see the recovery for that business. That's an investment we made for a longer-term gain. So that's half of that 130 bps of year-over-year decline. Bill had pointed out that we've moved $125 million of assets out of the oil and gas. That's only two-thirds of what we have to do. We have about another $60 million that we have to move out in the balance of this quarter, and we have action plans, individual assets identified. When you tie those two components together, that's the drag. That's the 1.3 year-over-year drag that we're dealing with. And it's not, unfortunately, as simple as us saying, "Well, we're not going to buy the remaining $200 million of high-time assets in Gen Rent business and replace them with those assets that are dragging the time down." And that's why it looks a little dislocated from afar. But when you dig into the detail, which we've obviously done, we're comfortable with our plan. Okay. That's actually a very helpful color. I appreciate it, guys. Thank you. Thank you. Thanks, Seth. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please. Great, thanks. Steve. Thanks. Good morning. Yeah. Just wondering how you approach the guidance on rates for the second half compared to how you approached it in April. Was there any more caution or conservatism this time or different analytical work? Just looking for your confidence that it won't be any worse than this, barring a real fall off in oil prices. Yeah. Steven, it's Bill. We're human beings. To the question about is there more caution? Probably. Look, we had a view of rates starting the year. We had a view of rates at April, and both were wrong. We thought very deep and hard about what we expect for the remainder of this year. That's influenced by our experience, right? How much? It's hard to put a number on it, but we feel like this is a realistic view, and look, we said about a half percent. Could it be 0.4 or 0.3? Yeah. Could it be 0.6 or 0.7? Yeah. I think it's fair to say that our thinking was influenced by the experience, and we don't want to be in a position of missing this time, to be brutally honest about it. Okay. That's fair. In terms of the non-oil related business, can you parse out the 30 basis points of lower time utilization as a function of just the reallocated oil equipment or is it other trends within the non-res construction market? What's your confidence that you'll start to see that utilization improving in the second half? Yeah. Tony, I think we certainly expect that the non-oil and gas parts of our business, as the oil and gas dislocation continues to be absorbed, should see less of a headwind going forward. How to quantify that is a tough one to respond to. I don't know, Matt or Mike, would you add anything? No, I would just say when you break it down market by market, and you see that half of our regions have had sequential rate improvement in Q2 as opposed to the overall company, and nine of our 14 regions have shown year-over-year growth. We see that there are still markets that even absorbing extra capacity in the near term are performing well, and that's what gives us that confidence that we continue on the path that we've re-guided to, more importantly, that 2016 and 2017 end markets feel strong for us. Yeah, I would only point out too, on the investor deck, which by the way, we've broken it into two segments, so it's easier for people to go through. One is the financial deck and one is the background information. On page 6, you'll see a non-oil and gas locations, and you'll see the greater than 20% upstream exposure and the ones with less than 20%. The OEC on rent bills is very similar to what the pattern you saw last year. You'll see that in the oil patch, particularly the upstream, you'll see the bifurcation of where it actually pivoted in March, and the drag it's been, but it seems to have moderated, as far as the timing. One thing we will tell you is according to Rouse, is that for the company, for United Rentals, we still lead the industry in our peer group on time utilization. That being said, we are not done. We got more to do, as Matt Flannery mentioned. We got some more assets we got to clear out of here, and we are going to get that done. This movie has not played out yet, but we are focused on it. Okay. Thanks a lot. Thank you. Thank you. Thank you. Our next question comes from the line of Nicole DeBlase from Morgan Stanley. Your question, please. Yeah, thanks. Good morning, guys. Morning. Morning. My question is on the medium-term rate outlook. In the slides, it was already mentioned that you guys have moved from 3% to 2%, and I think that the footnote says 1.8% over the next four years. I am just curious, when you look at what you guys are embedding now for free cash flow in 2016 and 2017, which the targets came down a bit. Does your 2016 free cash flow estimate assume that 2016 is the year that rates turn positive? When might things sort of wash out from an excess equipment perspective and rates could possibly turn positive year over year? Nicole, it is Bill. Our 2016 forecast does assume rates turn positive year over year in 2016. The note that we put in the investor deck about it averaging 2% thereafter reflects a positive year over year in 2016 and then a greater positive in 2017. That is the profile that we expect. The fleet absorption issue that we are playing through right now, we have talked about as being a 2015 or perhaps early 2016 phenomena. That is shaping our thinking about how we approach allocating fleet capital and so forth. Okay. Got it. That is helpful. Thanks. My