Earnings Call: Q3 2012

Oct 17, 2012

Good morning, and welcome to the United Rentals third quarter 2012 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the years end December 31, 2011, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that today's call will 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. With me today are Bill Plummer, our Chief Financial Officer, Matt Flannery, our Chief Operating Officer, and other members of our senior management team. The financial results we reported last night were strong. They reflect an operating environment with a solid level of demand and integration with RSC that is very much on track, and most important, the successful execution of our strategy as reflected in our margins. We'll talk about all three of these things today, but I also want to give you our current thinking about the months ahead. Before I begin, I want to remind you that any year-over-year comparisons we give you are on a pro forma basis that is measured against the combined results of United Rentals and RSC for 2011. Let's take a look at the quarter. It incorporated the most intense three months of our integration plan. From July through September, we completed the harmonization of most of our major account relationships, realigned our sales territories, and closed 126 branches, bringing the merger-related closings to 187 so far. We deliberately set the bar high to get most of the heavy lifting behind us by September 30, and I am very happy to say that we met that goal. While we are managing all that change, we generated a solid 9% increase in rental revenue year over year and $570 million of adjusted EBITDA at a 47% margin. That is our highest margin yet. In addition, we are running ahead of plan on cost synergies. We realized another $45 million of savings in the third quarter, and we now expect to reach $100 million of realized cost synergies in 2012 toward our ultimate goal of $230 million to $250 million on a run rate basis. Our progress on the cost side and the magnitude of our flow-through say a lot about our internal discipline in the quarter. Turning to the external environment, let's look at the drivers of rental revenue. They really affect two things: a favorable market condition for equipment rental and the successful execution of our strategy. The number one driver is rates. Our rates were very strong in the quarter, up 7.5% from last year. Our volume of equipment on rent also improved 7.9%. As these numbers show, we saw continued robust demand for our equipment that was almost universal. All but one of our regions reported year-over-year increases in rental rates. It's also significant that we were able to raise rates in what continues to be a modest and somewhat uneven construction recovery. There's something more at work here, and we believe it's the rental penetration. The rental options continue to gain traction as an economically sound way to solve equipment needs and is adding an extra layer of demand. I also want to talk about time utilization. It declined 200 basis points in the quarter compared to a robust level of utilization last year. So what were the impacts on time? For one thing, we absorbed those 187 branch closings, and we put more than $1 billion of new fleet into the field. On a year-over-year basis, our time utilization was about 67% through September. That's a healthy number, and we feel very comfortable with it. So far, for the fourth quarter, utilization is running more than 72%. Our record margin makes it clear that we're reflecting managing rates, utilization, and cost. Nevertheless, we want to be as accurate as possible about the numbers we put out there, and that's why we're updating our full-year outlook. We now expect time utilization to be approximately 67.5% for the year, which is a half a point below our prior outlook. We raised our outlook on rates to reflect a gain of approximately 7% year-over-year. We also think that we'll do better than expected on our free cash position. Our outlook is now for free cash usage in the range of $25 million to $50 million, excluding the merger-related costs. Our guidance for total revenue, EBITDA, and CapEx remains unchanged. A minute ago, I mentioned branch closings. We typically have a revenue dis-synergy when we close a location tied to the loss of business from small to mid-size customers. Over time, that revenue gets replaced. Given the reduction in branches and headcount related to the merger, the impact in the third quarter could have been substantial. Our field organization did a great job of keeping our larger account relationships on even keel, and this went a long way toward offsetting that impact. You've heard me say many times before that large customers are the foundation of our strategy, and for the most part, they reacted very positively to the integration. In the third quarter, our key account business, which includes national, strategic, assigned, and government accounts, grew by 17% year-over-year. So to summarize, the headwinds from the integration are largely behind us, and the top-line impact from the branch closings should fade over the next six months. Our entire field organization has done a great job at business retention, and we now have our sales force focused on growth. Our fleet is settling into a new footprint and is more available to meet demand. We just delivered a record EBITDA margin. Fortunately, this is playing out against favorable conditions in the rental industry. However, we are aware of the speculation that is out there, and we are watching the macro environment very closely for any signs of deterioration. But we are not seeing any cause for concern at this time, and we do not see any reason to alter our plan. As you may know, a couple of equipment manufacturers did voice some concerns about the economy