Earnings Call: Q3 2013

Oct 17, 2013

Good morning, and welcome to the United Rentals third quarter 2013 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 operation 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, 2012, 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 expectation. You should also note that the company's earning 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, Executive Vice President and Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Thanks, operator, and good morning, everyone, and welcome today. With me today, as the operator stated, is Bill Plummer, our Chief Financial Officer, Matt Flannery, our Chief Operating Officer, and other members of our senior management team. You may have noticed that we reported our results yesterday prior to the market close. That's because our release was inadvertently made available to employees at that time. So we made the prudent decision to distribute our release publicly. As you saw, we turned in some strong results, particularly in terms of margin. Historically, the third quarter is our most robust period, and that was true in 2012, and it was true again this year when our rental revenues increased by more than 8%. But more importantly, our results as a whole reflect two dynamics that are central to our strategy. First, our non-residential construction spending is recovering, although the pace is still very modest and the bulk of the upswing is expected to come in 2014 and 2015. But demand is definitely improving, and we're getting a benefit from that. And the second, the quarter reflects our ability to generate significant value, even from a small improvement in our operating environment. Remember, it was only a few years ago that we had the goal of adjusted EBITDA at only 40% margin, and this is the sixth straight quarter that we've exceeded that percentage. Now, obviously, our sights are set higher, but our objective remains the same, and that is to create value by improving our margins and driving better returns. Now, Bill will discuss our performance in more detail in a few minutes, and then after that, we can go into Q&A. But before I move on, I want to mention the share repurchase program we announced last night. Our board of directors has authorized up to $500 million in share repurchases, which we expect to execute over the next 18 months. This was carefully considered use of cash, and it's consistent with our overall capital allocation strategy, which includes balancing organic growth while maintaining leverage within the target range of 2.5 times to 3.5 times over the cycle and returning cash to shareholders, while at the same time remaining our flexibility to do M&A. If you have any questions about that program, we'll address those as well during the Q&A. So let's move on to the quarter. As you saw last night, our adjusted EBITDA was $642 million, and our margin was a record 49%. That's a $72 million increase compared to our third quarter last year. That puts us just over $1.6 billion in adjusted EBITDA through September. We reaffirmed our outlook for adjusted EBITDA between $2.25 billion and $2.35 billion this year, and we have good reasons to be confident about that target. First, as I mentioned, there's no question that we're seeing more demand from our services. While the upswing is modest compared to what we think we'll see next year, it has given us enough traction to grow the business. There's more than just a construction recovery behind our revenue improvement, and we're executing our strategy extremely well in this environment. You can see it in the components of our revenue increase year-over-year. For the third quarter, we drove an 8.2% increase in volume of equipment on rent, a 3.2% increase in rental rates, and time utilization of 70.8%, and that's 100 basis points higher than last year. As I said many times, it's always a balancing act between rates and utilization. You can see that in the third quarter that we had solid improvement in rates at an exceptional level of utilization, and still our rates are on a good trajectory. In fact, rates were up overall in every major category in the quarter, year-over-year. On a sequential basis, rates trended up each month versus last year. We're standing behind our outlook for full-year rate increase of at least 4%. I want to emphasize that we're never complacent about rate improvements at any level. Our mindset is that we can always do better, and you'll see us continue to push for rate in 2014 and beyond. We're also maintaining a tight cost discipline and continuing to harvest synergies from the merger with RSC. We realized $64 million of synergies in the quarter, and we expect to meet our goal of $230 million to $250 million in annual synergies. Now turning to the marketplace. One of the hallmarks of a genuine recovery is non-residential construction is in its footprint. That's the difference between a regional fluctuation to a true turnaround. In the third quarter, all but one of our regions showed growth in rental revenues, with eight regions showing double-digit improvement. It's also encouraging that growth comes from a mix of projects, not just one sector. In the Mountain West, for example, we have machines on site at a football stadium, a university expansion, an airport expansion, and a new healthcare facility under construction. We're also servicing projects in oil, gas, mining, distribution, and solar. That's all within one region. Organic growth was a major factor in our quarter, but we also expanded our specialty network with an eye toward driving returns in future periods. in August, we announced the opening of greenfield locations in San Diego, in Oklahoma City, and in Fort McMurray, Alberta. These were all power