聯合設備租賃 (URI) 2014 Q3 法說會逐字稿

Good morning, and welcome to the United Rentals third-quarter 2014 investor conference call. Please be advised that this call is being recorded.

Before we begin, note that the Company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The Company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2013, as well as the subsequent filings with the SEC.

You can access these filings on the Company's website at www.UR.com. Please note that United Rentals has no obligation, and makes no commitment to update or publicly release any revisions to forward-looking statements, in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the Company's earnings release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Good morning, everyone, and welcome, and thank you for joining us on today's call. Listen, before I begin, I want to mention that obviously we are aware of what is going on in the stock market. It has been a wild ride, and there are some big issues that need solving in other parts of the globe.

But this morning we are going to be focusing on our business and the operating conditions as we see them here in North America, so let's get started. Last night we reported another strong financial performance in a positive operating environment. You have heard us use those words before, and I'm happy to say that they're true again this quarter.

It confirms that our strategy is on track, and the construction and industrial recoveries are both gaining momentum. and it shows that we know how to manage the business with continuity and discipline through the early stages of the up cycle. I want to talk more about our environment before Bill goes through the numbers in detail, and then after that, we will take your questions.

The first notable thing about the quarter is that our end markets are continuing to rally. Demand is up, and we reported a robust 16% increase in rental revenue for the quarter. And more importantly, we accomplished this with record margin and adjusted EBITDA, and year-over-year gains in volume, utilization, and rates.

Volume increased 9.5% year-over-year. Time utilization was very strong, at over 71%, and we improved rates by 4.7%. I've talked about the importance of these three metrics before, and they are all valuable measures of performance, and while we manage our assets very strategically over the life of the equipment, we are always hungry for more, and that's particularly true of rates.

Our return on invested capital was 8.4% in the quarter, which is our best yet, and it is another indication that our strategy is on track. And, free cash flow increased to $312 million through September, and as you saw last night, we raised our free cash flow target to a range of $475 million to $525 million, and we reaffirm the other five components of our full-year outlook.

Now, I want to mention a few of the dynamics that helped shape our quarter. One is our new pump business. With the integration of National Pump behind us, we have begun cross-selling these assets to a broader base.

We now have four specialty lines in place. Trench safety, power and HVAC, pumps, and tool solutions. These are high touch, high-value services that build loyalty and engage our customers in using other types of fleet.

Our specialty segment had an 88% increase in rental revenue in the quarter, and a 98% increase in gross profit. So we're improving our margins as we expand these operations through acquisitions, cold starts, and organic growth. It's worth noting that excluding acquisitions, revenue was up about 27%, and that's outstanding organic growth.

In August, we announced eight specialty cold starts year-to-date, and we opened three more in September, and we plan another eight to ten branches in the fourth quarter, all in specialty. Another area that ties to recurring revenue is national accounts. Our national account revenue kept pace with Company performance in the quarter at 16% growth. It's our strongest growth rate for national accounts this year.

Now that large projects are picking up, these relationships are becoming increasingly important to our base. And right now they account for about 40% of our rental revenue. And while national accounts have a small constraint on rates, because of negotiated pricing, their support our strategy for the long-haul, which is to drive returns over time, and to mitigate volatility throughout the cycle.

Now moving on to the regional front, every one of our regions delivered year-over-year rental revenue growth in the quarter, excluding the impact of FX, and in fact, half of our regions showed double-digit growth. Now one of the standouts with our industrial region, which was up 22%, due in large part to manufacturing and certain energy verticals that were seeing strong demand from plant expansions and modernizations, particularly in the chemical sector.

And while there is a healthy variety of projects across our footprint, our regions are reporting certain types of projects more frequently. They are includes renewable such as wind and solar farms, hospitals, sports arenas, pharmaceutical and chemical plants, and urban office construction.

Now looking at the US and Canada as a whole, I would characterize our current operating environment is trending upward, with fluctuations in local and regional markets. The underlying fundamentals of the recovery look strong, just as they did when we had our call in July. This coincides with what we are hearing from our customers.

They are very optimistic which is probably the most valuable indicator of all. We have a lot of ways to take the temperature of our markets, but our customers are just that much closer to the action, so it's good to know that they're seeing the same momentum we do.

Also on the national front, we are seeing continued strength in the used equipment market. This is another good sign of healthy demand for equipment. Our adjusted gross margin for used sales was about 48% in the third quarter, consistent with the prior year.

Now, we're obviously aware of the volatility in the stock market right now, but most of that's global, and we don't see it relates to our industry in any meaningful way here in North America. There will always be bumps in the road in our end markets as we move through the recovery, but there are far more ups than downs, and secular penetration is adding an extra layer of demand, and we've shown that we can navigate the business successfully through much greater macro uncertainty than this.

Now turning to our internal initiatives, I want to give you a quick update on two programs that should have significant impact for years to come. The first is Lean, and the second is technology, specifically telematics.

