Earnings Call: Q3 2014

Oct 16, 2014

Good morning, and welcome to the United Rentals third quarter 2014 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2013, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's earnings release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Good morning, everyone, and welcome. Thank you for joining us on today's call. Listen, before I begin, I want to mention that obviously we're aware of what's going on in the stock market. It's been a wild ride, and there are some big issues that need solving in other parts of the globe. This morning, we're going to be focusing on our business and the operating conditions as we see them here in North America. Let's get started. Last night, we reported another strong financial performance in a positive operating environment. You've heard us use those words before, and I'm happy to say that they're true again this quarter. It confirms that our strategy is on track and the construction and industrial recoveries are both gaining momentum. It shows that we know how to manage the business with continuity and discipline through the early stages of the upcycle. I want to talk more about our environment before Bill goes through the numbers in detail, and after that, we'll take your questions. The first notable thing about the quarter is that our end markets are continuing to rally. Demand is up, and we reported a robust 16% increase in rental revenue for the quarter. More importantly, we accomplished this with record margin and adjusted EBITDA and year-over-year gains in volume, utilization, and rates. Volume increased 9.5% year-over-year. Time utilization was very strong at over 71%, and we improved rates by 4.7%. I've talked about the importance of these three metrics before, and they're all valuable measures of performance. While we manage our assets very strategically over the life of the equipment, we're always hungry for more, and that's particularly true of rates. Our return on invested capital was 8.4% in the quarter, which is our best yet, and it's another indication that our strategy is on track. Free cash flow increased to $312 million through September. As you saw last night, we raised our free cash flow target to a range of $475 million-$525 million, and we reaffirmed the other five components of our full-year outlook. I want to mention a few of the dynamics that helped shape our quarter. One is our new pump business. With the integration of National Pump behind us, we've begun cross-selling these assets to our broader base. We now have four specialty lines in place: trench safety, power and HVAC, pumps, and tool solutions. These are high-touch, high-value services that build loyalty and engage our customers in using other types of fleet. Our specialty segment had an 88% increase in rental revenue in the quarter and a 98% increase in gross profit. So we're improving our margins as we expand these operations through acquisitions, cold starts, and organic growth. It's worth noting that excluding acquisitions, revenue was up about 27%. That's outstanding organic growth. In August, we announced eight specialty cold starts year-to-date, and we opened three more in September. We plan another 8 to 10 branches in the fourth quarter, all in specialty. Another area that ties to reoccurring revenue is national accounts. Our national account revenue kept pace with the company performance in the quarter at 16% growth. It's our strongest growth rate for national accounts this year. Now that large projects are picking up, these relationships are becoming increasingly important to our base. Right now they account for about 40% of our rental revenue. While national accounts have a small constraint on rates because of negotiated pricing, they support our strategy for the long haul, which is to drive returns over time and to mitigate volatility throughout the cycle. Moving on to the regional front. Every one of our regions delivered year-over-year rental revenue growth in the quarter, excluding the impact of FX. In fact, half of our regions showed double-digit growth. One of the standouts was our industrial region, which was up 22%, due in large part to manufacturing and certain energy verticals that were seeing strong demand from plant expansions and modernizations, particularly in the chemical sector. While there's a healthy variety of projects across our footprint, our regions are reporting certain types of projects more frequently. They include renewables such as wind and solar farms, hospitals, sports arenas, pharmaceutical and chemical plants, and urban office construction. Looking at the U.S. and Canada as a whole, I would characterize our current operating environments trending upward, with fluctuations in local and regional markets. The underlying fundamentals of the recovery look strong, just as they did when we had our call in July. This coincides with what we're hearing from our customers. They are very optimistic, which is probably the most valuable indicator of all. We have a lot of ways to take the temperature of our markets, but our customers are just that much closer to the action, so it's good to know that they're seeing the same momentum we do. Also on the national front, we're seeing continued strength in used equipment market. This is another good sign of healthy demand for equipment. Our adjusted gross margin for used sales was about 48% in the third quarter, consistent with the prior year. We're obviously aware of the volatility in the stock market right now, but most of that's global, and we don't see it relates to our industry in any meaningful way here in North America. There will always be bumps in the road in our end markets as we move through recovery, but there are far more ups than downs, and secular penetration is adding an extra layer of demand. We've shown that we can navigate the business successfully with much greater macro uncertainty than this. Turning to our internal initiatives, I want to give you a quick update on two programs that should have significant impact for years to come. The first is Lean and the second is technology, specifically telematics. We've been talking to you about our Lean program for the better part of this year. It's the philosophy of continuous improvement based on the Kaizen process. 