Earnings Call: Q2 2014

Jul 17, 2014

Good morning, and welcome to the United Rentals second 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. 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 the 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. Well, thanks operator, and good morning, everyone, and welcome. I want to thank everybody for joining us on today's call. In January, we laid out our plan for a year of profitable growth in a steady market recovery. We spoke about a balanced capital allocation program that supported both organic growth and acquisitions, the diversification of our services, and our focus on return on capital. We set full-year goalposts that anticipated well over $5 billion of revenue and more than $2.5 billion of adjusted EBITDA and significant cash flow generation. Last night, we confirmed that we expect to meet or exceed every one of our goalposts by the year-end. Halfway through the year, our plan has become a profitable reality for the second straight quarter. We deployed over $1 billion of rental CapEx to date and realized double-digit revenue growth on our fleet. We added an important new component to our specialty range with our acquisition of National Pump, and we're well into our plan on cold start openings. We're executing a market strategy that leverages our broader service offering as well as our scale. As a result, we reported another quarter of significantly higher volume on a much larger fleet with no erosion of time utilization and, more importantly, better rates. Our adjusted EBITDA was a second quarter record for our company, and we revised our EBITDA guidance upward to a range of $2.65 billion-$2.7 billion for the full year. Another one of our key metrics, return on invested capital, showed real progress in the quarter. Our ROIC increased to over 8% for the first time in our history, and this has positive implications for our free cash flow. Last night you saw us raise our full-year guidance for this range. These are results of a company that's firing on all cylinders in an environment of increasing demand. Once again, our performance is outpacing the recovery, just as it did last year. Based on our current visibility, we now expect to capture a full-year rate of increase of about 4.5%, which is up from our original outlook. Bill will discuss our results in more detail prior to taking your questions, but first, I want to comment on the macro environment. I'll start with the forecast from Global Insight, which we agree with the salient points. Global Insight, as many of you know, provides a comprehensive forecasting service to our industry. Currently, the expectation is for equipment and tool rental revenues in North America to grow by 7.7% this year. That's slightly down from the earlier forecast but is still very robust. The U.S. industry growth is estimated at 8%, and Canada is just under 6%. By contrast, the U.S. non-residential construction spending is expected to grow at a rate of 3%-4% in 2014. This reflects a slow start to a year that's been picking up steam since March. In short, the demand for rental equipment is projected to exceed the upswing in non-residential construction by more than two to one. Contractors are changing the way they source equipment, and as the largest provider, we're in a position to capitalize most strongly on that change. I want to make one related comment to industry growth. We're seeing a very strong market for used equipment this year. Our adjusted second quarter margin on sales was up almost 49%. As we said before, time utilization, rates, and used equipment prices are the three main indicators of demand for equipment in our industry. So it's a very good sign to see all three of these metrics are strong. For our part, we intend to remain very disciplined about our $1.7 billion of new fleet capital we're buying this year. We have high expectations for this capital, and we're managing these purchases for maximum returns. There's no question that our end markets are getting back on track. In the second quarter, all but one of our regions saw rental revenue growth, and a majority of our regions had double-digit growth. Demand from the energy sector is strong across the board, and with power plants, oil and gas, and renewables such as solar, and infrastructure projects have been steady. We're also seeing an upswing in commercial and office construction. When the primary project is complete, such as corporate headquarters, we can often capitalize on after growth for surrounding hotels, schools, and retail centers. Our specialty segment continues to turn in exceptional performance. As you know, specialty rentals are an important focus for us going forward, and these are high-margin businesses with very attractive return on capital. They're a cornerstone of our strategy to deliver superior value to shareholders. In the second quarter, year-over-year, our revenue from Trench Safety rentals was up more than 21%, and power and HVAC was up 54%. Our same-store performance in these two businesses combined increased 22% over last year. So we're getting tremendous organic growth. Revenue from our tool assets, which are rented across our regions, was up almost 10%. From a market-facing standpoint, the primary value to customers lies in the quality of our service and our technical expertise rather than the equipment itself. This makes specialty rentals less sensitive to price pressure, particularly when it comes to providing engineered solutions. in May, we added to our power HVAC group with the acquisition of Blue-Stream Services, a four-location business based in the Gulf. Blue-Stream serves a good diversity of end markets: oil and gas, disaster recovery, construction, industrial, and entertainment, and it will be integrated into our