recently. While rental companies and equipment manufacturers serve similar customer bases, we believe our industry is in a better position right now because of rental penetration. That is why our top line is outpacing construction spending. It is because a very cautious recovery can create more demand for the rental industry while reducing demand for product purchases. Matt will be giving you some color about our performance by region and will also describe what we are hearing from our customers. Overall, we are feeling optimistic about next year. Global Insight also believes the recovery will continue, and they are holding firm to their forecast for an increase between 8% and 9% in equipment rental revenues in 2013. We share that view. We will be talking to you again on our Investor Day on December 4, where we plan to update you on our thoughts at 2013 at that time. Right now, we are focused on delivering a strong finish to the year, and it comes down to one word, execution. I want to remind everyone that our destination has been long-term profitable growth from day one of our strategy. We put that strategy in place four years ago, and at a time, our vision was for 40% EBITDA margin within five years. As you saw last night, we have already exceeded that goal, and now we are looking for ways to expand on it. So stay tuned. We have a lot of confidence in our ability to deliver even greater value for the future. So now I will ask Matt to give you an update on our operations, and then Bill will cover the financial results, and after that, we will take your questions. So over to you, Matt. Thanks, Mike, and good morning, everyone. I would like to start with a progress report on our integration efforts and then give you a brief overview of market conditions across our regions. On our call in July, we reported that our integration efforts got off to a very strong start, and we have made significant progress since our call. Our field team has heard me say from the very beginning of this merger that we need to focus on moving the big rocks. This means making sure we have communicated with our key customers, that our sales territories are realigned to eliminate confusion, and that we communicate what our new operational footprint will be to serve our customers. So let me take a minute to tell you what we have done. I will start with the customer first. Our sales team has done a great job of focusing on our key accounts, which grew by 17% in Q3. This was partially due to the fact that this past quarter, we finalized over 125 new national account agreements. We are negotiating, we will complete the remaining 260 throughout Q4. Additionally, we have realigned over 1,000 sales rep territories. This was a large and necessary undertaking due to the overlap in coverage between reps from the two legacy companies. Our reps have now been in their territories for over 60 days, and they are well on their way to further penetrating their new territories and the customers that they are calling on. To assist the sales team, we have implemented an early warning report for declining revenue customers, and we have given them multiple tools to identify additional revenue opportunities, like our dormant account program. After eight weeks of this program, we have reactivated almost 2,500 accounts that have rented over $60 million worth of fleet. We feel that this is work well worth doing to help recapture some of the revenue leakage that occurred during our consolidation efforts. Operationally, as Mike mentioned, we completed 126 branch consolidations in Q3, and that takes our year-to-date total to 187. We have integrated the teams into common facilities, one technology platform, and most importantly, one voice to the customer in the affected markets. We have charged forward with an aggressive closure schedule, and that speed of execution has allowed us to capture $45 million in cost synergies in Q3. As a result, we have increased our 2012 achieved cost synergy target to $100 million. Additionally, we have increased the top side of our range of our fully developed synergy guidance from $230 million to $250 million. When I break out the $45 million in cost saves in Q3, closures contributed about $18 million, and field staffing and corporate overhead reduction contributed $11 million each. Those three buckets total $40 million of the $45 million we achieved. We have also seen significant improvement in our branch productivity related to cost rentals. This is specifically evident in markets where we have consolidated stores and taken advantage of the economies of scale. Our average store size has increased by 30% in Q3 year-over-year. That is how we are able to grow our fleet by almost 10% over last year, while reducing the head count that serves that fleet by more than 5.5%. We did face a few bumps in the road while moving through the integration. We have seen that our closure markets did not grow quite as fast as our non-closure markets. That is a dis-synergy that we feel comfortable we will recover through the focused sales efforts I discussed earlier. I would like to emphasize how proud I am of our employees for coming together as a true team. Almost half of our employees have had their jobs or reporting structure changed in some way as a result of the merger. Their commitment to United Rentals is as strong as ever, and this is supported by a voluntary turnover, which is down from last year, as well as the tremendous engagement we encountered while conducting town halls in over 50 markets. Switching over to our Q3 regional results. We saw positive rental revenue growth in all but one of our geographic regions, and we had over 27% growth in our specialty region. Some of the higher growth markets are across the Gulf states and in the Southwest, but we are also seeing strong growth in