314 of our branch managers and over 2,100 employees have now participated in Kaizen events since our pilots a year ago. Now there's enough history with Lean we can share some metrics, and they're very encouraging. For an example, the branches that have been through the Kaizens for order accuracy, we've seen a reduction of about 16% in the credit memos issued as a percent of rental revenue. Where the Kaizen focus has been to bring down transportation costs, our Lean branches are seeing measurable improvement. Results like these have an immediate ramification on productivity and customer service. Our three-year target of $100 million in efficiencies should be very achievable. We've already identified a run rate of approximately $18 million in utilization and cost efficiencies. As always, we'll push for more if we see the opportunity. The other area I mentioned is telematics, which refers to the way we use GPS technology to manage the performance of our larger assets. We currently have GPS on about 6,000 machines, mostly generators and select big equipment. Now we plan to extend telematics to another 160,000 units by the end of 2015. These will be units with diesel engines and other types of powered equipment, such as electric scissor lifts, where telematics could potentially increase utilization. The benefits are going to be in the areas of preventative maintenance, employee productivity, and most of all, customer service, because telematics can reduce downtime. We're the industry's biggest advocate for technology, and this initiative is right in line with our focus on innovation. It also supports our strategy for rental CapEx, which is to manage and protect our assets as we move them through the rental process in a way that generates optimal returns. Now I want to conclude my comments this morning by recapping my three main points. Number one, the macro environment is favorable and our end markets are in recovery. Demand in 2014 is up over last year, and the forecast is even stronger for 2015, and we don't see anything that suggests otherwise. Number two, we're comfortable with our full year guidance. We raised those numbers in July based on our internal and external visibility, and we raised our free cash flow range last night as our other targets. Nothing's changed. Finally, we have the right strategy in place to deliver value creation. What's more, we have a record of very strong execution. There will always be puts and takes to our metrics, but taken in aggregate, our results reflect a trajectory that's consistently outperforming the recovery in our end markets, and that's an exciting endorsement of our business model. 2014 is playing out as a record year for us, but even so, we're confident that we've demonstrated just a fraction of what this company can achieve over multiple years in an up cycle. The present is pretty great, but from where we stand, the future looks even better. With that, I'll turn the call over to Bill for the financial results, and then after that, I will take your call and questions. It's over to you, Bill. Thanks, Mike, and good morning, everyone. As always, I'll add a little bit more color to the key headlines that you've already seen in the press release and the numbers that Mike has outlined. Starting with the revenue picture, which as we said, is a pretty strong one for us in the quarter. Rental revenues in the quarter were up 15.6%, and it reflected the strength that Michael mentioned in rates and volume and other components of our revenue generation. Within that 15.6%, our owned equipment revenue was up about 15.4%, and I'll go through the components of what drove that. Let me start with just the re-rent and ancillary component of our rental revenue growth, very robust growth in those two components in the quarter, totaling about $25 million of year-over-year improvement in revenues from re-rent and ancillaries. Within the OER component, rental rates were up 4.7%, as we said. That contributed about $46 million worth of rental revenue improvement. Volume was up the 9.5% that Mike mentioned, which drove about $94 million of year-over-year rental revenue improvement. The story there was the story of a larger fleet and better utilization of that fleet in the quarter. We spent about $456 million on fleet in the quarter, and that drove our average fleet size up 8.4% for the year in the quarter. Then we utilized that fleet more effectively with time utilization in the quarter coming in 71.5%, or 70 basis points better than the comparable period last year. That resulted in the 9.5% OEC on rent growth that we call out as volume. I will point out that even if you exclude the addition of National Pump in the quarter, our OEC on rent growth was still an impressive 6.9%. It was not just the impact of the acquisitions driving that volume growth. Fleet inflation, as always, has been a headwind for us in the quarter as we sell out older fleet and replace it with newer acquired fleet at higher prices. The impact there on a percentage basis within OER was 1.7% headwind. That translates into about $17 million worth of headwind in the year-over-year rental revenue performance. We call out FX for the last few quarters because it has been a material impact in the year-over-year drivers. This quarter was no different. The Canadian dollar year-over-year was down about 5%. That cost us about $7 million of year-over-year revenue, $7 million of headwind, which translates into about a minus 0.7% against the OER growth. Mix and other was robustly positive again in the quarter. Call it 3.6%, or $36 million of positive impact in the quarter. Obviously, adding an attractive segment like Pump in the quarter was a big driver of that positive mix there. Call it $30 million of the $36 million from the mix impact of National Pump. But even aside from that, we had a positive impact from a sweeter mix of products in the rest of our business, along with some other minor positives. The net effect of mix was a real robust $36 million. All of those components added together give you the $177 million of year-over-year rental revenue improvement. The momentum that we are feeling, as Mike pointed out, is robustly positive going into the fourth quarter as well. Moving to used equipment sales, another good quarter in used equipment sales. $140 million of proceeds from used and a very nice 47.9% adjusted margin in the process. We are seeing continued robust demand overall in all of our channels for used