聯合設備租賃 (URI) 2016 Q3 法說會逐字稿

Good morning and welcome to the United Rentals third-quarter 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 Company's earnings 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, 2015, as well as two 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. Please refer to the back of the Company's earnings release and investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.

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.

Thanks, operator. Good morning, everyone, and thanks for joining us on today's call. Before I begin, I want to mention our upcoming Analyst Day which will be held on Thursday, December 1, in New York. We hold this conference every two years, and the webcast is the most attended event.

This time I will be taking a deep dive into different initiatives we have underway, including customer strategies, fleet management, process innovations and other areas that demonstrate how we're maximizing the value of our Company for shareholders. I hope you join us. Now let's go into the quarter.

Our operating environment played out largely as we expected. Demand continued to trend up, driving an increase in volume of equipment on rent. Our specialty operations continued to outperform both the rental industry and our Company as a whole, delivering solid benefits to revenue, margin and returns.

And major initiatives such as cross-selling are ramping up nicely. The revenue contribution from cross-selling has increased sequentially throughout 2016. In the third quarter cross-selling to national accounts grew by a robust 14% year over year.

These gains were offset by three ongoing headwinds in our industry. They are the Canadian economy, upstream oil and gas and the current fleet imbalance. But overall the market continues to move in our favor.

Against this backdrop we did a good job with rental revenue. On a year-over-year basis, revenue was essentially flat despite softer rates. We are pleased to deliver adjusted EPS of $2.58 per diluted share, as well as adjusted EBITDA of $747 million at a margin of 49.5%. And free cash flow continued to be a robust $846 million through September, while our CapEx spending stay on plan.

Based on this performance and given the visibility into the fourth quarter, we have narrowed some of our guidance to help you model our business. We now expect full-year exempted EBITDA to be at the top end of the range we previously provided. We also feel confident that we can improve on our full-year rate decline we forecasted earlier with no significant impact to timing utilization.

And we expect record free cash flow of more than $1 billion, which would exceed our original guidance. As we consider the best way to service our large contract wins, we may buy up to an additional $50 million of fleet in the fourth quarter. So no surprises in terms of the cycle or our own performance, I would characterize it as being right on track.

Next, I want to spend a few minutes on our operating environment. There are some positive indicators. I just reported that new construction starts are up 22% sequentially in August, with the most meaningful gains coming from commercial and public construction.

Nonresidential starts increased significantly, overall, up 43% in August and another 5% in September. This is consistent with other US construction data, which showed that backlogs for large contractors hit a new high this year. And many of these jobs can take months or years to complete, which gives us added visibility into demand going forward.

Another key bellwether is our customer survey. Our customers felt good about their business prospects throughout the quarter. In fact, the August survey indicated the strongest optimism of the past nine months.

And the September employment report was also encouraging. It showed that jobs in US construction sector increased for the first time in months. While there is evidence of headwinds such as a modest contraction in the architectural billing index in August, overall the market feels positive to us.

So it's a lively marketplace for us in the US with a strong pipeline of new projects breaking ground. Geographically, we're seeing the most growth on the East and West Coasts. On the West Coast we won four major construction projects that will run through at least mid-year 2017.

Another two sites are starting up this quarter. Solar power and automotive are two key verticals, and government spending in California remains robust. In the mid-Atlantic our business is trending up from the past two quarters with a healthy mix of projects.

These include power and pharmaceutical plants, a casino, hospital, airport renovation and retail malls. Further south, a number of tourism projects are driving growth and automotive plants are underway in South Carolina. The Southeast Metro areas overall continue to represent large opportunities for both our gen rent and specialty operations.

I want to give a shout out to our employees in the Southeast who have been working long hours in disaster recovery mode following Hurricane Matthew. Our people are doing a stellar job of helping hard-hit communities in Northern Florida, Georgia and the Carolinas. And the restoration in these states could take years to complete.

That's a US snapshot. By contrast, the Canadian economy is still a challenge, compounded by the energy sector in western provinces. Rental revenue from Canada in the quarter declined by approximately 10%.

A fine line for us in this environment is to invest enough growth capital to serve our customers and grow our business without adding to the industry imbalance of fleet. So we are walking that line really well in 2016, continuing to use a balanced strategy of deploying our CapEx in a very [informed] manner, while also relocating our existing fleet away from softer markets. The major beneficiary to our growth CapEx, as we've noted before, is our specialty segment.

In the third quarter specialty had a strong showing. Rental revenue for this segment increased by more than 9% in the quarter versus 2015. Within that segment revenue from power and HVAC was up 17% and Trench Safety was up over 5%.

