Herc Holdings Inc (HRI) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Herc Holdings Inc. Q3 2017 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

Thank you, Brandon, and good morning, everyone. This is Elizabeth Higashi, Vice President Investor Relations. I'd like to welcome everyone to our third quarter earnings conference call. A press release and presentation slides went out this morning and both are posted on the Events page of our IR website at IR. HercRentals.com. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer; and Barb Brasier, our Senior Vice President and Chief Financial Officer. They will review the quarter as well as the industry outlook. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer.

Before I turn the call over to Larry and Barb, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to Slides 3 through 6 of the presentation for our complete safe harbor statement.

The company's Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission, contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2016 Form 10-K by visiting the Investors section of our website at IR. HercRentals.com or through the SEC's website at sec.gov. On a related matter, our third quarter Form 10-Q will be filed later today and will be available through either website.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which were furnished to the SEC with our Form 8-K this morning and are posted on the Investors section of our website at IR. HercRentals.com. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instruction were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. This concludes my comments.

I'll turn the call over to Larry.

Thank you, Elizabeth, and good morning, everyone, and welcome to our third quarter call. I'm pleased that you're able to join us this morning. Now please turn to Slide 7. By now, you've seen our third quarter press release, and I think that our results speak for themselves. Our strategy, which we are still in the early stages of rollout is working according to our expectations. Revenue growth is occurring across all of our regions. Our expanded fleet and customer diversification are driving improvements in volume, price and mix. As we continue to gain customer confidence, we are seeing increasing demand in the equipment rental market across all regions. As a result of the strength in the market and our ability to serve our broadening customer base, we are increasing our fleet spend for 2017 to meet the growing demand. In addition, we are raising the lower end of our guidance for 2017 adjusted EBITDA.

Please turn to Slide 8. We had strong top line performance, with growth in the third quarter rental revenues of 14.7% to $413 million compared to $360 million in the prior year period. All on organic basis. Our strong performance was being achieved well before the impact of hurricanes Harvey and Irma, which had minimal albeit positive impact on the quarter's results. We grew our fleet valued at original equipment cost on average 3.2% in the third quarter. Year-over-year pricing increased 1.7% in the third quarter and was strong on both local and national contracts.

Net income increased to $13 million or $0.45 per diluted share compared with $3 million or $0.11 per diluted share in the third quarter of 2016. third quarter adjusted EBITDA increased 16.2% to $177 million compared to $152 million last year. Adjusted EBITDA margin increased 90 basis points to 38.6% in the third quarter, the highest quarterly margin since the fourth quarter of 2015. Dollar utilization increased 350 basis points to 38.7%. Equipment on rent, mix and pricing all improved in the third quarter compared to Q3 of 2016.

Now please turn to Slide 9. We expect to build on our momentum and continue year-over-year improvements in the fourth quarter. Based on the strength we're experiencing, we are raising the lower end of our adjusted EBITDA guidance for the year to $560 million from $550 million and maintaining the high end at $590 million. With our year-to-date performance and our outlook for continued growth in diverse sectors of the rental equipment industry, we are also increasing our 2017 guidance on net fleet CapEx, from a range of $275 million to $325 million to a range of $355 million to $365 million. Overall, we remain confident in our strategy and in our team's ability to deliver improving results over the long term.

Please turn to Slide 10. As a reminder, our strategy includes operational priorities to expand and diversify revenues, improve operating effectiveness and enhance the customer experience. Our team and these strategic components drive our actions, which continue to transform our business while maintaining a disciplined approach to capital management.

Please turn to Slide 11. Rental revenues continue to improve each month in the third quarter, ending with a very strong September. We achieved above-market growth and importantly, rental revenues from upstream oil and gas markets increased in the quarter. We believe that upstream oil and gas markets have stabilized, so we're primarily speaking to our consolidated results rather than breaking out the impact of upstream oil and gas and key markets.

Barb will cover the quarter update for those markets in our discussion. But going forward, we don't anticipate breaking out select markets unless a specific market experiences a significant upward or downward impact on the business. The graph in the upper right shows the year-over-year rental revenue growth trends by quarter, with the latest quarter registering 14.7% growth compared with last year.