Western Canada, the Mountain West, and the Midwest regions. All but one of our business units are seeing strong EBITDA growth and improved rates. During my travel the past few weeks, I have had many longstanding customers inform me that their backlog is strong, and they want assurance that we will have the fleet ready to serve their major projects. These comments are consistent with results we are seeing from our monthly customer surveys, where over 90% of participants say they expect their business next year to be at least as good as this year, and almost half of those participants feel they will be up 10% or more in 2013. Before I turn the call over to Bill for the financial update, I would like to state how positive I feel that strategically, we have never been in a better position to win in the marketplace, and that is really what this integration is all about. We have been building deeper partnerships with our industrial and national accounts. We focused on cross-selling the strengths of each legacy company, and we continue to focus on improving our customer scorecard. Those are the pillars of our strategy and our roadmap to success. Thanks for your time, and now over to Bill. Thanks, Matt, and good morning to everyone. As is usual, I will add a little bit more color to the third quarter results, and I will also spend a little time updating our outlook for the full year. Before I get started, I will just remind everyone, as Michael did, that all of the comparisons and comments that we make are about the pro forma company, combined basis comparing to as though we have combined in the prior period. Let me start with rent revenue first. Rent revenue was up 8.9% in the quarter, with strong contributions from both rental rate and fleet on rent. Rates were up 7.5% compared to the third quarter last year, and they were 2.8 percentage points better sequentially versus the second quarter of this year. I will touch on it a bit later, but given the strong pricing performance that we have seen throughout, we are comfortable increasing our outlook for the full year, and now expect rates to be up 7% for the full 2012. Looking at our volume performance and time utilization, you all know that our measure of time utilization is OEC on rent. That measure was up 7.9% in the quarter, to a record for us of $5.2 billion of fleet on rent on average throughout the quarter. Clearly there was a strong demand environment, and that certainly supported our investment in the fleet. Time utilization for the quarter was 69.8%, and that is a very strong absolute level, and it is certainly consistent with the demand environment that we have been dealing with. Unfortunately, time utilization was down 200 basis points compared to last year, and that reflects a few factors. So maybe I'll spend a second on those factors. First, as Michael mentioned, we had the consolidation effort really at its peak during the quarter, closing 187 branches in total, 126 of them happened during the quarter. That was the largest factor, we think, in the year-over-year decline in time utilization. The closures were essentially completed by the end of July. But when you move that much fleet, as Matt pointed out, when you change that many sales rep territories and leadership changes, it has an impact on the business, and we certainly saw that in the third quarter. The second factor was the higher absolute level of fleet. We've been talking about this all year. We have brought in a tremendous amount of new fleet. We've spent $1.3 billion on new fleet purchases year to date, and in any sense, that's a large increase to our fleet overall, and it makes it tougher to achieve the same levels of time utilization that we did last year. Lastly, the second half of the year last year was a very robust time utilization environment. It was a record for both companies or the combined companies, and that makes for a very difficult set of comparisons this year. So before I turn to used sales, I'll spend a couple of minutes on the impact of mix in our rental revenue this quarter. We've gotten questions from several folks about the fact that our rates are up 7.5%, our volume's up 7.9%, but we only increased total rental revenue by 8.9%. So where's the difference? What's the key driver of that negative mix, if you will? In our view, the key drivers were started with our monthly mix. Our business shifted more toward monthly during the quarter by a significant amount. 75.5% of our revenues in the quarter were from monthly business, and that's up 270 basis points compared to last year. Now remember, the higher proportion of monthly rentals will drive revenue in the quarter down because the revenue per day that you generate from a monthly transaction is lower than it is on a daily and weekly transaction. That's just a fundamental feature of our pricing structure. That monthly mix impact was pretty significant in the headwind that we experienced in the quarter. We also had an impact, though, from ancillary items. So within our rental revenue, our items that are ancillary to a rental. Delivery is one example. When we look at those ancillary items, there are fewer opportunities for us to realize ancillaries when we have more monthly transactions. And it shows up as part of the mix headwind that we're experiencing. So for example, if you look within our rental revenue and look at just the owned equipment rental, the revenue that comes from the owned equipment being on rent, excluding the ancillaries, that was up a very healthy 11.6% in the quarter. But when you look at some of the ancillaries, like delivery, for example, delivery was only up 1.5%. So that impact also plays to the mix headwind that we've seen. Keep in mind, though, that this is all very consistent with the strategy that we've been pursuing since the last four years. The