network later this month. Of course, the most significant change to our specialty segment was our acquisition of National Pump on April 1st. The pump operations moved onto our IT platform in June, and we are now serving customers as United Rentals Pump Solutions. Pump customers have access to our complete range of fleet, and we are expanding our cross-selling of pumps to a broader customer base. We are very pleased with the caliber of the pump acquisition. It brought a great team on board, and it is off to a strong start. In fact, it is outperforming our plan. In the second quarter, rental revenue was up almost 62% year-over-year, with an EBITDA margin of more than 50%. This acquisition also gives us an ideal platform for expansion through cold starts, and at least three of our specialty openings planned for this year will be in pump. I also want to update you on a few internal initiatives we have in progress. First, there is our lean program, which I discussed last quarter, and this is based on the Kaizen philosophy of improving even the best operations. So far, we have completed phase one, which involved 306 Kaizen events at 141 of our branches. Though it is still early, we have seen measurable improvements in productivity in areas such as driver turn time and shop flow. We feel that our target run rate of at least $100 million in efficiencies in three years is very achievable. Second, we are operating our business more safely than ever with a recordable rate of just below one through June and a 32% reduction in injuries year-over-year. I am proud to say that we reduced our injury count more in the last six months than in the full 12 months of 2013. Last month, we also launched our United Academy, which is an online customer portal for safety training and certification management. Two weeks ago, we added our first blended learning programs, which provide a combination of online training with practical experience at our branches. United Academy is going to be a powerful force for safety in our industry. In closing, I want to say that clearly, we are seeing the immediate benefit from the execution of our plan. At the same time, our strategy is built for the long term to serve us well beyond 2014. We are looking at an upcycle with multiple years of industry growth, and when we apply our model to that forecast, we are excited about the kind of returns we can generate. Not just a broader goal of value creation, but also the components of that value, such as substantial free cash flow and a higher return on capital. By all accounts, we are in a very good place with a long and profitable runway ahead. With that, I will turn the call over to Bill for the financial results, and then we will take your questions. Over to you, Bill. Thanks, Mike, and good morning to everyone. I will center my comments around bridging our rental revenue performance for the quarter, our EBITDA performance for the quarter, and then updating the outlook. Along the way, we will throw in, hopefully, some useful information about a couple of other items. Starting with our look at revenue performance. Rental revenue in the quarter was up 16.8%, so very robust performance. Obviously, that was aided by the addition of the acquisitions in the quarter. But still, when you exclude the acquisitions, a pretty robust rental revenue result for us in the quarter. So 16.8% rental revenue growth, that is $170 million of year-over-year rental revenue growth. Within rent revenue, re-rent and ancillary items accounted for 0.7% of that 16.8 percentage growth. Ancillary in particular, had a robust quarter for us. Ancillary revenue was up $24 million year-over-year within that 0.7%. Re-rent was up about $5 million. So $29 million improvement year-over-year from those two items. When you look at the owned equipment revenue growth, that 16.1% that remains, it was driven by rental rate performance, and that was up 4.9% in the quarter. That was worth about $43 million of the year-over-year increase. Volume growth was very robust at 10.3% volume growth this year. That is worth about $90 million of the year-over-year revenue. Again, that includes the acquisition of the acquired entities this quarter. But even if you strip out the National Pump acquisition, that volume growth was still pretty impressive at 7.6% ex Pump. So, a nice volume quarter for us. We have been breaking out fleet inflation and the impact of that year-over-year on revenue, and that this year was about 1.7 percentage points negative, a headwind, which resulted in about a $15 million deduct from year-over-year rental revenue. Probably the best way to think about that fleet inflation, as we have talked before, is as a net against the volume growth. FX was another headwind for us in the quarter. The Canadian dollar year-over-year was down to the extent of about a 0.9% impact on our year-over-year revenue growth. So a negative 0.9% from FX, or about $8 million of year-over-year deduct from the Canadian dollar move. The remainder mix and other was a robust 3.5% positive in the quarter. That positive really reflects the impact of National Pump. National Pump's volume growth is included in the 10.3% volume that I referred to earlier, and given that they have a higher dollar utilization of the fleet that they add, they substantially improve the mix result for the quarter. So 3.5% mix and other impact in the quarter positive. That's equivalent to about $31 million of year-over-year benefit from mix. So add all those up, you get the $170 million of year-over-year rental revenue improvement, and again, it reflects what was a very good rental revenue performance for us in the quarter. Before I leave revenue entirely, just a quick touch on used equipment sales for the quarter. Another good quarter for us on used sales. Proceeds of $138 million, and a margin which was very robust. 