Each of our regions reported strong growth over the prior year during the quarter, reflecting our larger sales force and expanded fleet. In particular, I'd like to call out the West and East Coast and the upper Midwest, which reported superlative results during the quarter. As shown on the bottom right of this slide, we've continued to successfully increase overall pricing on a year-over-year basis. Prices have increased for the last 6 consecutive quarters, with the third quarter showing a 1.7% improvement over the prior year. Pricing was positive in both national and local customer accounts. ProSolutions and ProContractors both achieved outstanding revenue growth in the third quarter over last year.

Our expansion of equipment categories is also contributing to the growth of new customer accounts. We continue to add a significant number of new accounts each month.

We also continued to improve our ancillary revenues, which grew 19.6% in the third quarter compared to the same period in 2016. While this is a small percentage of rental revenue, approximately $0.90 to $0.95 of every dollar increase falls to the bottom line. We've been gaining momentum throughout the summer and fall as our strategic initiatives are shifting into a higher gear. We are pleased that our team is providing the topline momentum we had anticipated.

Please turn to Slide 12. We are continuing to grow and manage our fleet through purchases of new and targeted equipment categories that attract new customers and improve dollar utilization. Dollar utilization increased 350 basis points over the prior year to 38.7% in the third quarter. Fleet and original equipment cost as of the end of the third quarter was $3.75 billion, an increase of 3.2% of average fleet in the quarter compared with the prior year and 4.4% year-to-date average compared to last year. ProSolutions and ProContractors together now make up over 20% of our fleet compared to 17% at June 30, 2016, and 16% at the end of 2015. A comparison of the fleet categories year-over-year is also included in the appendix for your review. In addition to increasing our fleet and ProSolutions and ProContractor equipment, we continue to increase our investment in higher dollar utilization core equipment categories, such as Aerial-Scissor lifts, industrial material handling and compact earthmoving equipment. Combined, our OEC dollar value of these categories has increased 15% compared with last year and accounted for about 38% of the total OEC.

Please move to Slide 13. While we are focused on improving operating leverage in high-growth urban markets, the further implementation of our Herc operating model is an important contributor to our continuing improvement. Our fleet unavailable for rent, or FUR, improved year-over-year. In September 2017, FUR was 12.9%, down from 13.1% in the prior year period, reflecting better traction for programs focused on improving the turnaround of equipment. In addition, new initiatives are focused on improving logistics capabilities and other significant operational costs.

Please turn to Slide 14. Safety continues to be our #1 priority and we're pleased with our continuing progress as it is at the core of everything we do. Year-to-date, our total reportable incident rate declined 11% compared with the prior year. Our ultimate goal will always be 0 incidents and to provide a safe environment for our team and our customers. Overall, training and sales, branch operations, system and safety continue to be an important investment for both new and seasoned personnel.

Please turn to Slide #15. Our initiatives are focused on making our customer more efficient, effective and safe. For example, our The Dust Stops Here campaign helps customer comply with the new OSHA standards related to respirable silica dust, with a wide array of dust control equipment that they can rent. By getting out in front of the upcoming changes in federal standards such as this one, we play a critical role supporting our customers on this initiative. The successful expansion of ProContractor equipment to our line has enabled us to offer current national customers a broader product line and also attract new customers at the local level. ProContractor equipment is now in nearly 75% of our locations in North America. We are also now currently operating 34 ProSolutions locations. Our ProSolutions performance continue to improve substantially over the prior year, as we continue to attract new customers by providing solutions for remediation, climate control and pump and power. 2 years ago, we wouldn't have had the array of remediation and other critical recovery-related power equipment to support our markets in the event of natural disasters. We plan to continue to expand our ability to serve customers across a broad array of diverse industries that will benefit from our climate control, remediation and pump and power solutions.