The largest tailwind behind these two increases was same-store growth. We also had a 5% revenue growth in pump where our strategy of end-market diversification is paying off. And we seem to be at a turning point in neutralizing the drag from upstream oil and gas.

And finally, I want to give you an update on our digital strategy. We've gone from zero to over $1 million a month in online orders in just 12 weeks. So while this strategy is still very young, we've seen enough to know it's got legs.

Some of the business is coming from our existing customers who want the digital convenience and some are from first-time customers. So we are achieving both of our objectives with e-commerce which are to increase the stickiness with our current base, and to capture more customers through a new channel.

So to recap the quarter, there were no surprises. The Company is solidly on track and we're continuing to focus with many levers within our control. Demand is also on track based on what we saw in the quarter and what we hear from our customers, and we believe the cycle still has runway ahead.

Our full-year results should be near the upper half of our prior guidance in a number of key metrics. And we expect our free cash flow to be more than $1 billion this year.

Naturally we are mindful of the uncertainty that continues to be prevalent in the global economy, but I also want to remind you that we have considerable flexibility in operating our business to address any change in market dynamics. It gives us a great deal of confidence in managing the business for the strong full-year performance we have reaffirmed today.

So with that, I will ask Bill to discuss the numbers, and then we will take your questions. Over to you, Bill.

Thanks, Mike, and good morning to everyone. As usual, we will step through the highlights in the quarter and then update our outlook to finish up. So let's start with rental revenue. That was down $4 million year over year or 0.3%. Within that $4 million, re-rent and ancillary revenues in the quarter were actually up $5 million over last year, as was the volume component change in OEC-on-Rent which was a positive $26 million contribution from last year.

The offsets to those were rental rates. That down 1.7% translates into about $19 million of year-over-year decline. And our replacement CapEx inflation, which was worth about $18 million of year-over-year decline.

The remainder was mix and other, which was a positive $2 million versus last year. So all of those net to the $4 million or 0.3% decline. Within that rental revenue result, the Canadian currency impact this quarter was fairly minimal.

The currency was basically unchanged from last year and so had no significant effect on the overall rental revenue performance. But, if you look at the effect of the entirety of our Canadian operations, it still represented a headwind. Excluding Canada, our US-only revenue would have been up 0.8%, so a significant impact from Canada, and we can touch on that more in the Q&A and if there are questions.

Our used equipment sales result for the quarter was $112 million of used equipment revenue. That was down $29 million, or just under 21%, compared to last year. That decrease was primarily driven by the high level of used sales that we had last year, as we were moving equipment in response to the oil and gas challenge that we saw last year.

So, that decline in revenue, we think, was mitigated somewhat by the fact that we used our retail channel more significantly this year. In fact, you can see it in the adjusted gross margin result. Adjusted gross margin this quarter was 46.4%, and that was 2.4 percentage points better than last year.

And certainly that benefited from a much stronger use of the retail channel and much less use of auctions this year compared to last year. Moving quickly to adjusted EBITDA, the $747 million of adjusted EBITDA we reported was down $33 million versus last year, and that reflected the puts and takes that I talked about in the rental revenue description. In particular, rental rates cost us about $19 million versus last year, but volume offset $17 million of that headwind during the quarter.

The inflation, however, cost us about $15 million compared to last year, and the used equipment result cost us another $12 million. Merit increases, we always call out, worth about $6 million year over year headwind. And then the mix and other was $2 million positive impact.

So those were the pieces of the $33 million year-over-year decline in adjusted EBITDA. Our adjusted EBITDA margin for the quarter was 49.5%. That was down 80 basis points versus last year, and again, it reflects all of the components that we talked about here previously.

Just a quick update, within that EBITDA performance was our lean contribution for the year. Updating that progress, we ended the quarter at an annualized run rate of $96 million contribution from our lean and other savings initiatives. That compares to the $81 million we reported at the end of the second quarter.

So making nice progress, and as you all know that we are targeting $100 million run rate by the end of this year. And we still feel very comfortable about achieving that $100 million target by the end of December.

On adjusted EPS, $2.58 for the quarter was up $0.01 versus last year. Again, it had de minimis impact from currency in the year, and obviously reflected the impacts of the operational results that we talked about, as well as the benefit of the share repurchase that I will touch on a little bit later.

Free cash flow during the quarter -- or excuse me year-to-date period, free cash flow was $846 million. And that was better by almost $340 million compared to last year. The primary drivers were lower rental CapEx spending, that was worth about $280 million compared to last year for the year-to-date period.