48.6% is the adjusted gross margin from our used equipment sales. That's 660 basis points better than last year. And obviously, it reflects what is a continued strong demand for used equipment in the marketplace, as well as our continued focus on selling through our retail channel, which is the most attractive margin channel for our sales. So a very nice result in used equipment for the quarter, and it certainly does support the macro environment comments that Mike made about the continued strength. If we turn to profitability next, first looking at adjusted EBITDA. Year-over-year adjusted EBITDA was up $114 million to $663 million in the quarter. That's a margin of 47.4%, which is a new record for the second quarter in our company. And looking at the breakdown of that improvement in EBITDA dollars, $114 million total year-over-year improvement. We attribute $41 million of that 114 to rental rate, the 4.9% rental rate increase that we saw in the quarter. Volume contributed another $61 million of year-over-year growth. Netting against that would be the fleet inflation impact at EBITDA of a negative $11 million. And as you look at the other items in the year-over-year growth, the mix impact that I called out in revenue resulted in about $16 million of EBITDA improvement, and again, a very nice contribution from the addition of National Pump. The ancillary growth that I referred to earlier resulted in about $12 million of EBITDA benefit in the quarter. And used sales also contributed nicely, about $11 million of year-over-year EBITDA growth. Working against that was our cash incentive compensation accrual in the quarter, which was up year-over-year about $12 million. So a $12 million headwind as our incentive programs reflect our increased expectations for performance over the entire year. So it's a classic good news, bad news story. Performance is better, that's great, but the incentive comp represents a little bit of a headwind against that. Still, the overall impact is very positive. And the remaining $4 million headwind is merit increases and some other small other nits and nets. So all of that adds up to the $114 million of year-over-year EBITDA improvement, driving that margin result, which was 190 basis point improvement in margin up to, as I mentioned, the 47.4% EBITDA margin in the quarter. Flow-through in the quarter came in at 59.1%, and in fact, it's a flow-through result in the quarter that makes us comfortable to continue to look for about a 60% flow-through impact for the full year. Obviously, the flow-through reflects all of the factors that I touched on in revenue and our EBITDA performance. It is worth noting, though, that that flow-through impact in the quarter was weighed down by the addition of National Pump. As we have said before, Pump revenues come at about a 50% EBITDA margin. As we added in the quarter National Pump revenues, we added EBITDA at about $0.50 on the dollar for those revenues. That weighs down the overall flow-through of the company, and resulted in that 59.1% flow-through for the quarter. If you were to exclude Pump, the flow-through in the quarter for the full company would be more like 63%. National Pump had about a four percentage point negative impact on our flow-through in the quarter. We expect something comparable for the full year effect of adding National Pump this year, somewhere in the 4%-5% range for the full year impact of adding National Pump to adjusted EBITDA. Real quickly, I will just touch on EPS for the quarter. A very strong result for us at $1.65 in the quarter. That is up from $1.12 in the second quarter of last year, and obviously, it reflects all the operating points that we talked about earlier. On liquidity, capital structure, free cash flow, we had a very strong free cash flow result in the quarter. In the first half, first half free cash flow is $240 million. That, of course, reflects all the free cash flow remaining even after our CapEx spend this year. Rental CapEx was for the year-to-date period, the first half, was just over $1 billion of our total $1.7 billion expected spend for the year. So a pretty robust free cash flow result at $240 million for the half, and puts us well on track to achieving our outlook for the full year. That free cash flow helped maintain our ABL balances and maintain our liquidity overall. We finished the quarter with total liquidity of $1.2 billion, and that includes ABL capacity of about $1 billion available to us. Along with that, we also had about $170 million of cash on the balance sheet at the end of the quarter. Our share repurchase program continued apace in the second quarter. We bought $185 million worth of our common stock in the second quarter. That brings the cumulative program purchases to $237 million through the end of the quarter. Nice progress. Puts us well on our way to executing the $500 million total program that we are operating against, and well on our way to executing what we have said is going to be $450 million in calendar 2014 of repurchases. Our plan still is very much to complete the program overall by April of next year. Before we move to the outlook, just a real quick comment on ROIC. ROIC finished the quarter at 8.1% on a trailing 12 basis through June 30, and that is an increase of 1.1 percentage points over the past year. So a very nice year-over-year improvement in the trailing 12-month view of ROIC. We continue to expect to drive ROIC higher as we go forward. It was benefited slightly by the impact of National Pump in the quarter. Excluding Pump, ROIC would have been right at 8% for the quarter. So it bears out the premise for investing in National Pump as we go forward. Our outlook, you all saw we updated last night. We