We've been talking to you about our Lean Program for the better part of this year. It's the philosophy of continuous improvement, based on the Kaizen process. 314 of our branch managers and over 2,100 employees have now participated in Kaizen events since our pilots a year ago, and now there is enough history with Lean, we can share some metrics, and they're very encouraging.

For an example, the branches that have been through the Kaizens for order accuracy, we've seen a reduction of about 16% in the credit memos issued as a percent of rental revenue. And when the Kaizen focus has been to bring down transportation costs, our Lean branches are seeing measurable improvement.

Results like these have an immediate ramification on productivity and customer service. Our three-year target of $100 million in efficiencies should be very achievable, and we're already identified a run rate of approximately $18 million in utilization and cost efficiencies. And as always, we'll push for more if we see the opportunity.

The other area I mentioned is telematics, which reverses the way we use GPS technology to manage the performance of our larger assets. We currently have GPS on about 6,000 machines, mostly generators and select big equipment. We plan to extend telematics to another 160,000 units by the end of 2015.

These will be units that put diesel engines and other types of powered equipment, such as electric scissor lifts, where telematics could potentially increase utilization. The benefit is going to be in areas of preventive maintenance, employee productivity, and most of all, customer service, because telematics can reduce downtime.

We are the industry's biggest advocate for technology, and this initiative is right in line with our focus on innovation. It also supports our strategy for rental CapEx, which is to manage and protect our assets as we move them through the rental process, in a way that generates optimum returns.

I want to conclude my comments this morning by recapping my three main points. Number one, the macro environment is favorable, and our end markets are in recovery. Demand in 2014 is up over last year, and the forecast is even stronger for 2015, and we don't see anything that suggests otherwise.

Number two, we're comfortable with our full-year guidance. We've raised those numbers in July, based on our internal and external visibility, and we raised our free cash flow range last night, as our other targets -- nothing has changed. And finally, we have the right strategy in place to deliver the value creation, and what's more, we have a record of very strong execution.

There will always be puts and takes to our metrics, but taken in aggregate, our results reflect the trajectory that's consistently outperforming the recovery in our end markets, and that's an exciting endorsement of our business model. 2014 is playing out as a record year for us, but even so, we're confident that we've demonstrated just a fraction of what this Company can achieve over multiple years in an off cycle.

So the present is pretty great, but from where we stand, the future looks even better. So with that, I'll turn the call over to Bill for the financial results, and then after that, I will take your call and your questions. Over to you, Bill.

Thanks, Mike and good morning, everyone. As always, I will add a little bit more color to the key headlines that you have already seen in the press release, and the numbers that Mike has outlined. Starting with the revenue picture, which as we have said, is a pretty strong one for us in the quarter, rental revenues in the quarter were up 15.6%, and it reflected the strength that Michael mentioned in rates and volume, and other components of our revenue generation.

Within that 15.6%, our owned equipment revenue was up about 15.4%, and I'll go through the components of what drove that. But let me start with just the re-rent and ancillary component of our rental revenue growth, very robust growth in those two components in the quarter, totaling about $25 million of year-over-year improvement in revenues from re-rent and ancillaries.

Within the OER component, rental rates were up 4.7% as we said, and that contributed about $46 million worth of rental revenue improvement. Volume was up the 9.5% that Mike mentioned, which drove about $94 million of year-over-year rental revenue improvement.

This story there was the story of a larger fleet and better utilization of that fleet in the quarter. We've spent about $456 million on fleet in the quarter, and that drove our average fleet size up 8.4% for the year in the quarter, and then we utilized that fleet more effectively, with time utilization in the quarter coming in 71.5% or 70 basis points better than the comparable period last year.

That resulted in the 9.5% we see on rent growth that we call out as volume, and I will point out that even if you exclude the addition of National Pump in the quarter, our OEC on rent growth was still an impressive 6.9%, so it wasn't just the impact of the acquisitions driving that volume growth.

Fleet inflation as always, has been a headwind for us in the quarter, as we sell-out older fleet and replace it with new or acquired fleet at higher prices. The impact there on a percentage basis within OER was 1.7% headwind, that translates into about $17 million worth of headwind in the year-over-year rental revenue performance.

We call out FX for the last few quarters, because it's been a material impact in the year-over-year drivers, so this quarter was no different. The Canadian dollar year-over-year was down about 5%, so that cost us about $7 million of year-over-year revenue, $7 million of headwind, which translates into about a minus 0.7% against the OER growth. Mix and other was robustly positive again in the quarter, call it 3.6% or $36 million of positive impact in the quarter.

Now obviously, adding an attractive segment like pump in the quarter was a big driver of the positive mix there, call it $30 million of the $36 million from the mix impact of National Pump, but even aside from that, we had a positive impact from a sweeter mix of products in the rest of our business, along with some other minor positives. So the net effect of mix was a real robust $36 million. So all of those components added together give you the $177 million of year-over-year rental revenue improvement, and the momentum that we are feeling, as Mike pointed out, is robustly positive going into the fourth quarter as well.