higher monthly mix certainly brings along a better margin opportunity because it certainly reduces the amount of cost associated with generating that revenue. When you put it all together, we feel very comfortable that the 8.9% revenue growth was a very solid base for driving our business forward. More importantly, it allowed us the opportunity to deliver very strong profit improvement. Speaking of profitability, the numbers that you saw, adjusted EBITDA, was $570 million for the quarter at an adjusted margin of 46.8%. As Mike said, that's a record for the company. That's an improvement of 700 basis points in margin compared to last year, and it delivered a flow-through of 127% for the quarter. Clearly, an outstanding result on flow-through. The synergy contribution is obviously significant there, with synergies adding $45 million in the quarter. Even when you exclude the impact of synergies, it was still a very impressive flow-through performance, 81%, taking out the $45 million from synergies. When you look at EPS, we reported an adjusted EPS in the quarter of $1.35. We pointed out in our press release last night that that EPS benefited from a low tax rate, 22.3%, in the quarter. Even if you use a more normal tax rate, it's an impressive EPS result. We would call it $1.27 if you would use a tax rate right around 35%. EPS performance was also very strong for the quarter. Before I move to the outlook, let me touch just a couple of minutes on used sales and liquidity. First, on used equipment sales, we generated $101 million of used sales proceeds, and that was at a robust 40.3% margin, gross margin, excuse me. That's the gross margin adjusted to exclude the impact of the purchase accounting activity. That margin certainly reflects overall strong demand, but we also had a very healthy mix of retail transactions in the quarter as well, supporting the margin. When you look at liquidity and our Cap structure, as of the end of the quarter, we had total liquidity of $751 million, and that included $683 million of available capacity in our asset-based loan facility. I'll point out also that during the quarter, we increased the size of our accounts receivable securitization facility. We took it from $300 million up to $475 million, and we did that clearly to take advantage of the very low cost of those facilities. Very attractive financing, and it makes a ton of sense to do so. Before I move on to questions and answers, just real quickly on our outlook to update it. First, on rental rates, as we mentioned earlier, we expect rates now to be up 7% on the full year, and that's compared to our prior outlook of 6.5%. On time utilization, we now expect time utilization to be down about a half a point for the full year, but still at a very healthy 67.5% over 2012. Our CapEx outlook is unchanged. We still expect to spend gross capital of about $1.5 billion to $1.6 billion, with that netting out to a net rental capital of between $1.75 billion and $1.125 billion. Free cash flow expectations have increased. Previously, we were guiding to a free cash usage for the year between $90 million and $140 million. We now expect that free cash usage to be between $25 million and $75 million for the full year. Remember, that view of free cash flow excludes the impact of the merger-related costs, but it does include the impact of converting the RSC accounts payable policies to the shorter United Rentals payable policies. Those are the key comments that I would offer right here and now. Certainly, we will be glad to address any questions in Q&A. If we can ask the operator to open up the call for questions. 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. Our first question, and we would just like to remind everyone, in the interest of time and fairness, to please limit yourself to one question each. Our first question comes from the line of Scott Schneeberger from Oppenheimer. Your question please. Thanks, Scott. Hey, Mike. Thanks. Good morning, guys, and nice work. If I can make my one question a two-parter. The first part would be, could you discuss the utilization trends month-to-month sequentially as you progress through third quarter into fourth quarter? My second question is, with regard to this CapEx guidance for this year, could you give us an idea of what you are thinking for next year? How CapEx would compare to this year, and perhaps how free cash flow will compare to this year? Thanks very much. Yeah, sure. I'll give you the timing, then I'll shift it over to Bill on the capital. If you look at July, we were at 68.6%. For August, we were 69.7%. For September, we were 71%. As I mentioned in my opening comments, as we stand for the month of October, we're slightly above 72%. Scott, on CapEx, I'll start with just an additional comment about 2012. We're maintaining the range of $1.5 billion to $1.6 billion. We're focused more on the lower end of that range for 2012. We think that's an appropriate way to think about it right here and now. As we look at 2013, we haven't definitively set a plan, but our general thought is that our capital plan will look pretty similar next year to what it does this year. About flat. It could be a touch lower, and by a touch, $50 million is sort of where I define a touch. If we do what we think we're going to do next year in terms of operational results, with that kind of a capital plan, our free cash flow is probably going to be in the range of $400 million to $500 million. That's consistent with the forecast that we put in the S-4s that we released earlier this year. It's still consistent with how we're thinking about the next year or so. Okay, thanks, Bill. Appreciate it. No problem. Thanks, Scott. Thank you. Our next question comes from the line of Vance Edelson from Morgan Stanley. Your question please. Great, thanks. Just following