revised the revenue rate and free cash flow and EBITDA guidance. I'll leave you all to read it in detail, but we did narrow the range of total revenues that we expect in the quarter. It's now a $100 million range, centered around $5.6 billion. Rental revenue is within that, obviously. It'll be impacted by our rate expectations. We've raised our rate expectation for the year to about 4.5% from what was previously about 4% for the year. Reflecting the nice momentum that we've seen rates in the first half. Time utilization, we continue to expect to finish the year at 68.5%. Free cash flow, we've raised that range a little bit. We are now expecting between $450 million and $500 million of free cash flow for the full year. Our view of adjusted EBITDA is now higher. We expect adjusted EBITDA of between $2.65 billion and $2.700 billion for the full year. Those are the key points that I wanted to make. If I missed anything that you all want to talk about, please raise them in Q&A. At this point, operator, if we can open the call for questions. Thank you, sir. Ladies and gentlemen on the phone line, if you'd like to ask a question, please press star then one on your touchtone telephone. If your questions have been answered and you wish to remove yourself from the queue, please press the pound key. Once again, if you'd like to ask a question, please press star then one. Our first question comes from Seth Weber from RBC Capital Markets. The line's open. Please go ahead, sir. Hey, good morning, everybody. Morning. Morning. Wanted to focus a little bit on the specialty business, if we could. In the press release, where you are talking about the National Pump deal, you cite the purchase price of $853 million versus the $780 million at the time of the announcement. I assume that reflects confidence or line of sight to the earn-outs. Can you talk about You said you are running ahead of plan, so should we assume that you are going to hit that first earn-out in 12 months? Seth, it is in the Q if you look at it. The $853 million is comprised of $777 million, I think it is, of cash consideration. It excludes the stock component of the purchase. And then the remainder is the contingent consideration. It is the earn-out. It is the way that we have to account for the earn-out. So that $76 million is an expected weighted average of the earn-out that we expect to pay, discounted back To present value. That help? Yeah. Thank you. Okay. Yeah. Is it possible to parse out how much of the upside on the rate increase, the 4.9% in the quarter, how much did the pump acquisition contribute to the strength and rate in the quarter? Is it possible to split that out? You kind of qualified it for their ROIC. I am wondering if you could do that for rate. There is no impact of rate from pump. Remember the ARA standard calculation, you use the prior year weighting for the various cat classes, and we didn't have pump last year, so its weighting was zero in the rate calculation. Okay. Then just sticking on the specialty business. Last quarter, you talked about specialty getting about $240 million of the growth CapEx. I think it was a $560 million number. Has your thoughts around how much capital you're committing to the specialty business changed at all? You obviously didn't change your full CapEx number this year, but I am just wondering if you're committing more capital to the specialty business than you previously thought. Yes, Seth, this is Matt. We're absolutely continuing to fund that business, and we were even exclusive of the pump acquisition. But we will continue to fund that business, and we feel we can do that without having to raise our overall capital any more than the guidance that we changed early in the year when we announced the acquisition. But is it still in that $240 million-ish range? Or is it going to, I'm trying to understand Yes what percentage of the pie it's getting. It's still in that range this year because we don't have to fund as many cold starts in the power business that we did last year. If you recall, we started a lot of power cold starts last year and not as many this year. So it'll still be in that range, but we expect as we go forward, that range could increase. We're hoping it will increase, actually. Okay. And with the increased free cash flow guidance for this year, should we assume that your M&A could pick up? Or how do you envision spending that extra capital? This is Mike, Seth. I think that we're always going to be out on the horizon looking. As I stated in my opening comments, specialty is the cornerstone for our strategy right now. We'll look, and we just did the Blue-Stream. But I've said this more than once, the bar is pretty high to get over the hurdle for us to think about it. We've passed on more than we go deep in. That being said, I think our cash flow will be used right here and now just to kind of pay down our debt at this point. Okay. Thank you very much, guys. Yep. Thank you. Okay. Yeah. Thank you. Ladies and gentlemen, in the interest of time to allow others to ask their question, please limit yourself to one question. Our next question comes from David Raso from ISI Group. Your line's open. Please go ahead. Good morning. The free cash flow target we used to speak of, the $1.5 billion from 2013 to 2015, is that still a number we should think about as a set target for the three years? Yeah. Hey, David. Yes. We continue to think about that same number. Obviously, we're enhancing our chances of getting there as we raise our outlook for free cash flow this year, and we'll continue to work hard to hit that number and do even better if we can. It implies then free cash flow for 2015 is north of $650 million. Even if you do pay out the earn-outs, the full $125 million, you finish the last $50 million