Moving to used equipment sales, another good quarter in used equipment sales. $140 million of proceeds from used, and a very nice 47.9% adjusted margin in the process. So we're seeing continued robust demand overall in all of our channels for used equipment in the quarter.

Our retail channel mix was down a little bit in the quarter, roughly 10 percentage points, not due to anything other than the fact that we did a little bit more in the quarter in some of the other channels. Retail contribution was still up nicely on a year-over-year basis, up more than 20%. So we're continuing to focus to drive used equipment sales through our retail channel, as well as the other channels as well, and that contributed to the very strong used result in the quarter.

On the profitability front, you saw the adjusted EBITDA of $761 million in the quarter, at a Company record 49.3%. Actually both those numbers were Company records in the third quarter. Actually, EBITDA margin was a record overall. That was $119 million of year-over-year adjusted EBITDA improvement, and a 30 basis point improvement from the prior year.

The key drivers of that $119 million of improvement were as follows: Rental rate contributed about $45 million of incremental EBITDA, that's the 4.7% rental rate improvement flow-through, at about 95%. The volume component, we count as $66 million of impact on EBITDA.

The fleet inflation component was a headwind of $10 million at EBITDA from the previous inflation revenue impact that I talked about. Our ancillary improvement, ancillary revenue improvement, was another $11 million of EBITDA impact, and again, that's driven by the improvements that we're making in our pick-up and delivery revenues, as well as certain other ancillary items like our RPP program.

Used equipment sales, the margin impact there was $19 million contribution to EBITDA in the quarter. And then the other components were a variety of one-off items, so we had an increase in our cash incentive compensation programs in the quarter, that cost us about $10 million. Cash comp went up because our performance for the year is coming in strong, and so we're accruing more for cash compensation, and we made the adjustment in the third quarter to the tune of about $10 million year-over-year.

Merit increase, that's our normal merit increase throughout the course of the year. In the quarter, it was about $6 million worth of headwind, and then a variety of other components contributed to the remaining $11 million of headwind, of which bad debt expense was about $4 million of that headwind, reflecting not so much any deterioration in our experience with bad debt, but more, just the size of the accounts receivable balance, requiring a larger reserve to be set aside.

So, those are the key drivers of the $119 million of year-over-year adjusted EBITDA improvement, and again reflects all of the components that we talked about before. If you put that revenue and EBITDA performance together, you get an adjusted flow-through for the quarter of 51.1%, and that flow-through, while below the 60% that we have been guiding to for the full year, still puts us in line to deliver the full-year 60% flow-through. In fact, if you look at flow-through for the year-to-date period, we're right at 59.7% year-to-date flow-through, so we're well-positioned to be able to deliver the flow-through of 60% over the course of the full year.

We have though, gotten questions about what was it that drove third-quarter flow-through to be less than the 60%, to be indeed at that 51% or so. The couple of things that I would point to there are, the bad debt impact that I called out, that alone was worth about 1.5 points of headwind against our flow-through in the quarter. The cash comp increase that I called out as well, probably cost us about 3.5 points of flow-through in the quarter.

And then the robust other lines of business, used government sales, new equipment sales in particular, very strong growth in those two lines. So of the mix effect of those lower margin revenues coming in, in the quarter, was probably another 1.5 points. So call it 6.5 or 7 points worth of drag on flow-through, just from those three items. Add those back to the 51%, and you get pretty doggone close to the 60%. That is how we're thinking about flow-through for year-to-date, and more importantly, how we are going to get to the 60% for the full year.

EPS in the quarter was also very strong, $2.20. On an adjusted EPS basis, that compares to the $1.63 that we reported last year, so 35% improvement, and obviously EPS reflects all of the other points that we have made.

Before I go to the outlook, just a couple points on free cash flow, capital structure and liquidity. Free cash flow was very strong, as Mike pointed out. $312 million, remind everybody that, that includes the impact of our merger-related cash outflows. Those were about $16 million in the quarter, so if you look on the ex-merger basis, free cash flow in the first nine months was $328 million, very robust free cash flow picture. And of course, that's after we spent on capital in the quarter, total capital is $1.750 billion, that includes the rental capital plus the non-rental capital.

So even after the capital investments, we're on track for a very robust free cash flow year, and in fact, that pace is what gave us the courage to increase the free cash flow outlook for the full year. Right? We've seen a very robust delivery of operating cash flow year-to-date. We've seen very strong collections against our accounts receivable year-to-date, and the timing of our accounts payable year-to-date has broken favorably. So, you put all that stuff together, and that's what prompted us to raise our outlook for free cash flow by about $25 million for the full year.

On capital structure and liquidity, liquidity was a total of about $1.1 billion at the end of the quarter, and that included $900 million of ABL capacity, plus about $170 million of cash in the bank. So our liquidity position is very strong. We did, during the quarter, amend our accounts receivable facility. It's a $550 million facility that we amended to extend the maturity for another year, so that positions us with that facility as well.