Please turn to Slide 16. Our technology enhancements are intended to enable superior customer experiences, and we're focused on helping our customers work more efficiently, effectively and safely. We are currently beta testing our Herc on the Go application, which does more than just track delivery of equipment for both our staff and the customer. The new application facilitates electronic signature capture, allowing us to track and confirm delivery to our customer. We expect to roll out the app in the United States by early next year. Our proprietary pricing and quotation technology called Optimus provides real-time price quotations to our customers. Now our new Optimus mobile application provides our sales staff with quick quote capability and the ease of viewing pricing guidance by equipment category. Quotes can be created in a PDF format and can be easily e-mailed, texted, saved or printed right from a handheld device, improving our response time to our customers. We're committed to enhancing technology and mobility to provide our customers the tools to drive efficiency and effectiveness.

Please turn to Slide 17. Key industry metrics remain positive. Industrial spending forecast for 2017 remains solid. Expectations for U.S. construction spending for 2017 and 2018 continue to be strong in both residential and nonresidential segments, with compound annual growth for nonresidential construction starts projected at 4.7% through 2019. The ARA forecast also remains robust through the current industry projections. We expect that the recent natural disasters will add to the already strong market demand in North America. Longer term, the continuing overall shift from ownership to rental is expected to drive growth in the equipment rental industry over time. We believe that these factors will continue to fuel revenue growth and expand the current market cycle.

Please turn to Slide 18. While our transformation continues, the changes we are making are working. We are making great progress on executing our strategy and driving improvements in our operating performance. In addition to the progress we are making in the front end of our business, we also took an important step a few weeks ago, when we separated our front-end point-of-sale system, RentalMan from Hertz in North America. We are now finalizing the plans for the full separation from Hertz when we move our Oracle financial systems and related applications to our own hosted platforms. When this is concluded, we will end our transition services.

Now let me turn it over to Barb, who'll discuss our quarterly financial results in a bit more detail. And then I'll summarize before we open it up to questions.

Thanks, Larry. Good morning, everyone. Before I cover the financials, I want to highlight 4 takeaways from the quarter, all of which I'll expand upon in my remarks.

Please turn to Slide 20. First, our strategy is working. We drove strong above-market revenue growth across our regions while adhering to disciplined capital management. Our rental revenues grew 14.7% on an increase in average fleet of 3.2% in the third quarter over the prior year period.

Second, our fleet and customer diversification strategies are driving the improvements we're seeing in volume, price and mix.

Third, as Larry mentioned, the strong demand and the continued positive outlook for the industry have given us the confidence to increase our 2017 net fleet capital expenditures this year.

Fourth, we have increased the lower end of our adjusted EBITDA guidance from $550 million to $560 million. While we're not prepared today to talk about 2018, we feel confident that the business outlook for our industry will remain strong for the foreseeable future. Our 2017 performance is meeting our expectations, with the third quarter results offsetting the slower start of the first half.

Please turn to Slide 21. Larry already provided an overview of key metrics for the quarter. I'll reiterate a couple of highlights, then I'll walk you through the year-over-year changes. My comments today will focus on third quarter results, although the slides reflect 9-months results as well.

In the third quarter, we delivered excellent overall revenue growth and pricing improvement. 2017 rental revenues in the third quarter grew 14.7% to $413 million compared to last year. Total revenues in the third quarter grew 13.4%. Net income in the quarter was $13 million compared with $3 million last year. Adjusted EBITDA in the third quarter of 2017, improved to $177 million, up 16.2% or $25 million over the same period in 2016 and up $44 million from the second quarter of 2017, reflecting seasonality, strong market performance and stabilizing upstream oil and gas markets.

Please turn to Slide 22. We continued to drive above-market growth in the third quarter, with strong revenue growth in all of our regions. The growth was due to a combination of higher volume and price and improved mix. ProSolutions and ProContractor revenue increased substantially compared to prior year. The quarter also benefited from expansion diversification of our customer base. That growth was coupled with improvement in our upstream oil and gas markets this quarter.

Excluding currency, rental revenues from upstream oil and gas markets increased 6.4%, while key markets increased 15.6% compared with the prior year period. As Larry mentioned, we believe the upstream oil and gas markets have stabilized. And after this quarter, we don't intend to break out key markets from oil and gas markets in our quarterly reporting. In addition, our urban market strategy gained traction. Our industry and category specialists worked together with local branch personnel to find the best solutions for both national and local customers. We estimate that the impact of hurricanes Harvey and Irma contributed about $6 million or $7 million in rental revenues in the third quarter. We also benefited from the continuation of strong pricing gains in the third quarter, with an increase of 1.7% overall compared to the prior year period.