for repo. It's going to leave your net debt at the end of 2015, probably at or below the low end of your leverage ratio, the 2.5x-3.5x that you target. I was just curious if you can maybe give us some insight on where are you targeting ending 2015 leverage? That math right there already tells you unless EBITDA is wildly off from what you think it would be, you're going to be below the low end of your leverage. Yeah. All we've said so far, David Raso, is that we'll be toward the low end of that range. Without giving out any new guidance for 2015, I think I'll stick to that. I would just add, we feel very comfortable about all of the comments that we've made about 2015, including the contribution 2015 makes to the $1.5 billion 3-year cash flow, including the leverage being in the area of the low end of that range. So I won't go any further there right now. As the year plays out and as we get ourselves prepped for our Investor Day, maybe we can say more as we get later in the year. Well, I guess that's a related question then. Is there anything we should start thinking about the message for the December 4th meeting? There's a couple milestones people are trying to think about. Obviously, at this level, is there a stock split thought process? The entry into the S&P 500 isn't really up to you, but you would think that's something that could be out there that's obviously potentially could happen. Obviously, some of the leverage numbers I was talking about for next year. I mean, there are some things we should be thinking about already as a framework for the message on December 4th? 5 months in advance, you want the message already. I would say stay tuned. We'll develop those thoughts as we go. Mike, I'm sorry. Yeah. As I said, David Raso, we're still concentrating on this year. We'll frame up our discussion points. For the December meeting, you raised one. There are other investors who are asking other questions as well. We'll try to answer as many as we possibly can, as we get closer. As you know, in December, we'll have our understanding of what the 2015 will look from the roll-up of our budget. So it'll be an appropriate time in early December to have that discussion. Okay, I appreciate it. Thank you. Oh, thank you. Thanks, David. Thank you. Our next question comes from Scott Schneeberger from Oppenheimer. Your line's open. Please go ahead, sir. Hey, Scott. Thanks. Good morning, guys. Hey, one question, but a couple of parts in it. I will ask it all up front. Can you address how rental rate growth will flow over the second half, just to bridge the 4.5% rate guidance for the year? Then the follow-ons to that are how you are thinking about rental rates long term, just with a strong year again this year with specialty, National Pump mixed in, and some more specialty to come. What is the long-term view on that? Then lastly, just still on the rates theme, what the competitive environment feels like out there. It sounds like you guys are being good leaders, but just any anecdote there. Thanks. I will cut it there. Thank you very much. Thanks, Scott. I will start with the near term and what gave us the confidence to set a target of 4.5 for ourselves for the balance of the year. If you think about that sequentially and what we would have to do, we will have to do 0.5 sequentially for the balance of our peak season. So July through October, 0.5, and then flatten out to down in November and December. That delivers a 4.5 result for the year. So it is not a slam dunk, so to speak, but we feel confident. That is why we raised that guidance. As far as long term, we have not put a long-term target out there yet. I will let Bill speak to it some. Sure. But just to add on to the short-term statement. If we did that 0.5 through October, Scott, that would put our year-over-year third quarter rental rate performance in the high fours. Not quite 5%, but in the high fours. And that would put the fourth quarter year-over-year in the lower half of the fours. Hopefully that gives you a little bit better sense of the second half cadence of year-over-year rate. For the longer term, I think we have talked for a little while now that we continue to see rates over the long term trending down from the year-over-year growth rates that they have been achieving recently, down to something that looks like 3% a year as sort of a steady state. That is the way we think about our long-term forecasting. I am not saying that we will get to 3% next year. If we finish this year at 4.5%, say, that will be pretty good momentum carrying into next year, and maybe do a little bit better than 3% next year. Everything else holding at the macro holding in the kind of growth rate that we are experiencing right now. But as we think about 2016, 2017, 2018, something like 3%, we think makes a lot of sense as a modeling assumption. And obviously, the macro can swap that for the better or for the worse. But that is how we think about the long term. I would only add, Scott, that as far as the competition, I think everyone is being good stewards and marching forward. When you take a look at the Rouse Report, we have a bandwidth in which we are leading the charge, but that band seems to be consistent by all the report month-to-month, which tells you that as we are growing our rate, the industry is growing our rate as well. And then I think everyone else who is public has been reporting positive numbers. I think from that perspective, that is how the industry has been reacting. I would also say that it is necessary because inflation kicks in, prices go up, and we have to earn over our cost of capital as an industry. I think it will continue that trend. And to Bill's point, the macro environment will be one of the ones that we will be able to monitor and judge the rate