We also had lower cash taxes, roughly $41 million. And timing of working capital was a benefit versus last year of roughly $110 million. Those were the positives, and they offset on a year-over-year basis, the decline in adjusted EBITDA that we've seen year to date.

Our net debt finished the quarter at $7.7 billion, and that was down roughly $640 million compared to where it was in September of last year. Now, a good portion of that change is timing, so don't extrapolate it to the year-end, but we are still going to finish the year with a very, very significant reduction in our overall net debt position. And I think that's speaks to the cash flow benefits that we've been experiencing as well.

On the CapEx front, our gross rental CapEx in the quarter was $423 million. That was up from last year about $15 million and it brought our full-year year-to-date CapEx spend to $1.145 billion. On our way to that $1.2 billion to $1.250 billion range that we updated in our outlook, which again, I will touch on again in a minute.

Net rental CapEx for the quarter was $311 million. That's up from last year, and it primarily reflected the difference in used equipment sales, as well as some timing effects. When you put it all together, our ROIC performance in the quarter was down 70 basis points to 8.3% in the quarter, obviously reflecting the impact of the operating measures, particularly rate, as we discussed previously.

On liquidity, we finished the quarter with just under $1.1 billion of total liquidity. And that includes about $720 million or so of ABL capacity available to us, as well as just under $300 million worth of cash on the balance sheet. The capital structure, just briefly, you all recall that during the second quarter we had some redemptions.

We completed those actions during the course of the third quarter by redeeming the remaining $200 million of our 7 3/8% notes. We funded that redemption in Q3 by a draw on the ABL. So when you put all the actions on the capital structure together for the year, we are at an annualized savings of about $30 million of interest for the future periods.

Just a quick update on the share repurchase program. We bought $152 million worth of shares during the course of Q3, that brings our year-to-date total for share repurchase to $476 million. And if you extend the look-back to the beginning of this current authorization, the $1 billion authorization, we've now spent $587 million of that $1 billion of authorization that we have.

Our plan for the remainder of this year is to continue on the pace that we've been. We've been talking about a pace of spend of roughly $150 million, $160 million a quarter and we plan to compete continuing that pace in Q4. We have the flexibility to be able to execute the share repurchase.

Just an update on the covenant and cash position. We finished the quarter with about $560 million worth of capacity for share repurchases under our restricted payments limitations, plus the cash on the balance sheet. Let me finish out with an update to our outlook for the full year and a quick comment on October.

The outlook you've seen in the press release, but just to hit a couple of key points, we've narrowed the range of most of our outlook measures in order to reflect the fact that we've got nine of the 12 months already in the books. So our rental revenue is now within a $100 million range of between $5.65 billion and -- excuse me, total revenue is within a range of $5.65 billion to $5.75 billion.

EBITDA we narrowed to a $50 million range with the bottom of the range at $2.7 billion, going up to $2.75 billion. And you've all seen the rental rate guidance. We've narrowed that to 2.1% to 2.3% declines for the full year.

I mentioned and Michael mentioned, our CapEx plan. Right now we're calling it a range of $1.2 billion to $1.25 billion with any incremental spend being targeted at specific projects that we've been awarded and our need to spend in order to support those customer needs.

And finally, we mentioned that our improved outlook for free cash flow takes us to at least $1 billion. Call it $1 billion to $1.1 billion of free cash flow over the course of the full year.

Regards October, our rate performance so far in October is trending toward flat to slightly down result for the full month of October on a sequential month basis. And if you look at where we are on the time utilization for the month of October, month to date our average is up about 80 basis points over where it was last year. And if you look at it just on a one-day snapshot, as of today we are actually up 100 basis points over where we were on a comparable day last year.

So that supports the trend in improvement in utilization that we would need in order to deliver the time utilization outlook that we have for the full year. That full-year outlook is approximately 67.8%, and we would need something like 80 basis points each month the remainder of the year in order to hit that new time utilization guidance.

So those are the key points that I wanted to make. I will stop there and ask the operator to open up the call here for questions and answers. Operator?

(Operator Instructions)

Robert Wertheimer, Barclays Capital.

Hey, good morning, everybody. Pretty straightforward, so thanks for that. I actually have a more general question. As you see your national competitors expand, and one of them just had a five-year plan that was put out, is it coming to markets or expanding to markets where you have been, are you seeing most of the share come out from the smaller, less formal competitors? In other words, are we seeing a steady -- the big people in the industry steadily winning out over the smaller ones? Or do you see a big dip in each market as they do? I am a little bit curious if the expansion is accelerating the consolidation of the industry. Thanks.