Now please turn to Slide 23. Total revenues in the third quarter grew 13.4% to $458 million, slightly lower than the rental revenue rate growth as we are deemphasizing the sale of new equipment, which showed a slight decline compared with the prior year. During the quarter, we also continued to aggressively manage the fleet mix, and we increased the sales of revenue earning equipment 11.2% to $27.7 million.

Please turn to Slide 24. Our net income in the third quarter was $13 million compared to $3 million in 2016. For the quarter, while we reduced overall spin-off cost, we incurred higher information technology cost related to the separation from Hertz. As we discussed in the second quarter, we expect spinoff costs to be $35 million to $40 million in 2017. Fleet depreciation cost increased in the third quarter due to fleet growth and the carryover effect of depreciation adjustments made in 2016. There were no material adjustments made in 2017. Interest expense for the third quarter was flat with the previous year. The all other category, which is the largest bucket on this chart, includes the positive impact of our improved operating results. Details of the components are included on Slide 36 in our appendix.

Now please go to Slide 25. Adjusted EBITDA for the third quarter was $177 million, an increase of 16.2%, or $25 million compared to the $152 million in 2016 and an increase of $44 million from the second quarter of 2017. We estimate hurricane-related activity added $3 million to $4 million in EBITDA during the quarter. Our strategy is clearly working. We are realizing the benefits of the investments we have made in people, processes and facilities. The largest contributor to adjusted EBITDA was strong equipment rental revenue growth in the third quarter, which was offset primarily by variable costs related to higher sales.

Improvements in volume, mix and pricing helped drive a 47% flow through on equipment rental revenues in the third quarter. While we incurred a minor loss of sale of revenue earning equipment in the quarter, we improved our results from the prior year as we lessened our reliance on auction channels. We realized $0.42 on every dollar of OEC that we disposed and the average age of our fleet disposals was 79 months.

Direct operating costs increased $18 million, primarily related to the higher rental activity and related cost of transportation and additional staff. Selling, general and administrative costs increased $18 million in the third quarter compared with the prior year, due primarily to variable costs associated with higher rental activity such as bad debt provision and higher sales personnel and commissions. Adjusted EBITDA margin in the quarter improved more than 90 basis points over the prior year from 37.7% to 38.6% this year. And showed a sequential improvement of 660 basis points from the second quarter due to a combination of seasonal activity and better performance.

Please turn to Slide 26. We've broken out fleet expenditures and disposals on an original equipment cost basis. And we have provided a rolling balance of the OEC value of our total fleet. A quarterly breakout of this information for 2016 and 2017 is in the appendix. For the 9 months of 2017, fleet expenditures at OEC were $462 million, and fleet disposals at OEC were $297 million. As of September 30, 2017, the fleet value increased to $3.75 billion. While average fleet grew 3.2% in the third quarter and 4.4% year-to-date, rental revenue grew faster at 14.7% and 8.9%, respectively. The average age of our fleet is 49 months. Dollar utilization increased 350 basis points to 38.7% in the third quarter.

Please turn to Slide 27. Total debt was $2.2 billion as of September 30, 2017, largely unchanged from year-end. We maintained ample liquidity during the quarter. Availability under our asset-based revolving credit facility plus cash on hand totaled $672 million as of September 30, 2017. Net cash flow from operations totaled $250 million for the 9 months, with net fleet capital expenditures of $235 million. Free cash flow for the 9 months of 2017 was negative $39 million due to our increased fleet spending and investments in facilities. A reconciliation of free cash flow is in the appendix of the deck.

Please turn to Slide 28. In October, we completed our transaction to sell and lease back 42 company-owned branch locations, which generated approximately $120 million in gross proceeds in the fourth quarter of 2017. The sale of these properties does not qualify for sale-leaseback accounting. The book value of the buildings and land will remain on the company's balance sheet. There will be minimal impact to EBITDA. In addition, we've redeemed $123 million on outstanding senior notes at a redemption price of 103% on October 20, 2017. The redemption will provide us with additional cash interest saving, as the ABL rate [is currently] approximately 450 basis points lower than the fixed rate we pay on the senior notes. We are pursuing a disciplined financial strategy to fund our operations and our growth. We continue to enjoy ample liquidity, which provides us the financial flexibility to fund our strategic growth, serve our customers and create value for our shareholders.