improvement. But I will also point out one last point, and that is we will always, as a company, strive to maximize our return, and also on our rates. Great. Thanks, guys, and well done. Thanks, Scott. Thanks, Scott. Thank you. Our next question comes from Steven Fisher from UBS. Your line's open. Please go ahead. Hi, good morning. Hi. Wondering, Bill, you talked a little bit about return on invested capital. I'm wondering if you're still targeting double digits by the end of 2015, and how you see the trajectory of getting to that metric. Is it sort of a steady 100 basis points a quarter, or might it tend to be more of a hockey stick at that end, and why? I guess related to that, this National Pump is interesting in that you're taking a local high margin product service and leveraging it across your network. Is part of a key element to the plan of getting to that return on invested capital that you need to do more of these things? Is that sort of a new business model for acquisition for you? On the ROIC, just to be clear, I think what we've said about ROIC is that certainly we're targeting double digits. 10% is our internal hurdle rate. We've talked about achieving that in the material that we put in our investor deck, achieving that over a 3- to 5-year period. So 2015 is a little more sudden than what we would say we would expect to achieve double-digit ROIC. Not impossible, but that's not what we've talked about historically. I do believe that growing in the specialty areas is going to be an important component of us achieving that high level of ROIC. Again, in the material we put in our investor deck, there's a contribution that we have there from business mix and other, and a part of that business mix is from growth in the specialty areas, either organic growth or indeed, if we do any further acquisitions. The material we put out does not assume acquisitions. That's purely organic growth. But acquisitions certainly could help accelerate that process if we found the right ones. I think that's the way we talk about specialty and its contribution. Specialty certainly will be an important driver, but it's not the only driver of us getting to the levels of return that we want to get to. There are things that we can continue to do in our base business, and we're working very hard at those every day. And just to follow up, what was the starting point for that 3-5 years? Was that back from your Investor Day in 2012, or has that sort of been ongoing? Yes. So that's something that we put out in our investor material, I don't know, quarter, 2 quarters ago. It's based on 2013 ROIC. So 2013, and we targeted a 3- to 5-year horizon of getting above 10%, and we talked about the components that we think will drive us there. Okay, great. Thank you very much. Thank you. Thank you. Thanks, Steve. Thank you. Our next question comes from Jerry Revich from Goldman Sachs. Your line's open. Please go ahead. Jerry. Thank you. Good morning. Michael, can you talk about, out of the lean initiative that you mentioned, what would the impact be on fleet available for rent? It looks like in your long-term bridge, you're looking for 100 basis points of utilization improvement per year. Is that the driver? I know you spoke about the cost benefit, but maybe you can touch on the utilization opportunity as a result. Well, I think what you're referring to is as we go through the lean process, we're talking about the shop flow and turnaround time, which will be a component of not available for rent. If we were to take down 2 points, that would be a substantial amount of freed-up cash to deploy for put on rent. That's part of the strategy around lean. As I mentioned, we've had 141 branches. We're seeing nice improvements in efficiencies there. We're going to continue to focus on that. So that would be part of our plan. I think the other part of our plan around the not available for rent is really just about disciplined fleet management. When we took a look at the best of both worlds between United Rentals and RSC, we merged the two together. We have a gentleman who came over from RSC who's managing our fleet with the field and is doing a very good job of applying and putting that process to work. So our processes have changed as well in the way in which we deploy capital and move our fleet. But those would be the two dynamics that we're focusing on. If you take a look at our size of our fleet, 2 points is real money. Okay. Thank you. Can you just talk about on the capital allocation side, which regions you're seeing outsized capital allocations, and where you're seeing the most growth, maybe Bill name the top two or three regions within your company? Yeah. Matt? Yeah, sure, Jerry. Regionally, you could imagine where the hotspots are. Although we've had broad-based growth, as a matter of fact, we had 12 of our 15 regions show double-digit growth, and that's exclusive of Pump, who also obviously had robust growth. We're spreading the capital, but there are a couple of hot pockets where you can imagine the energy sector. Upstream gets a lot of talk, but we're seeing capital projects at a high level in the energy sector overall, whether it's power plants or LNG plants. Those hot pockets along the Gulf Coast and in some spots up in the Northern Midwest are certainly getting their fair share of capital. But I wouldn't point to just one or two spots. We're seeing robust growth in many of our end markets. I would only add that the only other thing that we're doing differently on our capital allocation is around contribution margin, not only by asset but by customer. That is probably one of the key takeaways of the changes in the way in which we're putting our fleet to work. So under the gentleman I mentioned earlier, that is being implemented through the field. They