up on the last question. The free cash flow will continue to improve over the next year. You've upped the guide, and you've started to build out your fleet early in the cycle, maybe ahead of the cycle, and you're going to see the benefits. So you've laid out some targets for reducing leverage over the next 12 months. Any update to the specific leverage ratio you're looking at, Bill, say, a year from now? And then beyond that, what do you see happening with free cash flow beyond 2013, and what's your ultimate thoughts on where the leverage is going to go, other uses of cash, and so forth? Thanks, Vance. We've spent some time recently with our board talking about this very topic, and we've aligned around a view that we will be targeting a lower level of leverage to sustain over the next number of years. If you look at leverage just as total debt to EBITDA, and I know that's overly simplistic, but just to keep it simple, we're now targeting a range of between 2.5 and 3.5 times total debt to EBITDA. And we feel comfortable that we can maintain that range over the next number of years. And it reflects the cash flow profile that we expect to see over the next few years, starting with that $400 million to $500 million range next year. 2.5 to 3.5 will be a normal operating range. In good times, we'll trend down toward the lower end of that range. Right now, we expect by the end of next year, if you look in our investor deck, we give you some very broad brush forecasts. We expect that by the end of next year, we'll be solidly in the middle of that range. We're right at about 3 times, from being just below 4 times on a trailing 12 basis right here and now. Nice, robust de-levering over the next year to 2, and we think that it makes sense for us to maintain those leverage levels as we go forward. What do we do with the cash flow beyond 2013? Can I answer that question next year? I think we want to think very carefully about where we reinvest the free cash flow that we have. We're certainly going to be bringing down debt consistently over the next several years. But we also want to make sure that we're looking for the opportunities that make sense for our investors. Okay, that's really helpful. Then maybe just a clarification on something earlier. Talked about the shift toward the monthly renting and the impact that that has, which makes perfect sense, but I might have missed it, but what's driving the shift itself? I would have thought in this uncertain environment, with the elections coming up and so forth, that if anything, rental periods would get even shorter. So what do you think the driver is there? I think it's the strategy. We've been targeting the key account groups that historically have rented equipment for longer periods of time. As we grow the share of revenue from those accounts, it's a natural outgrowth of being with those accounts. It's playing very well. It's playing very much according to the strategy. As you grow with those folks, you give yourself a better margin opportunity because the costs fall away, and it's driving to that result as we speak. Okay, that is great. Thanks. Thank you. Thank you. Our next question comes from the line of David Raso from ISI Group. Your question please. Hi, good morning. Morning. My question's about rates heading into 2013. Two angles on it. When you speak with your larger customers, some of the larger accounts you mentioned earlier you're in conversations with, how are the rates looking from current levels looking out to the new contracts for 2013? Secondarily, if we kept the rates where they are today and just ran them out flat, how do you see that rolling into next year for full-year rental rates or maybe how first quarter 2013 would look? Just trying to get some sensitivity. David, this is Matt. I'll talk about the key account rate harmonizations that we're doing. As I stated, we've already inked and completed a third of those. We're in negotiations with the other two-thirds, and the improvement is falling in line with our overall improvement. Certainly, we feel it's accretive to our goals. David, on 2013, if we do what we expect to do, what we've said we're going to do at 7% for rate this year, that'll give us a carryover benefit next year of something like 2.5%, even if we don't advance rates any at all during 2013. So pretty good tailwind to start. Let me be clear, we certainly do expect to drive rates beyond that carryover, but we've got a nice starting point. Okay. On the debt reduction comment, the total debt at the end of this quarter over trailing EBITDA pro forma is about 3.9. That's right. To get to your full-year free cash flow, the fourth quarter is going to be significant cash flow. Then you have the $400 million-$500 million as a baseline you're talking about for next year. You're using total debt in your comment instead of net debt. Just so I understand what you plan on doing with the cash that comes in the fourth quarter and next year, just for the pure calc. I'm just trying to understand the exact math because the 3.5 seems like something, especially if EBITDA grows at all, you're going to be below that pretty quickly. I just want to make sure how you're looking at that calculation. The cash that flows in during the fourth quarter will immediately reduce the ABL. That'll drive down that overall debt through the ABL balance. Then as we go forward, as I said, we're going to be right at about 3x debt to EBITDA by the end of next year on our current view. You're right, we'll certainly be in the lower end of that range pretty quickly. We'll be looking very carefully at how we should deploy that cash flow with a bias toward initially continuing to pay down our overall debt balance. It's obvious I'm trying to back you into giving an EBITDA guidance for next year, essentially, because if you've got- I