equipment in the quarter. Our retail channel mix was down a little bit in the quarter, roughly 10 percentage points, not due to anything other than the fact that we did a little bit more in the quarter in some of the other channels. Retail contribution was still up nicely on a year-over-year basis, up more than 20%. We are continuing to focus to drive used equipment sales through our retail channel as well as the other channels as well, and that contributed to the very strong used result in the quarter. On the profitability front, you saw the adjusted EBITDA of $761 million in the quarter at a company record 49.3%. Actually, both those numbers were company records in the third quarter. Actually, EBITDA margin was a record overall. That was $119 million of year-over-year adjusted EBITDA improvement and a 30 basis point improvement from the prior year. The key drivers of that $119 million of improvement were as follows. Rental rate contributed about $45 million of incremental EBITDA. That is the 4.7% rental rate improvement flow through at about 95%. The volume component we count as $66 million of impact on EBITDA. The fleet inflation component was a headwind of $10 million at EBITDA from the previous inflation revenue impact that I talked about. Our ancillary revenue improvement was another $11 million of EBITDA impact, and again, that is driven by the improvements that we are making in our pickup and delivery revenues, as well as certain other ancillary items like our RPP program. Used equipment sales, the margin impact there was $19 million contribution to EBITDA in the quarter. The other components were a variety of one-off items. We had an increase in our cash incentive compensation programs in the quarter that cost us about $10 million. Cash comp went up because our performance for the year is coming in strong, so we are accruing more for cash compensation, and we made the adjustment in the third quarter to the tune of about $10 million year-over-year. Merit increase, that is our normal merit increase throughout the course of the year. In the quarter, it was about $6 million worth of headwind. A variety of other components contributed to the remaining $11 million of headwind, of which bad debt expense was about $4 million of that headwind, reflecting not so much any deterioration in our experience with bad debt, but more just the size of the accounts receivable balance requiring a larger reserve to be set aside. Those are the key drivers of the $119 million of year-over-year adjusted EBITDA improvement, and again, reflects all of the components that we talked about before. If you put that revenue and EBITDA performance together, you get an adjusted flow-through for the quarter of 51.1%. That flow-through, while below the 60% that we have been guiding to for the full year, still puts us in line to deliver the full year 60% flow-through. In fact, if you look at flow-through for the year-to-date period, we are right at 59.7% year-to-date flow-through. So we are well positioned to be able to deliver the flow-through of 60% over the course of the full year. We have, though, gotten questions about what was it that drove third quarter flow-through to be less than the 60%, to be indeed at that 51% or so. The couple of things that I would point to there are the bad debt impact that I called out. That alone was worth about a point and a half of headwind against our flow-through in the quarter. The cash comp increase that I called out as well probably cost us about three and a half points of flow-through in the quarter. The robust other lines of business, used equipment sales, new equipment sales in particular, very strong growth in those two lines. So the mix effect of those lower margin revenues coming in in the quarter was probably another point and a half. So call it six and a half or seven points worth of drag on flow-through just from those three items. Add those back to the 51%, and you get pretty doggone close to the 60. So that is how we are thinking about flow-through for year-to-date, and more importantly, how we are going to get to the 60 for the full year. EPS in the quarter was also very strong, $2.20 on an adjusted EPS basis. That compares to the $1.63 that we reported last year. So a 35% improvement, and obviously, EPS reflects all of the other points that we've made. Before I go to the outlook, just a couple of points on free cash flow, capital structure, and liquidity. Free cash flow was very strong, as Mike pointed out, $312 million. Remind everybody that includes the impact of our merger-related cash outflows. Those were about $16 million in the quarter. So if you look on the ex merger basis, free cash flow in the first nine months was $328 million. Very robust free cash flow picture. And of course, that's after we spent on capital in the quarter. Total capital is $1.75 billion. That includes the rental capital plus the non-rental capital. So even after the capital investments, we're on track for a very robust free cash flow year. In fact, that pace is what gave us the courage to increase the free cash flow outlook for the full year. We've seen very robust delivery of operating cash flow year-to-date. We've seen very strong collections against our accounts receivable year-to-date, and the timing of our accounts payable year-to-date has broken favorably. So you put all that stuff together, and that's what prompted us to raise our outlook for free cash flow by about $25 million for the full year. On capital structure and liquidity was a total of about $1.01 billion at the end of the quarter, and that included $900 million of ABL capacity, plus about $170 million of cash in the bank. So our liquidity position is very strong. We did, during the quarter, amend our accounts receivable facility. It's a $550 million facility that we amended to extend the maturity for another year. That positions us with that facility as well. The share repurchase program, you heard us announce that we're accelerating the completion of that program to the end of this year. We have spent $389 million on the program life to date. That includes $152 million during the quarter. And it positions us very nicely to be able to finish it out by the end of the year. The combination of slightly stronger free cash flow, plus, as Mike said, we're paying attention to the real world, our stock price being down prompted us to