United Rentals, Inc. (URI)

Investor Day 2014

← View all transcripts

Dec 4, 2014

Good afternoon, and welcome to the 2014 United Rentals Investor Day. My name is Fred Bratman, and I handle investor relations for the company. We appreciate your interest in United Rentals and think you'll find today's program of interest and value. A few points before we get started. Each presentation will be followed by a question and answer period. This event is also being webcast. As a courtesy, please wait for the microphone before asking your question. We'll end the day with a Q&A with Michael, Bill, and Matt. I'll also point out all of the presentations you'll see today will be available at the conclusion of today's program on our website. In an effort to be ecologically responsible, we did not want to print them out and bring them down. Now, let me introduce our Chairman, Dr. Jenne Britell, and our CEO, Michael Kneeland, to get us started. Jenne and Michael? I'll just move this out of the way. Or I'll stand on it, and I'll be even taller, okay? It's sort of nice to have this perspective. As Fred said, I'm Jenne Britell, and I'm the Chairman of the Board of United Rentals. It's my pleasure to extend a warm welcome to you today, those of you attending in person and everyone on the webcast. Thank you for joining us. With me today, in addition to Michael Kneeland, of course, are four other board members, and I've asked them to just raise their hands. They're sitting among all of you, and please feel free to talk to them as well. Bobby Griffin? Okay. Jason Papastavrou? Well, they're not among you. They're all sitting up front. Don Roof? There. Okay. Thank you, Don. And Keith Wimbush. Okay. We have the senior management team here with us as well, led by Michael as President and Chief Executive Officer. Many of you I know have met many of them and will meet others today as well. Today, we'll be speaking and listening to you as a way of furthering a dialogue that is critical to our future. 2014 has been an exceptional year of performance for our stockholders, and the investment community, all of you, has played no small role in our success. We value our access to you, and we give considerable weight to your perspective. Today, we'll be speaking and listening to you as a way to further a dialogue that is critical to our future. We'll explain the opportunities as we see them, and more than that, give you the context of our strategy. As always, our commitment to you is to be open and complete and transparent in our communications, and you will have the opportunity to see and talk and experience that today as well. To take you into the days of information, I can think of no one better in terms of the future of our company than Michael Kneeland, who has led us to this extraordinary position that a number of you have commented on to me during our lunch hour. It is Michael's vision and Michael's commitment to keep us on the focus that enables us to be where we are today and to march to a strategy and a plan that is done within the company and makes us less dependent on the external forces, which historically has defined this industry. I see a number of you nodding about that. Without further ado, I'd like to introduce Michael Kneeland. A little technical challenge here. I just have to move this because I don't want to be towering over everybody. Thank you, Jenne, and hello, everyone. I'm glad you're here. I'm delighted to be here with you today. It seems like a full crowd, and first and foremost, I want to thank Fred and Don Erkel and Donna Moran for organizing this and making such a nice event. Before we begin the presentations, I have two things to share with you. The first is a short video that I believe will give you a sense of our intense passion of how we succeed and how pervasive it is within United Rentals. Then after that, I'll share my perspective on the competitive advantages and how it defines our ability to deliver. It's far more than just scale or CapEx. We built a strong strategic framework that makes us distinctly different in our industry. With that, we'll just start the video. Success comes in many forms: roads, buildings, infrastructure, production, distribution, energy, businesses of all kinds creating products and potential. There's important work going on out here, tough work, and we're ready to help get the job done across town and across North America, above ground and below. This is where the future is taking shape, where customers large and small share our commitment to safety and ensuring that everyone goes home the same way they came, where key markets continue to show signs of strong growth, and where end users see more and more the value and flexibility in renting equipment. Since United Rentals' inception, we've quickly grown into the largest equipment rental company in the world. But we're far from done. We see even more opportunity ahead, and we are ready and hungry. We carefully built the world's largest rental fleet around understanding what customers need, and we'll continue to expand our products and services to drive mutual growth. Diversifying our fleet to include even more highly specialized equipment and solutions that today's job sites demand. Leveraging scale and know-how to buy smarter, control costs, and maximize returns on every asset. Streamlining our operations and processes from how we take orders to how we deliver and service equipment. We're improving customer service and strengthening loyalty by not only meeting needs but exceeding expectations and setting and expanding our leadership position as the most trusted provider in the business. Sometimes bigger is simply a measure of scale, but sometimes bigger really is better. Through downturns and cyclical changes, we've learned and grown and developed a strong playbook. We're ready for anything. But in our view, the future looks bright. We share the industry's expectation of continued growth in the coming years, and we're focused on driving profitable growth and expanding returns. Investing wisely, buying the right fleet assets, and helping design the fleet of the future. Innovating, creating an enduring company. Producing strong results by putting equipment and people to work and attracting top talent by building a reputation for success and results. Bigger, better, yes, but also more profitable. We know where we've been and we're excited about where we're going because success, the future, is happening now all around us. At United Rentals, we are ready to lead the way to execute for growth and returns. Wars, roads, buildings, infrastructure, production. I hope our passion for customer service and innovation and discipline came through in what you just saw. These qualities are tangible when you visit a United Rentals branch or deal with one of our employees on a job site. And they play a large part of how we compete, which makes them relevant to every presentation you're going to hear today. That worked. The most important point to understand is our competitive advantage is that it's a robust combination of operational excellence and strategic skills. On the left side, you can see our continued focus on operational excellence and its six main components. Our enhanced value proposition, our sales process, our customer service metrics, which are extremely important, our Lean initiative and Metro model, fleet management, and the integration of acquired operations. Now, these components all have a place in our discussions today and are all familiar concepts. But as you may be less familiar with the other side of the equation, the section here on the right, that is our expanding scale set. There is a synergistic relationship between our scale set and our drive for operational excellence. They propel each other and both constantly are evolving and are never static, particularly in terms of talent. We are very fortunate in the position to be able to build the best scale set for a particular growth of our strategies, the way in which we think. That is critically important to our decision-making process, not just when it comes to things like M&A, but also in differentiation, such as new technologies. As Wayne Gretzky put it, "It helps to skate to where the puck is." Got it. Now, over the past two years, in particular, we have invested in bringing some exceptional people on board. They include, for instance, a number of strategists from Tier 1 consulting firms. We also have a highly experienced team leading our Lean process, and you will meet later today. We have built a deep bench of business development professionals who work closely with Juan Corsillo, our Head of Sales and Marketing. These are just a few examples of how we are investing in new talent that we believe furthers our competitive advantages. For those of you who are attending in person today, I would encourage you to connect with some of these new faces since our last Investor Day. I think, I know you will be as impressed as I have been over the years working with them. Now I want to expand on the concept that informs all areas of our competitive advantage, and it is our disciplined approach to strategic decision-making. If you were a fly on the wall in our strategic process, you may be amazed how rigorous that process is. Here you find the main components of our discipline, ranging from corporate and regional objectives to company-wide growth opportunities, to customer-facing performance goals and the application of business intelligence. Some companies reserve this level of discipline to major investment decisions, but for us, that discipline is ingrained throughout our business to the point where we consider these ramifications for every strategic decision, large and small, every single day. Here is our approach Tactical. There you go. Here you see our approach applied to the decision to acquire National Pump. First, the move into industrial pumps had to dovetail into our strategy for specialty rentals, and it meant it had to have the potential to drive outsized returns over time. Then our due diligence had to tick all of these boxes. Next, we mapped out the integration in advance and then executed it down to the smallest detail possible. Now we are delivering on that five-part plan for value creation. If you drill down to any one of these line items, you would see hundreds of carefully executed details, all contributing to the fact that a successful integration and cross-selling. National Pump is a great example of how we engage from the top, but also how we have more than 12,000 employees who are just as critical to our success, if not more so. I am very proud that our workforce today is more energized and more engaged than any time in our history. This is a result of years of stellar management of our culture. Here you can see some of the distinctions that makes us uniquely United Rentals. They include a genuine commitment to walk the walk when it comes to diversity, with almost 500 diverse employees hired this year alone, and our 501(c) United Compassion Fund, which is chiefly funded by employee donations to help colleagues in need, and also our long-standing support of veterans, particularly with job recruitment. This is a great source of pride for our company and for our branches in particular. I would like to give you more details, but I would rather give you the net result. 93% employee engagement. It is a powerful number. This is an exceptional result from our latest survey. It is an independent survey, and it confirms that all of our cornerstones are firmly in place, with the best safety record in our history and one of the lowest recordable rates in our industry. Turnover running at an all-time low, and a truly inspiring statistic, which is 98% of our employees say they are willing to work beyond what is required of them for our company. I cannot think of a stronger competitive advantage than that. All the strengths I just mentioned are in play every day, every action we take in this company, and every decision that we make. Please keep in mind, as you listen to the presentations that follow, we have a lot of ideas to share. They all have great genesis to our strategy. With that, given some of the fact that I heard today at lunch that a lot of people think we are an energy company or oil drilling company, Juan is going to spell out our go-to-market strategy and discuss our oil and gas exposure. So over to you, Juan. Thanks, Michael. Good afternoon. I am Juan Corcillo, and I lead the sales and marketing function at United. For the last five years, that includes my tenure with RSC. Here we go. Delighted to be here today to discuss the sales and marketing strategy and how it is going to help us to outperform the industry rental opportunity. One of my key roles at United is to ensure that we are continually expanding our market leadership over our competition. One of the things that you heard of, you heard it in the video and you have heard our leadership talk about on a regular basis, is the importance of increasing returns. Returns are a core aspect of our sales and marketing strategy. While there are many facets to our growth strategy, there are three key areas that I would like to talk to you about today. The first one being the fact that we believe we have a differentiated value proposition that allows us to garner over 12% of the available market and loyalty of our customers out there. To do that at a 5.5% pricing premium according to Rouse Analytics. We certainly can't stand on our laurels when it comes to this value proposition, and we're continually investing in ways to continually expand that lead, and I'll talk a little bit more about that today. The other area is the area of investing in rich data-driven customer segmentation. We believe that it's very important to identify those segments that are most attractive from a growth standpoint and growth and profitability standpoint, and those segments where the customers value what we bring to the table. Lastly, we've invested significantly in salesforce effectiveness tools and resources in order to out-execute our competition. We believe the combination of these three strategies are going to help us outperform the overall rental market. Let's talk about differentiated value proposition. Why should a customer do business with United Rentals? It really comes down to two areas that have come out loud and clear in a lot of our customer research. The first one is our customers want a company that's easy to do business with. That's everything from when they place an order to the amount and severity of issues that may arise, to how those issues are resolved, to the billings and off-rent or to the off-rent and billing processes as well. The second area really has to do with customers want a partner that is willing to help them tackle a lot of the waste and productivity issues that they have. Customers know that they probably rent too much equipment for too long, and a partner that can help them identify those opportunities for savings is treated as a partner versus a commodity provider. The other area, too, is they realize that the equipment procurement process can be a time-consuming process. We really lead the industry in talking about consumption management as well as improvement in productivity, and you'll see that come through in several of the technologies that we use that we bring to bear to our customers. A lot of the customer research that we've done really has resulted in this stairway to value, which really drives a lot of what we focus on day in and day out. Everything from the foundational needs that customers have, all the way to the highest order needs that they have. When you look at the scale of our footprint, of the breadth and depth of our fleet, the structure that we put in place for key accounts, and our operational excellence initiatives, these are things that are hard to replicate easily and that really help in delivering against some of the more basic foundational needs that customers have. As you walk up this stairway to value and we start to attack some of the higher order needs, that's where things like our incredible safety track record and the breadth of our specialty solutions business, as well as some of the technology that we've brought to bear in our consumption management tools, really starts to address some of the higher order needs that customers have. When you bring it all together, all of these capabilities together, we believe they help us to outperform and out-execute our competition by delivering against needs that others can't deliver against. One of the things that is very critical to us is to perform the basics. We talked about some of the foundational needs, and one of the things that our teams consider sacred is our customer scorecard. We measure all of the core expectations that customers have on a daily basis. We measure things like fleet availability, on-time delivery, and on-time pickup, the amount of time it takes to do a service call, as well as invoice accuracy. We measure these things on a daily basis, as well as we measure NPS score on a monthly basis. The important thing is not just measuring them. These things are tied to our team's compensation. This is measured down at the branch level, district level, and region level. Our leaders at those different levels, their compensation is tied to how successful we are at delivering against these very important metrics for our customers. A higher order need for customers really comes down to safety, and it's something that we take extremely seriously, as you can see by the dramatic improvement that we've had over the last 10, 11 years in our total recordable incident rate, and where we believe we are operating at industry-leading levels in this particular area. We really focus on a day-to-day basis at executing against the basics that customers have. Particularly when it comes to safety, this is very important to our large and mid-size customers, particularly in commercial and industrial, where a bad safety track record can keep you out of doing business with those particular customers. One of the important things for customers when it comes to ease of doing business is the importance of having a single point of contact so that they can get all of the products and services they need from one provider. We've organized around our customers in order to deliver the full breadth of the United Rentals offering through our national and strategic account sales force. This sales force is compensated not only for revenues and profitability, but also for our success at driving cross-sell into our specialty businesses. Just year to date, for example, on our national account side, our cross-sell performance is up 27% on a year-to-date basis. You could see on the charts on the right, we've done a really nice job at improving the amount of cross-sell as a percentage of our total national account revenue, going from the 9.5% range to over 12% in 2014. We believe there's significantly more opportunity ahead for us. The chart on the bottom shows the percentage of our national accounts that transact with each of the different specialty businesses. You can see it's almost as high as 70% for our tools business, but that there's tremendous more opportunity in some of the other specialty businesses as far as getting them to utilize those particular product sets. Paul will talk more about this around our strategy in terms of buying the pump business. We saw a big opportunity in pumps to cross-sell those product sets into some of our existing verticals that we play in today, particularly in the commercial side and the municipal side, and Paul McDonnell will spend more time talking about that. We really believe that this is an important competitive advantage that we bring to the table, not only in terms of the product breadth, but also in terms of how we're organized to make it easier for the customer to have access to all of these solution sets. We talked about the importance of ease of doing business. We are big investors in technology and using technology as a means to make it easier for our customers to do their jobs day to day. Earlier this year, and hopefully, some of you have had an opportunity to visit the kiosk that's in the other room, and if you haven't yet, please do so after, during the cocktail hour. UR Control was launched earlier this year as a means for our customers to manage their equipment rental process from their desktop or from their mobile handsets while in the job site. They could do everything from requesting pickups, to extending rentals, to viewing the equipment they have on rent, looking at utilization on their equipment, determining whether or not they should rent more equipment versus actually using what's already on the job site, viewing invoices, changing purchase order information, looking at equipment location as well. A lot of these things really help customers become more productive, but also help them to manage their consumption as well. Total Control is kind of the next level of our self-managed tool or rental process. This is geared much more towards mid to larger size customers. Customers who actually see that there's a big component of waste when it comes to rental. Where they see that they probably are renting more equipment than they need, there's a lot of duplication in terms of the equipment they have, as well as leaving equipment for rent longer than they should. As a result, we built this system using customer feedback to essentially tap them on the shoulder every time they have a savings opportunity. We use a management-by-exception methodology. Anytime we see opportunities for them to save money, we alert them through exception alerts. For example, if a piece of equipment was originally slated to be returned after 2 weeks, we advise the customer 24 hours before that equipment was supposed to be returned to let them know and remind them that they have a piece of equipment, and it was slated to be returned the following day. Then they have an opportunity to click on a button that says Pick Up or Extend the Rental. That has huge implications because we found that 25% of the time, equipment stays on rent 15 days more than it should, based on just people forgetting about it. Just alerting them to that fact is an important piece. The other thing it helps customers with is it helps to avoid hoarding. In a large job site or in a large industrial facility, you have a lot of people that can rent equipment. Sometimes they will rent a piece of equipment and keep it by them because they are going to need it again in 2 weeks. But that is waste. By creating a workflow tool that allows them to identify or to alert their manager that they are about to extend a piece of equipment, they become much more accountable. The other thing that the tool allows them to do is to share equipment between different jobs on a job site and different accounting codes, and that is something that actually helps to save a lot of money as well. All in all, we found that our customers that use Total Control, they have been able to save anywhere from 15%-40% by lowering the amount that they rent. But the benefit for us, because you might be asking yourselves, well, that is that does not sound like a fair trade. You are actually lowering your revenue. The fact of the matter is, what is good for the customer is good for us. When we sell Total Control, we are usually the first-call provider or the exclusive provider, rental provider. We are not treated as a commodity, but we are treated much more as a partner. In many of the cases where we have been using Total Control for a long time, we often find