So Robert, this is Matt. I think everybody is running their playbook and we are aware that we have one national competitor that has still got some growth ahead of them from filling out their footprint. But at the small de minimis market share that they are at, I am not sure that drives the changes in the marketplace as much as the other 70% that we don't have visibility to. For the 25 years in this business that I've been in, any market that I've participated in has somebody trying to get some share for various different reasons.

So this is part of being in the rental business. You are going to need to sometimes protect share, sometimes gain share. I will tell you that what we are focused on in making sure we are not just chasing the last dollar of revenue, but profitability remains our focus regardless of what anybody else is doing.

Just to put it in context, when you think about all the local, regional and maybe some semi-national competitor's, it's a competitive market, but there is a lot of demand. And we feel that the absorption is better off today than it was six months ago, on the fleet, in the industry. And we are encouraged by that.

Great, thanks.

Nicole DeBlase, Deutsche Bank.

Hi, Nicole.

Good morning, hi. My first question is around oil and gas. I was hoping you could talk a little bit about what you saw during the quarter with respect to the different verticals, so like upstream, midstream and downstream. And is there anything notably improving at all, given what we've seen with the oil price so far?

Nicole, this is Matt. I wouldn't say that there's been much improvement in the upstream. There's been some noise about the rig count being slightly up over a much lower base. And we even have put out what we call a few frac packs, but really a small amount compared to historically what we used to put out to those spaces.

The good news is we do feel it's bottomed out. And so, we are not counting on much of an uptick in upstream right now, but we are positioned in case there is one. I think the surprising element that not everybody on the call may recognize, is that refining is still a pretty robust end market for us. We are up almost 12% in refining on a year-over-year basis.

So not all oil and gas is a challenge for us, just really the upstream. And we are encouraged by that and we think this fourth quarter there will be even more activity, a lot of turnaround activity that our customers are speaking of. So we feel pretty good about that sector.

Okay, thanks, Matt, that's helpful. And then on a similar topic, if we could talk a little bit about Canada, you guys provided a little bit of color in the opening remarks. But have you seen any signs of stabilization in Canada, or are trends still deteriorating?

I would say similarly that Canada, the good news is that they've bottomed out. The difference is, I think we still have some more year-over-year headwinds in Canada than we do just strictly in upstream. But the theme up there is actually thought pretty well to even getting some sequential positives in the last couple months. It's just the year-over-year headwind is still significant.

Our rent revenue for the quarter was down 10.7%, but most of that was rate, that was a 5.3% rate decrease. But their volume, their OEC-on-Rent is only down 4% and that's after we pulled over 8% fleet out of there.

So we feel we've right-sized our business from a fleet, headcount and footprint perspective without damaging our ability to participate in whenever they get some tailwinds at their back. They've done a good job mitigating that 10% through the P&L without weakening our positioning. Hopefully next year they get some tailwinds.

Thanks, Matt. I'll pass it on.

Seth Weber, RBC.

Hey, good morning, guys. I wanted to ask about the large contract wins that you called out in the press release. Can you give us any color on what that involves? Were those conquest wins from other rental companies? Or are those projects the companies have previously furnished equipment themselves internally? And can you give us some idea the duration of these projects to justify going out and buying new equipment at a time when utilization levels are -- they're okay but they're not rising? Thanks.

Yes, this is Mike. Let me just say that it's always competitive out there. So, regardless of when you say, are we taking this away from somebody, it is a competitive marketplace, so it is very broad. We were very fortunate to be able to take a multi-year contract that we need to make sure that we can be able to meet the customer demand.

As Matt mentioned earlier, we've been very good about looking at our fleet, managing our fleet. Remind everybody that we really didn't put any growth capital in our core business at all this year. So it has been by moving fleet around.

We exhausted our resources in looking at what is needed. And by the way, we said we would spend up to, and that is still yet to be determined, but I thought it was prudent to make sure that we communicated that to everybody.

If there is an opportunity for us to be able to reposition fleet at that time, to satisfy that, we will do that. But right here and now, as Bill mentioned, about what we're seeing in October on the utilization, is actually up year to date and on average for the month of October. So the demand is there, as Matt said earlier.

Yes, I think Mike covered it well, Seth. I would say, just to simply answer it, it's a yes on if these are long-term projects. And the amount of fleet that we need to fund for one specific plant award and then a couple of large projects, that's what Mike referred to in his opening comments, including some nice infrastructure projects, this represents a very small single-digit percentage of what will be needed on the life of that project.