say, "Look, let's just get it done during calendar 2014, and then figure out where we go from there." So that's the rationale for accelerating the repurchase. ROIC was strong, as Mike mentioned, for the quarter trailing 12 months, 8.4%, a company record. That's 1.3 percentage points better than the same period last year. It's a 30-basis-point improvement compared to where we were at the end of the second quarter. So we continue to be on track to drive our ROIC higher, targeting cost of capital, and ultimately, that 10% hurdle rate that we talked about as a target. Nice progress against that in the third quarter as well. On the outlook, we reaffirmed all the components with the exception of free cash flow. So just to recap where we are, we still expect the full year revenue, total revenue, coming in the full year for between $5 billion 550 and $5 billion 650. That includes, of course, rental rate performance in the rental revenue component that we continue to expect at about 4.5% year-over-year for the full year. Time utilization, robust in the quarter, and positions us well to be able to deliver the 68.5% time utilization that we've given as an outlook. We're sticking to that, as well as the adjusted EBITDA range of between $2.650 billion and $2.7 billion for the full year. CapEx and cash flow, we touched on already. CapEx, we continue to expect to invest net rental CapEx of $1.2 billion, and that, of course, is after gross spends on new rental equipment of $1.7 billion. The free cash flow range I touched on. Those are the comments that I'd offer as color for the numbers. Obviously, we can go into more detail in the Q&A, but let me add my thought to Mike's thought. We're well-positioned, and everything that we see and hear keeps us on that path for 2014. We certainly are not naive to what's going on in the outside world, but we feel good about where we are, what we're hearing from our customers, and how we're running our business. We're going to continue to drive forward and we'll talk to you as we go forward about the results that we achieve. With that, I'll open up the call for questions and answers. Operator, can we open it up? Thank you. If you have a question at this time, please press the star then one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you are listening on a speakerphone, we ask that you please lift your handset before asking your question. Please limit yourself to one question and one follow-up so we can get to as many questions as possible. We'll go first to Ted Grace with Susquehanna. Please go ahead. Hey, guys. Congratulations on the quarter. Thank you. Ted, thanks. I was hoping just to kind of come back to the 2015 outlook. I know you haven't provided kind of formal guidance, but Mike, your body language is quite positive. If I didn't hear you right, I think you said that the business feels to be accelerating, and there's obviously seasonality. But could maybe just touch on at least a framework for how you're thinking about 2015? I think a lot of questions we get are kind of on energy and energy exposure and kind of what you're picking up from those customers and maybe how much of that business that constitutes. Yeah, I will take part of it, then I will ask Matt and maybe Bill to chime in as well. We are looking at the forecasts that obviously are produced by Global Insight, as well as we are looking at IIR, which is an industrial resource, and looking at how they are seeing the world, and they continue to see 2015 stronger than 2014. Obviously, they can always update, but we have not seen any material change. As we went through the quarter, we saw momentum building, and that was particularly true in our time utilization as we went through. The other thing I would tell you as just a data point, Ted, is another thing that we look at is the construction backlog indicator, which is produced by the Associated Builders and Contractors. In August, it reached an all-time high. We are still waiting for their report to come out. It will come out sometime in October or early November. But those are some other indicators that we see. As I mentioned in my opening comments, talking to our customers and their outlook of how they see the next 12 months. Again, as we went through the quarter, that progression of optimism grew as well. So those are the things that we look at. With regards to the oil, I would point out oil and gas is how we look at it. We do not bifurcate the two because of how we go after the market. All in, and I am talking about upstream, downstream, midstream, you are looking at about 10.5% of our total business. If you take a look at, I think where you are trying to drive to is the area of where we would see exploration on oil would be around 5%. Now, that 5% would also include pump. It would also include the natural gas as well. Natural gas, the LNG plants and everything that we have seen is continuing to go along. Matt, do you want to? Yeah. Mike covered that we do not necessarily have a lot of exposure to oil and gas. But I think more importantly is the fleet that we use to serve that vertical market is compatible to the rest of our fleet. So if something did change in that sector, we have robust growth throughout our network and throughout many verticals that we could move that fleet because it is core to our offerings, to other verticals and other end markets. And when I talk about the breadth of our end markets, Mike mentioned that more than half our regions had double-digit improvement in year-over-year rent revenue. Well, we had over 30 states that had double-digit improvement in rent revenue year-over-year, and five of our 10 provinces in Canada. And all but four states showed year-over-year rental revenue improvement, and eight of our 10 provinces. When we say we have broad demand, we really do have broad demand throughout our network. Okay. And then the follow-up I'd ask is, just from the standpoint of taking share in your competitive positioning, can you just maybe give us a sense for how you think you're doing relative to the broader growth? Because honestly, my sense is non-res and your markets probably are not increasing double-digit rates. Just from the standpoint of how you think about market share capture next year, maybe can you just touch on that? Well, we haven't gone through the process, and obviously, we're going to have our December meeting coming up