The share repurchase program, you've heard us announce that we are accelerating the completion of that program to the end of this year. We have spent $389 million on the program life-to-date, that includes $152 million during the quarter, and it positions us very nicely to be able to finish it out by the end of the year. The combination of slightly stronger free cash flow, plus, as Mike said, we are paying attention to the real world.

Our stock price being down prompted us to say look, let's just get it done during calendar 2014, and then figure out where we go from there. So, that's the rationale for accelerating the repurchase.

ROIC was strong, as Mike mentioned, for the quarter. Trailing 12 months, 8.4%, a Company record. That's 1.3 percentage points better than the same period last year, and it's a 30 basis point improvement compared to where we were at the end of the second quarter. So we continue to be on track to drive our ROIC higher, targeting cost of capital, and ultimately, that 10% hurdle rate that we have talked about as a target. Nice progress against that in the third quarter as well.

On the outlook, we reaffirmed all the components with the exception of free cash flow, so just to recap where we are, we still expect the full-year revenue, total revenue coming in the full-year for between $5.550 billion and $5.650 billion. That includes of course rental rate performance, and the rental revenue component that we continue to expect at about 4.5% year-over-year, for the full year.

Time utilization, robust in the quarter, and positions us well to be able to deliver the 68.5% time utilization that we've given as an outlook. We are sticking to that, as well as the adjusted EBITDA range of between $2.65 billion and $2.70 billion for the full year.

CapEx and cash flow, we touched on already. CapEx we continue to expect to invest net rental CapEx of $1.2 billion, and that of course, is after gross spends on new rental equipment of $1.7 billion. And the free cash flow range I touched on.

So those are the comments I'd offer as color for the numbers. Obviously, we can go into more detail in the Q&A, but let me add my thought to Mike's thought. We are well-positioned, and everything that we see and hear keeps us on that path for 2014.

We certainly are not naive to what is going on in the outside world, but we feel good about where we are, what we are hearing from our customers, and how we're running our business. So we're going to continue to drive forward and we'll talk to you as we go forward about the results that we achieve.

So, with that, I'll open up the call for questions and answers. Operator, can we open it up?

(Operator Instructions)

Ted Grace, Susquehanna.

Congratulations on the quarter.

Thank you.

Thanks.

I was hoping just to come back to the 2015 outlook, and I know you haven't provided formal guidance. But Mike, your body language is quite positive, and if I didn't hear you right, I think you said that the business feels to be accelerating, and there's obviously seasonality, but could you maybe just touch on at least the framework for how you're thinking about 2015? I think a lot of questions we get our on energy and energy exposure, and what you're picking up from those customers, and maybe how much of that business that constitutes?

Yes, I'll take part of it, and then I'll ask Matt and maybe Bill to chime in, as well. We're looking at the forecast that obviously are produced by Global Insight, as well as, we're looking at IIR, which is an industrial resource, and looking at how they are seeing the world and they continue to see 2015 stronger than 2014. Obviously, they could always update, but we haven't seen any material change.

As we went through the quarter, we saw momentum building, and that's particularly true in our time utilization, as we went through. The other thing I would tell you is just a data point, Ted, is another thing that look at is the construction backlog indicator, which is produced by the American builders and contractors. In August, it reached an all-time high. We're still waiting for their report to come out, it will come out sometime in October or in early November, but those are some other indicators that we see.

As I mentioned in my opening comments, talking to our customers and their outlook of how they see the next 12 months, again, as we went through the quarter, that progression of optimism grew as well. So those are the things that we look at.

With regards to the oil, I would point out oil and gas is how we look at it. We don't bifurcate the two because of how we go after the market.

All-in, and I'm talking about upstream, downstream, midstream, you're looking at 10%, 10.5% of our total business. If you take a look at, I think what you're trying to drive to is the area of where we're seeing -- where we would see exploration on oil would be around 5%.

Now, that 5% will also include pump. It would also include the gas, natural gas as well. Natural gas, the LNG plants and everything that we've seen, is continuing to go along. Matt?

Yes. Mike covered the -- we don't necessarily have a lot of exposure to oil and gas. But I think more importantly is the fleet that we use to serve that vertical market is compatible to the rest of our fleet, so if something did change in that sector, we have robust growth throughout our network, and throughout many verticals that we could move that fleet, because it is core to our offerings, to other verticals and other end markets.

And when I talk about the breadth of our end markets, Mike mentioned that more than half our regions had double-digit improvement in year-over-year rent revenue. Well, we had over 30 states that have double-digit improvement in rent revenue year-over-year.

And 5 of our 10 provinces in Canada, and all but states showed year-over-year rental revenue improvement, and 8 of our 10 provinces. So when we say we have broad demand, we really do have broad demand throughout our network.