ourselves that we never get put out to bid either. It becomes much more of a partnership than a typical kind of commodity provider relationship. You could see that we have managed to grow our revenues at a nice clip over the past 2 years. We certainly are setting our sights high and have a goal out there to grow our Total Control revenues to $1 billion by 2017. The next piece is really all about talking about customer segmentation. We have focused using data and analytics on focusing on those segments that have higher growth as well as higher profitability that could help us really reduce volatility during the cycles while improving returns. When it comes to the different segments, I think it is fair to say that different customers have different needs. We certainly try to tailor our value proposition to the needs of different segments. The nice thing is we have a very expansive value proposition that can really be customized to the specific needs of different customers. At a high level, there are 3 major segments that we focus on. You have got the large industrial segment, which is really all about signing up enterprise agreements where we provide company-wide solutions to a customer. The things that are important to them are things like consumption management. Total Control is a big tool that we use in order to win business in this space. Uptime is critical to them as well as one-stop. The ability to get most of their equipment needs and solutions from one provider versus having multiple providers is a really big deal for this customer segment. This segment, as a result, provides us a level of stability in longer-term rentals that plays a very important role in our financial performance. The next area is large commercial, and this is really about job site management and being a reliable partner, and things like having a single point of contact is important to them. One person they could negotiate an agreement with and that they can speak to about major issues is very important for this segment, as is footprint. These are customers that work all over the country. They need to be able to have consistency of service no matter where their work is going on. This is also a group where a one-stop solution is very important. As I mentioned earlier when I was talking about safety is critical to both these segments. It could actually keep you from doing business with a lot of these large customers if you have a high TRIR. We focus every day on making sure that we're continuing to improve that number. Then lastly, we have our transactional base, and this is that local customer that is focused on availability, reliability, service levels, having access to a call center. They want to do business with someone who's easy to do business with. This group tends to provide us other types of flexibility, like spot pricing. When it really comes down to it, our goal is to manage all these three different segments so that we can deliver the best financial outcome for the organization throughout the cycles. While we're on the topic of segments, I think it's important to see how we've done. We've been able to create a fairly diversified business over the last couple of years. You can see now industrial non-construction now represents more than half of our revenue. Certainly, we believe that this helps to mitigate some of the cycles as this is a little less exposed than, say, the non-residential and residential construction segments. We also have large, stable customer base, and 59% of our customers are key accounts. These are the larger accounts that rent for longer periods of time. We've also increased our specialty exposure over the last couple of years, and the important part about that, and Paul will mention it in his presentation, is the returns in this business are significantly higher. As we increase the percentage of revenue from this, it certainly helps to buttress the returns. Just as importantly, it really solidifies our value proposition because it helps us to deliver that one-stop solution that I talked to you about. Then lastly, on the chart on the bottom right, you could see that we're highly diversified from a customer standpoint with no single accounts representing a large percentage of our revenue. We really believe that this approach not only is a win-win scenario for us and our customers and that we can deliver more value to them, but that diversification really helps us to balance out our returns and to weather cycles. Let's deal with the 800-pound gorilla in the room. That is I'm sure you've been waiting. "Well, when is he going to talk about oil prices?" Right? Look, certainly none of us here could tell you where oil prices are going to end up. But what we could tell you is today, and this is based off of Q3 information, oil and gas represents about 11% of our revenue, with about 6% coming from downstream. And of that 6%, about 60% is oil-related. The rest is natural gas. Let's just run through the math a little bit. When you run through that math, we think we have about $275 million-$300 million of revenue tied to oil and gas in general on an annualized basis. About $165 million-$180 million on an annualized basis, we believe, is tied to downstream oil, okay? I've heard, and I've been talking to some of you, as well as some folks before we came to this meeting, I've heard estimates of drop in CapEx in upstream of anywhere from 15%-20%. We're assuming worst case, they say it's 25%. We're looking at under $50 million of revenue exposure on the upstream side. We do take comfort in the fact that when we think about upstream, 75% of what we rent to this space are three CAT classes that are the highest utilized CAT classes in the company. So it really comes down to reach forklifts, booms, and pumps. You could see the average time utilization on a trailing 12-month basis across the entire company, not just in the oil and gas space, is in the 78%-79% range. We believe they're very fungible CAT classes that can be redeployed to other verticals. As a result, we think that the exposure that we have is limited and manageable, particularly when you start to think about where the growth opportunity exists. We do see growth opportunities in other areas. For example, non-res construction is expected to grow 11% in 2015. LNG projects are a big opportunity for us, and you could see growth expected of 28% in the CapEx spend in some of those projects. Chemical processing already was slated to grow 25% in 2015, and that's not even taking into account the impact that lower oil prices can have as a feedstock to the chemical producers. As well, power generation is expected to grow 5%, and certainly, we have a lot of national accounts that continue to grow and have needs. We believe that the risk exposure that exists on the upstream side is manageable because of these other opportunities we have to redeploy assets. Lastly, let me talk about the investments we're making on the Salesforce effectiveness side, and particularly focused on two areas. One, we're investing in better coverage models that positions us to out-execute in the market, as well as we put a tremendous amount of focus on improving pricing discipline over the last two years. You've seen the effect of that over the last two years as far as our price performance. We are significantly deepening our market penetration over the past two years. You can see we've increased the number of outside sales reps by 24% since Q4 of 2012, and our inside sales rep count is up 9%. Importantly, we've instituted very rigorous data-driven models to identify where we should be placing our reps, but also to optimize our territories and rebalance our territories to ensure that we're maximizing our opportunity and our penetration of those markets. We also launched an outbound call center in Charlotte in July of last year. With the success we've had with that center, we're opening another one in Phoenix in January. The important thing is what's the net result? We've actually been able to increase rep productivity significantly during this period of time, even though we've added so many reps. Our rental revenue per rep is up 27% during that 2-year period. If you exclude the impact of price, it's up 17.9%. We really believe that the investments we're making on the sales force effectiveness side are allowing our reps not only to do a better job at canvassing their markets, but a better job at winning. As a result, you could see the impact of that. We really believe that our broad coverage is a significant competitive advantage because it allows us to touch more customers and prospects more often. One of the things that I'm very excited about, and that is really going to take our sales performance to a whole new level, is another data-driven. You'll hear this throughout my presentation. Data is a really core competency that we've really developed in the sales and marketing function because we believe that it helps to make the right investments in the right places so that you can maximize your returns. We've created proprietary algorithms that is allowing us to prioritize our customers and prospects and assign certain calling protocols to our reps to ensure that the right customers are being contacted at the right time on a regular basis. We've actually built in our calling protocols directly into our CRM system, salesforce.com, and we have market coverage dashboards that a branch manager or a sales manager can go and see every morning to see how effectively a sales rep is covering their market. If they're not covering it effectively, they could take corrective action. It's going to lead us to ensure that reps are doing a good job covering their markets. It's going to identify markets for us that maybe require more reps, because we certainly can't get to all the right customers and prospects in that market. As a result, we're going to be able to continue to increase rep productivity, as I pointed to earlier. We ran a pilot in four districts earlier this summer, and the results were very impressive. That pilot group was able to grow revenue on the touched accounts 12% more than the accounts they touched prior to the pilot, whereas the control group stayed exactly the same pre- and post-pilot. The other nice thing is the pilot group was able to grow 5% faster than the control group. I have really high hopes for the impact that this new sales effectiveness program is going to have for us. We're in the process of rolling it out company-wide. All right. The other thing that I'm sure is on your minds is rental rates. Where are rental rates going to go for the company? I'd point you to the right chart first. The red line represents our rental rate index. And you could see here that we have recently gotten back on a blended basis to the rates that we used to charge back in 2007. It's been a long time coming. We're certainly proud of the fact that we've been able to get them back up there. At the same time, I'd point you to the chart on the right, which is an equipment inflation chart provided by Rouse Analytics. It represents the increasing cost of equipment for the entire industry by four major CAT classes. As you can see, getting back to 2000 levels isn't enough because we've seen a significant increase in the cost of equipment during that same period of time. We're certainly not going to rest on our laurels because we got back to 2007 rates. The reason we feel good about our ability to continue to get rates out in the market, it comes down to two things. There's some environmental factors and an internal one. The environmental factors are Tier 4. Tier 4 engines are here to stay, and it's going to impact everyone in the industry. We believe that that's going to continue to be a tailwind as far as allowing us to raise rates. The other thing that's really unique in this environment is in the last couple of years and really in the past year, Rouse Analytics has created a really powerful pricing benchmarking service that most rental companies participate in that covers in excess of 80 markets today. This tool and this visibility that they're providing the industry, we believe will lead to more rational behavior by participants in the industry. We think this is a good thing for the industry. Lastly, as rental penetration, if you believe that rental penetration is going to continue to increase, we believe that that comes with some level of pricing power as well. Outside of these environmental tailwinds, the other piece really comes down to our proprietary pricing strategy that we've been executing against. We certainly have demonstrated over the past couple of years that we've been able to increase pricing. It really comes down to three things we're doing and continuing to do that help us in this regard. In May of this past year, we introduced a new algorithm to price our spot business down at the counter level. We believe that this helps us to continue to push price with the most accurate, timely information down at the district level. We also instituted new contract analytics and management tools to help our national and strategic account teams do a better job at not only understanding their customers and the rate breakdowns, as well as where the opportunities for pricing improvement might be, but also on managing those contracts. We developed a new profitability model that actually calculates profitability for us down to the transaction level, the customer, CAT class, and transaction level. This is a game-changing tool for us. I'll speak about it a little bit more on the next page, but it's informing us in ways that we never had before, in order to make better pricing and negotiation decisions. Lastly, we put in place new processes when it comes to discounting. We think that this approval rigor that we have put in place, we are able to capture some of the leakage that may have been occurring before on the pricing side and giving us visibility into margin opportunities that we might have. All of this information and data, again, going back to the theme of data, is really helping us to make better decisions day in and day out down at the local level. This is one of the things I am most excited about, our contribution margin model, because this model really, and this is something we have built and honed in the past year, has all the components of cost built into this, including capital charges. By understanding our current profit and mix by customer, down to the transaction level, by understanding the competitive landscape that we have, we have been able, particularly, and we have really focused in the past year on our key account base. We have been able to set up very focused account plans for each major account that we have. That really takes a lot of this information into consideration and allows us to take a very segmented negotiation approach with each customer based on what their needs are, based on what we know about how we are making money with that customer. It allows us to optimize our overall returns. Lastly, we are very focused on enhancing our value prop to each customer in a very tailored fashion. We are using technology, as I mentioned earlier, to make it easier for customers to do business with us, as well as to change the conversation with customers to one that is focused very much on consumption management and driving productivity down, and we have the tools and solutions to back that up. We are very aggressively using data and analytics to make sure we are focusing on the right segments, broad segments as well as specific customers, to ensure we are maximizing our returns and then giving our sales reps the tools to effectively go after it. Lastly, we are confident about our ability to continue to get rate out in the market. With that, I want to thank you for your time, and I would open it up for any questions you might have. Yes, Ted. You talked about Well, I think we have to pass you a mic so that people on the webcast can hear. Juan, you talked about some of the tailwinds on pricing. Could you just give us a framework for what the benefits might be? I mean, if order of magnitude, are we talking 100 basis points, 200 basis points of tailwind, maybe cycle over cycle? How would you just encourage people to think about the benefits? That's one I punt to Bill. Give us a nice easy one to lead off there, Ted. We've talked in the past about doing some of the side-by-side comparisons that we've done as we develop these pricing tools, and we haven't been very precise about the number, the tailwind, the benefit, but it's several hundred basis points would be the number, 2 to 3 in that range, in some of the side-by-side comparisons that we've done. Not going to claim that that's the benefit across the entire network, but in very significant cases, it's in that neighborhood. Thanks. Over here. Oh, she's got the mic. Sorry, Cliff, I have the mic. Sorry. You talked a little bit about the oil and gas exposure, and I presume that that's completely driven by your actual oil and gas customers. But I'm more curious about the indirect exposure related to non-resi construction. So if you were to look at the growth you've seen over the past several years within the energy-levered states versus non-energy-levered states, has there been a big differential? Yeah. That's a very good point. We've tried to estimate what that might be as far as kind of the ecosystem benefits, right? It could be a couple of extra percentage points. One of the interesting things that when I look at where we are playing in downstream, a lot of our assets have been going into the downstream, and we haven't played as much in some of the ancillary business that's out there. That still represents an opportunity for us. One of the things we didn't talk about is the impact that lower oil prices has on the overall economy. I think I heard one of you in the room tell me that there's at least a 40 basis point improvement to GDP as a result of $80 oil. So, at $70 or $65, what does that do to the GDP? That has implications to growth in some of these other areas. So it's really hard for us to pinpoint exactly how much is tied to that band of geography around those areas. But it could be a couple of percentage points more. Again, we've had a hard time even serving some of those areas because we've had so much focus on the upstream side. Hopefully that helps. Yes. Yeah. Cliff Ransom. Can we talk about the employee side of this when it comes to how you are tasking your sales forces? You go from an industry that was historically very relational based. Yeah relations based to something which is data driven. Have you largely been able to convert those people, or you had to replace those people? No, we've had very low turnover in the organization. Our sales turnover is in the high single digits, which I think is a very healthy level. No, I think people actually see firstly, when it comes right down to it, let's make sure we talk about one thing. You still have to be really a very strong relationship driven individual to be a good salesperson. The data driven process part of it is all about making those people more productive. It's about helping our sales team have more time in the day to ensure they're making more calls and covering their markets. That's really what we've leveraged a lot of the data for. We've put sales managers in place. We've trained our leaders to ensure that they're using the data to make better sales management decisions, to point their salespeople in the right way to ensure that they're driving accountability to cover their markets. Right? It's actually just a nice complement to a very strong kind of relationship organization. Then when you tack on top of that, some of the changes we've made to our value prop, having a great relationship, then putting on top the ability to self-manage your rentals using UR Control or lowering your consumption via Total Control, it's just a double whammy of sorts and really helps to drive even more loyalty. I think our salespeople have embraced it openly. Thank you. Ron, getting back to the sales tool, where you got the 12% lift and you alluded to rolling that out nationally. Could you talk about when you started to roll it out nationally? How long will that take? Is there a certain number of months lag between- Sure as a salesperson, when I get that tool and when I actually start to see the results? We started rolling it out in late October, and we would expect to start seeing results certainly first quarter. I think it is fair to say that our time utilization is very strong. Yeah, I think that just to add, that wasn't by mistake. We were very aggressive at pushing out by October because we know we were coming into our down season, and penetration, this is when we're going to have the most excess capacity, is for the next four months. So the penetration opportunity is there, and we're holding that time utilization gap that we've had for the past couple of quarters right now today in December, which is unique. This is usually a real difficult time for us from a time utilization perspective. Oh, yeah. We feel good about it. You got a mic? Yeah. With the lower oil prices, just a quick question. Has it impacted how you're looking to allocate fleet next year? Have you begun to move fleet a little bit in reaction already to energy? And maybe a question related to Dale, maybe even impacting on what you're buying next year or where you're allocating it. Just curious how much you're maybe getting ahead of what could be some pressure in those markets. Dale can jump in, and please do. Because the assets are very similar to what our growth opportunities are going to be in all the geographies, I don't think we're going to have a major mix change at all. We've been talking about it. Candidly, geographically, there will be some change. A lot of it would be incremental growth or replacement CapEx, so we won't even have to actually move assets at that lower level. Let's say there's a 20% drop in shale, which is maybe at the largest region, let's say the south region, which is Texas, Oklahoma. Let's say that that has 25% impact on their fleet. We're going to sell 10% of their fleet. So just not replacing. We don't even have to actually go through the tactical step of putting the machines on trucks to move a lot of it. We will reallocate resources appropriately. I'll tell you, there's a lot of people in non-shale drilling states, those other 41 states, that are excited to get the opportunity at some more of the growth CapEx, and there's really robust demand throughout our network. Also the impact from the lower diesel prices on all your fleet trucks. Maybe Bill wants to address this, but there's been some quarters where you've called it out as a negative. Obviously, now it could be a positive. If you can quantify that a little bit, it would be helpful. Can't quantify other than to say that there'll be a net positive. Remember, we do hedge a significant portion of our diesel exposure on an ongoing basis. So that'll mitigate the impact, and we'll have to look at whether it's a significant enough impact to call out as we go through the quarters. Yes. Okay. Sorry, Mike is there. Sorry. Hi. Two industry-related questions. One is, when you started the whole consolidation process many years ago, the comparison was to how far rental had penetrated in Europe versus here, and used that as a scale for how much more penetration there was. Can you update us on that? Number two, a pricing question. Is the industry at the point where you talk about having a pricing leader or pricing followers? Maybe I'll tackle it first. On penetration, the updated view is that rental penetration in North