Now I'll turn it back to Larry.

Thank you, Barb. Turning to Slide 29, before we begin our Q&A discussion, I'd like to thank our Herc rental team members for their tremendous efforts this past quarter, especially during the natural disasters and recovery efforts. They remain hard at work transforming our business while maintaining an unwavering focus on serving our customers and continue to advance every day towards our vision to be the supplier, employer and investment of choice in our industry. And now we look forward to your questions.

Operator, please open the line.

(Operator Instructions) Our first question comes from Joe Box with KeyBanc Capital Markets.

So Larry, you mentioned earlier that you saw some pretty good momentum by month. Actually, hoping you could put some color around that to maybe show what either revenue growth was or fleet on rent was by month? And then maybe how we should think about that trajectory moving into 4Q, if we don't get the $6 million to $7 million of rental revenue gains from hurricanes?

Yes. Look, we don't break it out by month. We -- in terms of a reporting basis, but I will tell you that we saw increasing revenue in each month of the quarter. As we rolled into the back end of the quarter, which seasonally adjusted is typically our largest quarter and September is typically our best month of the quarter. So we continue to see that. Bruce, any color you want to...

Yes, Joe. This is Bruce Dressel. I would say, sequentially, and this kind of will answer some -- or maybe some of the pricing questions that come up also. Sequentially, we saw volume growth throughout the quarter, and we also saw pricing sequentially month-over-month growth throughout the quarter, which leads you to believe that we're heading into kind of a strong fourth quarter.

Okay. And then, I guess, just the step up that you probably saw in September. I mean, that wasn't fully related to the hurricanes, was it?

No. Look the hurricane -- what came on the 25th of September, I think at the end of the month or last week or earlier? But we didn't have a big impact from the hurricane in the quarter. We believe there will be a continuing impact from the hurricane going into the fourth quarter and beyond over the next 12 to 18 to 24 months, dealing with the rebuild efforts. Whether it's in Florida or along the Gulf and Texas and even the most recent natural disasters up in Northern California related to the fires. So we think that, while it's a horrible event for everybody to live through and get displaced or whatever took place, our business, as will the industry will benefit from that over a longer period of time in the future.

So changing gears and obviously, you guys had a really solid pick up in dollar utilization. I was hoping maybe you could flesh out some of the particular drivers to that 350 basis point increase. Maybe just some color around how much might have been from ancillary, from rental rates, from higher time ute or even easier oil and gas comps?

Yes. I think all of those things you just mentioned other than ancillary played a part, right? We had less headwinds from oil and gas for the first quarter since I've been here. We -- our fleet mix is working well, so we're driving a different mix that drives a higher dollar utilization. We grow -- we grew our ProSolutions business and our PCT business at a higher rate than our core business, which drives a higher dollar utilization. We improved in our time ute quarter-over-quarter, which also drives higher dollar utilization. So kind of all of those things working together helped improve that.

Yes. Additionally, I think some of the things really are focused around maintaining a very strong discipline in how we approach our pricing and how we approach our fleet use and our fleet mix. And I think we've been very consistent and very disciplined over the last 24 to 28 months in how we're driving that.

Our next question comes from Nick Coppola with Thompson Research Group.

Wanted to talk about long-term EBITDA margins. And I know in the past you've talked about a goal of reaching a level that's in line with peers. I was just looking for an update on that, your confidence in being able to reach that target over the longer term. Maybe some of the things you've been doing to get there. I know that's kind of a big question, but I think it might be helpful to get a review and potentially an update.

Yes. Let me take maybe the first half of that and I'll ask either Barb or Bruce to jump in after that. Look, when we began this journey at the time of spin, we said we had a 5-year horizon on being able to close the gap between us and our peers in the industry. And I would tell you, I think, we're well on that track now. And beginning, as we've shifted, we've had 2 years of updating the fleet. We'll be going into our third year of renewing the fleet, continuing to change the mix and roll out some of what I'd call the higher acquisition costs, which creates your denominator in the formula for your dollar utilization. So as we continue to roll out and change the fleet mix that will continue to improve over time. And as we maintain this disciplined approach to pricing that we've implemented as well as the higher dollar [ute] categories of products. So I think we're well on our way. And I think, we're still on track with our 5-year plan. And either Bruce or Barb, you want to comment on anything else?