HVAC branches. Our specialty operations reported an impressive year-over-year growth of nearly 25% for the quarter, and 19% of that was same-store growth. We're doing a good job of cross-selling our services and building a reputation as a single-source provider. All of our growth initiatives are carefully calculated to give us near-term and long-term results. This applies to our M&A activity, like our acquisition of Rent World in August, as well as the new branch openings, sales force expansion, investments in technology, and a whole range of other options at our disposal. It also applies to our CapEx. We treat our CapEx like any other growth initiative, and we allocate our cash what would drive results and attractive return. Through the first nine months of this year, we spent just under $1.5 billion on new equipment rental. That puts us on a path to spend $1.6 billion in total. We're investing in equipment that we know that our customers need, and we're constantly always fine-tuning that mix. Our salespeople also do an excellent job of reading the local markets. The money we spent on the fleet in April, May, and June helped drive our numbers in the third quarter. We saw key account revenue increase by 7%, and unassigned accounts, which tend to be local customers, had revenue growth of 10.5% in the quarter. That's good progress because as you know from our last call, these smaller accounts were the most challenging to retain during the integration. Our end markets are percolating, and we think they'll heat up significantly in 2014. That's also the view of many forecasters in our industry. 2015 is expected to be even stronger, particularly for commercial construction. In terms of the coming year, we'll talk more about that on the next call. But in the meantime, you'll see us continue to focus on controllable elements of our business and execute our strategy with diligence and discipline. We have good visibility through December, and all indications are that we'll continue to show year-over-year improvement. Before I close, I want to share a personal experience I had earlier this week. I had the honor of speaking at the International Rental Conference in Beijing, China, which is still very much an emerging market for equipment rental. Their industry is facing the same challenges right now, but the energy at the rental conference was absolutely electric. Rental operators in China can see the future, and they can't wait to carve out a new industry, just as we did in North America in the '70s and '80s. While our focus remains on North America in the short term, we have the same passion for taking the business in new directions. We're the architects of our own success, and we've worked hard to bring the business to this point. And it is no accident that we find ourselves in the position to expand our fleet, delever our balance sheet, and return cash to investors while pursuing numerous avenues for growth. In short, we are going to go into 2014 with every opportunity on the table. With that, I will turn over to Bill for the financial results. It is over to you, Bill. Thanks, Mike, and good morning to everyone. Mike hit the highlights of the quarter, so I will try to add a little bit of color as I go through the financial results, and then touch briefly on the outlook for 2013 and the share repurchase programs. In terms of the financial results, the quarter, as Mike said, was a strong one within revenue. We had a very robust rental revenue growth, up 3.8% in the quarter. You all know that rental revenue is composed of our owned equipment revenue plus re-rent revenue plus ancillary and other revenues. In this quarter, owned equipment revenue was about 87% of the total rental revenue, and OER was up 8%. Obviously, OER is driven by our rate performance. As Mike said, the rates were up 3.2%, also driven by our volume performance. Volume was up 8.2% in the quarter. The difference between those two added together and the 8% OER growth was mix and other factors. Within that mix and other, inflation made up a negative 2%, and the remainder was a negative 1.3% that we point to as mix. Those were the important drivers of rental revenue. We did have a good quarter in ancillary, and that offset a little bit of headwind in re-rent. You all know that we have been displacing re-rents with owned equipment since the merger, so we expect to see a little bit of a headwind in re-rent. So put all that together, and that explains the 8.3% improvement in rental revenue for the quarter overall. I will offer a little bit more on the volume performance in that quarter. Volume was very robust, up 8.2% in the quarter, as I said. We had OEC on rent of $5.6 billion in the quarter. That is a record OEC on rent quarter for us by quite a margin. To be able to have that size fleet out on rent, growing 8% plus in the quarter, on top of the increase in the size of our fleet overall, I think makes a very strong statement about demand in the marketplace. Mike mentioned that the time utilization in our fleet was 70.8% in the quarter, up 100 basis points over last year. Again, that is a very robust level of time utilization for the size fleet that we have. So a really good quarter in terms of the level of demand and our ability to satisfy that demand, and we feel good about the momentum that we have carried into the fourth quarter in terms of our rental revenue. I will touch briefly on used equipment sales, another good strong quarter for us in used. We had $102 million of used proceeds in the quarter, and those revenues came at a 48% adjusted gross margin, a very robust margin result for us as well. A big driver, which has been the case for the last several quarters, is the shift in the channel mix. Our retail channel just contributes more and more every quarter. Retail sales this quarter represented 62.6% of all of our used equipment sales, and that is nine percentage points more through the retail channel than last year. So that strong retail channel mix, along with what is still a very robust pricing environment for used equipment, contributed to that 48% adjusted gross margin in the quarter on used. Used continues to contribute nicely to our results, and we look to continue that going forward as well. Let me turn to profitability at EBITDA. Mike mentioned $462 million of adjusted EBITDA for the quarter and the 49% EBITDA margin. I guess that is a little repetitive, but it is fun to say, so I will say it again. 