for our investors. But the way I would look at it is, what is projected today by Global Insight for our industry for 2014 is 8% growth. We just reported a 16% growth, and I think you can get a sense of how we're outperforming. I want to make sure everyone understands, while I'm not thinking about just growing for market share, I'm talking about growing for profitable growth and returns, and those are the things that we're most interested in. Again, I think that we're performing well. I think that our specialty business clearly is outperforming the industry by a multiple, and I think you can see the power of the cross-sell that we're actually benefiting from right here and now. Yeah. I'm a simple guy, Ted. I just step back and I say, "How have we driven our business throughout the course of the year?" Rental revenue year to date is up 14.2%. I would guess that there aren't a lot of rental companies that can say the same thing, and so I think we're positioning ourselves against the overall environment and against the competitive set pretty well, and that positions us well to be able to continue to do that next year. Okay. Well, that's great. Best of luck this quarter, and I'll get back in queue. Thanks. Thanks. We'll go next to Seth Weber with RBC Capital Markets. Please go ahead. Hey, thanks. Good morning. Good morning. I wanted to talk about the rental metrics a little bit for the quarter. Time utilization was actually much better than what we were expecting. Rate was good. But I'm wondering, does the upside to the time utilization, should we infer anything into that you're pushing time versus rate any more going forward? And is that any kind of reflection of the national account growth that we've been seeing? Thank you. Hey, Seth. This is Matt. We absolutely are continuing to push both rate and time, and we feel that the demand is there to get both. We saw a record realized rate in Q3, and we saw record time as we closed Q3 in September, and I'm pleased to say that that kind of demand is, as we sit here today in October, we're seeing sequential rates continuing to grow at about half a point. And the time utilization gap that year-over-year, which was a 1.6% positive, 160 basis points positive in September, as of last night, we maintained that 160 basis point gap. So we're seeing the demand continue, and we feel that rate and time are both there for us for the taking. The only thing I would add to that is the only thing that we saw in September is our national account did grow faster than our core business. And as I mentioned, a lot of these larger projects are coming online. Right. Mike, you mentioned, I think the phrase you used was negotiated pricing, and I'm trying to understand this market a little bit better because some of your competitors have talked about going after the national account market more aggressively. So I'm just trying to understand how that, as this market becomes a bigger part of your mix and as other competitors are going after it, your ability to sustain rate here and your ability to continue for that business to grow at these types of levels at a profitable level. Great- Have you noticed any change on the competitive front, I guess, on the national account business? Overall in aggregate? No. I think there may be some movement within who is the number two, number three, number four players for some accounts. But as Mike had mentioned, our September growth for national accounts was almost 19%. That is as high a number as we have had in the quarter. We are actually seeing our momentum pick up. Is that a slight drag on sequential rate? It can be in a quarter, but I think Bill guided properly at where we get to see rate going forward. We have talked about that, and we think that 3% is the entry level for us, and somewhere between that 3% and our about 4.5 guidance for this year is the goals that we look for going forward. The other thing I would only add is, look, we cannot be complacent. We have to continue, and as I mentioned in my comments, to be innovative and think about how we can enhance our value proposition to our customers. I just mentioned that we announced that we are going to have 160,000 units by the end of next year with GPS. Yes, there are other competitors who have GPS capability. They typically will put it on and charge for an extra charge. December, we will give you some understanding of what we intend to do with the GPS technology, and how we think that we can continue to focus on improving our value proposition in comparison to the competitive environment. That is what we are learning, and that is our job, and I am very happy to report that the team is very active in thinking that through. Okay. Thank you for that. If I could just ask a quick follow-up, kind of piggybacking on Ted's question about 2015. Bill, is it fair to think about pull-through margin at these same levels? Is a high 50%, 60% pull-through margin, do you think, sustainable into 2015? And how much of this $100 million Lean initiative do you think is part of that? Seth, we've said in the past that we believe 60% is a reasonable way to think about pull-through margins for the next couple of years. Yes, use 60% if you're thinking about 2015 as a good starting point. Obviously, we'll sharpen that as we finalize our plan for the year and talk about it at future points. That feels about right. I'm sorry, the second part of your question was? Just how much of the $100 million of initiatives, the Lean initiatives, that you see capturing in 2015? Yeah. We haven't boiled it down to an expected realized dollar amount. Again, as we go through our planning process and think about what our guidance for 2015 is going to look like, we'll figure out what more we might want to say on that. Stay tuned. Okay. Thank you very much, guys. Thanks, Seth. Thanks, Seth. We'll go next to David Raso with ISI Group. Please go ahead. Hi, thank you. Hey, David. Quick question on 2014, then a bigger question on 2015. The utilization I know seasonally peaks in October. But still, just given the way you've started the quarter, it would appear to get to your full year utilization increase to 40 bips. The drop-off in November, December in utilization appears to be a little heavier than normal seasonality. Am I reading that correctly, or is it maybe utilization's the area that maybe there's a little upside to the guide, but then the