Yes, Larry -- Nick, I think it's really just -- we have laid our strategy and it's really just implementing our strategy. It's been a consistent strategy. It's designed to close that gap over a 5-year period. And it's around the same pillars: Expanding and diversifying our revenue base, running more revenue through existing branches, improving that operating effectiveness and enhancing the customer experience, all while being disciplined in how we approach capital. So it's really just continued execution of a consistent strategy that's going to get us there and close that gap.

Our next question comes from Rob Wertheimer with Melius Research.

So believe me, I understand the focus on dollar utilization and trying to get more dollars per equipment rented. The strength in the quarter was probably through -- I mean, pricing was great, was probably through obviously more equipment going out as well. And I guess my question is, without time you disclosed, can you give us a sense of how much more revenue you can get out of the assets, right? I mean, you give us the FUR, which is lovely. But can you do another 5% out of the same assets? Can you do another 10% out of the same assets? Or do you have to really start reinvesting in the CapEx to grow? I think there's some room there. I just don't know if you can comment on that a little bit?

Bruce. Bruce will take it.

Okay. Yes. So I guess the way I would answer that is there is still room for improvement in our volume or time ute. We don't disclose the time ute, but I would tell you there's still room for improvement there. And then to go back to my commentary on pricing, I think the market, overall, is pretty robust and the industry is acting fairly rational towards that marketplace. And like we said, the 1.7% year-over-year aim. We were sequential month over month during the quarter, I think we can -- we'll continue to see that. The percentage that we can squeeze out of this as we get the mix right, we're not giving guidance on that. But I would tell you on all the different levers we pull, whether that be time ute, price, mix and in FUR there's still room -- plenty of room for us to improve, and we're in pretty early innings of this 5-year plan.

Yes. And I would also go on to further answer that by saying, the improvement in terms of what we can squeeze out varies by categories. Some categories we're probably at the point, where we need to add capital and some categories, we have plenty of room to move in. And some categories, we're lessening our dependency on and moving away from. So it varies by category, but what Bruce said is absolutely correct. We still think we can squeeze out some more out of our existing fleet, but we will also -- while we're not going to talk about it today yet, we will also continue to grow our fleet in our 5-year period, 5-year plan.

Our next question comes from Tate Sullivan with Sidoti.

The -- your updated guidance and higher guidance on the low end implies, I think, a $24 million sequential decline in 4Q. You mentioned seasonality earlier with September the best quarter. But I mean, what other considerations might get you to that low end?

Yes, this is Barb. Tate, I think you need to check your math. The low end of the guidance now gets you to a fourth quarter that is better than Q4 of last year.

He was talking about sequential.

No. Right. But a sequential decline from 3Q '17.

From Q3 to $177 million (inaudible).

I'm sorry. I'm sorry. But the average is seeing...

So $177 million to $152 million?

Correct. And we've always stated that the third quarter is our strongest quarter throughout the year.

Okay. Okay. Understood. And then, I mean, you said -- I'm just looking at it and you said you'll -- I mean, you probably will still get some hurricane benefit going to the fourth quarter too. And then on the pricing systems that you've been developing since the spinoff. Is that running a 100% currently?

You mean our Optimus pricing system. Is that you're referencing?

Yes. Yes, and is it advanced in all locations?

Correct.

Or is it still being rolled out?

It's currently used in all locations from desktop. The mobile application is being rolled out throughout the United -- the U.S. currently.

Great. And then in terms of booking the spin-off costs and, I mean, you'll have another quarter that's coming. But will you still book them as "spin-off costs" in '18? I mean, given it's a bit past the spinoff at this point. Or how long will you book those spinoff costs?

Yes. Yes, we've kind of said that, in general, there'll probably be a 2-year period that we would incur most of the spinoff costs and have them behind us; that's the expectation.