49% EBITDA margin. All right, thanks. That was for me. And that was a nice improvement over the prior year, $72 million of improved EBITDA performance over the prior year, or 220 basis points in margin improvement. To bridge that $72 million year-over-year EBITDA change, I would break it out as follows. The 3.2% rental rate increase flows through to an EBITDA impact of $27 million in the quarter. That increase in OEC on rent, the 8.2% volume increase that I mentioned, flows through at $48 million of volume impact to EBITDA. We had a year-over-year improvement in our synergy results. We delivered $64 million of synergy in the quarter. That compares to $45 million last year. So $19 million of improved synergy results in the quarter. Used sales contributed $8 million more in gross profit for the quarter. We had a particularly nice bad debt expense result in the quarter of $5 million improvement compared to last year. And so those were all of the positives that we had in that $72 million year-over-year impact. Working against those, fleet inflation. We started talking about that last quarter a little bit more explicitly. If you take the impact of the fleet that we sold as used through the quarter, we sold $189 million of OEC in the quarter. Replacing that fleet at current prices had an impact at EBITDA of about $12 million unfavorable. Along with that, we had an impact of a couple of other items. Delivery expense was a little higher in the quarter, unfavorable by $8 million. That is really driven partly by timing of expense invoices year-over-year, but also most strongly by the fact that we have now improved the deliveries per driver within our system very effectively to the point where we have to use a little bit more outside hauling. And so that was the main contributor to that $8 million unfavorability in delivery expense. We talked previously about merit increases. They took effect early in the year. The impact in the quarter was an unfavorable $5 million in the quarter. And everything else lumped together, we will call mix and others, was an unfavorable $10 million in the quarter. So those were the key pieces to the total $72 million year-over-year improvement that we had in EBITDA. If you take that $72 million against the total revenue changes that we had, the flow-through to adjusted EBITDA this quarter was 78.3% in total, and obviously that includes the $19 million of year-over-year improvement in synergies. If you exclude the synergy impact, our flow-through was a little north of 58% in the quarter excluding synergies. That's putting us in line to deliver a flow-through ex synergy for the full year that's going to be about 60%. At EPS, you all saw the results there, adjusted EPS of $1.63 for the quarter. A very strong quarter for us and obviously a very nice improvement at EPS over last year. Moving on to free cash flow, just really briefly. Our year-to-date free cash flow usage is $84 million, and that includes the effect of our CapEx spend. As Mike said, we spent year to date just under $1.5 billion of gross CapEx. I'll remind you that when we talk about free cash flow, typically we talk about it excluding the impact of merger-related expenses, just to get a clear view of how the underlying company is performing. We called it out in the press release of those expenses being $33 million in the quarter. I'd just remind everyone that you'd have to take that off the minus 84 to think about the full-year free cash flow the way that we think about it on a go-forward basis. I think that's all I'll say on free cash flow. Real briefly on our outlook. Mike mentioned that we've reaffirmed our outlook, in particular, total revenue between $4.9 billion and $5.1 billion, adjusted EBITDA between $2.25 billion and $2.35 billion, free cash flow between $400 million and $500 million for the full year. We certainly feel that those ranges are appropriate. If you pressed a little harder, given the challenge that we've addressed with rental rate performance, it's more likely that we'll come in the lower half of those ranges. But the ranges are still effective at this point. In terms of the share repurchase program, again, Mike touched on that briefly, but the $500 million program we think is very consistent with our philosophy and approach around how we deploy the cash flow that we expect to generate over the next several years. In particular, it's fully consistent with what we've said about our desire to manage leverage to a lower level for our company. We still see leverage between 2.5 and 3.5 times as being appropriate over the cycle, and we continue to expect to reduce our leverage as we go forward over the next several years, even as we execute the share repurchase program. That program we expect to start executing against immediately, again, with the intent of getting it completed within 18 months. We expect to use open market purchases primarily to execute the repurchases, although we do preserve flexibility to do something in the way of an accelerated repurchase if we think that's appropriate. But we like the flexibility that an open market program brings to us to manage all of the demands on our cash flow. The ABL will be the main source of financing for the repurchases as we have done in our prior repurchase programs. We feel that we are very well positioned overall to execute this program, and still be able to manage the business in the way that we think is appropriate. Those are the key comments that I would offer. At this point, I will turn it back to the operator and ask you to open up the phones for question and answers. Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered and you would like to remove yourself from the queue, please press the pound key. We ask that in the interest of time and fairness, that you please limit yourself to one question and one follow-up. Our first question comes from the line of Seth Weber from RBC Capital Markets. Your question please. Hey, good morning, guys. Morning, Seth. Hey, Seth. I guess on the reaffirmed rate guidance, 4% plus for the year, to me it seems like that implies some improvement in the fourth quarter, north of what the 3.2% that you did here in the third quarter. Maybe something in the mid to upper 3% range year-over-year. Can you give us your confidence? What gives you confidence in hitting that kind of number? Any color on what trends you're seeing in October, and maybe what that implies for a rollover into start 2014? Hey, Seth, it's Bill. I'll start, and Matt, feel free to chime in as well. I think you're right. The implications mathematically is that we'll do better than the 3.2% year-over-year in fourth quarter. While we haven't given any more specific guidance than that, I think what we would say is that if you look at the sequentials that we need in order to deliver at least 4% for the full year, the sequentials in the last three months of the year, they average out something maybe just a little shy of half a percent. We think that's very reasonable. In fact, if you look at what we've experienced so far in October, it sets us up very nicely to deliver the month of October, and we feel very good about November and December on a sequential basis. If we do what we think we can do and what we've done historically in the fourth quarter, we should be pretty good at hitting that at least 4% rate guidance. Matt, anything you want to add to it? No, but I think Bill's touched on it, and we'll continue to see October and November sequentially improve as we historically do. Okay, and what would that translate to start the year, do you think? Is that like a 2% or low 2% range to start next year? Yeah, it'd be about 2% carryover, Seth, right? Okay. If you're doing that kind of rate, mid to high 3s at the fourth quarter and something like that maybe next year, can you still do a 60%-70% pull-through margin on that kind of rate gain for next year? Yeah. What we would say is we will be about 60% for the full year based on our forecast for the fourth quarter. All of that is consistent with a flow-through about 60% in Q4. As you look to next year, we view our base business as being a flow-through normally in that 60%-70% range. I would probably say about 60% for next year as well. Obviously, we have to refine and finalize our planning process for next year, but that is the neighborhood that I think we would be comfortable with. Okay, great. Thanks very much, guys. Sounds good. Thanks. Thank you. Thanks, Seth. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please. Hey, Jerry. Hi, good morning. Morning. Michael and Matt, I wonder if you could talk about, from the Total Control penetration that you've been able to achieve so far, what's the dollar impact you're seeing on your business, whether it's customer retention or lower cost to serve the customer and just frame for us where do you think Total Control can ultimately go as a proportion of your business? And obviously, nice progress on the RSC synergies. Can you just talk about what are the next levers you're pulling to get to the multi-year synergy target since you've already hit your 2014 target technically this quarter? Sure, Jerry. As far as your first point on Total Control, as you can see on slide 17 of the investor deck, we have had a $28 million improvement, a 27% improvement over this time, over Q3 last year, and we are going to continue cross-selling to new customers within the portfolio. We had over 200 prospective Total Control members at our conference that we had in Orlando last month. This is an annual conference we get to introduce the Total Control offering to existing customers to help us enhance it, as well as bring in new opportunities. We feel very comfortable that we will continue to penetrate more customers with this value-added tool. As far as the synergies, as you recognize, we will reach our $230 million-$250 million range by year end, as opposed to having to wait till 2015. We will continue to look for more opportunities in productivity, basically in shop and driver turnarounds. We have an ongoing lean process that we are going through to help untap some of those opportunities. We feel very good about that, and even better that we are a year ahead of schedule on achieving that $230 million-$250 million range. Yeah, Jerry, I would only go back to the one comment on Total Control that Matt talked about in Orlando. We announced that we have got a whole new mobile app that we are rolling out to our current members who are signed up with it. It has a very robust capability as well as some GPS additions. That gives them really more opportunity to manage their consumption. It was very well received amongst the audience, not only current customers, but more importantly potential customers who are looking at the value proposition around