rate is the trade-off on it? I'm just trying to understand, are we seeing something for November and December that would imply a little further decline than normal seasonality over the last two months of the year? Maybe I'll start. I think we saw a very robust utilization result in the third quarter, and it's hard for us to extend that thinking too aggressively into fourth quarter. Obviously, we're working very hard to make sure that we get as much utilization as we can in November, December. But we haven't really aggressively moved those utilization months up from what we thought earlier in the year. So we're continuing to look at it. If October finishes out the way it started, then maybe we'll have to revise our thinking. But right now, there's nothing dramatically negative going on in the November, December timeframe that we're protecting against or concerned about. It's just we haven't gotten to the point of saying, "Oh, yeah, third quarter and October. Let's goose up November, December based on those results." Haven't gotten there yet. Okay. So that's some wiggle there. Okay. On 2015, I know that the stock's up a lot today, but obviously, the stock's been off. It influenced your use of cash and the timing of the repo for 2014. Can you walk us through the cash flow for next year, the use of it, how the stock price may influence your thoughts on moving forward with more repo versus maybe what you're seeing in the M&A market? I think it is important to say that the stock price is not really the guiding light for our decision about whether we do a repurchase and how much of a repurchase that we do. That comes out of our consideration for how to allocate our capital and our free cash flow. That is what led us to the $500 million program that we are currently on. That is what we would think about as we consider whether and how much of a follow-on program we could or might do. That thinking is going on right here and now. The stock price at the margin may prompt us to say, "Hey, let us go a little bit faster or a little bit slower," within the broad framework that we established. In this case, the current 500, we said initially it was going to be 500 over the period extending till April of 2015. As we got into it and saw our cash flow come in and saw the stock price come down, we adjusted as we thought appropriate. Tactically, that is the way we would manage any future program as well. But the program itself, both existence and scale, would come out of what we think our cash flow is going to look like over the long term, over the next number of years. We will continue to talk about that as we sharpen our thinking about 2015 and future. Yeah, David, on the M&A front, our principles have never changed one bit. It has to be strategic. It has to be accretive, and you know our goal around return on invested capital. The other part would be a cultural fit. It is a pretty high hurdle, and we are very comfortable with that. The net debt to EBITDA is 2.9 at the end of the year. When I think about how you are going to manage that through 2015, are you comfortable maintaining the 2.9? Obviously, I am trying to figure out whatever I believe the cash flow will be for next year. Can I assume you are going to put that all to work? I know you have got roughly about $125 million of earn out you have to pay for the National Pump deal, assuming they hit their targets. But are we comfortable assuming where the net debt to EBITDA ends this year is- Yep a comfortable ratio for the end of 2015? I think, and we've said, that next year, 2015, we believe that the leverage should trend lower, so lower than the 2.9. In fact, I think I've said in the past we see it toward the lower end of the 2.5-3.5 range that we've talked about. That thinking certainly would have us using our cash flow to both pay down debt, but also to finish up our current share repurchase. We would continue to think about it that way, the leverage path that way, even if we decided to do another share repurchase. Obviously, that all assumes de minimis in the way of acquisitions. If a significant acquisition comes along, we would reassess the path of leverage that we'd want to be on. We'd talk about it at the time of announcing the acquisition, right? But our thinking right now, ex acquisitions is that we're going to trend toward the lower end of the range during 2015 and finish up toward the low end of that range. Okay. That help? Appreciate it. Thank you. Thank you, Dave. Thanks, Dave. We will go next to Joe Bell with Vertical Research. Please go ahead. Hi, good morning. Good morning. First question on Lean. It looks like from the slides that employee participation was higher in Q3 versus Q2, that the actual branch participation was more or less in line. As you approach year two of the implementation, could you talk a little bit about how Lean evolves and what the key goals become in year two of that process? Sure, Joe. Part of what you see as far as more participation is the aggregate, right? We aggregate how many folks have been through Lean, as our goal to get through as many of our 12,000 employees as we can. I'd say the bigger opportunity for us is, you'll see it on that slide, I'm sure you were referring to slide 21. We've got 141 branches, but 314 branch managers. We do believe there's an opportunity for us to spread through our line management some of the Lean processes and procedures, as well as push out some very simple best practices that we've discovered during the Lean projects and the Kaizens that we've done, and push them out through the broader organization. One example of that would be counter accuracy, and you'll see the term BPro in there. That was a designed rollout as a result of findings during Kaizen events at multiple branches that we felt we'd share with the broader organization, and we are seeing metrics very favorable throughout Kaizen and nine Kaizen branches in our order accuracy because of that. I think you'll see us continue to work down that path in our Lean management process. That's right. Just to add, that's the process for driving the culture change that Lean represents, right? We recognize that it is fundamental culture change, right? It's a different way of looking at your business. We're taking the variety of paths to drive that culture change, whether it's direct training, whether it's rolling out BPros, best practice