And the follow-up I'd ask is just from the standpoint of taking share in your competitive positioning, can you just maybe give us a sense for how you think you're doing relative to the broader growth? Because obviously my sense of non-res and your markets probably are not increasing double-digit rate, so just from the standpoint of how you think about market share capture next year, maybe can you just touch on that?

Well, we haven't gone through the process, and obviously, we're going to have our December meeting coming up for our investors. But the way I would look at it is, what is projected today by Global Insight for our industry for 2014 is 8% growth. We just reported a 16% growth, and I think you can get a sense of how we're outperforming.

I want to make sure everyone understands, I'm not thinking about just growing for market share. I'm talking about growing for profitable growth and returns, and those are the things that we're most interested in. So, again, I think we're performing well, I think that our specialty business clearly is outperforming the industry by a multiple, and I think you can see the power of the cross-sell that we're actually benefiting from, right here and now.

I'm a simple guy, Ted, I just step back and I say, how have we driven our business throughout the course of the year? Rental revenue year-to-date is up 14.2%. I would guess that there aren't a lot of rental companies that can say the same thing, and so I think we're positioning ourselves against the overall environment, and against the competitive set pretty well, and that positions us well to be able to continue to do that next year.

Okay. That's great. Best of luck this quarter, and I'll get back in queue.

Seth Weber, RBC Capital Markets.

Thanks, good morning. I wanted to talk about the rental metrics a little bit for the quarter. So, time utilization was actually much better than what we were expecting. Rate was good.

But I'm wondering, does the upside to that time utilization -- should we infer anything into that, that you're pushing time versus rate any more going forward, and is that any reflection of the national account growth that we've been seeing? Thank you.

Seth, this is Matt. We absolutely are continuing to push both rate and time, and we feel that the demand is there to get both. We saw record realized rate in Q3, and we saw record time as we closed Q3 in September. And I'm pleased to say that that kind of demand, as we sit here today in October, we're seeing sequential rates continuing to grow at about 0.5 points, and the time utilization gap that, year-over-year, which was a 1.6% positive, 160 basis points positive in September, as of last night we maintained that 160 basis point gap. So we're seeing the demand continue, and we feel that rate and time are both there for us for the taking.

The other thing I would add to that is, the only thing that we saw in September is our national account did grow faster than our core business. And as I mentioned, a lot of these larger projects are coming online.

Right. Mike, you mentioned, I think the phrase you used was negotiated pricing, and I'm just trying to understand this market a little better, because some of your competitors have talked about going after the national account market more aggressively. So I'm just trying to understand how that -- as this market becomes a bigger part of your mix, and as other competitors are going after it, your ability to sustain rate here, and your ability to continue for that business to grow at these types of levels, at a profitable level. I mean, have you noticed any great change on the competitive front, I guess, on the national account business?

Overall in aggregate, no. I think there may be some movement within who is number two, number three, number four players for some accounts, but as Mike had mentioned, our September growth for national accounts was almost 19%, so that is as high a number as we have had in the quarter, so we're actually seeing our momentum pick up.

Is that a slight drag on sequential rate? It can be in a quarter, but I think Bill guided properly on where we get to see rate, going forward. We have talked about that, and we think that 3% is the entry level for us, and somewhere between that 3% and our about 4.5% guidance for this year is the goals that we look for going forward.

The other thing I would only add is look, we can't be complacent. We have to continue, as I mentioned in my comments, to be innovative, and think about how we can enhance our value proposition to our customers.

I just mentioned that we announced that we've going to have 160,000 units by the end of next year with GPS. Yes, there are other competitors who have GPS capability, they typically will put it on, and charge for an extra charge.

December, we'll give you some understanding of what we intend to do with GPS technology, and how we think that we can continue to focus on improving our value proposition, in comparison to the competitive environment. That's what we're learning, and that's our job, and I'm very happy to report that the team is very active in thinking that through.

Okay. Thank you for that. If I could just ask a quick follow-up, piggy-backing on Ted's question about 2015. Bill, is it fair to think about pull through margin at these same levels, is high 50%, 60% pull through margin you think is stable into 2015? And how much of this $100 million Lean initiative do you think is part of that?

Seth, we've said in the past that we believe 60% is a reasonable way to think about pull through margins for the next couple of years. So yes, use 60% if you're thinking about 2015 as a good starting point.

Obviously, we'll sharpen that as we finalize our plan for the year and talk about it at future points. So that feels about right. I'm sorry, the second part of your question was?

Just how much of the $100 million of initiatives, the Lean initiatives that you see capturing in 2015?

Yes. We haven't boiled it down to an expected realized dollar amount. Again, as we go through our planning process, and think about what our guidance for 2015 is going to look like, we'll figure out what more we might want to say on that. So, stay tuned.

Okay, thank you very much.

David Raso, ISI Group.