Total Control. Okay. Thank you. In terms of the rates that you are seeing in the marketplace, can you just give us a sense what the difference in rate increase you are seeing on a spot market basis versus your monthly business? Is there a difference in what is being put through currently? There's not a significant difference in the period mix of day, week, and month rate improvement. It's consistent with what we've been achieving over the last couple of years, and we don't really expect to see much variation in that either. Sorry, Matt, just to clarify, you're seeing the same rate increases on a spot basis that you're seeing on your longer-term business? Obviously, the contractual, if you look at it month by month by month, is a little more stable, but as far as against our goals and against our previous achievement, we're not seeing fluctuation. Okay. Thank you very much. You are welcome. Thank you. Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Your question please. Hey guys, how you doing? Hey, Ted. Good. Great. Just wondering if we could talk about the macro. If you look at non-res this year, at least on government data, it's been a little slower than expected. You guys have put up some nice volume growth. You've grown the fleet. The time utilization's been strong. Can you just talk about how you think the market's evolved year to date, what your outlook is, and kind of customer surveys, and how you think you're setting up for 2014 and 2015, with maybe some specificity about where you think things will accelerate or where you're most optimistic? Yeah. This is Mike. Let me just walk you through a progression analysis that sets up how you can take a look at the improvements in what we're seeing and what gives us confidence. Everyone on the call realizes that one of the leading indicators is the ABI Index, and we've all been watching that every month as it comes forward. Year to date, there's only been one month that was negative in our space. When you go back to 2012, we had three negative months in that same period. 2011, we had four, and in 2010, we had eight. So you can see the reduction that you're seeing in negative, and most of them, all with the exception of one month this year, we saw a positive growth component in that arena. Step back and take a look at residential construction. Residential construction continues to improve, and that's usually another leading indicator. Roughly around 18 months after residential starts to improve, you'll start to see non-res improvement. Those correlations have been very well documented in historical recessions. Our customers continue to be very optimistic. 63 of our respondents in Q3 expect growth in the next 12 months. It continues to improve. When you take a look and step away and look at the whole macro from the ARA metric, according to Global Insight, they're expecting an 8% growth in 2014 for our industry, and a 10% growth in the rental industry in 2015. You take that all together, coupled with the fact that Bill, myself, and Matt, particularly Matt, spends a lot of time in the field. We were at the QBRs, the quarterly business reviews. Very optimistic at the management level as well. Okay. That's really helpful, Mike. Just in terms of thinking about the fleet size, could you just give us some hand-holding on how you'd encourage us to think about what you'll do with the fleet in 2014 to capitalize on that in terms of growth, and where we should look for focus? There's no doubt you guys have incrementally tilted towards specialty, and it'd just be great to get your perspective on how we should think about CapEx next year and in the context of specialty rental. Sure. Ted, I think it's fair to say next year, we expect with the improving level of demand in the overall macro environment to spend a little bit more on fleet than we did this year. So instead of the $1.6 billion, we're thinking a touch more. A touch might be an extra $100 million, in the $1.7 billion area. Obviously, we'll flex if we see the demand ramp up significantly or ramp down significantly. But that's the framing thought right now. A significant portion of that level of spend or that incremental spend is being driven by growth in our specialty area. Trench Power and HVAC are opening new branches, as we've talked, and really penetrating the market more effectively. So we want to support that without starving the rest of our gen rent business. That's the framing thought process. I don't know, Matt or Mike, if you guys want to add anything about where else we might emphasize the spend. Well, I would just reiterate with the specialty business, the high return product, not only that, but a unique product offering in our space. We've grown our specialty products at three times the rate that we've grown our overall fleet. We'll continue to see that trend throughout 2014. The last thing before I jump back in queue, but in terms of just cadence, if we were to go back and look at normal seasonality of CapEx patterns, should we at least be thinking that that repeats, or is there any unusual flows that we should be thinking about? Yeah. I think a normal cadence of quarters is probably the way to think about it. As we plan, obviously, it'll depend on our planning process, which we're in the middle of as we speak. But I think if you look back historically, a more normal cadence is where you should start thinking about 2014. Okay. Guys, thanks so much. Best of luck this quarter. Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of David Raso from ISI Group. Your question, please. Thank you. Hey, David. I think about funding the debt reduction and the share repo. Just looking at some of your leverage targets, the fourth quarter cash flow, which is implied around $500 million, can you give us some feel for how you are thinking about debt reduction and free cash flow for repo in the fourth quarter? Sure, David. I will remind you that we gave a range for free cash flow between $400 million and $500 million. Our view is that between payments against our accounts receivable, and the timing of the remaining payables that we have against our CapEx purchases, that we expect a pretty robust fourth quarter of cash coming in. We will monitor that as we go through the quarter. We have been more effective at collections against our receivables over the course of the last year or so. That puts us in a pretty good position to have a very robust payment stream coming in in the fourth quarter to get us to that free cash flow number. Obviously, as we think about executing the share repurchase throughout the fourth quarter, we will be very mindful of how the cash is flowing in in the fourth quarter. We'll meter the share repurchase activities that we do to make sure that it fits with our goal of coming in at about 3x debt to EBITDA by the end of the year. If we're doing some share repurchases, obviously, that puts a little upward pressure on that. If it's 3.1 or even 3.2, please don't call me a liar for saying about three. That's the way we think. That will firmly keep us on the path of reducing leverage over the next several years, and we'll continue to manage it with an outlook toward achieving that while we execute the repurchase and fund the overall needs of the business. Does that help? It's helpful. Obviously, we're trying to figure out can you fund both, and what's the priority? We're talking- Yeah through 2014. Because when you talk about leverage, you're talking total debt, right? Not net debt, correct? Just so I'm clearly doing the math properly. Yeah, that's the way we usually talk about it. There's not a lot of cash, so, $120 million or so of cash relative to $7 billion of debt or so is not going to make a big difference. Yes, total debt is usually the way we think about it. Because, the thing is, let's say the EBITDA this year is a little below the midpoint, $2.275 billion, for example. To get that to three leverage, that means you have to end the year with total debt about $6.8 billion, $6.9 billion. You ended the third quarter nearly at $7.6 billion. Right? To get the debt down to the appropriate level to hit your target, it is going to imply all the free cash flow in the fourth quarter is going toward debt reduction. I am just trying to figure, is that the priority? Should I expect almost all the free cash flow in the fourth quarter is going to debt reduction then? Yeah. Again, we will manage it with debt reduction firmly in mind, and so I think that is a backhanded way of saying, "Don't look for $100 million worth of share repurchase in the quarter." I think we will manage the share repurchase to make sure that we stay on that path of leverage reduction. Thinking about the target of 2.5 leverage by the end of next year, what that can be implying about the EBITDA for next year. The cash flow for next year, you put out a target for three years cumulative, $1.5 billion. Right? If this year you do 450, that means we have a little more than $1.15 billion the next two years. If you just take the average of that, you'd say next year free cash flow is about 625. I mean, just keep it simple, $600 million. To fund the share repo next year, $500 million, it doesn't leave a lot for debt reduction next year. I'm just trying to think, are you feeling that confident about the EBITDA number that you can pay off very little debt next year, fund the repo, and still hit your target of 2.5? Because if you did, it would imply an EBITDA next year of 265, 270. A pretty large number. That's what the math is telling us. I just want to make sure, what are you implying? That high an EBITDA, or that be careful on assuming we can do the repo at $500 million during the course of next year and still get the target to 2.5 on the leverage? Without addressing the specific numbers, what I'd say is that we purposely chose the size and the timing of our share repurchase, and purposely chose the statements that we make about the leverage, so that we can make them all work together. 18 months is the time that we said we would execute the share repurchase over, and that's not a statement that we'd do all 500 during calendar 2014. And we'll continue to focus on managing and balancing how much we do of any of this so that we can continue to de-lever. That's an important priority for us. And we're going to manage with that objective firmly in mind, and we feel confident that we can do it. Okay. I appreciate that. Thank you. Okay. Thanks, David. Thank you. Our next question comes from the line of Manish Somaiya. Your question please. Hi, Manish. Good morning. Morning. Bill, I guess this is a good follow-up then. Perhaps if you can outline your thoughts around refinancing higher coupon debt. What are you thinking in terms of timing strategy around that? Sure, Manish. We monitor the higher coupon issues on almost a daily basis. Even if we didn't want to, we get phone calls on almost a daily basis, so we're always thinking about those issues. In particular, the 9 and a quarters and the 10 and a quarters are the issues that we do keep close tabs on. Right now, as we sit today, it's a challenge economically to say that it's appropriate to go, right? We don't have a call available under the terms of those notes today, right? The calls don't come into effect until later next year. To take them out right now, you'd have to use the make whole or tender for them, and that's pretty expensive. So we're continuing to monitor. As time passes, as we get closer to the intrinsic calls in the issues, the