rollouts, whether it's just generally talking about what Lean means to an organization. We're deploying all of those and doing it in a structured, reasoned way to make that Lean implementation stick, because that's how we're going to deliver the $100 million and beyond of benefits from that change in mindset. We'll continue to work on it and talk about it, and welcome your questions about it. Okay, thanks. Second question, just on National Pump and with respect to CapEx plans, how are oil prices right now influencing your equipment spend plans? If no change so far, how long before $80 oil leads you to hold off on some considered investments? I'd say no change so far is definitely the way to think about our capital plans. Unless and until we actually see a pullback from our customer base, we're going to continue to invest. Even then, even if we saw a little bit of a pullback, we would have a debate about what does it represent and how does it impact our plan for investing in our pump business. In fact, in all of our specialty businesses, right? It may not mean anything. If you look at National Pump through the last recession, they were on a growth path that was so aggressive that they didn't have a downturn back in the 2009, 2010 timeframe. Right? We would have to ask ourselves, are we positioned so that we can find demand outside of a slowing oil and gas sector to continue on the growth path, and therefore justify continued investment? I do not think that is a ridiculous thought to have for the pump business or indeed most of our specialty businesses. Yeah, I- I was going to say, strategically on the pump business, I just want to remind everybody. It was roughly a $200 million volume play, with 50% of their business in that oil and gas arena. If you recall, 6% of their business is in our sweet spot. We are almost $5 billion. The idea is taking that knowledge and spreading it and cross-selling it to our customer base, as opposed to us going after their customer base. That strategically, we found very attractive. Great. Thanks very much. Thank you. We'll go next to Steven Fisher with UBS. Please go ahead. Steven. Hey, good morning. It's Eric Crawford on for Steve. Hey, Eric. Hey. Circling back to Seth's question on time utilization. With all your operational improvements with the Lean and telematics initiatives, how are you framing the puts and takes around what the new normal for time utilization can look like? I mean, clearly it varies by equipment type, but do you think you can raise each category another couple hundred bips from where it stands today? Yeah. Eric, we've talked in the past about operating in the 70s on average throughout the course of the year. So yeah, that would be a couple hundred basis points from the full year 68.5% that we're expecting this year. And we certainly feel like Lean and some of the things that we're doing to change internally will help us get there. So that's how we're thinking about it broadly, is in the 70s. If you got a couple of drinks in the three of us, we all might give a slightly different number in the 70s, but it's going to be in the 70s, and that's a couple of hundred basis points north of here at least. Okay. Well, we'll work on getting those drinks with you a little later, I guess. I guess switching over to the dollar utilization. Nice uptick year-over-year and sequentially across all the categories. But the largest step up was year-over-year, at least, was in earthmoving equipment. Could you speak to your availability in that category specifically, and how the demand has trended relative to your expectations? Well, Eric, I think the demand is picked up at about the same pace that most of our other core products. I think we made a little bit more concerted effort on fleet mix, and therefore, we're calling on a broader customer base than the broad base we already had. So we continue to want to broaden our offerings for lots of reasons, and we think there's part of that opportunity. And I think that's what you're seeing. You're seeing the result of that. And I think as we continue to tie our sales efforts to our fleet mix efforts, we'll see continued growth in both scale of our other non-aerial reach fork products as well as returns. Okay, great. Thanks so much. Yep. Thank you. We'll go next to Nicole DeBlase with Morgan Stanley. Please go ahead. Yeah. Good morning, guys. Good morning. Congrats on a nice quarter. Thank you. Thank you. Most of my questions have been answered, but maybe the one box we haven't ticked yet is just the M&A backlog, what you guys are thinking from an acquisition perspective as a potential use of cash in 2015. Nicole, good morning. It's Bill. I think the way we approach M&A is the way Michael articulated earlier. We certainly look at a variety of opportunities. We look carefully because it's been an important part of how we've driven the company forward. But we're also very disciplined in when we actually execute a transaction. We're continuing to look at opportunities as they come. As I'm sure everybody's aware, there have been a number of opportunities, a number of properties available in our sector over the last recent period. And we've taken a look at the ones that made sense for us, and we'll continue to do that. But nothing more to say on that front right here and now. Okay, got it. Michael, you guys want to add anything? Other than just to say, Mike said it on every quarterly call we have. The bar is high. The bar is high for us, and we'll continue to keep that bar high. Okay, good to hear. Then maybe just one on CapEx into next year. Is it fair to assume that we're going to have kind of another flattish year of $1.7 billion-ish of gross CapEx in 2015, or is there scope to increase given that you guys are seeing improvement in your end markets? Yeah. Well, certainly we feel there's justification for another $1.7 billion next year. That's our thinking right here and now. Could it go a little higher than that? Yeah, it could go a little higher. We're in the midst of that plan process right now. That's firmly on the table. I would say if the utilization trend that we've seen here late in the year continues to the earlier discussion, if November, December don't fall off, or indeed if they do a little bit better, then I think we would have to put at least another $100 million on the table in that kind of environment. Now, Matt's