Thank you. A quick question on 2014, then a bigger question on 2015. The utilization I know seasonally peaks in October, but still, just given the way you have started the quarter, it would appear to get to your full-year utilization increase, the 40 BPs, the drop-off in November and December in utilization appears to be a little heavier than normal seasonality. Am I reading that correctly, or is it utilization is the area that maybe there's a little upside to guide, but then the rate is the trade-off on it?

I'm just trying to understand, are we seeing something for November and December that would imply a little further decline than normal seasonality over the last two months of the year?

Maybe I will start. I think we saw a very robust utilization result in the third quarter, and it's hard for us to extend that, thinking too aggressively in the fourth quarter. Obviously working very hard to make sure we get as much utilization as we can in November and December, but we haven't really aggressively moved those utilization months up from what we thought earlier in the year. So we're continuing to look at it.

If October finishes out the way it started, then maybe we'll have to revise our thinking. Right now, there's nothing dramatic negative going on in the November December time frame, that we're protecting against, or concerned about. It's just we haven't gotten to the point of saying, third quarter in October, let's goose up November and December based on those results. Haven't gotten there yet.

Okay so that's some wiggle there, okay. On 2015, I know the stock is up a lot today, but obviously, the stock has been off. It influenced your use of cash, and the timing of the repo for 2014. Can you walk us through the cash flow for next year, the use of it, how the stock price may influence your thoughts on moving forward with more repo, versus maybe what you're seeing in the M&A market?

I think it's important to say that the stock price isn't really the guiding light for our decision about whether we do a repurchase, and how much of a repurchase that we do. That comes out of our consideration for how to allocate our capital and our free cash flow. And we try to think about that question in longer-term strategic terms.

That's what led us to the $500 million program that we're currently on, and that's what we would think about, as we consider whether and how much of a follow-on program we could or might do. So that thinking is going on right here and now. The stock price, at the margin, may prompt us to say let's go a little bit faster, or a little bit slower, within the broad framework that we establish.

So in this case, the current $500 million, we said initially it was going to be $500 million over the period extending until April of 2015. As we got into it and saw our cash flow come in, and saw the stock price come down, we adjusted as we thought appropriate. And so tactically that is the way we would manage any future program as well. But the program itself, both existence and scale, would come out of what we think our cash flow is going to look like over the long-term, over the next number of years, and we'll continue to talk about that as we sharpen our thinking about 2015 and future.

And David, on the M&A front, our principles have never -- they haven't changed one bit. It would have to be strategic. It has to be accretive, and you know our goal of return on invested capital. And the other part would be a cultural fit, and it's a pretty high hurdle, and we're very comfortable with that.

The net debt to EBITDA, 2.9% at the end of the year, when I think about how you are going to manage that through 2015, are you comfortable maintaining the 2.9%? Obviously, I'm trying to figure whatever I believe the cash flow will be for next year. Can I assume you are going to put that all the work?

I know you have got roughly about $125 million of earn-out you have to pay for the National Pump deal, assuming they hit their targets? But are we comfortable assuming where the net debt to EBITDA ends this year is a comfortable ratio for the end of 2015?

I think we've said that next year, 2015, we believe that the leverage should trend lower, so lower than the 2.9%. And in fact, I think I've said in the past, we see it toward the lower end of the 2.5% to 3.5% range that we talked about. That thinking certainly would have us using our cash flow to both pay down debt, but also to finish up our current share repurchase.

And we would continue to think about it that, way the leverage path that way, even if we decided to do another share repurchase. Obviously, that all assumes de minimis in the way of acquisitions.

If a significant acquisition comes along, we would reassess the path of leverage that we would want to be on, and we talk about it at the time of announcing the acquisition, right? But our thinking right now, ex-acquisitions, is that we're going to trend toward the lower end of the range during 2015, and finish up toward the low end of that range.

Appreciate it. Thank you.

Joe O'Dea, Vertical Research.

First question on Lean, and it looks like from the slides that employee participation was higher in 3Q versus 2Q, that the actual branch participation was more or less in line. And so as you approach year two of the implementation, could you talk a little bit about how Lean evolves, and what the key goals become in year two of that process?

Sure, Joe. Part of what you see as more participation, is the aggregate. We aggregate how many folks have been through Lean as our goal, to get through as many of our 12,000 employees as we can.

I'd say the bigger opportunity for us is, you'll see on that slide, I'm sure you're referring to slide 21, we have done 141 branches, but 314 branch managers. We do believe there is an opportunity for us to spread through our line management some of the Lean processes and procedures, as well as push out some very simple best practices that we've discovered during the Lean projects and the Kaizens that we've done, and push them out through the broader organization.

One example of that would be counter accuracy, and you'll see the term B Pro in there. That was a designed rollout, as a result of findings during Kaizen events at multiple branches, that we felt we would share with the broader organization.

And we are seeing metrics, very favorable throughout Kaizen and non-Kaizen branches, in our order accuracy, because of that. And I think you'll see us continue to work down that path in our Lean management process.