America is in that 52% area or so. Our view is that there's still material opportunity for it to continue higher. How much higher? Time will tell, but certainly there are European models and Asian models that say it could be significantly higher. We're continuing to look at the opportunities for rental penetration. We believe that economics still very nicely favor rental versus ownership in many cases. This is when you know you've spoken too long because I've forgotten your second question, so ask me again. That's true. Pricing. Is there a concept of a pricing leader in this space? Yeah. You could argue we're the pricing leader today, right? If you look at the Rouse data that we've mentioned in the past, we certainly achieve the price premium in most of those regional markets that Rouse surveys to a good extent, 4% or 5%. We believe that we are most in tune with pricing changes as we go forward. I could argue, if you wanted to argue that there is a pricing leader, it's United Rentals. The question is, at 12%, 13% market share, are we enough of a pricing leader so that there's a real dynamic that we alone can create? We're working on that still. Does anybody else have a different view? Please chime in. Must've got it right. One more question we have. Time for one more question. Yep. You talked about pricing. It would be helpful to talk a little bit about the cycle. Obviously, pricing has been strong, utilization has been strong. If you were to take an educated guess, what inning do you think we are in this cycle? On top of that, it would be helpful to understand when we hit the next peak, could we expect it to be a magnitude larger than the last peak, just given the market's growing bigger, GDP growth, rental penetration going up? Give us a feel for how this time around it could be bigger and maybe even longer as far as duration. This is Mike. I'll try to answer that, and then management, please feel free to chime in as well. I'm not going to pick an inning because I think the past 18 months are private non-res turned positive. What we do rely on is ARA works very closely with Global Insight, and we agree with them that they've got the next four or five years as being positive. Next year is going to be a very strong year, and we agree with them from what we can see and what we understand from our customers today, understanding that there's a lot of variables that could disrupt that. Nonetheless, even with all the oil prices that have changed, they just did a release, and it didn't move material at all. So we think that we've got a long runway ahead of us. Much beyond that, I think as far as where the penetration levels are, that we've come up to that 52%, and the fact that our market continues to grow, we believe that rental volume will grow as well. That's why if you look at, again, going back to ARA, they've got just under 10% next year for industry growth. Now, keep in mind, that will continue pricing as well as products going in and taking everything into consideration. But we think that we've got a runway ahead of us. Yep. I'm not as smart as my boss, so I will pick an inning. I'd say four, just to put a stake in the ground to start some argument. It feels like there is material runway in front of us here, just based on what we're seeing and hearing from the customer base. So that's Bill Plummer, one man's view of where we are. As to how high can it go? Again, that's a tough one to ask. Later on, you're going to see us put some numbers up that are a few years down the road that suggest that we believe we still got some room to run. So I'll wait until those numbers are up, and then maybe you can ask that question, and we can talk about it more in the final Q&A. We certainly wouldn't complain about extra innings. Thank you. Thank you. Great job, Juan. Can you hear me okay? All right, I'm David Hobbs. Very excited to be here. I assure you, my presentation will be much less academic than Juan, so bear with me. This is my first time, and I'm very excited to be here with you. I hope you guys enjoyed lunch, and as Juan said, I hope you got a chance to get by some of those stations and see some of the exciting things that are happening at United Rentals. Just a little bit bio on myself, if I can get this to work. Point to the back. Point to the back. Okay. Too far? Okay. You can see I joined the company in 2005. I've been in the industry coming up on 20 years, and my responsibility is essentially the Southern U.S. and the Western U.S. My counterpart, Kevin Parr, is in the room here. Kevin, raise your hand. Okay, he's way in the back. He covers the Northern U.S. and all of Canada. Paul McDonnell, who you'll hear from later, he canvasses the two of us in the specialty business. You can see I've held various levels of responsibility in this industry, and I've been with, as I said, United coming up on 10 years, and I can't tell you how excited I am. I'm more excited today than I've ever been in the industry, and that's not just an investor pitch. That's from the heart. We have so much going on in this company, and it is so exciting. I've worked for three companies. This is my third company in 20 years, and this is the NFL. Absolutely a world-class organization with so much happening and such a bright future, as Michael talked about and the video talked about. Very excited, if you can't tell. Lastly, I was proud to serve our country in the U.S. Army as an Airborne Ranger. One thing Michael didn't mention is we continue to improve our military vet population in the company, and some of you may or may not know, we continue to climb the ranks on the G.I. Jobs most military-friendly employer in America. That's something, as a veteran, I'm very proud of, and to continue to see our population increase is very exciting. The purpose of my presentation is really to give you kind of just a general introduction to our business. Some of you know a lot about our business. Others of you are new. I hope you find this helpful. This is a very general, kind of broad-based presentation. You see that we really look at our business in three different segments, the industrial non-construction. Again, you heard Juan talk a lot about that. The non-res, and then the residential piece. For those of you who have been around a while, you remember that prior to the acquisition of RSC, we were very, very heavily weighted into non-res. With the RSC acquisition, it has essentially overnight balanced our business. We have a very balanced business. You saw the pie charts that Juan presented that really give us a very stable footing as a company. If you see the numbers there, as he said, over half of our business in industrial non-construction, almost half in non-res. Residential doesn't represent a huge part of our business today. It's an opportunity for us. It is a very strong leading indicator for where the industry is going. But again, feel very good about how balanced we are as a company and the opportunities that are in front of us. You can see the ARA is reporting over 9% growth in 2015. If we advance to the next slide. We'll take these one at a time. In the industrial space, there are really four types of construction, and you can see the first bullet, plant maintenance, just the regular, what they call run and maintain of the industrial plants. Capital work, which represents putting in or replacing something or building additional capacity in the plant. Shutdowns and turnarounds, those occur once or twice a year, generally in most all the plants in the industrial space. Then finally, as you would expect, emergencies. The equipment that the industrial activity rents is essentially what we call our core product. That's earthmoving equipment, aerial equipment, compaction, power, air, material handling. Their rental needs fit our profile very well, and you'll see the theme of our presentation is that if we have one space that softens, we have another space that hopefully will have good demand, and we'll be able to move equipment from different construction segments in different parts of the country, as Juan discussed. Fleet diversity, Juan talked a lot about that. He talked a lot about safety. Our Vice President of Safety, Jim Dorris, is here. Jim, raise your hand. He's in the back of the room with Kevin. He has been with us the last few years and has done an excellent job helping lead our safety effort. As Juan talked about, some of the plants, we're not able to bid on work if our safety record is not acceptable. I'm very proud to report that you saw the graph on the right-hand side. We were going to turn in another record-breaking year this year in our safety performance. If you look at these pictures, you can see there a refinery in La Porte, the onsite in Houston. That's a very large chemical outfit that we just renewed a five-year contract with them. That particular site represents over $20 million of OEC, just to give you kind of a sense about what the benefit that an onsite can bring to us and the sort of activity. Juan talked about Total Control. We talked about safety, the convenience, the customer entanglement of being right there on the site. Then the last picture, the tool trailers, you'll hear Paul talk about this more in the tool business, but essentially just think of that as a mobile warehouse, where the customer walks up those steps, through a system of scanning, checks out a tool, maybe has it for the day, maybe has it for the week. There's employee accountability there, and it's very, very convenient for our customers. Again, creates more and more entanglement. Fred thought it would be helpful to put some of the notable projects on the page. These projects are not something that is coming or that is planned. These are underway right now. The Sasol project in Lake Charles is a three-phase project that is $24 billion in work. Phase 1 has started, and it represents $8 billion and 2 or 3 years of activity. The Gulf Coast Dow Chemical, you can see $1.5 billion. That is underway for a few months. Then the Formosa expansion of $6 billion down in Texas. As part of the industrial space, the oil and gas, I am very thankful Juan got to take all your questions on that 800-pound gorilla, since this is my first time. But when you think about the upstream, the midstream, and the downstream, as he said, we are very bullish because what may exist in upstream softening, particularly in the downstream space, driven largely by LNG, is like nothing I have seen in 20 years. I do not know if I told you, I live in Texas, and I travel over to that area a lot, really from Corpus Christi around to Mobile, Alabama. The capital work and the downstream activity is staggering. So we feel very bullish back to the transferring and the cross-pollination of equipment that if there continues to be upstream softening, that we are going to be fine. You saw the time utilizations on those assets that are primarily in upstream. Okay, so advancing to the next slide. Non-residential, as you know, represents half of our business. That is exactly what you would expect it to be, right? That is your hospitals, your strip centers, your malls, amusement parks, et cetera. Again, back to core fleet. So those same assets that are rented on an industrial plant also can go right over to a non-residential construction space. As you will see in my last slide, we transfer an incredible amount of equipment. 85% of our transfers last quarter happened from one branch to the other within the same district. So it is really about filling a customer's need, not what we had at one point, which was kind of protectionism of our equipment. The equipment canvases really the entire region, and, of course, that is a benefit to our customers. So when we put this power plant slide on the non-residential, we do not want anybody to be confused. Michael thought about us taking it off there. That is considered non-residential because it is a capital project and new construction within a power plant. So once the contractor turns that project over to the plant, then it will shift to the industrial space, and you will have your run and maintain and your general maintenance that I talked about earlier. The San Francisco 49ers stadium, hopefully, we have some 49er fans in the room. Personally, I am a Cowboy, but we did very well on that project. Then the Boeing facility up in Seattle. We have a great relationship with Boeing, and that just kind of gives you an example of the breadth of activity that our equipment is used on. Then again, on non-residential notable projects, the Falcons and the Braves stadium, again, have both kicked off. They are underway now. We are in a great position on the Falcons stadium, particularly with our location. Many of you know about the Tesla car battery project outside of Reno, Nevada. We are in an excellent position there. Our vice president of that area was just there 2 weeks ago to meet with the owner and the main contractor. We are in a great position. Google has two data centers go and valued at slightly over $1 billion in Tulsa, Oklahoma. Advancing to the next slide. As part of non-residential infrastructure, again, multiple types of construction, transportation, energy, power, utilities, et cetera. The same type fleet, again, crosses into this space. The difference in this space, you will hear Paul talk about it later, there is a significant specialty opportunity. If you look at that bottom right-hand picture, the underground project in Phoenix, Arizona, the 24th Street, is more than a $7 billion project. It represents back to the customer entanglement and why we are attracted to certain customers. There is not a company that can offer what you see right there in our industry with the breadth and the depth that we have. Many of you have been maybe stuck in traffic on the Tappan Zee Bridge. Ask you not to badmouth that construction. That is paying the bills. That is good for us, not far from here. The 91 freeway project in California. As a recap, you all know that we have the world's largest fleet, meeting customer demands that now, as I mentioned, we are very proud and excited and feel very stable that we are much more balanced than we have been in the past. You heard Bill talk about the rental penetration in North America. It is my belief that we will continue to follow the European model, and it will continue the significant upside, material upside, as Bill said. The equipment cost, the flexibility, the utilization, those are all reasons why I believe you are going to see continued demand in the rental space. I talked about our equipment matching the demand, and you saw the video about buying the right equipment for demand and the data and the analytics that are going into our business, and the level of sophistication at United Rentals, as I said, I do not know how to describe it other than it is the NFL. Finally, customers depend on us to solve their problem. We have the experience and the footprint and the products to do that. I talk to customers every week as a field representative, as does Kevin, as does Paul, and our customers are very bullish about the next few years. I was just having lunch with an owner last week who talked about there is more work than he can bid, and his margins have improved dramatically in the last, say, 18 months. We are very bullish, very excited as I said, and just tickled to be here to be able to give this presentation. Do we have any questions? Great. Thanks. Steve Fisher. You mentioned a couple of times LNG as a key driver of growth, and we have now seen one large project get deferred already up in Canada. I guess, to what extent are you expecting, or your growth that you are counting on coming from projects that have recently started construction in the Gulf Coast versus those that may be expected to get approved and get started over the next year or so? This is Steve. Thanks for the question. One of the things I did not mention on the industrial activity page is October 23rd, the Industrial Info Resources Group, IIR, produced an article saying there is more than 1,000 projects with a dollar value of more than $245 billion that is underway or planned. I cannot tell you what percentage of that is future planned that, to your point, could get pushed and what of it is going. I can tell you there are three export LNG plants that I know of personally, having been on one, that are underway right now that the combined dollar value of the three of those are upwards of probably, I would say $900 million, maybe a bill-- excuse me. I do not want to get confused in my numbers, so let me get back to you or have Fred get back to you. Juan talked about with the lowering of oil prices, gas has not been as affected as oil, and there is a huge benefit in these plants exporting the LNG. Do you have anything to add, Matt? I would just add, we went through the quarterly business reviews by region just in November, and when I think about the amount of volume of projects in excess of $1 billion in the Gulf region, some of it LNG. If it got cut in half, it would be the most volume we have seen in that region in many years. Probably over $1 billion since 2009. There is robust demand that we can have some fall off. We are still going to have record demand in the Gulf states, in my opinion. I agree. I had a follow-up kind of along the same lines in terms of the Gulf downstream type projects. Do you have any feel for how many large projects like that broke ground in 2014? Do you have any feel for what could break ground in 2015 and/or 2016? Thanks. I do not have credible numbers. As Matt said, the work that started is in essentially all of those coastal towns that have the facilities and the infrastructure to export it. I do not have a credible number I could give you. Hi. Just on pricing in some of these longer-term projects. Are you finding that you are getting better visibility into pricing for your business as a whole, as you are getting tied into more of these bigger infrastructure works? Can you just talk a little bit about how the pricing dynamic actually works with the Tappan Zee Bridge or the Tesla facility or what have you? Are you regularly renegotiating that, or is it sort of a long-term upfront deal with escalators? Just any clarity on that would be helpful. Sure. Well, the first question, the answer is absolutely. We have more visibility into pricing today than I've ever seen. It is really incredible. Juan did a great job describing all of the revenue generating and sales activities, particularly on the pricing front. If you've seen our performance in the last few years, that's a result of all of the resources and the information that we brought to bear at the field level. The visibility has been just staggering. Now, regarding how something is priced, for example, at the Tappan Zee Bridge, that's a harder question, right? Because you'll have a national account that may have established pricing with us that's been negotiated. Whatever that national price is, he would get that on the Tappan Zee Bridge. Conversely, you may have a contractor working for him or a contractor that's a regional or essentially a local player that could get spot pricing. The question then would be, well, how do you arrive at that person's price? You heard Juan talk about spot pricing. It's a function and an algorithm of what is the time utilization of that asset? What's the piece of equipment that you're renting? What is the availability of it? What have we gotten in rate recently? There's a lot of math going into it. Juan, do you want to add something? Yeah, I would just add that, like you mentioned, it varies by customer, right? But in the case of Tappan Zee, it was a negotiated deal that was done on the spot. We haven't seen in any of our major projects that we've been bidding on, we haven't seen any major deviation from what we've been pricing over the last 12 months. There's no additional pressure that we've seen in any of these jobs. We've been able to continue to get pricing increases along the lines of what we've been reporting. Our experience has taught us that, Mike and I were doing large projects as far back as the early 1990s, and there was a period where we were chasing car plants around. It's continued on, whether it's industrial plants, LNG plants, stadiums, or bridges. That's an area where our scale and the breadth of our fleet is a huge advantage because the amount of dollar value of the spend of rental equipment on those projects is really minuscule compared to what can be caused if you don't have it. Having the largest fleet gives people a lot of comfort that we can supply those jobs. Our opinion is that they're actually less price-sensitive against set rates than transactional business when you're dealing with an electrician that walks in and wants a lift. Much more value add to the customer on the larger the project is. The only thing I would add just to that is that Juan talked about the tools that we've laid out, particularly on deal management, looking at our national accounts, having that level of detail and analytics that will enable them to price. Also there's phases of construction and different contractors will come at different phases of the construction, and they will all be priced accordingly. We have time for one more question. Yes. Can you please talk about your experience on equipment classes that have moved over to Tier 4 on new equipment? How long has it taken the industry to start to move the price back higher to reflect the replacement costs? Can you just remind us what proportion of your fleet will be shifting to Tier 4 next year? On a separate question on the discussion of the derivative impact of lower oil prices, can you gentlemen just talk about how broad-based the recovery has been across the regions over the past four years? Where's your business in Texas today versus four years ago, and how does that compare to the other parts of the U.S.? Jerry, part of your question will be answered by Dale's presentation. He'll go into detail and give you that color and that level of detail on the Tier 4. As far as pricing, I'll leave that to Matt and to David. You want to take that one? Go ahead. Okay. Right, Dale will do a much better job than I will on the Tier 4 and on the broad-based function of the oil. It's been considerable, as you know. West Texas, again, where I live, the Eagle Ford, which is south of San Antonio, it's been a modern-day gold rush. I think Juan did a really nice job describing we have gone really full force into the upstream and has done very well. We've done very well in the upstream, but that peripheral midstream and downstream, we've done reasonably well but not remarkably well. That represents a big opportunity for us. That will be obviously in the area where the shale plays are. Texas, the Louisiana, the Gulf Coast, the Midwest, and even into the Carolina and Virginia. There's continued opportunity for us in the non-upstream space. Again, I think Juan did a really nice job talking about the other ecosystems, so it's hard to say what that would do in terms of our general business. As that oil's driving some other activity, yes, that will cool off, but we feel very bullish about where that equipment could go, whether it be into other oil spaces or into the general marketplace. Does that answer your question? I guess maybe a better way to ask it, how much is your business up in areas like Texas over the course of this recovery versus other parts of the U.S. where you haven't had the derivative benefit from the oil infrastructure build-out? Yeah. I don't have an exact percentage as to how much it's up, so we'll have to get back to you. Yeah. Thank you. Bill? Thank you, David. Just