Okay. So 2 years...

So 2 years from the June 30 of '16 date is our approximation.

And let me just add, Tate, that we gave you a range for adjusted EBITDA guidance of $560 million to $590 million. So you were talking to the low end, but on the high end range that actually would show a sequential improvement so there's a bit of a range there.

Right. Right. Good point. Okay. And I think you mentioned, I mean, it's a 5-year plan to get your equipment mix right in terms of equipment composition. I assume that includes maybe store remodelings too. I mean, so you're very early in that 5-year plan. I mean, what percent are you done with that effort to get the mix…

Well, look, as I said before, we've been here for 2 years, where we've been responsible for the CapEx for the past 2 years, going into the third year, this upcoming season. So nothing is exact about it. But we're coming up to what I would call the midpoint of where we are from a fleet turnover. Remember, also the average age or the average life that we keep equipment is about 7 years. So even though we'll be 3 years into adding and changing to the fleet, some of the equipment that will remain in the fleet beyond that 5-year period is equipment that was purchased prior to us over getting here because of the normal useful life of the gear.

Our next question comes from Jerry Revich with Goldman Sachs.

This is Corinne Jenkins on for Jerry. So when you guys took over as the management team you inherited a mixed asset fleet that had a challenging dollar utilization. As you're ramping up CapEx today, is the utilization you're generating with that incremental $60 million in CapEx kind of in the 50% range that your competitors are getting?

Yes. This is Bruce, I'll answer that. I think it's a blended mix. I mean, everything you buy new and adding into the fleet isn't going to drive a 50% dollar. You're going to have some equipment to drive so much higher dollar ute and some that's lower. It's just we didn't have that correct mix. So yes, as we make the investments, we're taking that into consideration. And you can see the success we've had so far in driving that. And of course, there's much room for improvement and I think you'll continue to see that as we go down our journey here that we'll continue quarter-over-quarter to improve that dollar utilization as we get the mix right and as we tighten up time utilization as we continue to drive price.

And then kind of on a similar note, those utilization and pricing comments imply that there's been an inflection in your time utilization this quarter? What part of the footprint are you seeing the most significant improvement in fleet on rent? And do you think that's going to be able to continue moving into the fourth quarter?

Yes, I think we're seeing time ute -- we saw time ute improve across all categories and all regions. And we're saying -- we're stating that we feel that it's a very strong market. And that we see -- we believe the industry overall will see some added benefits from the 3 major natural disasters that we had in the states over the next -- in the short term and longer term. So we feel it's a pretty strong market and things should continue as they have.

Our next question comes from Brian Sponheimer with Gabelli.

A few here. Just a real quick, Barb. When did the sale-leaseback close?

It closed in early October.

Okay. And that's net $105 million? Did I get that right?

Gross.

No. The growth was around $120 million. We didn't disclose the net number.

Okay. So on the CapEx, obviously a major bump. Part of that's confidence in what's going on. I'm curious as to what you think or what portion of that you're actually pulling forward from 2018 plans or whether this is all truly just incremental to drive the business higher?

Yes. Actually, none of it is pulling forward from 2018. It was all equipment that we felt to go directly and rent. In fact, some of it was not the fact that we acquired more equipment. It's that we sold less equipment than what we originally planned to because it was on rent and driving strong performance. So the combination there wasn't just an absolute buy of new gear. It was selling less of some of the gear already on rent.

Okay. That's helpful. We're in early stages in D.C. on the tax reform. You are at least nominally blessed with a very high effective tax rate. Any bits and pieces that are outstanding that would have a major effect either positive or potentially negative on your business and maybe how you think about your fleet?

I think, it might be a little too early to tell at this point, not knowing where the ball is going to land. Every day you wake up and there's a new tweet. And so I'd say, we haven't focused too much on that at this point. We're going to wait until the dust settles and then figure out what the real future is around that.

Our next question comes from [Bill Masters] with [Bard and Company].

I like to follow-up on an earlier question. And how you are thinking about when you manage your balance sheet and giving full acknowledgment to the increase in CapEx and your past desire to reduce financial leverage. How do you

(technical difficulty)

off between debt reduction and increased spending to meet demand and particularly, with the prospect of a tailwind that may last anywhere between 12 and 24 months?