avoid it. Yeah, I know. But you can sort of do the math now, right? You are basically saying that the total debt, the way I am calculating this quarter, was about $7.375 billion. You generate $375 million of cash roughly in the fourth quarter to get to the free cash flow full year, roughly. So if you are at $7 billion going into next year and you generate, say, $450 million midpoint, you are down to $6.55 billion for the year, divided by three. It is implying EBITDA next year slightly below $2.2 billion. Okay. I just want to make sure that is. For me personally, that is a little bit lower than what I am thinking for 2013, so I am just trying to make sure you are not backing into something you are not trying to imply. No, we are certainly not trying to imply a specific number, certainly not that low, right? Look at the S-4 data that we put out earlier this year. If you just add those, the RSC and the URI together plus synergies, I think you get a number that is beyond $2.2 billion. So that is certainly not what we are trying to imply. I think there are a huge number of assumptions that we would have to guide you to in order to get to the right number, and that is why I am trying to avoid that discussion right here and now, because there are just too many assumptions to walk down that road. Okay. We will leave it where there is either a movement in the $400 million-$500 million of free cash flow and/or if that is what you generate in cash, you will be below 3x. Because if the EBITDA is above $2.2 billion and you generate that cash, you are below 3x total debt to EBITDA. I mean, just leave it as that, right? You are not implying below $2.2 billion of EBITDA next year. We are not implying an EBITDA that low. Okay. Just making sure. Okay. Thank you very much. Thanks, David. Bye-bye. Thank you. Our next question comes from the line of Joe Box from KeyBanc Capital Markets. Your question please. Hey, Joe. Hey, good morning, guys. I just have a high-level question for you, Mike. It feels like the RSC deal has really stirred the pot in the industry. With almost six months under your belt, I am just curious how you are seeing competitors respond to the deal. Specifically, any color on how industry pricing has been impacted, the prospect for future consolidation, or just how competitors may be thinking about fleet growth going forward? Yeah. Well, I will tell you, obviously you have been hearing from all the other competitors that are out there publicly, and those who have public debt out there, their rates all have been improving. Also is supported by Rouse, he recently had a call, I think yesterday, with one of the analysts. So that supports that data, that overall the industry is improving on price. So that continues to grow. With regards to the way people are putting their fleet in, I think each one has their own strategy on where they are going and what they are trying to do. Each one is completely different. When you look at what we are doing, we have said we are going to focus on diversifying our customer mix, our portfolio, and we have done that. Then we are enhancing that. We are growing across our footprint. We have the broadest footprint. That's one of our, I believe, is a significant advantage for United Rentals, particularly with the larger accounts. That's what we're focusing on, and we're utilizing the best of both worlds between both organizations and growing on that. Does that mean we have competitors in certain markets? Yeah, absolutely. But on balance, I think that the industry is still reeling back from the declines of 2009 on the rate, and they haven't really levered up, or I should say levered up or brought a lot of fleet in as of yet. I think it's still challenging for a lot of smaller tier players to get access to capital. It's better than it was, but not where it was before the downturn. I guess with respect to the last part on the fleet growth side, is it your expectation then that industry fleet growth is probably going to be somewhat muted next year? That's hard for me to say. I don't know what happens in the credit market. If things get opened up, I don't know. It's hard for me to call. I can only tell you what Bill mentioned, how we're thinking about the world, and what we're focused on. Great. I appreciate the color. Thank you. You are welcome. Thanks, Joe. Thank you. Our next question comes from the line of Nicholas Coppola from Thompson Research Group. Your question please. Hey, morning, guys. Morning. Morning. One thing I wanted to do is just clarify what specifically changed relative to your previous expectations on the synergy front. You were able to get 12 up to $100 million for cost synergies, now the fully developed range of 230 on the cost side, or moving up from 230 to 250 on the cost side. Sure. This is Matt. First of all, for the accelerated achievement of the branch closures and some of the other corporate savings that we've got, that guided us to the $100 million for this year. As far as for the top end of the range, we're starting to see that there may be more opportunity in some of the central dispatching we're doing. Some of the branch efficiencies I mentioned earlier about the productivity improvements in some of our larger scale facilities, and we think that there's some upside there that we're going to get at, and we should definitely be able to get at before our fully developed plan in 2014. Okay. That's helpful. Then on utilization, I was noticing that for fleet mix, that aerials ticked down sequentially as a percentage of your fleet. Is there any impact there on utilization? Is there anything else based on fleet mix that you'd want to call out? This is Mike. I would tell you that it has some effect over time. We don't look at it that way, but it's a valid point. What we are doing is we are expanding what we call the other. Inside of that, you would see the power side, the trench side, and the tool side because we're going to leverage our footprint. We're going to leverage the relationships that we have and expand the expertise that RSC brings to the table. So to some degree, you'll see some changes, and I think when we do our investor presentation, we'll try to give a better view on what that would look like. It's too early. We're going through it, and we're trying to see what the opportunities are. We know they're there, and we're actually investing so that we can capitalize on it. Okay, that's helpful. Thank you. Thanks, Nick. Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question please. Thanks, and congratulations on the quarter. Thank you. Thanks, George. You've noted time utilization has been improving sequentially over the past four months, reaching to slightly north of 72% so far in October. Could you give us color on what's driving the improvement, and whether you expect these factors to persist? Sure, George. This is Matt. I think what's driven the improvement is demand, first and foremost, but we've also moved further away from those closures that started towards the end of June, and as Mike stated, really ramped up between July and August. We're starting to move away from that. Our team's much more focused on trying to grow revenue versus our early focus candidly was making sure we stabilized the base business. I think that's given us some tailwind in time utilization. Yeah. I would also add that I made the comment in my opening comments about penetration. Penetration to me is one of the drivers in the industry. There is also a seasonality. The third quarter is always our strongest. We did see a build up, and as Matt mentioned, and as we mentioned in our results that we did have a disruption. But there is a seasonal trend. But when you step back away, there is a shift towards rental penetration. Great. Thank you. Yep. Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please. Hi, Phil. Good morning. Morning. Hi, guys. I was hoping you could walk me through the different components of what changed in your free cash flow guidance from previously being negative $90 million to $140 million to now being negative $25 million to $75 million. Is that just better EBITDA and less net CapEx? Or is there some interest savings there? Could you just walk us through the pieces? Yeah. Phil, the biggest drivers are in working capital and CapEx. Working capital, as I said earlier, we revised our expectation about the impact of shortening the payment terms for fleet purchases for what we buy for RSC. That was probably the biggest factor. Then we're working at the lower end of our CapEx range, and that contributed a little bit more as well. So those are the two predominant drivers. There's a little bit of a benefit from profitability improvement as we started to realize a little bit more in the way of synergies, but it's CapEx and working capital are the big drivers. Great. Bill, if I could sneak a second one in there. Earlier you gave guidance for 2013 in terms of CapEx, but you talked about gross. Can you talk about it on a net basis, if possible? Earlier I was talking about gross. Net is probably not going to be dramatically different than this year either. We're on target to realize used sales proceeds somewhere around $440 million. It's probably going to be something like that again next year. Great. Thank you very much. Good luck. Thank you. Thanks. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please. Hi, Jerry. Good morning. Morning. Bill, can you talk about how monthly rates you're signing today compared to prior cycle highs? I think spot rates are back at prior cycle highs, and I'm wondering if your new monthly business is as well. Could you give us a broad update? Thanks. Without the specifics here in front of me, Jerry, I do know that what you call spot rates. Call it what we call it, our daily rates are already above the prior cycle highs. The weekly rates are about at the prior peak. And we're still below on the monthly rates, somewhere in the neighborhood of 7% below the prior peak. So, some room to go on the monthlies to get to the prior peak. Whenever people raise this point, though, I always have to ask the question: why does the prior peak matter? Is the prior peak some kind of physical law that limits where rates can go? We don't believe so. That was five years ago, and the environment's different now. And so I think it's interesting to talk about where we are versus the peak. I don't know that it really defines where we can go, though, in the future. The question is from the standpoint of understanding how much room the monthlies have to catch up because obviously they roll on a delayed basis. I'm assuming the 7% number you mentioned is the entire book of monthly business, and I'm wondering if you are comfortable commenting on the monthly business that you're signing today, not the overall book. No. That's the monthly rate that we're experiencing today compared to what we experienced back in the early part of 2007. Okay. In terms of thinking about the timing of the CapEx spend over 2013, I'm wondering if you just give us more context. Earlier this year, you mentioned that because of how front-half weighted the CapEx budget was, there was some utilization pressure. I'm just wondering how that factors into your timing decision of when to take deliveries next year and how should we think about utilizations heading into next year. First quarter looks like a pretty tough comp, so I'm wondering if you could just provide some broader brush comments to the extent you're comfortable on those topics. Thanks. Yeah. I think next year you'll see timing of our CapEx that's more normal. There was a specific strategy behind front-end loading the