a quick check. Yeah, microphone is working. I'm not going to talk about oil and gas, so I'm already at a disadvantage just from the get-go. On top of that, I'm going to try over the next 30 minutes or so to convey to you my excitement about the operations of picking up equipment, making it ready, and delivering equipment. So we'll see how it's going to go. Here's my background. Professionally grew up in GE. What is not on this one, which I thought I wanted to tell you, was that I actually have a longer history with United Rentals than what's on this chart because I was part of the team that was here when Cerberus was in the process of acquiring United Rentals. I am telling you that because I fell in love with the company back then, and I want to give you a little bit of a feel for why. The first reason of my love affair with United Rentals is that United Rentals is a really unique company. On one hand, it is a very meats and potatoes, blue-collar type company, which I personally love. We have a bunch of very genuine people and provide, as a company, an opportunity that is becoming more and more unique in the Western world for the regular person to make a real career. The second part that is difficult to explain is that despite our blue-collar nature, when you are spending $1.7 billion, and when you are in a capital-intense business, you actually have a real intellectual challenge that you do not see in a lot of other companies. Because when you are spending $1.7 billion, you need to really be smart about the analytics and understand what you have to do for you to do that optimally. United Rentals is a very unique company between an operational blue-collar side of it and a real intellectual challenge on spending the capital. The second part of my love affair with United Rentals is the opportunity. Back when I was here with Cerberus, it was obviously a very different company, but that was a huge opportunity for us to bring some of the more mature operational tools to bear in the company at that point in time. United Rentals has come a long way since 2007. But even today, and especially with the acquisition of RSC, the opportunity still exists. It is still a very young company where all the tools coming from Lean, Six Sigma, total quality control, all the tools can still be brought to bear and can still bring this company way forward from where it is. That was just my personal history of United Rentals and part of the reasons why I am here. Today, we will talk about four items. First, you heard Matt and Bill and Mike talk about our Lean initiative, and we will give you a little bit more insight to what we are doing and how we are bringing those tools into action here. We will talk to you about the early results we are seeing and why we are getting so excited about what we can do in the company. Then we will talk about the challenge. I talked to some of you over lunch that when you have 900 branches, this scale is really where the fun comes in and where the challenge comes in, going, how do you drive a change across this scale of operation? Lastly, we will talk about technology. Technology, in really two sides of it. One is we are using technology to keep raising the bar on everybody else in the industry. Second, from a Lean and process perspective, how we are going to leverage technology and how we are leveraging technology to accelerate our efforts. Pointing in the back. Our goal with the Lean initiative is really creating a sustainable and scalable platform for growth. Again, you can read it, and I am going to point out that we are making a very conscious effort that we want to create a sustainable platform. Therefore, what you are going to see with our version of what we are doing with Lean, there is a lot of focus on our people and engaging our people and making it a very bottoms-up and a very organic process because that is how we are going to create not only results now, but how we are going to create a culture that is going to maintain that momentum past what we are doing right now. I put in this slide because I get reminded and I wanted you to get reminded on the scale and the complexity of what we are trying to do. It is so easy, and we will show some of our early results. It is so easy to take that and multiply it by 900 and come out with very large numbers and forget that this is really 13,000 people across North America that we are trying to impact and have working in a very different way. Back in the day when I was teaching Six Sigma, we used to tell when we were going through statistical and the black belts were kind of sweating over the tools, we used to tell them, "This part, the hard part, the statistical tools, that is easy. How to apply it and get results in the business for the black belts perceive to being easy, that is hard." That is what we are learning in our progress here. In terms of the tools we are putting to bear, they are actually fairly mundane, at least to date. The challenge is in the change management and keep driving the 12,000 or 13,000 people forward. We will go more into detail on this, but I wanted to give you a feel for that we are building our initiative on a three-legged stool. We are using Kaizen to engage the people in discovery and come out with a solution. These solutions are built in the field. We are then, in parts of it, experimenting now with having what we call PIT crews or process improving teams, where we take the best practices that have been developed, and we can deploy them in a more rapid fashion, where we do not have to go through the discovery every single time. Lastly, when we have more singular type processes where we have established a best practice, we have what we call a best practice rollout, where we engage in a rapid deployment of a best practice. Again, we will go through these in a little bit more detail, but the underlying theme here is that we have found ways where we are systematically engaging our people in eliminating waste. This is my opportunity to just give you a primer in Lean, and it is fairly straightforward. What you will typically have in a business in a process, you will have activities that are value-add. In Lean, we are very strict about the definition. Value-add is what the customer is willing to pay for. Then you have a lot of non-value-add steps, which we call waste. Lastly, we have what we call non-value-add but needed, and those are controls-type processes that may not be directly value to the customer, but that we definitely don't want to live without, and especially not with our history in United Rentals. What you will typically see when we're growing, and what we see in United Rentals, is that the entire pie expands. So the value-add activity, but as you're expanding, your non-value-add activity expands as well. The whole pie moves out, and you don't really change the game. Our job in Lean is to provide a tool and a process where we eliminate the waste in the process, and by that, create the capacity for value add, activities that the customer is willing to pay for. When we are teaching this and going out in the field now, we're going, "Guys, these are tools that's going to allow you to grow for free." That was enough of the theory. I was going to try to give you a little bit of sense of what a Kaizen event looks like when we are out in the field. There's no way for you to see that from the back, but we will have a Kaizen toolset, and the agenda starts on Monday morning, where the team being forced to go out and observe the process. This is typically where the team is kind of going, "Well, I've been in the industry for 18 years to 25 years. Why do I have to spend time observing the process?" We force the rigor that those teams have to go out and look. Then we'll come out on Tuesday, which is where typically the tension is really, really high. Tuesday night, we'd normally get them out for drinks and dinner just to make sure we still have the team on board. Then on Wednesday morning is when we start eliminating the waste and really take action. This is when we are changing the flow of the yard or in the shop, and the energy just goes way up and the teams get really excited because we're not only theoretically talking about what we want to do. No, we are out there, in our boots and our vests, changing the process. So it's a very hands-on process, but we force a rigor in how it is conducted to make sure that all our people go through the process. I'm going to go through some of the early results, with the risk of you guys multiplying it by 900. But we'll do it anyway. One of the first areas we went was what we call our order accuracy. So we were observing the process on the counter, and we put criteria together with the team on what is a good order. What is an accurate order? Came up with 11 criteria, and then we asked the team to print out. The first team that did it, we printed out 150 orders and put them up on the wall and asked them to judge against their own criteria. They were shocked by the number of red Xs they had up on the wall. Mike was out at one of those events. I believe Matt was one out of those events. It was eye-opening because we thought we were doing fairly well, but when you actually put the data to it, we had a lot of room for improvement. The team, in the 2-week period with what they did, improved that number to north of 95%. What they saw, in this case, was a 47% reduction in customer disputes, which is, as you can imagine, a real significant improvement in a branch that thought they were doing fairly well. Another example that we have seen over, and over, and over again is that when we go out and observe what we call the yard turn time, the process from a truck comes home with equipment, offload the equipment, bring the equipment back on, and it is ready to leave the yard. We typically see now more than an hour that is spent in the yard of truck time. We can go in with the teams, reorganizing the yards and the tasks, and can take that from 60 minutes down below 20 minutes. In this one example, which was taken out of California, they were lucky or good or both that they had a customer that had a real need and a real hard time. So by gaining 40 minutes per truck per time they were home, they got the capacity where they could suddenly start saying yes way more often to that customer, and over a very short period of time, grew 32%, kept the cost virtually flat, and grew EBITDA 10 points. We have another example, in all the examples now, where we reorganized the yard, combined with what we can do on the dispatch side, and took the cost per delivery and reduced it 45%. Again, just giving you a sense of the magnitude of the changes that the teams have seen. Then finally, we are doing work in the shop. Again, the teams are working out, pointing out where is the waste, eliminating it, and we have seen north of 90% reductions in the number of steps the mechanic has to take during the day. Again, as you can imagine, it is a real game changer in terms of the productivity that we see in those shops. Here are three examples, and as you can imagine for today, these are obviously not random examples. I am not showing the worst. I have obviously taken some of our best examples. Again, I am not going to go through all of them because they are similar in terms of magnitude. But the first one is a branch in Louisiana. I cannot take credit, and my team cannot take credit for the revenue going up 60%, because that was a large construction project that happened in that area. But what that team did, they really saw an opportunity in using our tools. As you can see, reducing the branch turn time, as we talked about. They also worked on the shop. They also worked on the counter. They created that capacity, where typically, you would have seen that revenue, you would have seen costs go up with it. But they were able to grow for free, and they were able to sustain a customer engagement and a customer service and take that extra dollars and bring it to the bottom line. So these are just three examples. The stories obviously vary. They are from three different geographies. But the bottom line is the same, is that when these tools get adopted 100% by the local teams and the local leadership teams, we are seeing some absolute incredible results. The big question that we are struggling with and the big challenge we have is: how do we scale? How do we scale that kind of impact across the 13,000 people? We already talked about the three-legged stool. The Kaizen was about the engagement and the discovery. The BPRO and the PIT. Here is an example of what we call a BPRO, a best practice rollout. It is nothing more than, if you will, the best practices that was developed in the Kaizen that we distill into a very succinct toolkit. Then we have a champion by district that gets trained in these best practices. Then that champion is then responsible for rolling this BPRO out locally. The key here is that when we try to roll something similar out in the past, we sometimes get a lot of skepticism and a lot of resistance. But because these were not developed by me or my team, but these were developed in the field by their peers, the acceptance is just absolutely incredible. I need to point exactly in the corner. There we go. As you can see, here is the result of this particular BPRO. We are measuring one of the outputs of what we call a lagging indicator of order accuracy, is the number of overrides and the number of credits that we have to write on a contract. As you can see here, as we were doing the Kaizens, we saw some improvement year-over-year. But when we roll out the BPRO, this is across the network, you saw a more than 40% reduction in these lagging indicators, really showing that when we distill our best practices into something that get rolled out, we can really make an impact. The PIT Crews, we are just in the process of going out with those. I wanted to point it out to you because it is the third leg of our stool. It is a more involved process. This is a team of four people that will be in a branch for 2 to 3 weeks, and is just going to hunker down, and it is a more of an end-to-end deployment of a set of best practices. So it is not as much focused on one best practice as it is an entire kind of value chain where they go out and can deploy a best practice. So, more to come when we have more of these under our belt and we have learned how these are going to work. This is a slide that just gives you a little bit of feel for what it is that we have observed and what is the feedback that we are getting from the field. But what I am going to do instead of pitching this slide, I want to show a video and let you guys hear it from our people out in the field. That was probably one of my biggest aha moments, was when we came out and we analyzed the shop and we did the spaghetti trails, and we watched how much walking our guys did. We thought we were pretty dialed in from our 5S and efficient. All of a sudden we start tracking and we realized how much time is spent with our guys just walking to get some. We were able to move the parts that they needed right to their workstation and reduce the amount of walking they are doing and just let them turn right to what they want. The exciting, big piece were the employees as part of the process. That is what I like about it. Since we got the drop associate now, we are just able to find equipment a lot easier. We are able to load up a lot quicker, get out of here a lot sooner versus the pool when we did not have him. Since we got the drop associate, basically load by ourselves. We save a lot of time, and we just could not get as much done without him. The process is a lot easier. We are getting more time on the street with the customers and making deliveries on time compared to to the criteria that we are being scored on now to where we were before, we are realistically probably below 30% on total order accuracy. Like I said, we are up above, we are 95% now. The criteria is much bigger in that aspect than it seems to be. We are transferring the savings down to the drivers and many of the customers who are having a better experience with us. Before, they wanted all the RDIs done by the end of the day, so we were staying here till 6:30, 7, 8 o'clock at night. Before, they wanted all the RDIs done by the end of the day, so we were staying here till 6:30, 7, 8 o'clock at night. Now they just want to get their equipment out ready to go out the next day, and then we can pick up the RDIs the following day. Now we can get home in time for dinner. Hopefully that gave you a sense of the impact and the feedback we're getting from the field. What's important for you guys on this video is that all the people can read the same books we read. You can take some of the material we created, and you can copy it. You cannot copy that kind of engagement from our people. That is a competitive advantage. The day we have 12,000 people that come to work with that kind of passion on a daily basis, to every time do it a little bit better, that is a competitive advantage that you can't take away, that you can't copy and replicate. That's the strength we believe of the program that we are putting in place, that we are really making an effort that this becomes a cultural change, a continuous improvement culture within United Rentals. I want to change gears and talk about how we are leveraging technology, both from a Lean and a process improvement standpoint, but also how we are raising the bar on the industry. I know Mike talked to you about how we are deploying GPS. If you didn't see it at the kiosk, and there'll probably be time after, this is what it looks like. This is a telematics device that's going to be implemented on our equipment. Essentially what it does is it'll have certain ports that will take information from the equipment. It has a GPS receiver where it'll know the exact location of the equipment, and it has a transmitter on the mobile network where it can send all that information back to us. It's a technology that's been around for a while, and we have had it as part of our Total Control offering, but we are making a real commitment to deploy it across the network. As you'll see, we're targeting almost 90% of our fleet to have GPS units on them. We have most, if not all, the OEMs in line now where our deliveries in 2015 will have GPS and telematics devices installed already. I think it's important to note that those telematics devices are going to be ours. The information, we own the information, and it's proprietary to us. We just initiated, about a month ago, a large retrofit program. As you can imagine, that's a very challenging logistical project where we need to. Basically, the way it works is that every time you have seven pieces of equipment that a branch doesn't need for about 30 minutes, a tech will show up and retrofit one of these devices on the equipment, and we'll roll that out over the next year to get to our target to about 150,000 units or so with this capability on it. What does this mean to our customers? Here's an example of one of the capabilities of what this means to our customers. I'll just say as a disclaimer, when we came up with this idea that we were going to do this, it felt like a really good idea. Right now, I feel like a second grader that is presenting my science project. I am not sure I am as excited about this as I was 24 hours ago, but hey. Here is the intent. You will have the fuel gauge. The fuel gauge is connected right into the port of the GPS unit. When the fuel reaches the low level, the GPS unit gets that signal that we are low on fuel. Again, with the location and the information, that gets then transmitted to our systems, and through UR Control, we can enable alarm to our customers that on this particular piece of equipment, on this location, you are low on fuel. A great value add to our customers, especially in more remote areas and especially on certain classes, a huge benefit to our customers. If the science project worked the way we wanted it, you should have received an SMS or an email alerting you that we are now short on fuel on this particular piece of equipment. Not sure if that part of the science project worked the way it was intended, but Nobody got the-- Yeah, we got. Perfect. Thank you. You are now alerted that you are low on fuel, and you can take action before it is too late. You can now take action, make sure you are fueled up. In terms of our internal benefits, we obviously, from a service standpoint, this is incredibly important information, and we are in the process of creating what we call a conditional maintenance program. Today, we are working somewhat off averages. But with this information, we can really get precise about when a piece of equipment needs maintenance. Today, our drivers, through their handhelds, can locate equipment and save a lot of time when they are picking up a piece of equipment. The project is fully funded by internal benefits, and from a customer perspective, we are creating these benefits, really for us to keep raising the bar on the industry, and just keep building and sustaining our competitive advantage. Here is another example of how we are leveraging new technologies. This one, in particular, came out of a Kaizen event. As you saw, in the yard, what they found was that the yard associate spent up to 2 hours a day on walking from the yard back into the office, look at the computer, what am I doing next? Back out, find a piece of equipment, back in, saying the equipment is available. Again, if you have time in the kiosk, you will see the details. That team found an old laptop, they welded it on the back of an old forklift, and created a solution with an old air cart, and suddenly released 2 hours of time for that yard associate. We looked at that solution, we were going, "Well, this is phenomenal," but we probably do not want to find old laptops and weld them onto old forklifts across the network. Instead, we leverage mobile technology and are now testing this application that is fundamentally what they developed in that branch in California, but on a mobile platform where the yard associate has an Android device where they can see this information. So far, the feedback has been absolutely incredible. This is the direction we will keep going in with leveraging our mobile technology, but we are doing it not to perpetuate what we are doing today, but using it as a step in the Kaizen process to really accelerate the rollout of best practices. Again, I do not want you to think that it is all about GPS and a few mobile applications. We continue to work on a host of technologies that are helping our field and really accelerate our efforts. A lot of you have probably been out and see FAST, our logistics system, in action. Together with Dale's team, we have really taken that in 2015, and we are going to bring that out. We call it FAST 2.0, but we have really taken that to a new level, both in terms of the algorithms that we are using in the core piece of it, but also in terms of the handheld and the applications that we bring to bear for the driver. Voice over IP has been a big push for us. We have that almost fully deployed now across the network, and it really enable us to create a new set of processes that give the customers a completely different experience calling a United Rentals branch, where we can ensure a rapid and accurate response in a very different way than we were able to in the past. Again, just some examples on technologies that we are developing and will continue to develop. To recap, we are very excited about what we are doing with Lean. The initial results are