premium to take them out comes down. Time is on our side in that regard. So timing, we'll certainly monitor it every day from now going forward. Realistically, you probably, over the next couple of quarters before it really becomes economically attractive to do something. But we'll certainly let you know as we think more concretely about when we might do it. Okay. Then just two operational questions, maybe for Matt or Michael. I guess firstly, maybe if you can give us a sense of how URI is performing versus the ARA operating metrics. Obviously, when you look at the performance for Q3 and this year, the performance is obviously quite strong, but I guess what I'm trying to gauge is where's the room for improvement? Is there a room for improvement? Sure, Manish. This is Matt. I am not sure which metrics you would like to hear about, but just as we look at the business, we have got a lot of focus right now and will throughout 2014 about continuing to drive more productivity. We think the scale that we have built from the merger, and now that we are very comfortable in branches that are anywhere from 30%-50% more fleet than they had pre-merger, we think we have got some opportunities to re-engineer, and whether it is cost out or just not as much cost in to support our growth, we think productivity is probably our single largest next lever of opportunity. Yeah. Manish, I would also add, just to give you a little color, you mentioned ARA metrics, and Rouse Analytics has a benchmark service that follows that and has a peer group that is a pretty good size. We have in our presentation, we put in there our dollar utilization as it relates to our industry peer group. We are the highest. We lead the industry within that peer group, which it takes into account a lot of different things on dollar utilization. We also know that our rates are leading that industry peer group and have consistently done so for a period of time. But you asked for where we can always improve. It comes to rate, it comes to mix, it comes to driving increased margin. I would tell you that we are never done. I think our best years are ahead of us, and we are going to focus intensely to achieve it. Okay. That is helpful. Just lastly, you talked a lot about the specialty equipment and the growth prospects there. Maybe if you can outline size and scale of potential acquisition opportunities in these markets. Well, the specialty size of the business in the adjacencies, you're pointing to something that really, it's very fragmented, extremely fragmented. In one area, there's only one large company into power, and that's not something that we would be interested in. What we're focusing on right now is doing organic with some bolt-ons. We've got a good team. They're showing good growth, and we're going to continue to feed that opportunity. With regards to the other adjacencies that we have there, we're always opportunistic and inquisitive to what may be out there. But there's nothing that is of any magnitude, but there are some adjacencies that are attractive, and those all will be fully vetted to the same process that we've always looked at, and our model is always focusing around our strategic vision. Is it accretive? Will it enhance our returns? And then culturally, how does it fit with the organization? So we will always use that as a balance. Okay. Thank you, guys. Yep, thank you. Thanks, Manish. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Thanks. Good morning. Hey, Scott. Good morning. Hey, Mike. On the free cash flow, I know you guys last year on the third quarter call were kind enough to provide a guide for free cash flow for the next year, and Bill Plummer, you've already mentioned the $1.6 billion-$1.7 billion for CapEx. I think the most recent thing we have is what David Raso mentioned, the $625 million in the investor day packet. Can you give us a little more color on what you are expecting for next year? Why don't we get through our planning process for this year and give you more clarity on that in January, Scott Schneeberger? I certainly feel like it will be a very robust free cash flow result. I would really not like to put any new numbers on the table at this point, so let's talk in January. Okay. Fair enough. One of the things that's been a headwind is the fleet inflation. This is a time of year where you set pricing with your suppliers. Obviously, you can combat the fleet inflation by increasing rental rates. Any commentary on how things are progressing with supplier pricing? Are you pushing particularly strong this year? I think what we would say is what we've said basically since I walked through the door here, at least. We're in discussions with suppliers about next year's purchases as we speak. We feel very good about our ability to keep our overall inflation in the very low single digits on a year-over-year basis. There will be some impacts to final Tier Four configurations of some cat classes. But when you blend the impact of price increases for final Tier Four in with the overall purchases, we're still going to be in the very low single digits. Okay. Thanks very much. Thank you. Thank you. Thank you. Our next question comes from the line of Nicholas Coppola from Thompson Research. Your question, please? Morning. Morning. Just following up on rate here, understanding that 3.2% is still nice performance, it's certainly a deceleration from what we've been seeing. My question is, why are you able to drive more rate at this point, and what kind of environment are you facing competitively in terms of price, and what kind of pushback are you getting from customers? Hi, Nick. It's Matt. When you look at it on a year-over-year trend, we continue to see sequential improvement that may not be as