That's right. Just to add, that's the process for driving the culture change that Lean represents. We recognize that it is fundamental culture change, right? It's a different way of looking at your business, and we're taking a variety of paths to drive that culture change, whether it's direct training, whether it's rolling out B Pro's best practice rollouts, whether it's just generally talking about what Lean means to one organization.

We're deploying all of those, and doing it in a structured reasoned way, to make that Lean implementation stick. Because that's how we're going to deliver the $100 million and beyond of benefits from that change in mindset. So we will continue to work on it and talk about it, and welcome your questions about it.

Okay, thanks. And second question, just on National Pump, and with respect to CapEx plans, how are oil prices right now influencing your equipment spend plans, and if no change so far, how long before $80 oil leads you to hold off on some considered investments?

I'd say no change so far is definitely the way to think about our capital plans. Unless and until we actually see a pullback from our customer base, we're going to continue to invest.

And even then, even if we saw a little bit of a pullback, we would have a debate about what does it represent, and how does it impact our plan for investing in our pump business -- in fact, in all of our specialty businesses, right? It may not mean anything.

If you look at National Pump through the last recession, they were on a growth path that was so aggressive that they didn't have a downturn back in 2009-2010 timeframe, right? So we would have to ask ourselves, are we positioned so we can find demand outside of a slowing oil and gas sector, to continue on the growth path and therefore justify continued investment. I don't think that's a ridiculous thought to have for the pump business, or indeed most of our specialty businesses.

Is going to say strategically on the pump business, I just want to remind everybody, it wasn't -- it was roughly a $200 million volume play. It was 50% of their business in that oil and gas arena.

If you recall 6% of our business, or their business, is in our sweet spot and we're almost $5 billion. So the idea was, is taking that knowledge and spreading it, and cross-selling it to our customer base, as opposed to us going after their customer base. And that strategically, we found very attractive.

Great, thanks very much.

Steven Fisher, UBS.

Good morning, it's Eric Crawford on for Steve. Circling back to Seth's question on time utilization, and with all your operational improvements with the Lean and telematics initiatives, how are you framing the puts and takes around what the new normal for time utilization can look like? Clearly, it varies by equipment type, but do you think you can raise each category another couple hundred BPs from where it stands today?

Eric, we have talked in the past about operating in the 70%s on average, throughout the course of the year. So that would be a couple hundred basis points from the full-year 68.5% that we're expecting this year, and we certainly feel like Lean and some of the things we are doing to change internally will help us get there.

So that's how we're thinking about it broadly. It is in the 70%s. If you've got a couple of drinks in the three of us, we all might give a slightly different number in the 70%s but it's going to be in the 70%s and that's a couple hundred basis points north of here, at least.

Well, we'll work on getting those drinks with you, a little later I guess.

I guess switching over to the dollar utilization, nice uptick year-over-year and sequentially, across all of the categories. But the largest step-up was, year-over-year at least, was in earth moving equipment. Could you speak to your availability in that category specifically, and how the demand has trended relative to your expectations?

Eric, I think the demand has picked up about the same pace that most of our other core products. At think we made a little bit more concerted effort on fleet mix, and therefore we're calling on a broader customer base, and the broad base we already had.

So we continue to want to have -- broaden our offerings for lots of reasons, and we think there's part of that opportunity, and I think that's what you're seeing. You're seeing the results of that, and I think as we continue to tie our sales efforts to our fleet mix efforts, we'll see continued growth in both scale of our other non-aerial reach fork products, as well as returns.

Okay, great. Thanks very much.

Nicole DeBlase, Morgan Stanley.

Congrats on a nice quarter. Most of my questions have been answered, but maybe the one box we haven't ticked just the M&A backlog, what you are thinking from an acquisition perspective as a potential use of cash in 2015?

So, Nicole, good morning, it's Bill. I think the way we approach M&A is the way Michael articulated earlier. We certainly look at a variety of opportunities, we look carefully. Because it's been an important part of how we've driven the Company forward, but we're also very disciplined in when we actually execute a transaction.

So we're continuing to look at opportunities as they come. As I'm sure everybody is aware, there have been a number of opportunities, a number of properties available in our sector over the last recent period. And we've taken a look at the ones that made sense for us, and we'll continue to do that. But nothing more to say on that front right here and now.

Okay, got it.

Mike, do you want to add anything?

Other than just to say, Mike said it on every quarterly call we have, the bar is high. The bar is high for us and we'll continue to keep that bar high.

Okay, good to hear. And maybe just one on CapEx into next year. I mean, is it fair to assume that we're going to have another flattish year of $1.7 billion-ish of growth CapEx in 2015, or is there scope to increase, given that you are seeing improvement in your end markets?

Yes, well certainly, we feel there's justification for another $1.7 billion next year. That's our thinking right here and now. Could it go a little higher than that? Yes, it could go a little higher.