incredible and very encouraging. We keep being challenged by the change management across the network. We think we have found the right tools to get it done faster, but it continues to be a challenge not to be underestimated. As we are moving into 2015, we are really making a push to leverage technology, both to raise the bar to the industry, but also to accelerate our efforts. With that, open up for questions. See if we can find a way to sneak in an oil and gas question. Cliff, please. It is Cliff Ransom again. It strikes me that the telematics opportunity has finally reached a stage. We have known it was a possibility for 10 years, but the market seems highly receptive to it. How soon can you go from a simple fuel gauge to being able to do predictive maintenance on a device and say, you are about to have catastrophic hydraulic failure or something that could be a real safety issue that becomes a very big sales tool. Correct. A bearing heat or a motor burnout or whatever it is. How much more work will that take, or will that be actually relatively simple? No, I don't think it'll be relatively simple. There are a couple of pieces to it, Cliff. The stage 1 is we need to get this deployed. That's kind of been our focus for the last 2, 3 months or so, and it'll continue to be our focus for the next couple of quarters. Because without a critical mass, Cliff, there's very little I can do. The next part of that is we then need to start now that and because I own the information, we then need to analyze it. That will take some time, Cliff, for us to analyze that data. We'll be able to leverage some of our relationships with OEMs to accelerate some of that, but that's going to take some real time. The last leg of that process, Cliff, is that we need to create the rigor in our processes that we can actually take that information and those results from the predictable analytics, and they'll consistently be deployed across 900 branches. Those are the three pieces of that rocket. As you said, the promised land and our goal on that is the guaranteed uptime. When we are able to predict the state of a piece of equipment and can get out ahead of time, that is when we can be able to really take this to the customer. Does that answer your question? Yes, sir. Very well. I appreciate your time. Thank you. Paul? Good afternoon. Can you hear me? Good afternoon. Can you hear me, okay? Yes. Let me try this here a little further. That better? Yes, fine. My name's Paul McDonnell. I'm the Senior Vice President of Operations with responsibility for our specialty businesses. I'm very excited to be here to talk to you about our specialty businesses and how specialty is aligned with the broader growth strategy of the company and what our plan is to continue to accelerate growth in our specialty segment as well as each of our specialty business units. A little bit about my background. I joined United Rentals back in 1999 when United Rentals acquired Sorry, Cliff, what's up? You have a fly on your mic. I do. Sorry. That's telling me, right? Predictable. There you go. I didn't want to get into the fly. I joined the company back in 1999 when United Rentals acquired a company called D&E Steel Plate Rental. D&E was a specialty trench safety rental company. I came to the company as a district manager, as an acquired asset initially, and then I progressed to the current position of SVP of Operations today. Back in 2008, when I was promoted to the SVP role, our specialty business was primarily just trench safety. We feel a little bit more special today as we've continued to evolve and growing our specialty business to include trench safety, power, and HVAC, our tool solutions business, as well as our recently acquired and integrated pump solutions business. Our team, and we have a team of industry rental veterans leading each of the specialty businesses, which is important as we continue to focus on accelerating growth. Todd Hayes joined the company back in 2002. Todd also came to United Rentals through an acquisition of a trench safety company. David Scott joined the company in 2010. David joined United Rentals from one of our competitors, where David had responsibility for running the power business, and David brings over 20 years of industry experience, as does Todd, to his position. Bill Kiker runs our pump solutions business. Bill joined the team earlier this year when we acquired National Pump and Canadian Pump. Bill Kiker spent his entire career in the pump rental space. Then most recently, we promoted Josh Flores. Josh Flores was promoted from district manager to run our tool solutions business, and Josh joined the team as part of the RSC acquisition. Each of these leaders are responsible for not only aligning with but also executing our ongoing strategy for specialty, which I'll talk about as we get into the presentation a little bit deeper. First, I want to talk about, at a fairly high level, what is specialty at United Rentals? We got four business units. We got trench safety. What we do in trench safety is we provide production, we provide protection to the underground construction industry. We provide contractors with excavation support systems that allow them to drive productivity on their job sites. These systems, these solutions, are revolutionizing actually how contractors perceive and use protective systems as cost-effective alternatives to older, more conventional applications, and I'll give you an example of that in a case study in a little bit. We're also a leader in customer training. Juan touched on our United Academy, which is strengthening our value proposition as we think about additional resources that we can provide to our customers. Excavation safety and confined space entry is a critical component of what contractors need to be safe when working in underground excavations. We will train close to 30,000 customers in our trench safety business in 2014. A rapidly expanding power and HVAC business. Similar to trench safety, we provide engineered solutions in large power up to 2 megawatts, temperature control that includes industrial air conditioners up to 80 tons, desiccant dehumidification up to 15,000 CFM, as well as direct and indirect fuel fire heaters. We service primarily industrial, commercial, government, disaster management, emergency response customer segments. Our pump solutions business really provides solutions wherever customers are transporting fluid or water. There's that word again, oil and gas. We are a leader in oil and gas. That being said, we also have a material presence in other customer verticals like mining as well as downstream industrial. We're going to talk a little bit about that, I'm sure, as we go through the presentation. David touched on our tool solutions business. Our tool solutions really provide both short-term and long-term project solutions, whether it's a single tool or a pull box tool that's customized for a smaller commercial project or a fully stocked managed tool trailer that comes with computerized tracking and support. So that's the four business units. These business units today represent, and Ron touched on it earlier, 18% of our company's total revenue. As a footnote, as we report, we report two operating segments, specialty and general rentals. Within the specialty operating segment, it includes trench power and pumps. The incremental to get us to 18% includes tools and other small specialty CAT classes that reside in some of our other general rental branches. One of the attractiveness is, and I think both Ron and David touched on it earlier, is as we think about our specialty businesses, it's a very attractive return on investment. We measure ROCA internally as a way to measure financial performance and returns. ROCA, as we define it, is EBITDA annualized divided by total controllable assets. You can see each of these business units have attractive returns starting with power and HVAC at 30% all the way up to 44% for our pump solutions business. So shifting gears a little bit, I want to talk about the segments that we service. We have a broad reach within our specialty business. We have a broad reach within the company. We have a very diversified vertical customer mix in each of the business units. Probably the one that jumps out more than the others is as you look at pump solutions, they have a higher concentration of their business that's coming from upstream oil and gas. That being said, when we did this acquisition, the plan was not to really double down on upstream. It was to build the mix very similar to what you see in the other specialty business units. For example, if you think of our trench safety business, 48% of our customer mix in trench safety is tied to utilities, underground construction, water, sewer, bridge building, and every water sewer pipeline project has a pump. When you look at the concentration in utilities for our pump solutions business, it's just 4%. We have a significant opportunity to continue to evolve and cross-sell our pump solutions into trench opportunities, as well as downstream industrial. If you look at tool solutions, tool solutions encompasses 60% of its revenue that is industrial. We have another opportunity to continue to cross-sell as we think about ways to penetrate more downstream pump rental opportunities. Then on the opposite side of that, we have the opportunity to cross-sell tool solutions into more commercial-related projects and non-industrial projects as we think about the broader reach of the company. I just want to walk through a couple of case studies. One of the things that as we think about our specialty business, why is specialty special? Well, we are specialty because we drive a high return on invested capital, but we are also special because our go-to-market strategy is all about uptime. It is all about how do we increase productivity for our customers? How can we design engineer solutions that make them both safe and productive on the job site? That correlation does tie back into why it is we are able to drive a high return on invested capital in each of our specialty businesses. This is just one example. I think actually David had it on his slide. This product, by the way, it is called ENS Slide Rail Shoring System. It is more cost-effective than older conventional welded in place structural steel solutions. Our strategy was to be first to market with this technology. We introduced this concept, this particular product to the North American market. We have it available, and we do business in 48 of the 50 U.S. states, as well as Eastern and Western Canada. Given the fact that we have 70 locations or over 70 locations within our trench safety business, we can be first to market, and we can be the standard for how contractors would use this type of technology. It worked in this particular situation. The customer, it was a national account, used the technology for the first time to help excavate and support a 32-foot Excavation. One of the concerns was that the solution was needed because it was paralleled to a 20-million-gallon reservoir. So movement outside the excavation as well as inside the excavation was critical. Needless to say, this type of application, working in this type of situation, that customer is going to continue to generate repeat business. A power and HVAC team, we have a lot of subject matter expertise in our power and HVAC business. This is just one example on a process cooling application in the Gulf, sorry, in Louisiana, where the system needed to be cooled. For any of you who have been in the Gulf South region in the heat of summer, it gets pretty hot. Right, David? It gets really, really hot. That can actually reduce the productivity in a particular plant. The challenge here was to turnkey chillers as well as power to lower the temperature in the plant. We design engineer the solution, where we plugged it into the process, lowered the temperature by four degrees, which allowed the customer to increase productivity or maintain maximum productivity throughout the course of the summer months. Another example of a solution sale is our pump solutions team. This was a catastrophic failure in a refinery in Port Arthur, Texas, where the cooling tower went down. If you think about the cooling tower pumps water into the heat exchanger that cools the process. The risk is if the plant goes down, it is going to cost the plant millions of dollars. Our team deployed rapidly. We had a 6-hour response time to turnkey a solution. In just 6 hours, they engineered a solution, provided on-site consultation and support, and the plant didn't miss a beat. Here we go. For those of you that are, I think, David, you mentioned earlier we're in the NBA. The Minnesota Vikings are having a losing season right now, but we're winning. We're winning in the new stadium, right? NFL. NFL. Sorry. NFL. See, that's what happens when you're an Irish guy. You don't know the difference between NFL and the NBA. If it was a soccer stadium, it would be a whole different story. This is actually a great example of a tremendous win. Our tools business historically are more in that industrial space with shutdown turnarounds, particularly when it comes to managed tools trailers. In this particular situation, we deployed a turnkey solution with a mobile tool room that helped the customer really have the right tools instead of having to worry about repairs, maintenance, leakage, having the right tool for the skilled labor on the project. This particular project is going to last 2 years, and it will result in $1 million worth of rental revenue for our tool solution division. Now that I've talked about what is specialty, I want to talk about why specialty. Talk about the high returns on invested capital. Juan touched earlier on the depth and breadth of our products. Customers like a single source provider for all of their product needs. That plays very well into each of our specialty businesses. The competitive advantage, we truly believe we have a competitive advantage. When you think about not only the depth and the breadth of our product offering, but the solutions that we're providing to our customers, our ability to provide safety and productivity, to problem solve, to engineer solutions, we believe gives us a unique position within the industry. As we looked at our specialty businesses, we have opportunity for growth, and I'll talk to that in a couple of slides. ROIC is one measurement of returns that we look at internally. To give the specialty business even additional credit, when you look at the attractiveness of the investment, you can measure it based on the multiple or the cash flows earned over the life of the asset. When you apply that dimension here, you can see that our specialty businesses have a 4 times payback over the life of the asset to EBITDA. Over 4 times up to, as you can see, a high of over 8 times for our trench safety business, which is also accretive to our company's ROIC and aligned with our company's strategy to drive a higher return on invested capital. I think it was back in 2012, at our last Investor Day, we talked a lot about the excitement around specialty. We talked about the attractiveness of the investment, the customer loyalty, the competitive differentiation. Mike says, "Paul, you got to hurry up and double down on this business. We got to go faster. What needs to be true to really grow the specialty business to a billion-dollar business by the end of 2015?" We accepted the challenge. To get there, we had to lay out a strategy. We evolved with a strategic process with a goal to be the number one in each of the businesses that we participated in. Looking at the capabilities, looking at our strengths, we want to identify what needs to be true for us to win in each of the businesses that we do business in. For example, with trench safety, it's about building the business. It's about innovation, it's about protection, it's about outreach, it's about solution selling. We're increasing penetration by getting our customers to rent more because we can provide more cost-effective solutions for their applications. For power, HVAC, and for pumps, it's about expanding our footprint. It's about cross-selling. It's about deepening the relationships that we have with our national accounts through solution selling. For tools and industrial tools solutions, it's about leveraging our general rental sales force to continue to gain share within our commercial and industrial segments. We set out a cadence with a focus on really these key work streams that you can see on the bottom of the slide. It was about talent acquisition, and talent development. It was about cross-selling, which continues to evolve within our company. The footprint, as we think about cold starts, where do we open locations? When do we open them? How do we open them? Also built on M&A. I think it's fair to say the strategy's working. At a high level, in 2004, we've hired over 400 employees, and we've promoted over 200 of our internal employees. We continue to build our footprint from just 77 locations at the end of 2010 to 187 locations by the end of 2014. We've got a plan to open somewhere in the range of 16 to 21 locations in 2015. Cross-sell, as Juan touched on earlier, continues to evolve as a cornerstone of our growth strategy. In fact, I would argue it's evolving to be a core competency today of United Rentals. It wasn't always that way. Took us a while to get there. Had to work hard at really selling the collaboration and the benefits to working together to cross-sell, to incentivize the team to want to cross-sell. Cross-sell today has evolved to become more of a core competency. We've done some very strategic acquisitions going back to 2012. We acquired two power and HVAC acquisitions in the southern part of the U.S. Gulf Star, we saw that industrial process cooling application. That talent that we acquired with that acquisition is really what's able to turnkey that solution. We did two trench safety acquisitions over the same period of time. Ontario Laser was a leader in Eastern Canada. It's been a very successful acquisition and integration where we didn't have a presence for trench. Coble, an 11-location acquisition in the Mid-Atlantic, where we have very little overlap. Many of you are familiar with the National Pump and Canadian Pump acquisition that we did earlier this year, which we're very excited about. We also acquired Blue-Stream, which strengthened our position in Louisiana. David talked a lot about some of the large LNG projects that are planned for this year and next year, and they're in process. One of the concerns that we're seeing in that market, in support of just the volume of downstream capital projects, is a shortage of labor. We picked up some incredible talent with the acquisition of Blue-Stream, not only from a sales and operations perspective, but from a technical perspective. We now feel we're better positioned to really kind of support the opportunity over the next 2 or 3 years. There's the line of sight to $1 billion in revenue by the end of 2015. We've grown our specialty business from $166 million in 2010. That's a CAGR growth through 2015. On top of that, we've been able to drive that level of growth while increasing our ROCA percentages in sequential years all the way through this year. While we feel good about that, we feel that we got that line of sight to deliver on the billion-dollar goal for 2015, we actually feel like we're just scratching the surface. We feel there's even more opportunity to continue on the path that we've started out on as we think about organic growth, inorganic growth, cross-sell, our footprint expansion, et cetera. This slide here kind of highlights where we feel the opportunities. We size the specialty rental market north of $8 billion in revenue. As you can see on the right side of the screen, we're $800 million in revenue by the end of 2014. We still have small market share in power and in tools and certainly in pumps, which is really exciting. We've got very small market share in those vertical specialty segments. Trench, we have more market share because we are the leader, but actually that's helping us. Because we're creating the standard and we're building the business. We're the only national player. We're the only player with a footprint throughout North America. We are becoming the standard for how contractors use protective systems, and we are deepening our penetration by changing behavior. We're going to continue to see an increase in penetration that will drive runway for years to come. The specialty business has the potential to be a $2 billion business by 2020. We set our sights on $1 billion by the end of 2014. Now we're setting our sights to be a $2 billion specialty business by the end of 2020. Just to recap, we're on track to achieve $1 billion in specialty revenue by the end of next year. We'll continue to hold ourselves accountable and build that cadence of accountability with our leadership team to focus on the key work streams that are driving growth in each of our specialty businesses. We'll also continue to explore attractive adjacencies outside of our core specialty businesses. We'll continue to evaluate what needs to be true to achieve that $2 billion goal by the end of 2020. Questions? Paul, you outlined a $2 billion revenue goal by 2020. Can you talk about, is that presumed to be organic, or is that acquisition included? Could you just update us on the acquisition landscape? Sure. I said potential by 2020. I would say it's a great question. It's something that we feel that we have runway organically right now in each of our specialty businesses. We're not relying on M&A to date to continue to grow faster in our core specialty businesses. Absolutely, if you think about what Michael talks about all the time, it's a three-legged stool. If there's companies out there and there's adjacencies that are financially attractive, that are strategically right from a customer perspective, and that culturally we could make work, we're in that process all the time in sizing adjacencies. In fact, that's what got us to where we did the pump acquisition. We prioritized adjacencies, and pumps came out on top. It came out on top because of the returns, the cultural fit, and strategically, we have huge amounts of overlap from a customer perspective. Right? When you think about the customers that we do business with today rent pumps. Right? They just historically hadn't rented them from United Rentals. When we think about the three-legged stool, and we think about some of the vertical opportunities that I highlighted on that $8 billion opportunity, we're looking at both, and we have the flexibility. I won't speak on behalf of the bank of Mr. Plummer here, but I think that we have the flexibility to be able to do deals if they make sense. Maybe asked a little differently. If you want to double your revenue in the next five years, and it's an $8 billion market today, what would you expect the market to be in 2020? Yeah. We have taken a turn at looking at each of those specialty markets by market. I think we actually put some of that information out when we made the National Pump acquisition announcement. I do not remember the numbers off the top of my head, but I am vaguely recalling 7%, 8%, 9% kind of growth rates for each of those specialty markets that we identified. If the background market is growing at that kind of level, the question is, can we take our share and then some to be able to support doubling in five years? That is a little north of 15% a year growth in order to get $2 billion in 2020. We think that we have got a position