Yes. So really our strategy for deleveraging is to hold our debt relatively flat while we increase EBITDA. And that is what we've been accomplishing and that continues to be our strategy. So that's how we will delever. We will hold debt, and we will increase EBITDA.

Okay. And then maybe another follow-up on how you think about CapEx. How much of the increased CapEx is to meet demand for what you expect to be the natural disasters versus that? And what would be kind of a fundamental run rate for the expected increase you would have in nonresidential and industrial spending?

So this is Bruce. I would tell you that the overall majority of the additional CapEx was not spent due to the hurricane activities. Once again, Larry already answered the question in that. You got to balance between what we already spent or what we decided not to dispose of to get to that increased net CapEx. So as we went into the latter half of the year and had our planned disposals, our activity levels were greater than we had built into our plan, which then allowed us to not delever or reduce down that fleet and dispose of it, but keep it out in the hands of customers generating revenue. So we took the right choice -- made the right choice, not to dispose of the total amount that we had planned, which then raised our overall net CapEx. Now did we spend some additional CapEx? Absolutely. As we went into the latter half of the quarter, with this increased demand, we wanted to take advantage of it, and we saw pricing sequentially month over month increasing. So we saw that it was a good decision to make the investment to meet that demand.

Okay. And if I could circle back to the question on leverage. Is your target leverage still and as far as being measured net debt in the 3 to 3.5 range? And what time frame do you think you can actually achieve that?

Yes, it is. Our target actually is we said from 2.5 to 3.5x over a cycle. And I think what you'll see is as we increase our EBITDA, we'll be able to get under that forehandle pretty quickly and approach the 3.5%, the top end of the range.

3.5x.

3.5x is where we want to be.

Okay. And about what time frame? Would you think a couple of years?

Yes. We're not going to guide on that. It's a -- it'll be through the cycles, and we haven't put a timeframe on when we would be at what level. It has more to do with where we are in a cycle, frankly, and our outlook on the economy as well. So as the economy and the cycle look strong, being at the higher end of the leverage range is perfectly acceptable.

Yes. As long as our demand is strong, we'll continue to invest in the business and invest in fleet, which will ultimately drive additional EBITDA, which will ultimately help to reduce the leverage.

Our next question comes from Jon Evans with SG Capital.

You said that pricing got better, I think month over month throughout the quarter, et cetera. So I'm curious if you look at the exit rate that you had for Q3 and that ended today, where would price be year-over-year change for the Q4 already?

Yes. We don't give that information. I can tell you that it would have been higher than 1.7%.

(Operator Instructions) We have a follow-up question from Tate Sullivan with Sidoti.

I mean, in terms of store composition and maybe I missed it earlier, but is it part of normal course of business to consider continuing to close stores, or are you done closing the stores? Are you happy with your store composition?

Well, look, I think we are always evaluating our individual branches and markets on a continuous basis. And we're always determining whether or not any particular store is achieving the levels of performance that we expect. And we always try to cut the tail to improve our business, in a particular market. So I would say, we're not on a -- what I recall, where the initial phase where we evaluated a number of locations that we felt were not performing or weren't -- or didn't have the opportunity to perform. But right now, our store count is somewhat similar. We've probably opened as many as we've closed. And there is no program in place to say we're going around looking for opportunities to pull out of markets or pull out of locations. Bruce, you want to add to that?

No, I think you covered well. We continually evaluate on a quarterly basis all of our locations to make sure they're performing or at least improving their performance and also meeting our strategy of getting served in markets and -- in serving a broad base of customers. So I'm sure there will be branches that will be closed over the next 12 to 24 months and there will be others that are added.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Silber for any closing remarks.

Okay, great. Well, thank you for joining us on the call today. And if you have any further questions, please don't hesitate to call Elizabeth Higashi. Just reminding everybody, we'll be in Boston, next week at the Goldman Sachs Industrial Conference, followed by trips to Baltimore and Philadelphia. We also plan to be in Chicago and Milwaukee in December. So we look forward to seeing most, if not all of you at some point over the next 2 months. So thanks again for your time, and everybody have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.