We're in the midst of that plan process right now, and that's firmly on the table, and I would say if the utilization trend that we've seen here late in the year continues, to the earlier discussion, if November December don't fall off, or indeed if they do a little bit better, then I think we would have to put at least another $100 million on the table in that environment. Now Matt is smiling here, so our arm wrestling match is going to continue once this call is over, but that's the range that we're thinking about. And the market certainly, as we sit today, the market feels like it could support that.

The only thing I would say, Nicole, is that we are very disciplined in our approach on how we use CapEx, and that will stay with the Company, in our belief.

Okay, understood. Thanks, I'll pass it on.

And we'll go next -- just a moment. (technical difficulty)

(Operator Instructions)

Scott Schneeberger, Oppenheimer.

Thanks for taking the question. I just want to talk a little bit about the increase of free cash flow guidance? Bill, could you talk a little bit about what some drivers were of the strength in the quarter, and how you're thinking about the multi-year free cash flow guidance right now?

Sure, Scott. I think I touched on it, the key drivers in the quarter, and for our outlook for the full-year, is the momentum that we've seen on collections, our DSO performance is coming in nicely, relative to what we expected. So that's feeling more confident around the collections that we're going to experience.

And then we've got greater visibility on the timing of our payables for the quarter during third quarter, and a greater visibility to what fourth quarter is going to look like. So those were the two main drivers for the increase in guidance for this year.

It sets us up nicely for next year. We have talked in the past about being north of $600 million in free cash flow during calendar 2015, and we certainly continue to feel good about that, and again we'll sharpen that as we finalize our plan for 2015 and report more on it, either in our Investor Day, or when we deliver fourth-quarter earnings. So, well-positioned for next year to be in that north of $600 million range, and beyond that, 2016 and 2017, assuming the cycle plays out, look better still.

Thanks. And just following up on a question earlier regarding M&A. It does seem like there are a lot of opportunities out there for you. Could you just compare and contrast, looking in your traditional equipment rental business versus specialty on an M&A, and maybe some of the areas you're looking to branch out into, in specialty, or is it just work within assets?

This is Mike, I would tell you that obviously we've been talking about specialty as an area of growth for us, and I'm sure we'll talk more about that at the Investor Day. We have a keen interest in that arena, and there's a lot of areas we don't understand, and again we look at that strategic return and cultural fit, so all those things have to come into play.

As Bill mentioned, there's been a lot of properties that have been up for sale and we've looked, and we've passed, because of the high bar. That will continue, so I would say that we're always acquisitive, and we'll always look and we'll try to understand how that can benefit the Company, not just in a year, but over time for longevity, but tie it to our strategy and the return metrics that we're looking for.

Great, thanks. I'll turn it over.

Jerry Revich, Goldman Sachs and Company.

Good morning it's Matt Rybak on behalf of Jerry. Just briefly wanted to talk on the capital allocation side, and see if you could maybe touch on which regions you're seeing outsized capital allocation towards, maybe where you're seeing the most growth, and maybe give us one, two, and three of the top regions within your Company?

Sure, Matt. It's pretty broad-based, and we have a very rigorous process when we put out growth capital. So when you think about our capital, a large portion of it is replacement.

And because of the broad-based opportunities we've seen throughout our network, we've been giving all of our regions the appropriate replacement capital. And then they earn growth capital based on the returns, not just the demand in the end market.

Mike said earlier we're chasing not just growth for growth's sake, but profitable growth. And we dole out our capital appropriately. You can imagine where the hot pockets in the markets have been along the Gulf Coast, but we've seen growth in the Midwest and on the West Coast, as well as the North East as well, so we're really seeing a very broad-based growth, and we're allocating our capital appropriately.

The only thing I would add to that is a proportion of our growth capital has gone into our specialty business, and that's where you're seeing the fantastic growth that they been able to produce.

Great. I know you touched on it, just to follow up a little bit on the beginning of the call, but from an end market standpoint, Gulf Coast obviously large pet chem, potential LNG build out there, but can you maybe touch on which end markets are driving the strength in the Midwest and in the Northeast?

I think you take a look at, it goes in line with what you're seeing in the consensus report. There are things like commercial, healthcare, power, manufacturing, and multi-family are all seeing nice improvements. So those will probably be the likely areas that you were going to see, where we're putting it.

As I mentioned in my call, broad-based, multiple different types of projects. I was just recently down at a race car facility where they're doing a major expansion, and so it's just very, very broad in general, but those would probably be the hot buttons that you can take a look at.

Great, thank you very much.

Okay, operator I think this is a good time to wrap up the Q&A. I do want to remind everyone to download our investor presentation, if you haven't already. Please give us a call in Stamford, or give Fred Bratman, a call particularly if you want something to discuss, or if you want to see a branch visit or go to a branch visit.

Also please make note of December 4, it's our annual Investor Day in New York, and we're very excited about it and I hope you will attend, but if you can't, you can join us on the webcast. So operator, I think you can end the call now. Thank you.

This does conclude today's conference. You may now disconnect, and have a wonderful day.