where we can leverage our footprint, we can leverage the cross-sell that Paul talked about, in a way that nobody else can. We think it is very reasonable to think that we can get that kind of growth out of the specialty markets. Is Paul back here? Yeah, we are. Oh, yeah. Sorry. Hey. What are your capital needs on organic 800 right now? What's your CapEx even as a percent of the 800? At $2 billion, what kind of capital will you need? Lots. That's always the answer, by the way. Right. Capital to $800 million of this year, I think we're going to put $240 million of growth capital into the business in 2014. I think in 2013, we invested $170 million. Some of that delta was the pump acquisition coming online. Notwithstanding what I would like to see with respect to the longer-term plan for additional growth capital, I don't know we're ready to talk about CapEx beyond really 2015, David. I would say that capital has not been restrained from the specialty businesses. If the business is there, and we can continue to show that we're good stewards in how we allocate capital and how we drive those returns on invested capital, we've gotten the capital that we needed. I think that will continue as we think about the business going forward. But I'm not sure if you want to add to that or. No, I think that's well said. Well, the thing is, I mean, if it's supposed to be a driver to improving your returns on capital, that gross CapEx as a percent of rental revenue is no different than the traditional business, what we're seeing in aggregate for the whole company right now. So how is it going to help drive ROIC if I'm putting the same capital into it as a traditional business? Yeah. It's growing at a much more rapid rate, so it'll take more share of the business overall, and it'll mix to that higher return that we get out of this business. We think that the math all works, and that's why we want to keep feeding Paul and the team. Just so I understand, to quantify the lots, $800 million, 240, 30% gross CapEx as a percent of your revenue right now. Is that the correct math for this year? So $800 million in total revenue. Correct. That's not- Your CapEx is $240. I think $240 is growth. It doesn't include replacement. So growth is $240. I don't have the total CapEx number inclusive or including replacement, but I can get that number for you. Well, we can talk offline, but in general, say, Bill Plummer, when you look out five years, to keep this as an improving return on capital growth story, can you help us understand the capital requirements to grow the business from 15%-17% of company today to 30%-35%, just so we walk away with the correct message? I think the correct message is that we're going to fund the growth in specialty that's going to help continue to drive the overall return toward the company higher. And we feel like we can do that within the context of what we talked about for our capital spend over the next several years. That's about where we've been this year, about that $1.7 billion, maybe a touch higher as we go forward. And we think that we can mix it all together in growing specialty, along with improving the returns of the rest of our business so that we continue to drive returns higher. I'm not sure I'm answering your question. How would you describe the return on capital for specialty today versus the traditional business? Then help us with if today it's 15%, 18% of the company, where do you see it in 2017 or 2020? Just for us to walk away with a clear what can specialty do to your return on capital profile. Specialty can improve it. We haven't specified a lot of the numbers that you'd like us to have, David. I'm trying to give you some general guidance on how we think about where specialty can take us. So we said $2 billion in 2020, growth from $1 billion next year. That gives you a sense of revenue there. We're going to talk in a little bit about overall company revenue so you can back into what share of the overall company it represents. If you look at returns today, returns today in the specialty businesses are several hundred basis points better than the gen rent business, right? We don't break it out on ROIC basis, but if you look at ROCAs, specialty business ROCAs are anywhere from 5 to 15 percentage points higher than general rentals. As we mix all that together in our modeling, we come up with a mix that's very attractive, so we're going to keep feeding specialty. More specific than that, we haven't gone. David, to the 30% to 35% number, I'm assuming you were using $2 billion on a base six. We won't get to that $2 billion. We'd be very disappointed if we were a $6 billion company in 2020. So it won't be in that 30% to 35% range. It'll continue to grow at a faster pace than our non-specialty. Well, that's where the M&A is a wild card. I think $2 billion from $1 billion next year is only a 15% growth rate. This business has grown a heck of a lot faster than that the last few years. 15% organic is one thing, but you're going to have a lot of capital to put to use, and we've been told clearly this is where you're going to put the growth CapEx. Yeah. But also M&A. The $2 billion number, I assume, is not- Right. The grand plan, let's say that. The $2 billion number can include M&A. We certainly want to find the right acquisition opportunities to help us get there. We are not afraid to spend to do that. If you are trying to use the CapEx discussion as a way to say, can they do it organically? I think thinking about it only organically is too limiting. Okay. Thank you. Okay. Yeah. You showed mobile storage as a nice size chunk of that $8 billion adjustable market. Is that an area that you are interested in? How are the returns, do you think, in that segment? Can you talk about with respect to the $2 billion by 2020, would you get the lion's share of that just by increasing market share in the areas you are already participating in, or are there a lot of new adjacencies that- I think it goes back to the conversation that Bill just had with David. We see we have runway for growth, and we think we can obviously grow faster given the market share opportunity in our core specialty businesses. It goes back to my comments earlier, where all of those adjacencies, whether it be tanks or mobile storage or scaffolding. We try to prioritize the attractiveness based on our customer strategy, the return profile, the volatility at the end markets, and whether we want to do it organically or whether we want to even do it through M&A. We continue to evaluate and size those opportunities. Bill, you want to add to that? No, I think that's fair. All of those areas we take a look at and we evaluate, and we look at the opportunities to enter those either organically or through acquisition. If we see the right opportunity, and we can manage the risk of it, we take a look. I didn't think that's fair, Mike. It goes back to my comment. The process that we're going through, you can take a look at what we did with National Pump. The rigor that we're going to put behind that process will be very similar. And the level of detail, and the bar is set pretty high, and that's how we would approach it. That's it. Okay, great. Thank you very much. One last one here. One more. I'm sorry. Just a follow-on to that. Is there anything about those markets that you're not in, the tank scaffolding mobile storage, that you see as prohibitive, undesirable, doesn't fit your model, your competencies, the volatility today? Or over the very long term, it's just as possible you could be in all of those end markets as you- Without getting specific and without responding in detail, I think those markets are attractive. It really comes down to what you get in return for the investment that you make, and what you can do with that investment strategically from a return profile and even culturally on a go-forward basis. They're on the list for a reason, because we are sizing adjacencies. As we think about the $8 billion space, we'll continue to do that and make it part of the process. Okay. Thanks. On top of all these, you've talked in the past, and it's been in your presentation pack, scaffolding, liquid storage, portable storage. Are there any other areas in specialty that you would like to add to that right now that you're looking at? That's the first part of the question. The second part is, we have seen a little bit of activity in portable storage and liquid storage in the M&A front. I guess, could you just address what you're seeing out there in the marketplace, multiples, things that have you moving faster or slower with regard to looking at deals? Thanks. I'll try that one as well. We're certainly aware of what's going on out in the marketplace overall. We have seen some activity recently in tanks, and involving one of the mobile storage players. So that's something that we're aware of, and we're always looking very closely at the argument, the logic, the strategic logic that makes someone take an action or not take an action. As we look at these markets, there are things that we look at and we say, "Yeah, that lines up perfectly with what we are." Right? Same customers, same rental process, similar assets. And then there are things that are a little different, right? In the scaffolding world, you have to ask yourself how involved do you want to be in the process of constructing the scaffolding on a given job site. And we'd have to think through how we approach that and how we manage that. Those are the things that we go through in our strategic analysis of which of these specialty areas make sense. For the question of are there other specialties that aren't up there that we might look at? Always looking for opportunities. We focus in on these because these are the specialty areas that we think are most likely to fit with us strategically. But you could add cranes if you wanted to, right? Specialty hoist and rigging kind of opportunities. Those are things that we continue to think about, but these are more immediate, is the way I'd say it. What else, Scott? Did I miss something else in your question? Thanks for all that coverage. I appreciate it. Thank you. Okay. Thank you. Okay. A quick little audio check, right? So good afternoon. We're getting close, I promise. Two presentations left. I know. I'm glad I'm up here, believe it or not. Most people probably don't like speaking, but I don't want to sit in that chair any longer, right? I get it. Okay, we're down now. We're down to two. So trust me, these are the good ones based on some of the questions we've had earlier. Now we can see if we can get the technology working. First of all, for those of you who don't know me, my name is Dale Asplund. I work in the capacity for the company of Chief Information Officer, as well as Senior Vice President of Business Services, and I'll define that in a minute for you. I've been lucky enough to be with the company since the very early days of inception, and had a chance to go through the whole transition we've done from an acquisition-based company consolidator, all the way to where we're at today as a wonderful operating company that we are. Let me first tell you, what is business services? Because I think it takes a minute to think about it, because it's important. You've heard some of my colleagues talk about IT and how we use it across our business. Let me take a step back and tell you, where do we start when we look at IT usage? First of all, fleet management. We'll talk about our fleet a lot over the next few minutes, but fleet management is critical. It's been the fundamental thing we've been able to change with our business to continue to show improvement. When we talk about fleet management, obviously there's so much more. It starts with the procurement of all of our products. That's a critical component in fleet management. Our used sales. How do we go about the process of disposal once we get to end of life of those assets? All the vehicles. We talked about earlier the fuel impact, but we have thousands of vehicles we use to deliver or go out to maintain our equipment. How we manage that licensed vehicle fleet is very critical. The repair, maintenance, and warranty of all that product we have, over $8 billion of fleet that we have. How we manage that is very, very critical. Contractor supplies. We have customers that rely on other little items as an ancillary item in the process, making sure we have the right products. Many of these are the personal protection items that we pitch with our customers to make sure they're safe on the jobs like our employees are. Credit and collections, we encompass. Make sure we go through the process at the end of life to collect. Then shared services, which incorporates many of our back-office functions such as accounts payable. We tie all that together under business services, and then we incorporate that with IT, because we continually believe we have to use technology to make sure we leverage our size to be the most efficient back-office company in the rental space that we're in today. We've done it very well as we've migrated the company to where we are today. Okay, let's talk about a few things. First, let's start with our fleet. If we take away the people we have that we've talked about already, our fleet is probably our biggest asset as a rental company. As of the end of the third quarter, we have $8.6 billion of fleet. You can see the distribution up there. If you've followed this for a while, what you'll notice and what you've just heard from Paul, we continue to focus investing that capital we spend every year on the highest return assets. Whether it's specialty product or the higher return assets in our general rental fleet, this is critical in our mission to make sure we continually improve the returns for our investors. Let's talk about what do we do to procure that fleet. We'll start with that. This is a great process that we go through every year. What do we talk about? Obviously, everybody will think price. Price is the first thing we talk about. All our suppliers know that. But there is so much more. It is not just what we can buy it for. We also talk about what can they do for lead times. Our business can be cyclical. We spend our capital not spread out across the 12 months, but somewhat seasonal. We make sure that they can fill the slots we need during our seasonality. What do they do for freight, and how much do they want to charge us on the freight? We inbound a lot of new equipment, and making sure we get competitive freight rates is critical. What do they give us for warranty? Not only the duration, but what is the reimbursement rate they do, and what is travel time or any downtime reimbursement they do? This is very critical in our business because our assets, unlike people that buy a new asset, do not necessarily get the number of hours annually. So making sure our extended periods of warranty are beyond the manufacturer's normal period gives us the same protection with those assets. Across our fleet, this can be critical. What do they do for billing us? Some of our larger suppliers, we do upwards of 100,000 invoices a year. If they send those manually versus electronically, it is a huge difference for us. What are their payment terms? This is very important. Making sure that the payment terms they offer us are very fair. What do they do with technical support? We have over 3,000 mechanics today. How do they support us to make sure those mechanics are capable of being efficient to maintain that equipment? When they need parts to be able to maintain that equipment, what is our discount on that parts? Because that is a big cost for us in the repair and maintenance of our equipment. Are they on our purchasing system? This is critical for our mechanics. It is a very critical aspect for them to be able to quickly get the right part ordered and shipped for the asset that they need. Can we retail the product? Many of our customers ask us to retail the product. Do they give us training? Training is critical for our mechanics, whether it is simple electronic training or advanced Tier 4 engine training that we have all talked about already. Probably the biggest one lately, where are they in the engine tier cycle? Which I know we will have questions at the end. It is all those components when we look at our supplier base that we choose who is the best supplier for us. We add those up every year to determine our best partners are the list of suppliers that you see above. Now, once we get all that data, we have to make the decision, whose product are we going to buy? So when do we do that? This goes through the next stage of us saying, let us take a step back and say, we are going to buy this asset. We know how long we are going to have it. We will talk about that in a minute. But what is it we are going to see through the life of that asset using the data that we have seen? If you think about it, we can estimate very accurately, based on the historic data of our fleet, for each OEM, how much we are going to see in maintenance, both parts and labor, and probably a good idea of what, at the end of our anticipated life, we are going to see for residual value. If you add all those components up along with the initial price, you will come to a place where you will see which product is the best total cost of ownership. That is the language we speak with our branches. Total cost of ownership. Not cheapest price, not best quality. It is the best total cost of ownership for our business. That is where we drive our purchasing decisions towards. Now, we talked about seven years in that asset, but when we are going to sell it. How do we determine when to sell it? Once again, we have a litany of data, and we can look at it. We look at all of our CAT classes, and we look at what do we see for the revenue trend of that asset? As it ages, do we see a large decline at any given point in the actual rental revenue that will produce? As well as, what do we see in the repair and maintenance cost associated with that asset as it ages? Do those have a tendency to go up or spike at any given point? Then, another important factor, do we see any big decline in the residual value at any age of the asset? This is critical because keeping those assets is very important. In fact, many of our areas that we have spoken to have seen us and talked to us about what our challenges are to get returns on some of our aerial products. They have taken some of the major repairs that were required to be done at year 7 and aged them out to years 8 and 10. This gives us great ability to age those assets a little bit longer. In fact, if we could take those booms, 33% of our fleet, and age them, if it was the right thing to do from 7 to 10 years, we could increase our internal rate of return by 33% on those assets. A great opportunity for us just by working with those OEMs to let them know what we see during that maintenance cycle. These three levers, along with what we see at the end residual value in the markets, give us the ability to accurately predict when we should sell the assets. Now how do we set that price? We get that asset. We know when it is time to sell, but now we look at every day we get assets that are aging, that are hitting that hurdle. Whether it is the actual hours put on the asset or the timeframe, we get to a point where we want to sell it. We will then use data to look in our system to say, "What should the price be?" When we see high utilization on assets, we mark those prices up to make sure we maximize our pricing. In fact, our goal is to get at or above the Rouse values of fair market value for all our assets with a focus on retail, primarily. Okay, so now, what do we buy. We have talked about when to sell it, which vendor do we choose. Now it is important to talk about what product lines we should buy. We have talked about what our fleet has done. We have talked about the impact of specialty. Let us look at our fleet and think of it in a quadrant of four different areas. Let us start with the bottom left. This is an area, down the left side, where we have time utilization from low to high. Across the bottom, we have our contribution margin, you heard Juan touch on that earlier, from low to high, left to right. If you think about the bottom left, if we have low margin and low time utilization, this is what we call the fleet reduction zone. This is probably excess product across our network that we should look to eliminate. The good news is that is the smallest portion, or about 4% of our fleet right now. If we go immediately above that, we are seeing great demand, and we are getting high utilization on our product from time. Yet, our returns are not adequate in our minds. That is 31%. Our focus with our sales and marketing team is to continue to drive rate. Make sure if we are seeing demand, we are pricing it at the right level. Then we go down to the bottom right. 