understand it, and it's a different way in which we look at the world. Therefore, the monies that we talk about, the capital allocation, that's one of the reasons why we'll continue to make sure that the specialty businesses are well-financed and well-funded for their growth, and doing both organically as well as through cold starts, and we've done two acquisitions. So that's kind of how we think about it. Thank you very much. Yep, thank you. Thank you. Thank you. Thank you. Our next question comes from George Tong from Piper Jaffray. Your line's open. Please go ahead. Hey, how are you? Hey, George. Morning. Thanks for taking my question. I just wanted to drill a little bit deeper on rates. You mentioned the pump business was not reflected in rate growth this quarter since it was not in the business a year ago. Once National Pump does lap next year, can you quantify the impact it will have on rate growth? Yeah. George, I don't think it will be a significant impact, one way or another. The rate growth is not dramatically different than what we're seeing in other areas. The pump story is more about getting more fleet on rent. It's a volume story for us more, right here and now. That's the real opportunity, right? To get out there, find the customers who need pumps, and get those pumps in their hands. That's what we're chasing after. I don't think you're going to see it moving our rate performance dramatically once it does start being included. Very helpful. Thanks very much. Yeah. Thanks, George. Thank you. Our next question comes from Nick Coppola from Thompson Research. Your line's open. Please go ahead. Hey, good morning. Morning. Morning. I wanted to ask the one question on weather here, and in your conversations with customers, how much volume in Q2 do you think could have potentially been from work pushed out from winter weather, and really just some catch-up activity occurring? Hi, Nick. It's Matt. We're not really seeing that as something that we're hearing from our customers. It's really, when you think about the cycle of a project, you can ramp it up some and maybe condense the front end of it if you had a delivery date towards the end of the year, and maybe you can condense some. But you still got to go through the normal phases of construction, and I don't know that you can condense it enough that it would have a real impact on Q2 revenue. Maybe some small projects that had a very short window of need, but that's not a monstrous part of our portfolio. So I don't think it's a material, at least we don't think it's a material impact. Right. I certainly think that makes sense. Then just my second question, can you give us any color on what's been going on through the first few weeks of July here, and are utilization rate kind of trending in line with your expectations and any kind of incremental color on that would be helpful. Sure. Nick, it's Bill. Yeah, the first quarter, excuse me, the first part of the third quarter, early part of July, things are trending nicely for us, and very much in line with the outlook that we've given and what we expect. On the rate front, on the utilization front, volume front, it's trending well. I don't know, Matt or Michael, if you guys want to add anything. No, I think you said it head on, Bill. All right. Well, thanks for taking my questions. Thanks, Nick. Thanks. Thank you. Thank you. Our next question comes from Joe O'Dea from Vertical Research. Good morning. Morning. First question is on the EBITDA incrementals into the back half of the year. You had expressed that there would be a little bit of a step down into 2Q, and understand the National Pump impact. As you go into the back half and applying an additional step down, could you just walk through some of the components driving that? In the back half, I think the key things to remember are the impact that we'll see on the year-over-year rental rate. I think I mentioned that before with the fourth quarter in particular, being a little bit less of a year-over-year improvement, than what we've seen in the first few quarters of the year. In the lower half of the 4s instead of in the upper half of the 4s where we've been. We've got the year-over-year impact of items like our bonus accrual. I mentioned that in our bridge of EBITDA. Compared to last year, our bonus and other compensation expense are going to be up a little bit. Used sales is a significant impact in the second half versus the first. Remember, if you go back to the first quarter, our used sales were actually down year-over-year, and used sales bring a lower margin than the rest of the company. As they go down, they actually help the flow-through. That was a pretty significant impact in the first quarter. That impacted the first half flow-through positively, and therefore, the second half should be a little bit less. What else? The pump acquisition obviously will be a significant impact. I called that out already, a 4%-5% impact, depressing the second half, and therefore pushing it down versus the first half. I think the important thing to focus on is the full year flow-through that we expect is still about 60%, and that's including the impact of pump. If you excluded pump, the full year would be a little higher, and therefore the second half would be a little higher than what maybe you're calculating just based on the outlook that we've given. Truth told, if you put a gun to my head, I said this last night to a couple of folks. If I had to bet whether it would be a little higher or a little lower than that 60%, I'd bet right now maybe a little higher. I think our flow-through is shaping up nicely for the year. That was really helpful. Thank you. Okay. Just components of growth. Obviously, the National Pump impact on mix in the quarter. I think from the