second question, just shifting to EBITDA drop through. You guys talked about some of the puts and takes there, but you still had 70% EBITDA drop through minus all of the one-time-ish items this quarter. I am curious, I am calculating implied drop through of about 48% in the second half. Could this possibly be conservative? Is there something to think about there? Maybe incentive comp? Just curious about your thoughts there. There is nothing major and specific that we have baked into our forecast for the second half. If you want to interpret that as being conservative, I guess you could reasonably do it that way. But we do not want to get too far down the road of forecasting higher flow through unless and until we have got a better sense of where that is going to come from. We put our best foot forward on flow through in our comments year to date, and we are going to work real hard on it in the second half. Okay, thanks. I will pass it on. Thank you. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Hey, Scott. Thanks. Hey, good morning, guys. First one, Bill, for you, just following up on talking about the outlook for price going forward. Could you speak, thanks for the cadence of what you're going to see sequentially over the months of the back half. How is that going to flow into 2016? You mentioned a little lighter in 2016, better in 2017 and beyond. Just curious at the transition at the end of the year into the next year, the rate flow through. Thanks. If you're looking for a statement about how the sequentials in 2016 will shape up We certainly have looked at that differently than we might have done had we not had the oil and gas dislocation that we've had, right? We've tempered our view of how the sequentials in 2016 will play out versus where we were before oil and gas. Hopefully, that's responsive to your question. If you've got another question, ask it a different way, Scott. Okay. Well, kind of a follow-up, trying to figure out the right way to ask it, and maybe I'll come back to that. In the meantime, I'm curious, maybe Matt, this might be for you. Rental rate trends by asset class. Could you give us a little bit of color on what you're seeing with regard to the equipment itself? I think it's probably intuitive with regard to pumps perhaps, but maybe stabilization, and then some other things that anecdotally might be helpful to us. Thanks. Sure, Scott. When we look at the major cats, some of our larger products are similar to what you'd imagine the overall company is, maybe a hair better. The aerial products, the reach fork products are similar, a hair better than what we're seeing as the overall company. Some of the higher return assets that were in the oil and gas, whether it's some dirt product or light towers, they're seeing a little pressure because of the extra capacity moving into different and moving them into different markets. I guess the way I'd answer it is the more fungible the asset, the more it seems to act like the overall business. And those that are less fungible, like pumps, like some of these high-hour assets that have been in the oil and gas for a while, we're seeing a little more rate pressure. These aren't huge swings, but there is some delineation between the two. Great. Thanks for that. Bill, if I could circle back just real quick. Sure. I guess historically, you've talked about, hey, we're ending this year. We've been running at 3% hypothetically, and that's going to trickle 2% into the coming year. That's essentially what I was asking, and then what we should think about in comps this year-over-year comps in the first half with that in mind, just to get us bleeding into 2016 and where that may start. Yeah. How do I do this without going through a quarter-by-quarter breakdown in 2016? Maybe I'll approach it this way. If we finish the year the way we have in our forecast for the second half of 2015, our carryover into 2016 will be about a quarter of a point negative. So that's where we would start the year. If we got any reasonable sequential progression from that, then that would start digging us out of that negative carryover position. That help? Yeah, no, that's great. Thanks, appreciate it. Mm-hmm. Okay, next question, please. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Good morning, Jerry. Good morning. Jerry. This is Brendan Jaffe on behalf of Jerry. Can you give us a sense for time utilization performance for National Pump in the quarter, maybe quantify the headwind to total business? We haven't broken out National Pump utilization separately. As you might imagine, it is on a year-over-year basis, it's down materially. But that's about as far as we've broken it out. Matt, you want to Yeah. If you look in the industry background deck on slide 32, you'll see that we've acknowledged there's been 11% year-over-year decline in revenue in the pump business. But to Bill's point, we haven't pointed out time utilization. But we did show that in the slide in the deck, and that's the bet that we talked about earlier, right? About our longer-term view of this business and holding those assets that have a lot of tread left on them for the longer-term gain. Okay, thanks. Second, both the dollar and time utilization increased for aerial work platforms. Can you provide any color on what drove that improvement or what you're seeing in that market? Sure. That's the aggregate of the improvement that we've been building. A little bit of that is the momentum that we've had over the last couple of years, candidly. That's when I had stated earlier in answering Scott's question that they're a hair better than what we're seeing overall in the company. When you pull out the oil and gas participation of those assets, that hair turns to be a little bit more significant, right? That's when we're talking about the positive sequential rates in more than half of our regions. You'd have to imagine as big a part of our fleet as aerial and reach fork are, they'd have to participate in that. Hopefully, that answers your question. Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question, please. Hey, George. Hi, thanks. Good morning. Good morning, George. When you take a step back and look at the key metrics, rental rate growth, slowdown/decline, time utilization reduction, CapEx reduction, those are typically classic signs of a peak in the cycle. What gives you confidence we are not at or near a peak in the cycle, and potentially a peak that is induced by over-fleeting or oversupply? That is a great question. Let me step back and say, if you recall, that used margins continue to be very strong. More importantly, we took a look at, and if you take a look at just the U.S. economy forecasted growth in 2015, 2016, and 2017 on real GDP, it is supposed to improve. When you take a look at residential investment, business investment, and even the state and local investment, it is supposed to improve. Step forward, take a look at what Dodge has put out, and we have this all broken down in our investor deck. Construction, excluding utility and gas plants, is going to be up in 2015 by 9%, projected 12% in 2016, and 14% in 2017. Then we even break it down by IHS, where they see real construction growth by sector over the outlying years. Again, all public information, all independent. All of the primary goals, or I would say the primary business of non-res construction, which is a big catalyst for our industry, remains positive. So over time, we see that to continue to play out. With regards to the fleet, and I have talked about this. I understand the re-fleeting. I get it from all of the independents. They have been somewhat blocked out for some period of time. They will not have an endless supply of capital available to them. I also think that with the Rouse information, at least 55 participants, aside from United Rentals, participate in this. So they have real data. They have real information by which they can help judge their business better today than ever before. And I believe that they sign up for this so that they can understand how they can drive better returns, how they can drive better cash flow, so that they do not get themselves into situations when the cycle does turn. So I do not see the cycle turning yet. I think there is still multiple years ahead of us, and we tend to agree with the experts that are out there. Great. Thank you. Thank you. Our next question comes from the line of Nic Coppola from Thompson Research Group. Your question, please. Hey, good morning. Hey, good morning. Good morning. I don't believe you guys have talked about wet weather much. Clearly places like Texas, Oklahoma, and Colorado saw a lot of rain in Q2, and to what extent was that a drag in the quarter? Any kind of way to quantify that or speak anecdotally about it? Sure, Nick, this is Matt. We obviously saw in May our largest year-over-year sequential time utilization gap. So it did have a drag on the overall business. We've since rebounded from that, so it certainly had some impact on the first half results. But candidly, we don't think that was the major reason. It was in a specific period of time, but I think the overall dislocation of the fleet that was brought in and then a faster than expected decline in a big end market of oil and gas has probably had more to do with it. But May weather was certainly no help, and we did see our largest dislocation. We were 170 bips down year-over-year in the month of May, and then rebounded up to 130 bips in the month of June. Okay, and then last question here. I wonder if you can just talk a bit about the acquisition landscape right now, and whether or not the current environment is giving you any pause. Look, we're in a very good position. Right now, we're giving $1 billion in share repurchases back to stockholders. Still gives us plenty of flexibility to do acquisitions. But I will tell you that we have a high bar, and we look at these things. We've passed on a lot, and some that we've been intrigued by, but it's ongoing. I would just say that the rigor that's out there is not going to dissipate. I think that's important for everyone to understand, that this company has not changed its view or its goals of where we are and where we intend to go on returns, and whether it be capital, whether it be acquisitions, they all go in the same bucket. Acquisitions have to be on their own merit as to strategically, financially, and culturally why we would do it. Okay, thanks. Those are my questions. Thanks, Nic. Thank you. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to management for any further remarks. Well, thanks, operator, and I do want to thank everybody for taking the time to spend with us. If you have any additional questions, please reach out to Fred. As I stated just a moment ago, this company is going to remain focused on executing on its plan, and making sure that we focus on returns, and that our goals have not changed. We are better equipped today than we have ever have in our past. We will pull what levers we need to accomplish our goal. Thank you very much, and have a great day. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.