25% of our fleet is in this bucket. This is critical. We get adequate returns, but the fleet we have is not being fully utilized. Our sales force is continually looking to keep pushing those assets into the market and get aggressive. A great opportunity for us to drive even more returns in those assets. Then there is the best spot. Up in the top right, high returns, high utilization. This is where we want to invest that capital every year. Each one of those buckets, every time somebody sends in a requisition, we review where does it sit in that chart. Is it the right thing to buy it, or should we move it. That is what we do as a big company that manages fleet across North America. This is a critical step in our journey to getting a higher rate of return across all of our asset base. Now, Tier 4 engines. I know this is a topic, a little bit of an eye chart, but as you can see, 2015 is a critical year. As we exit 2014, the engine horsepowers are down on the left. You will see that will be the final year of interim Tier 4 product, and basically all products next year will be switching to final Tier 4. A big transition. But if you look at our fleet, and I think this is a critical thing for you to look at. This gives you, if you start on the left in 2014, if you think of our fleet with an average age to sell over seven years or 84 months, this is what it would look like if we took our fleet today and over the next seven years we transitioned it to get to where our final Tier 4 engine transition would be. If we start at 2014, today, less than 5% of our fleet is final Tier 4 engines. Next year, we will do everything we can to invest as much money as we can in the interim Tier 4 slots that we have available with our key suppliers. As you can see, between 2014 and 2022, as we go through the next cycle, we will transition to having a much greater portion of our fleet. In fact, about 82% of our fleet, based on today's mix, will actually be impacted by final Tier 4 engines. So a huge opportunity for us to make sure. We've done a great job as we've transitioned from Tier Three to interim Tier 4 to final Tier 4 to make sure we work with our OEMs to get every available engine credit that they have from the previous engine tier into the next cycle. We've done that very, very well, but those opportunities are starting to run out. There's a good news here for us. We get asked very often, what's the delta between renting and buying? This is interesting because if you think about how long it's going to take us from 2014 through 2022 before we get out of all that final Tier 4 fleet, if you think about a customer today, if you go down the right, it gives you a 48-month term, 10% financial charging. The assumptions are on the right of what we look at when we say as an example of renting something versus buying. If you look today, a customer could probably go out and buy an interim Tier 4 compressor versus renting it, and it's probably about 9 or 10% better to rent over buy. Come next year, when they're forced to buy a Final Tier 4 engine, they get the immediate impact in their purchasing cost, versus us transitioning over the next several years as we incrementally move our rates up. That rent versus buy decision drastically changes, changing that penetration in the rental view. In fact, if you looked at it and said, "For the next six years, we're going to increase rates 3% on this model, and at the same time, the cost of that asset only goes up an incremental 2%", you would still have almost a 15% gap over what it would be to rent it over buy it. Now, each CAT class is different, but this just gives you an example. That transition of those Tier 4 final engines really impacts people buying assets as much, if not more, than what it does to our fleet. Us having as much fleet as we do, us aging it as much as we do, gives us the opportunity to migrate in the impact and the cost of those assets with Final Tier 4. So a few quick items, and then I'll open up for QA. First of all, remember, we use technology. You've heard Juan talk about it from our sales and marketing team. You heard Helge talk about it, how it makes us more efficient. We use it for many sides of our business to create efficiency. Our vendor negotiations, they encompass a full line of items. It's not just price. Total cost of ownership. That's where we focus on. Not just one piece of it, but the full total cost during the life of the asset. Used sales, we focus on retail. And we actively manage our fleet to make sure that contribution margin is continuing to grow. That's our focus. With that, I will open it up for any questions you would have. The matrix you showed us, what's in the upper right-hand corner? I'm sorry? The matrix you showed us of the high rent. Keep going. The four boxer? Yeah. In the top right, 40% of our fleet, high time utilization, high margin. We want to continue to invest in those products. Right. What kinds of equipment are in there? I kind of got your question, but I didn't want to answer it, but I thought you'd let me go on. Hey, there might be a lot of other people on the phone that want to know. Unfortunately, if I had that list and my competitors could get it, they'd love to know, right? So as much as I'd love to disclose it, I'd rather tell you maybe what's in the bottom left. I think for our business, I will give you one in the bottom left because I don't necessarily think it's a rental problem. I think it could just be our customer mix today. But large earth moving, for an example, could be one that sits in our bottom left corner. Large bulldozers, as an example. Our business doesn't necessarily get the long-term rentals out of it. And that's a product you have to keep on rent for long term. If we can change our customer mix and they can come back into play, that would be a very good thing, and we can get customers that rent from us as first call. But today, we kind of fill in the niches on those products. So I don't think that's an area that we see adequate returns. So before we invest, we want to make sure we find those right customers. But I'll leave the stuff in the top right kind of hidden for now. Is that fair? What else? Sorry. It's Justin Jordan from Jefferies. Can I just go back to your first slide, just on the various circles and on the pie chart you started with? One of the big facets of URI that's really better than anyone else in the industry is on your disposals. You're achieving better margins on disposals than anyone else globally, as far as I can tell. Can you just talk through the various channels that you're doing disposals through, and how that mix is changing over time? Because I'd appreciate there's more going through e-auctions, there's more going through the branches, and just where we are in terms of potential, where you think you might get to over time. Yeah. So great question. Like I said earlier, our primary focus is to use our salesforce to drive as much of our sales as we can through the retail channel. The retail channel for us is by far the most profitable channel for us. Then we look at leveraging some relationships with brokers. That's a part of it, and brokers usually export it overseas, as well as we have a little bit the supplier trade package type work. Those two are a little lower margin. We also have grown a business on export sales. We continue to focus on international export right through our own sales team, and that's become a very profitable channel for us. Actually, the amount we try to minimize the most is the auction channel. Auction, we feel, really devalues the value of our equipment. We maintain our equipment very, very well. We have very great processes to make sure that we're hitting our preventive maintenance. We make sure that our equipment carries a premium. If it goes across an auction block, we don't get a chance to sell that premium. The less we can do with auction, the more our returns will be on used equipment sales. It's probably as important, one of the main reasons we probably see that higher margin is we sell it at the right time. We wait to see when we should sell it. We don't just look at our fleet of $8.6 billion and say, "Everything's for sale." We don't try to sell new assets. We want to sell them at the right time in the age of the asset. Justin, I'll just also say that we also give a suggested price. We use real-time data that we feed to our salesforce, so they know that they're getting the best bang for the buck on the assets. I'll just add that we also have volume targets for all of our salespeople that they have to meet on a monthly basis for used sales as well. They get the commission on all used sales as well. Hi. Cliff Sosi. Yep. If I go back to the four-quadrant chart, is it possible if I think about the quadrant in the upper left, the quadrant where you're trying to drive rates. Can you provide some color around where you think the return on incremental investment is for assets in that quadrant? That would have to factor in the idea that incremental margins are higher because you lever fixed costs, but at the same time might have an overall negative impact on rates because of some sort of elasticity of demand. In terms of, I guess in the yellow box, if you were to think about adding $1 million of fleet there, what would you estimate the return on invested capital for that $1 million to be? If you look, that line's obviously long. If it's on the far left with very low returns, it'd be very poor. If it's right on the border of shifting over to the one on the right, we'd be more towards our targeted goal, right? I would also tell you some of those products that are in that category, we can have territories in the country where we do better than we don't do in other territories. When you start getting products that have that high a demand, we have markets where our returns are adequate in those. When that product hits, it's not an area of do we not buy it. How do we make sure where we buy it ends up in the right market where we get the adequate returns? The markets that don't have adequate returns, we keep pushing them to get their returns to a level that we need them. The goal is to shift all of that over to the right. The goal would be to have every product that we can in that top right corner, and then the Bank of Bill would be hopefully funding more money, right? Wide open. One more question. Can I just add to that? Sorry. I mentioned earlier the contribution margin model has shed a lot of light for our salespeople as far as when they go in to negotiate a deal. That's another tool we use that allows a NAM or a strategic account manager to see where are they making money, where potentially are we on the left side, and they potentially push price more aggressively on certain CAT classes, and oftentimes succeed in the process. Some of this is really just having the visibility into what's a highly profitable one and what is less profitable allows us to optimize our returns just through that visibility alone. Sorry. Is it possible you can try to quantify adequate? Just so we understand. Is it possible you can try to quantify what you mean by adequate? Maybe where would that line be between green and yellow in your opinion? If you think about it mathematically, the side to the left half would be bad, and to the right half would be good. Thank you. It was worth a try. Okay. Dale is very light on his feet. I like that. Cliff, we haven't quantified the numbers that specifically, but I do think that it's fair to say that there will be CAT classes in that box that are north of the 10% return hurdle that we're looking for, and appreciably north. There will be others, to Dale's point earlier, that are further to the left that are going to be maybe marginally below. But because the demand is so high, we have to have those units in our fleet. And so our job is to mix those customers and those utilizations of the equipment such that all in, we end up at a good return result, and that's what we're always trying to balance. Donna? Oops. Do we have one more time for us? Time for one more. Donna? I think we have one in the corner. One more, and I promise, Irene, it's all yours. Cliff Ransom again. I'm a friend of the family, and I'm a big fan, but I don't believe you've changed human nature. When you get into the next down cycle, you're going to stretch the life of those assets again. Why is it going to be different? It's all right. If an aerial work platform has an optimum life of six years, you're going to stretch it to seven, you're going to stretch it to eight. Probably not going to stretch it to nine unless all hell breaks loose. Why should we have confidence that you'll have that discipline? I don't think that downturn is coming for a long time. Why should we think that's something new in this company when it hasn't been true any time in the last 30 years of your industry? I think, and I'll let Michael add, too, but I would think, Cliff, what we saw in the last downturn, we actually sold assets with a younger age. We didn't sell them with a longer age because we didn't want to hold onto the fleet. The utilization of our fleet suggested we should de-fleet more, and we sold. That's what we did during the downturn. I would tell you that right now, what would cause us to age those assets is the interim Tier 4, final Tier 4, Tier 3 engines. We're seeing stronger residual values that are staying on those assets for a longer period of time, and it's given us the opportunity to kind of age it. I think it's all product based, and I think the message is, how do we manage it more real time? It's not a moment in time. It's every year we continuously look at it to say, what is it at that point we should age it to? It's precisely your emphasis on information technology that's allowing you to do that. That's what takes away the action. I would say that we have a lot more tools available to us today than we had in the past. Got it. To enable us to make those kind of decisions, Cliff. Thank you. Yep. Yep. Okay, Pat? Good afternoon, everyone. I'm fine. Thank you very much. My name's Irene Moshouris. I'm the Treasurer of United Rentals. I joined in 2006, and now I have responsibility for tax and real estate as well. I'm going to spend a few moments talking about our capital structure, and then we'll turn it over and also talk about our outlook on the business. On our capital structure, underlying the growth strategies that all my colleagues have talked about, Paul, David, and Juan, is really a strong capital structure. Our philosophy on managing our capital structure is one of really trying to optimize our costs and flexibility. From a cost perspective, we recognize that we're in a capital-intensive industry, so funding with a moderate amount of leverage makes sense. We're able to service our debt as our business has consistently generated free cash flow. Except early on in the company and in 2012 when we acquired RSC, United Rentals has generated positive free cash flow at every stage of the business cycle. As I'll talk later on in my presentation, we expect to continue this trend over the next few years. An added bonus is that our fleet is valuable, it's liquid, and we can easily monetize it. This allows us to access the secured markets at very attractive rates. To optimize our flexibility in managing our capital structure, we do a number of things. We manage the maturities of our debt to avoid excessive refinancing in any one year. We also use a variety of funding sources, so we'll tap the secured markets, the unsecured markets, convertible markets. This affords us access to capital in the event that any one market is closed. We also avoid concentrations with any one lender. We believe by optimizing the cost and the flexibility of our capital structure, we're in the best position to support our growth strategies. Looking at the maturity of our debt portfolio, you're very familiar with this slide. This has been on our investor deck for quite some time. This chart illustrates how we've extended the maturities of our debt well beyond 2019. In the near term, we do have some maturities. In 2015, we have our accounts receivable securitization facility. This is a 364-day facility, and we just renewed it in September. The larger maturity that sticks out is in 2016. That's our ABL facility. It's also a revolving credit facility. Both the AR securitization and the ABL facilities provide United with its daily liquidity needs. At the end of September, we had over $1 billion in liquidity. This level of liquidity is more than enough to satisfy our fleet needs, and it also provides additional flexibility with respect to some of the other growth strategies and at very reasonable rates. The ABL is an important facility for us, so in 2015, we will begin negotiating to refinance that facility. Under current market conditions, we would expect that to negotiate similar, if not better, more favorable terms and pricing. We also have some high coupon debt out there. We have an 8 and 3/8 subordinated note that matures in 2020. We have an 8 and 1/4 senior note that matures in 2021. Many investors, we get this question all the time, asking us how is it that we think about and when do we determine that we're going to refinance debt? The analytics that we go through are just basically looking at the cash flows of refinancing, then looking at the net present value of those cash flows. If the net present value is positive or close to breakeven, we typically would refinance. With respect to these particular high coupon notes, the make-whole premiums that we would have to pay right now cause the NPV still to be negative. It's not something that we would refinance at this particular time. But rest assured that we're looking at the markets every day and watching to see for cost-efficient opportunities to refinance and push out the maturities. I'm going to shift gears now away from our capital structure, and just as a heads-up for you, what I'm about to say is probably one of the more important messages that you want to listen to today. Shifting gears now to free cash flow, and naturally, it doesn't go. There we go. Based on industry forecasts and consistent with our expectation that our end markets will continue to strengthen, we are forecasting that United Rentals will generate significant free cash flow over the next three years. We expect free cash flow above $600 million in 2015, north of $800 million in 2016, and north of $1 billion in 2017. In total, we expect to generate about $2.5 billion in free cash flow in the next three years. Did I say $2.5 billion in the next three years? If you're wondering what it's like to work in a company like this and what makes us excited, this ranks up pretty high up on the list. The next question that you might be asking is what are the underlying assumptions with respect to this forecast? What's supporting our outlook? Just a quick note, there is no assumption with respect to M&A or any significant organic initiatives underlying this outlook. For gross CapEx, this is something you've heard us talk about. We're assuming $1.7 billion for the next three years and net CapEx at $1.2 billion. This reflects a modest increase in our fleet, and it also continues our disciplined approach to investing CapEx, with a focus on achieving the appropriate returns on our investment. You've heard that word "returns," I can't say how many times during these presentations. We still haven't completed 2015 budget process, so in January, with respect to 2015, we'll be making some more refined assumptions regarding that particular year. So with respect to fleet spend, it might be maybe $100 million plus or minus depending on demand, and we've talked about that also in the past. With respect to rental rate assumptions for the outlook, it includes rate assumptions of 3%-4% in 2015 and 3% thereafter. Over the last few years, I think Juan pointed out we've made good progress in recovering off the lows of the recession, and our outlook reflects our continued belief that we offer a value proposition that merits these increases. It also recognizes that we must recover rate to offset some of the impact of inflation previously discussed. With all the metrics that we talk about, and if you have followed the company for many years, you know that we always strive to do better. But at this point, this is our best guess as to what we see in the future. For cash taxes, which may be one of the biggest changes that you've seen, because if you recall, the company has been in a net operating loss position for federal income tax purposes for quite a number of years. In 2015, we will be utilizing the remaining NOLs, and we will become a federal income taxpayer. We estimate cash taxes for 2015 at about $225 million. To put this into context, in 2014, we expect cash taxes to be about $90 million. That's a significant outflow. In 2016, we expect cash taxes to increase another $200 million to about $425 million. In 2017, another $200 million. Michael, I'm telling you, I see the steam coming out of your ears. Yet even with these substantial increases in taxes, we are still generating significant free cash flow. I think that's the big takeaway here. For cash interest, we would expect a range of about $450 million to $475 million in the next three years. We believe that these assumptions, which are driving the $2.5 billion in free cash flow to be reasonable and achievable. Heads up, here's another one of those important. What are we going to do with this cash, you may ask. Today we are announcing a new share repurchase program for $750 million over the next 18 months. We also want you to know that we completed our previous $500 million share repurchase program. In fact, we completed it two days ago. It is possible that we will be beginning repurchases on this $750 million program in the remaining days of December. But the bulk of the repurchases will occur in 2015, where we expect to spend about $500 million. This announcement falls squarely within our strategy on capital allocation. We prioritize our capital allocation first by investing in our fleet to support growth. This includes some of what Paul was talking about previously, about opening branches. In 2013, we opened 18 specialty and a similar amount this year. In addition to investing organically, we're an acquisitive company, again, discussions with Paul, and we continue to evaluate potential assets, particularly in specialty. Within the framework of our capital allocation, we've targeted a leverage range of 2.5x to 3.5x net debt over adjusted EBITDA throughout the cycle, and I'll talk a little bit more about that in a moment. Finally, if we've invested the appropriate funds in our fleet and if there are no acquisitions, then we consider returning cash to our shareholders. That's exactly what has been done here with today's announcement on the $750 million share repurchase. Leverage. Let's spend a little time on this. We've targeted a range of 2.5x to 3.5x over the cycle, and we talk a lot about the path to lowering our leverage. Well, over the last few years, we've steadily come off the 4.6x pro forma leverage from 2011. In fact, at the end of 2015, we are forecasting our leverage to decline to the lower end of our range. Looking beyond 2015, we are projecting a further decline in the ratio as the company generates significant free cash flow. We know that all of you are out taking out all sorts of devices trying to calculate the projected leverage for 2016 and 2017. But the real point is that the takeaway here is that our leverage is forecasted to dip below the lower end of our target range of 2.5x, and that we view this excess as dry powder to invest in the right acquisition or for organic growth opportunities such as building out our own adjacencies. This dry powder gives us considerable flexibility to continue investing in our business. Turning it over now to ROIC. Again, many of you are familiar with this slide from our investor deck. Fred Bratman calls it the famous slide 50, which is a bridge illustrating the company's path to higher returns. We modified and refined the bridge to reflect some of the assumptions that I just mentioned. As a company, we have an intense focus on ROIC. In fact, a portion of compensation for management as well as the field is tied to ROIC or a version of it. As we've stated, a goal of achieving an average 10% ROIC over the course of the cycle. This targeted 10% really is a stretch over our estimated cost of capital, which is about 8%-9.5%. As just an aside, when we speak about ROIC, our definition reflects an after-tax computation, and it includes goodwill. What's notable about this slide today is that we see the path above 10% from 8.4% for the trailing 12 months from September to about 11% in 2017. This timeframe has been accelerated from our previous view, and we believe that our focus on returns is paying off and that we're getting closer to achieving our goal. We wanted to share just one more slide with you, and again, this is one of these you're going to want to pay attention. You've heard a lot about many of our initiatives, our view about our end markets, the assumptions underlying our outlook. Here is our point of view on what we think 2017 may look like. Two additional data points on where we see our business in three years. For 2017, we see revenue between $6.9 billion and $7.3 billion, adjusted EBITDA between $3.6 billion and $3.9 billion, and ROIC of about 11% and free cash flow north of $1 billion. This does not assume any M&A or new organic growth initiatives, and we cannot stress enough that this is our best estimate at this time of what 2017 may look like using reasonable assumptions. But we can completely understand why it may be hard for you not to be as excited as we are about the runway for our business over the next few years. We think the best is yet to come for our company. With that, I'm going to invite Q&A and Michael Kneeland and Matt Flannery and Bill Plummer. I had a question over here. There are a couple things that I'm not quite sure how they fit together. You talk about flat CapEx over the next three years. You're clearly growing the specialty business, so that would imply negative CapEx in the base business. Yet you talked about only being in the fourth inning, and somewhere else, there was a footnote that talked about a 7% fleet growth. I'm a little confused how you get. Those things don't quite