robust every month as it was last year. But we've seen sequential improvement throughout Q3. We expect to see sequential improvement up through December. December could be flat, but we don't need December to be sequentially improved to hit our 4%-plus target. And we're seeing most of the industry with a similar discipline around rate and understanding for all the reasons we need to, inflation of equipment costs, and everything else that's involved in it. We're not really concerned that we're not going to continue to get rate improvement throughout next year. I think we referred to it earlier. We're going to go into next year with a 2% year-over-year improvement. Our year-over-year improvement in the fourth quarter, we expect to be over what the year-over-year improvement was in the third quarter. And on top of that, demand. We've got record time utilization for us, and as we sit here today, still very robust time utilization. So we're very comfortable with the trajectory we're on to meet our commitments that we've made. I'd also add that as you look at the fourth quarter, the comparable is a little easier in the fourth quarter than it was in the third quarter. If you remember back last year in the third quarter, the sequential months in the third quarter last year were very robust. July was 1.2%, August was 1.1%, and September was flat. That was a very robust third quarter, and so you're comparing to a pretty high base of pricing there. Those sequentials eased in the fourth quarter last year, and so if we can sustain the sequential momentum that we think, it'll show as an improvement in the year-over-year for the fourth quarter. Okay. That's helpful. Then on your unassigned accounts being up 10.5% year-over-year, certainly very strong relative to the prior quarters. Can you give us any color on what the drivers were there? Is it really specifically going back after some of the folks that you left on the integration, or is there really something there in terms of underlying demand between the smaller and the larger guys? I think it's a combination of both, Nick. It's certainly the fact that, as we had referred to earlier in the year, that we were going to put more sales reps back in the network to help accomplish that. So we've got 118 reps more today than we started the year with, and that's a net number, and well on our way to our goal of 120 to 150 increase. I think the demand for these accounts is also higher. I just think we needed to reconnect, and the combination of many outbound calling programs and a lot of activity around this, once we recognized that we lost touch with some local folks through the branch consolidations. We just made a very conscious effort, and I think that number reflects the benefits of that effort. Okay. That's great. Thanks. Thank you. Thank you. Thank you. Our next question comes from the line of Steve Fisher from UBS. Your question, please? Hi. Thanks a lot. Hi, Steve. The margins on equipment sales were strong, and I think you said 62% are going through the branches, and that is up 9%. Can you just give us a sense of where you see that 62% going, and how quickly you might see that change over the next couple of years? Hey, Steve. I will take a shot at it. We do not have a specific target that we are trying to achieve. I guess you could say our target is 100%. Correct. I think at some point, it will slow down. I do not know that we are at the point yet where that share of retail will slow down significantly in the near term. I think we are getting better all the time at how we market used equipment. We are getting more sales collateral in the hands of our sales reps. We continually update how we present the equipment online, more pictures of the equipment. We are running many more training actions to get sales reps focused on selling used equipment alongside rental. We are just now starting to ramp up a very focused effort on export sales, for example. That should help keep that channel going. So it is hard to put numbers on it, but I think you can look for that mix to continue to shift positively, and that is going to be all good in terms of driving our margin performance. Anything you disagree with, Matt? No, I think Bill captures it well. I just think it's another byproduct of the strong demand that we see from our customer base with improved fleet utilization, improved year-over-year rates, and improved used sales volume and margin is really in the retail channel, which is really our end users. I think points to all the great indicators that we're seeing. Yeah. Okay, great. A quick follow-up. Time utilization certainly better than expected in the third quarter. Any particular expectation you want to call out for the fourth quarter? Can it be up year-over-year? Is that what your expectation is? It will be exactly what it needs to be to get to 68% for the year. How's that? No. We'll continue to see a year-over-year improvement in Q4. We haven't quantified it other than what's needed to get to the full year. But we feel pretty good about how time utilize is developing here. Not quite another 100 basis point improvement, but there'll be an improvement year-over-year in the fourth quarter. Great. Thank you. Thank you. Thank you. Thank you. Due to time constraints, this does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Michael Kneeland for any closing comments. Thanks, operator, and I want to thank everyone for joining us today. You will find our latest investor presentation on our website, and we have added a few slides to it. As always, please reach out to us if you have something you want to discuss. Look forward to our next quarterly call. Thank you very much, and have a great day. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.