smiling here, so our arm wrestling match is going to continue once this call is over. That's the range that we're thinking about, and the market certainly, as we sit today, the market feels like it could support that. Yeah. The only thing I would say, Nicole, is that we are very disciplined in our approach on how we use CapEx, and that will stay with the company and our belief. Okay, understood. Thanks. I'll pass it on. Thank you. Thanks, Nicole. We'll go next in just a moment. Operator? Did we lose him? We lose everybody. He walked to the other room. As a reminder, please press star and one if you have a question. We will pause for a moment. Hopefully everyone is still out there. Operator, can you hear us? Yes, sir. It will be just a moment, please. We are just experiencing a little technical difficulty. We will be underway in just a moment. Thank you. We will take our next question from Scott Schneeberger with Oppenheimer. Please go ahead. Hey, Scott. Thanks. Hey, guys. Thanks for taking the question. I just wanted to talk a little bit about the increase of free cash flow guidance. Bill, could you talk a little bit about what some drivers were of the strength in the quarter and how you're thinking about the multi-year free cash flow guidance right now? Thanks. Sure, Scott. I think I touched on it. The key drivers in the quarter and for outlook for the full year is the momentum that we've seen on collections. Our DSO performance is coming in nicely relative to what we expected. So that's feeling more confident around the collections that we're going to experience. Then we got greater visibility on the timing of our payables for the quarter during third quarter and a greater visibility to what fourth quarter's going to look like. So those were the two main drivers for the increase in guidance for this year. It sets us up nicely for next year. We have talked in the past about being north of $600 million of free cash flow during calendar 2015. We certainly continue to feel good about that. Again, we'll sharpen that as we finalize our plan for 2015, and report more on it either in our Investor Day or when we deliver fourth quarter earnings. So well-positioned for next year to be in that north of 600 range. Then beyond that, 2016 and 2017, assuming the cycle plays out, look better still. Excellent. Thanks. Then just following up on a question earlier with regard to M&A. Yeah, it does seem like there are a lot of opportunities out there for you. Could you just kind of compare and contrast looking in your traditional equipment rental business versus specialty on an M&A? Maybe some of the areas you're looking to branch out into in specialty or is it just work what you have? Thanks. Well, this is Mike. I would tell you that obviously we've been talking about specialty as an area of growth for us. I'm sure we'll talk more about that at the Investor Day. We have a keen interest in that arena. There's a lot of areas we don't understand. Again, we look at that strategic return and cultural fit. All those things have to come into play. As Bill mentioned, there's been a lot of properties that have been up for sale, and we've looked, and we've passed because of the high bar. That will continue. I would say that we're always inquisitive, and we will always look, and we'll try to understand how that can benefit the company, not just in a year, but over time for longevity, but tie it to our strategy and the return metrics that we're looking for. Okay, great. Thanks. I'll turn it over. We'll take our next question from Jerry Revich with Goldman Sachs & Co. Please go ahead. Good morning, it's Matt Rybeck on behalf of Jerry. Just briefly wanted to talk on the capital allocation side and see if you could maybe touch on which regions you're seeing outsized capital allocation towards, maybe where you're seeing the most growth and maybe give us one, two, and three of the top regions within your company. Sure, Matt. It's pretty broad based, and we have a very rigorous process when we put out growth capital. When you think about our capital, a large portion of it's replacement. Because of the broad-based opportunities we've seen throughout our network, we've been giving all of our regions the appropriate replacement capital. Then they earn growth capital based on the returns, not just the demand in the end market. Mike said earlier, we're chasing not just growth for growth's sake, but profitable growth, and we dole out our capital appropriately. You can imagine where the hot pockets in the markets have been along the Gulf Coast, but we've seen growth in the Midwest and on the West Coast as well as the Northeast as well. We're really seeing a very broad-based growth, and we're allocating our capital appropriately. The only thing I would add to that is a proportion of our growth capital has gone to our specialty business. That's where you're seeing the fantastic growth that they've been able to produce. Great. I know you touched on it, just to follow up a little bit on the beginning of the call, but from an end market standpoint, Gulf Coast obviously a large petchem potential LNG build-out there. Can you maybe touch on which end markets are driving the strength in the Midwest and in the Northeast? Well, I think if you take a look at it goes in line with what you're seeing in the consensus report. There's things like commercial, healthcare, power, manufacturing, and multifamily are all seeing nice improvements. Those would probably be the likely areas that you're going to see where we're putting it. As I mentioned in my call, it's kind of broad based. All multiple different types of projects. I was just recently down at a race car facility where they're doing a major expansion. It's very broad in general. But those would probably be the hot buttons that you can take a look at. Great. Thank you very much. Okay. Operator, I think this is a good time to wrap up the Q&A. I do want to remind everyone to download our investor presentation if you haven't already. Please give us a call in Stamford or give Fred Bratman a call, particularly if you want something to discuss or if you want to see a branch visit or go to a branch visit. Also, please make note of December 4. It's our annual Investor Day in New York, and we're very excited about it, and I hope you'll attend. But if you can't, you can join us on the webcast. Operator, I think you can-