queue, it says that the mix effect is still a headwind on the general rental side. Just how to think about mix into the back half of the year, and sort of net effect of inflation and mix to growth. Yeah. I think if you think about the back half as comparable to the second quarter from a mix impact perspective, that'll be a good start on how to model it. As I said earlier, about 3.5 percentage points of the 16.8 rental revenue growth that we had came from mix. I think if you did that again for third and fourth quarter, that'd be a good starting point. Great. Thanks very much. Okay. Thank you. Thank you. Our next question comes from Tim Robinson from Susquehanna. Your line's open. Please go ahead. Hi, guys. Good morning. Thanks for taking my call. Welcome. I just wanted to ask real quick about SG&A and tick-tock. It sounds like it was mostly incentive comp, and I am assuming acquisition out of the cost as well. I was just wondering if there is anything else in there we should be aware of, and how you would encourage us to think about the 187 as a run rate going forward. Nothing else major to call out, Tim, in SG&A. The incentive comp was the big driver. As you go forward, again, there is nothing major that I would call out for the second half. So, I think you can safely use that run rate. Obviously, we will have the impacts of the selling cost based on your revenue estimates. We will have puts and takes in some of the line items, but nothing major that we would point out. Got it. Then real quick, if you were to hit your rate guidance for the year, what would that imply for a carryover pricing heading into 2015? Give me a second, Tim, here. We will dig that up. It is normally in the 2% area, maybe a touch higher, but we will dig it up real quickly and throw it out before the call is over. Perfect. Well, thanks a lot. That's all I have. Thank you. Our next question comes from Nicole DeBlase from Morgan Stanley. Your line's open. Please go ahead. Yeah, good morning, guys. Hi. Just a question on CapEx. I know we talked a little bit about the potential for additional M&A with your free cash flow for the rest of the year, but I'm just curious, what would cause you guys to take up your CapEx plans from the $1.7 billion for 2014? Is there anything, or is that pretty much you'd say, locked and loaded for the year? This is Mike, and I will ask Matt to join in, and Bill too as well. But for me, I like to see both rate and time utilization grow. Particularly as it applies to our contribution margin in areas that we can really get nice returns on. But those are probably the two dynamics. That being said, I want to make sure with the management team, that we are not just buying for today, we are buying for multiple years, so that they can put that equipment to use longer term. But rate and time utilization, that combination may give me the opportunity to think differently. Yeah, this is Matt, Nicole. Someone asked earlier about what kind of impact Lean could have on OEC NA and OEC not available. As we continue to drive our Lean initiative throughout the organization, we are about 20%-25% of our stores impacted already. We actually hope we will create more capacity for growth within the capital that we have. So we really have gotten our team away from the thinking that, I need $2 of capital to drive $1 of growth revenue. That is really part of our goal and part of the reason why we want to stay disciplined on our capital spend. The only thing I would add, Nicole, is that all of those factors we would mix in along with the impact on cash flow. We take cash flow pretty seriously, and as long as we do not feel that we are doing significant damage to our cash flow, and in the long run, we are enhancing our cash flow as a company, that would be a factor in deciding to spend more capital as well. Just to go back to Tim's question about carryover rate. If we did 4.5 this year, I think 2% is probably a good number to use right here and now. So just Tim, I wanted to follow up on that. Okay, thanks for the color on the CapEx, guys. Just one more from me. Mike's comments about commercial construction were pretty bullish. I am just curious, are you guys actually seeing real tangible signs of that recovery, or is that more a reflection of just customer confidence in the recovery getting better? Hi, Nicole. It's Matt again. I would say it's both. You see in our deck that our customer confidence is the best results in our survey that we've seen in all year, including last year. We also have seen a robust pipeline of large projects, and that's a core competency, not just of ours, but of our key accounts. So we expect to get our fair share plus of participation in those projects. I had mentioned earlier, all the jobs in the power sector and the LNG, probably the most renowned one is the Sasol project down in the Gulf Coast. But we've got stadiums popping up in different markets. We've got large retail popping up in different markets, and really a robust pipeline of major projects throughout the country. Okay, great. Thank you guys so much. Thank you. Thank you. Thank you. I am showing no further questions at this time. We would like to hand the conference back over to Mr. Michael Kneeland for closing remarks. Well, thanks, operator. I want to remind everyone that our annual Investor Day in New York has been scheduled for December 4. I hope you will all attend and join us on our webcast. More information will come forward as we get closer to that date. In the meantime, please download our current investor update or our updated investor presentation that we have. As always, you can contact us here in Stamford if there is something you want to discuss. Operator, you can end the call now. Thank you. Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.