CapEx this year. I don't know, Matt, if you want to flesh that out a little bit. Yeah. We did a big pre-buy for a multitude of reasons last year, and we won't need to do all of that this year, and we won't need the timing to be the same. If projects accelerate and demand peaks up, we'll always hold the right to adjust, but I don't think it'll be as front loaded next year. Jerry, just on your comment about the time utilization next year, we'll try to give some guidance later on and during our Investor Day on the 4th. But to your point on the seasonal swing, we did have a very mild winter. I don't know what that is going to deal with us this year. But on balance, we will continue to strive to expand it. Thank you. Thank you. Our next question comes from the line of Henry Kirn from UBS. Your question please. Hey, good morning. It's actually Eric Crawford on for Henry. Hi, how are you? Hey, good, thanks. Bigger picture on time utilization. Once you get past the branch consolidations, adjust the fleet mix and the business mix, what's the ideal time utilization for the new URI? What's the right range for the business post transformation? Yeah, I think earlier question we had was around the same thing, and we're going to kind of give some guidance. We have to go through. We're going to take a look at what is coming in from all of the regions on what capital they want to spend. As I mentioned before, we are expanding into the trench, the other side of the business, the tools, as well as the power, which historically runs at a lower time utilization, but very nice returns. As we go through our business process and our budget process, we're going to take a look at that, and then we're going to come back probably on the 4th and give you some guidance. I don't know it's going to change dramatically, because there's still opportunities, we think, in specific markets and areas that we can do better. But you can look for it on the 4th. Okay. That's fair. Then just a point of clarification on the rates, how they trended through the quarter? For July, they were up 7.5%. For August, they were up 8%, and for September, 7.1%. Okay, great. Thank you very much. Thank you. Let me just tack onto that real quickly. That gave us the 7.5% year-over-year rate that we realized for the quarter on our way to 7% for the full year. I have heard people talk about fourth quarter year-over-year rate realization, and I have heard some pretty interesting numbers. Just to be clear, we think about the fourth quarter year-over-year rate realization needed to get to that 7% for the full year as being about 6%. I have heard some numbers that were significantly higher than that, and I just wanted to make sure that everyone heard it here, that we are thinking of fourth quarter year-over-year of about 6%. Thank you. Our next question comes from the line of Yilma Abebe from JPMorgan. Your question please. Thank you. I was hoping if you could comment on how you're looking at an overall credit risk and leverage specifically. The 2.5x-3x leverage target that you have, how does it compare in terms of the company? It looked at leverage pre-recession as a standalone company. I was hoping if you can put this 2.5x-3x in historical context for us. Yeah, sure. We used to talk about the preferred leverage range being in the 3.5x-4.5x range. Certainly 2.5x-3.5x represents a shift in our thinking there. To give some context, during the absolute depths of the recession in 2009, we peaked up just above 5x on a trailing 12 EBITDA basis. Clearly in the extreme, a higher leverage than we would want in our normal range. But that gives you a little bit of context of where we've been over the last number of years. So 2.5x-3.5x is fundamentally different, and I think it reflects our view that we want to maintain a reasonable level of leverage to make for very efficient capital structure. But we don't want to go too far because you lose that advantage as you go too low in leverage. On the other side, you don't want to get too high because it really does amplify the volatility in cash flow and returns that we have from the business. That's something that hurts the returns for equity investors and makes the debt investors, puts them in a riskier position as well. If I can add on to that. What is the driver behind the lower target in terms of leverage then based on historical context? Why have you reduced that target? If you can give a little bit of context in terms of the drivers behind this lower leverage target now. Well, I think, again, it is about reducing the volatility of our results overall, is an important driver for why we want to target a lower range. It will solidify our access to debt financing, although it is pretty good right here and now. But we want to make even more sure that we have got free access to debt financing. It will reduce the volatility in cash flow and equity returns, and that should make the equity more attractive. And it just gives us a firmer foundation for driving the strategy of the company, whether we grow organically, whether we position ourselves for further acquisitions, it is all helped by the somewhat lower leverage. So those were the main drivers of the thought process. Thank you. That is all I had. Yeah. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Michael Kneeland for any further remarks. Thanks, operator. I want to thank everyone for joining us today, and want to make sure that everyone goes onto our website to see our latest investor relation presentation. It has some new slides out there that hopefully you'll find helpful. It talks more about the business and how we're seeing the world. We look forward to talking to you again on December 4 at our Investor Day. Operator, this concludes our remarks and you can end the call. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.