seem to fit together. I was hoping you could fill us in a little bit. Thank you. Sure. The roughly $1.7 billion capital plan for gross CapEx is certainly, we believe, enough to support that overall, it's a little north of 7% average fleet growth. How do we do that? We get Specialty taking their share, and it will grow. It's a disproportionately large share. You have to understand the used equipment sales path that we're assuming over the next several years. We're probably going to sell a little bit less as used equipment next year than we do this year, and possibly a little less than that years thereafter, but somewhere around the $1 billion number for used equipment sales. Then when you combine that level of fleet investment with, you see up here, 3.5% average rate growth over the next several years, some utilization expansion, it all does tie together. I was going to say, utilization, the things that Helge pointed out on that business process or the processes, we think that will benefit the company, not just in the efficiency. That efficiency is going to come in various forms, and we think that we can utilize our fleet more efficiently. I'd be very disappointed. I know the team would be very disappointed if our Kaizen and our Lean efforts didn't turn into increasing capacity versus saving whole dollar costs. That's not the way we want to win that game. Great. Thanks. Yeah. Just a quick question. Maybe I missed it in the slides, but with the metrics you've given us, it seems to be implying EBITDA next year north of $3 billion. I am assuming you do the payouts for National Pump next year. Is that in the calculation? That is. If we are over $3 billion next year, to get to 2017 at 3.75, it is only 11%-12% EBITDA growth. How should I interpret that? I appreciate if you're doing that without any gross CapEx growth. I understand it. But again, your top-line initiatives seem a little more aggressive than only producing 11.5% EBITDA growth in 2016, 2017. Are we not getting much incremental EBITDA margins? I'm just trying to understand why the growth rate slows in 2016 and 2017 that much. Well, again, remember that the year-over-year rate improvement slows. That's the 3.5% versus about 4.5% that we're going to get this year. I'm speaking after 2015. We just were able to back into the three bill for 2015. Yeah. Mm-hmm. I'm saying 2016, 2017, the growth rates slow to 11.5 on EBITDA. Yeah. You're still getting 3% rate. You're speaking of where we are in the growth trajectory of the traditional business. You've still got specialty rental. I'm just trying to understand why the EBITDA number is not higher for 2017. It slows because the rate does slow. It slows because the rate of fleet growth does slow when you keep the capital spend flat at $1.7 billion or so. It all boils down to that level of adjusted EBITDA. I guess your question really more fundamentally is- What is the incremental EBITDA margin? I am sorry? What is the incremental EBITDA margin in 2016 and 2017? It just seems a bit low. It is actually right around 60% again, even in 2016 and 2017. But your average OEC on rent is going to grow 6%. Then you got 3% rate. Unless there's a really bad mix, you're still growing the top line high single digit. High single digit top line shouldn't only be 11.5% EBITDA unless you're only getting an incremental margin that's barely above your operating margin. We are within the ranges that we gave you. We will deliver something like 60% flow-through over that three-year period. So it's tied up between the ranges and the specific assumptions that you make about all the inputs that get you to the EBITDA numbers that we showed up here. So we could certainly take it offline and walk through a little bit more 60% incremental probably gives you more than $3.75 billion EBITDA in 2017 because your absolute EBITDA margin's only 48%, 49%, so you're clearly leveraging top line pretty well if you keep it at 60%. So all right. We can go through the numbers offline. Thank you. Sorry, can I just address the ROIC thing? You've had, obviously, phenomenal progress in the last 12 months, taking ROIC up 130 basis points, and you're now sort of giving us a guide to maybe 11% ROIC in 2017. Can you give us any sort of feel as to what you think across the cycle ROIC for the business might be on a go-forward basis? Across the cycle for ROIC? Yeah. You have to define where the cycle is, where the peak of the cycle is. But certainly, if the next three years represents sort of the middle part of that cycle, then 11% is getting toward the mature end of where ROIC goes. It'll certainly go higher if the cycle continues higher beyond 2017. Can it go into the mid-teens? Could. But again, it depends on how long the cycle runs thereafter. Justin, the point is we're not going to stop. We're going to continue. If we can grab more, we're going to grab more. This is one of those things, trying to forecast out to 2017. If we went to 2016, we'd be pushing what would happen in 2017. But we don't know much beyond where the cycle's going to go, how much further, how many legs up it's got beyond 2017. Is it three years? Five years? I don't think anyone knows here. Just a couple of questions. Just to clarify, are you guiding to 3.5% rate growth in 2015, or are you implying a higher number than that in 2015 and sort of slows down over the next two years? Right. We are only guiding to a compound average of 3.5% over those three years. We will talk more about our 2015 specific guidance in January when we go through the full year. But I have said previously that we believe 2015 is unlikely to be as high as what we do in 2014, about 4.5%, but we do not see any circumstance in which it could drop below 3%. Somewhere in that range is where we think it will be, more likely between 3% and 4%. As we finalize our plan, our directors are here, as we present our final plan to them and get approval, we will communicate that in January. Just think about it as a compound average rate improvement over the next three years for now. Okay, thanks. Then just the follow-up question to that CapEx question, and your general rental fleet versus your specialty rental fleet. If we go back 2009, obviously United Rentals did not buy a lot of equipment, and the fleet age is generally around seven years, and you can extend it. Is part of the answer to that question that your replacement CapEx needs on general rental just fall sharply in 2016 and 2017? I would not say sharply, but I would say there is an opportunity in certain categories, certain segments to extend some. I think more importantly, the mix will have some impact on that, the mix of what we are buying. As far as we do not plan on needing to ramp up the used sales at the same level of our gross CapEx. Right to that math interplay, there is incremental improvement of the spread between gross CapEx and net CapEx as you go forward, if we are not selling at the same ramp rate. Okay. You'd have to know our walls of the age of the fleet in each category and when it's up against its rental useful life for you to see it. I get how when you're looking at a macro number, you think it would be clean. But we look at it by asset class, by rental useful life, and when we need to sell the asset. There'll be some movement within that replacement number in the gross CapEx each year. Right. Are you finding that your suppliers are maybe beating themselves up a bit amongst each other on pricing as United Rentals has gotten much more focused on taking a life cycle approach? Obviously, your CapEx trajectory has matured. It's flattening out. Is that working to your advantage with respect to price negotiations with your traditional OEMs? I think that talking about returns, and look, we know that we buy. We're one of the best purchasers of equipment in our industry. We know that we get a price premium, and we know we got high time utilization, and we know what our returns are. I think that as we speak more and more about returns, it's become more and more of a highlight for our OEMs to think about that. We work with them. I think the biggest thing that Dale put up there was the total cost of ownership. Collecting that data and showing them that there's reasons why we're shifting some of our purchases to one brand to the other, or one model or another, for particular reasons. Sharing that information, not the competitive information, but just where they fit in that bucket, and understanding that not all products are created equal, and being partners with our vendors. I think that's probably the most eye-opening thing that we've been working with. And if you think about it from their perspective, I think Dale does a tremendous job of being a partner with them and getting us the best price. But if we buy better than everybody else, we have a rate premium in the market, and there's products that we're not getting the return we need on it, that the industry needs on it. That's pointing out a challenge to them that they have overall. So I think that's part of our partnership with them and the value we play for our OEMs. Bill, on pricing. Yes, sir. If we were to think about what you told us earlier, that the structural changes in the industry might give you a 200-300 basis points of tailwind, and we kind of back that out of the rate target of 3.5% compounding. You're obviously at a very low single-digit rate. If you look over the last cycle, you averaged almost 4%. So the company's known for giving conservative guidance. Could you just maybe talk a little bit more about the pricing assumptions? Is there a mix shift that we should be aware of? Because if your underlying pricing's only improving 1%-2% or even possibly less, has something changed? Is the mix different, or should we just think this is a very conservative base case? I think there's certainly going to be a mix impact in the next several years as we do grow specialty more rapidly than general rentals. We've been focused on growth in specialty more so than the absolute last dollar of rental rate that we could get or last basis point of rental rate. As we mix more towards specialty, there'll be a little bit of a drag from that for year-over-year rental rate growth. Is that major? Probably not major. The way we're thinking about rental rates, the path of rental rates forward is that we have had very high year-over-year rate growth for the last several years, and we're just assuming that that won't continue at the same pace over the next several years. We might be right, we might be wrong, but our approach is let's make that assumption, and then let's build our business such that we achieve an attractive outcome even with that as the rate scenario. There's a little bit of a mix assumption going on, a little bit of conservatism perhaps going on, a little bit of a sense that you know what? As the recovery matures, it's less likely that you're going to be able to move rates up at 4% or 5% a year like we have for the last several years. That's how we've come to that view of rental rates. Yeah, I think the way to look at it is it's a reasonable assumption, right? Conservatism or being bold. I don't know of any other rental company that's going out three years out and talking about rental rates. We have a lot of data. Juan's got plenty of tools to work with. We will continue to push the envelope. I think we're also sending a message that the industry needs to get higher rates, and we'll continue to be advocates for that. We're not going to be shy. If we can get more, we'll take more. But I think as Bill mentioned, it's a reasonable set of assumptions. Okay, and then maybe a question for Paul. Paul, could you just talk about the underlying rate kind of environment for specialty? As we report the business, we do not track rate as a segment, but I can tell you that on a year-to-date basis, the rates are positive. I do not know if you want to have the specific numbers. If you want me to give them, I prefer not to. No. But it is equal to or better than where the company is. So that is Oh, and I think it plays into, if you think about the ARA measurements of rate, and it is same category over same category, so we do not mix the apples and oranges of the boom rates versus pump rates. And you think about Dale's very popular four box on fleet, and that top right box. If we get locked into a rate metric, let us say we go, we are going to go 5 out, and we have the opportunity to grow our market penetration in those higher than our average return assets, that will incrementally lower our rate increase year-over-year, right? Because we will use pumps, the pumps over the pumps. So we want to give ourselves that flexibility in the way we look at our business. And I think that is a reasonable assumption for some of the specialty products as we grow, especially the ones that had the smaller penetration on the pie charts Paul showed in his presentation. Yeah. I want to make one point on the specialty business. It is much more than just a rental company. It is about solutions. It is about engineered solutions. We actually have engineers on our payroll that design projects for our customers. So it is engineered solutions that we are providing. It is not just about rental. Question right there. It is Cliff again. As you are boarded here, I am going to try not to end this question with a, or is it just a sop to Wall Street to get a higher multiple? You can borrow money better than anybody in your industry. You are a bigger buyer than anybody in your industry. You can buy at better prices than anybody in your industry. You know more about the equipment, have a longer history, and your knowledge of the equipment is expanding rapidly as you embrace information technology. Why wouldn't you raise rather than lower your leverage? Certainly, there is a very strong component of what Wall Street wants in that decision, right? We certainly are mindful of the view of what is appropriate for a company in our industry at this point in the cycle. But we are also mindful of the things that Irene said, right? The cost and flexibility of our capital structure as well. So raising leverage while it might reduce the cost all in, right? Greater mix of debt versus equity. It will reduce the overall cost, but it ties your hands a little bit more in the way of flexibility. We saw it in the last downturn. We see it in every downturn. More leverage just makes your life more difficult in terms of being able to do everything that you want to do. We try to strike a balance around flexibility and cost that quite honestly doesn't. There's really no rule book. We try to strike a balance that's comfortable for us and that fits with what investors might want to see as well. Cliff, I would just say that you talk about the old school and the new school. This isn't all about top-line growth. This is about profitable growth. This is about returns. If we hit where our cost of capital, we could probably have a different discussion, right? But the reality of it is that we're still striving to our internal goal, and we have a lot of discipline around that. We're not afraid to do acquisitions if it's a right acquisition, just like we did with RSC, and our leverage went up for all the right reasons. But that's the level of discipline you can expect that this management team will deploy. Where do you stand on the trajectory of the $100 million of Lean benefits over the next three years? Is that now equally balanced over the next two? How much did you get in 2014? And would you say, is that the single biggest source of margin improvement potential over the next couple of years? I wouldn't say it's the single biggest source. It's what we hope to be one of the more sustainable ones, and the ones that can compound after the three-year target that we gave you. Helge talked about the change management portion of that. You'll see more of the $100 million on the back end of that three-year timeline that we've given you. We're well on track today. We gave a number in the third quarter, right? Twenty-three. We are at 23 million run rate today. I think Bill said it. We are targeting about 50 in the first couple of years, and the balance of it in the third year. It does not end, right? It is not an event. It does not end at that year. What do we do with that additional leverage that we created, that capacity we created after the three-year $100 million goal, is really why we are investing all this time. I know that is not a definitive answer, but we do not see 100 million as we are done, wrap on, move to the next project. We really want it to be a Lean thought process in our field and throughout our organization. It is a journey. We just started. Helge is enthusiastic, I am enthusiastic. I had some aha moments. I was the guy out there on the spaghetti chart, following someone around, and I was exhausted by the second day. We took our delivery times down, our turnaround times significantly. It is about making sure that it is sustainable. We could shoot a shotgun out there and hit everybody, but it would not sustain itself. We are taking a very rigorous process in which we can implement. It is like a three-legged stool, right? We are doing learning what we can do. We are doing the B-PRO, and we are doing the PIT teams, which are taking the best practices. I think there is a lot more opportunity for us in the long run, but it is going to take us time to get there. Could you just talk about your time utilization assumptions underlying the next few years goals? Is there anything in there to cause? On that trajectory, is it sort of smooth in terms of the progress you are making? Is there anything with Lean and what is happening there in, say, 2015 or 2016 where we see a nice step up in those levels? The underlying assumption is a fairly modest improvement year-over-year in that ROIC bridge slide that we talked about, the key assumptions. What was it, Irene? 20 basis points. I think we left it at 20 year-over-year, each year for the next three years. We model it as a pretty smooth improvement over those three years. Could there be material improvements beyond that come out of our Lean initiative? Certainly, there could be. We have fleet not available right now. Let us use 10% as a number on an annual basis that if we could find a point or 2 worth of availability out of OEC NA and put it on rent, then that could be a material improvement to utilization. What we want to do is to make sure that we've built ourselves a system and a set of disciplines that will allow us to improve our utilization and to sustain it. That will take some time, as we've talked about, the Lean processes. We're not at the point where we want to factor in more aggressive utilization improvements than what we did. Could it be there? Could be. Unlike our rate metric, time unit is always aggregated in the whole, in the entirety of the fleet. As we continue to grow our specialty products, and even some of our other higher return items that are non-aerial, non-reach for in our overall portfolio, they usually run at a lower time utilization, either because of seasonality or the typical usage of the product itself. While we're getting 20 basis points improvement, we're actually absorbing a fleet that has naturally on our base a lower time utilization. The improvement is actually a little bit more than just the 20 basis points you see in aggregate because of the remix. Question. As you guys think big picture about the industry, it's clear all facets of your business, you've improved the performance and the execution from that standpoint. My concern is when things do kind of roll over, you keep using the word sustainable. If I think about your industry, though, it's really so fragmented. You're long and depreciating financed piece of equipment, and when demand isn't there, people do crazy things. What can you look at from an industry standpoint that makes you feel like your industry is better off? Do you have a view of the industry structure today and why it might be more sustainable for your results in the future? Well, I think there's a lot more tools available to the industry. We talked about the Rouse tools. There's a standard metrics by which most of us are utilizing. I think that we're talking about it more openly about the needs for returns. I get it. I think that our industry hasn't been good stewards through this cycle. We've had some failures along the way. I do think we've learned from that. I think we've got better tools. I think the tools, not only United Rentals, but other companies are utilizing will make them better, smarter. I think the customers today see the value behind renting. I think that's also changing as well. We've had a significant increase in just the absorption rate on rental. Before the downturn, it was closer to 40. Now it's like 52. I do think that there's a lot of differences between then and now. You're right, history will prove and determine how we react in the downturn. The other thing I would tell you is for United Rentals specifically, we're not talking about going negative free cash flow. We're not talking about growing our fleet. We're talking about driving efficiencies with our current fleet and things that we see that we can do to be good stewards with the capital. Again, I think the industry is smarter, has more tools available to it today, and we're talking more openly about it. That's right. What we want to do is to give ourselves the best opportunity to deal with whatever the industry throws at us, right? And that's the focus. So it's sustainability from our perspective, and then we can absorb more of what the industry might throw. Fred's cuing me that there's one more question, but before I say that and you guys all run out of here, we are going to have some cocktails. Management, and we have a lot more management here that is up here presenting, welcome you to join us and get to know us even further. Question about Tier 4. How much on average does that equipment cost, and will it cost more to maintain? Will it last as long? Dale's walking up to answer, but obviously, that's tremendously different on a generator or compressor and how much of that engine is on basically a box around an engine for a generator than it is on a reach forklift. Blended, Dale, I don't know if you have that number available. Yeah, I think the way to think about it would be in terms of dollar impact. You'd probably think it's probably $4,000 to $5,000 on average to an asset. A big excavator would be obviously less impactful than a smaller 185 air compressor. The unit should be more efficient, actually. For our business with the rental industry, the amount of maintenance required at the excessive amount of hours, we probably won't achieve because of the life of the asset in our fleet and the hours we do. On the purchase side? On the purchase side, yeah. Plus, you think about the rent first buy assumption that Dale put in there. If the United Rentals of the world, and the rental industry as a whole, should definitely have a cost advantage in the buying versus an owner of an asset and the maintaining of the Tier 4. That is a whole another scale set that we are going to catch up to speed on much quicker than individual owners of equipment. I actually, in an odd way, that increase in cost and challenge of Tier 4 could play into the rental penetration. That is great. I think that wraps it up. Next door, if you would, please. Thank you very much for joining us. Thank you all.

Data Source: Quartr Last updated: Dec 4, 2014

Earnings call transcripts are provided by Quartr and are published within hours after each earnings call.

Update frequency:

Quarterly

Data Sources Report a data error