So we will be able to take existing capacity to put on this project. But if we don't fill these immediate needs that we don't have available right now, we don't get to participate in the other 90%-plus of this project. So these will be mostly served by the $9 billion of fleet that we already own.

And just to emphasize, I know you know this, but to emphasize, even if we spend the incremental $50 million, our cash flow for the year is still in that $1 billion to $1.1 billion range. It includes the possibility of spending that incremental $50 million.

Sure, I appreciate, it's helpful, thanks Bill. And then a quick follow-up on the lean initiatives. It sounds like -- like you said, you are very close to hitting your target for this year, for exiting the year.

So should we expect to hear new initiatives at the Analyst meeting? Additional efficiency or cost measures that you are talking about for 2017?

Yes, we are still deciding exactly how we are going to approach that Investor Day but I think it's fair to say that we will be talking about initiatives that we think will have positive impact in our financial performance over the next couple of years.

All right.

So stay tuned.

I will see you there.

Yes, be sure to show up.

David Raso, Evercore ISI.

When I think about where you're better visibility lies, I would think it would be national accounts and maybe large projects. So if you can keep your answer to those accounts, those projects, what are you seeing when you reprice national accounts on pricing? And then also how you think about looking into the first half of 2017. Is the utilization still growing on those accounts in first-half 2017 versus this first-half 2016?

Obviously I am trying to think about the fourth quarter, you feel pretty good about your utilization growing, I think you said about 80 bps. Rates, obviously seasonally are down November, December but in general rates are still a little bit of a struggle sequentially, as we saw in August and September.

So not the short-term business, but where you really have visibility, are you repricing national accounts at higher or lower levels? And what kind of visibility do you have on the utilization into next year?

David, this is Matt. I would say on national account pricing, what we are experiencing on a year-over-year perspective from national accounts does not differ much from what we see in our overall business. Now admittedly, they are all coming off different baselines, so you can imagine that national accounts are going to leverage that spend, but that's already built into the baseline. So we are not seeing a tremendous amount of difference between our overall business rate performance and national accounts.

What we are seeing, and it's a big part of our focus strategically, is that our national account growth in Q2 was higher than what our overall growth was as a Company. So to your point, there is greater visibility into it. It's already such a big part of our business and we still have such an established baseline that I don't think there is a lot of headwind or tailwind by customer segment because they're pretty well established.

But the growth and the demand is still there in that space and that remains a key focus. And they do most of the large projects, so they kind of go hand-in-hand. Your question was about projects and national accounts.

That's what I'm trying to figure. We all have our own view on the shorter-term rental swing on how we view activity for next year. But at least to start the year it still sounds like more of a lean on utilization growth. And the rate for now, we can all assume what we want, but it doesn't seem like the rate is necessarily growing on these new accounts. It's more about utilization and then make your own call about the shorter-term projects. Is that fair?

No, I wouldn't necessarily say that. Because remember, embedded in that national account pricing experience is the largest headwind that we have. Most of our oil and gas business was national account business. So that national account, even though it being similar to the Company average, had to absorb almost all of the oil and gas experience, which is negative on a year-over-year perspective.

So I wouldn't necessarily characterize it that way. The truth is, we will find out in the future. But as we sit here today, and where our business is today, I wouldn't say that. I would actually say they've absorbed more pain overall in that business.

Well, when can we start repricing those contracts then? That would be an interesting thing to delve into. When do those contracts come up?

I know you're generalizing a lot of different accounts, but you want to be positive and say, hey, oil is a little higher today. Is that a different tenor in the conversation about what you could charge? When do those conversations start up?

So the 25% on that are fixed-price all have different expiration dates. And most of them are multiple years, so it's not really a clean answer for you. I would say that it's throughout the year.

As far as the projects, they will price accordingly. And it really depends more on what market the projects are in as far as the price volatility, and who is more capable of supplying the assets that are needed. We feel on some of the ones that we've recently won we are very well positioned.

We'll continue to focus on where we are well positioned versus chasing down somewhere where we may not have as much a competitive advantage. And that's part of our focus on profitable growth versus just revenue for the sake of revenue.

All right, I appreciate the detail. Thank you.

George Tong, Piper Jaffray.

Hi, thanks, good morning. You are at the point in the rental season where a lot of rate change coincides with equipment coming off rent, which implies less control over rates compared to the beginning of the cycle. In light of this, what factors help give you confidence that rates will come in at the higher end of your prior guidance?

This is Mike and I will ask Matt and Bill to also chime in, but as you heard from Bill that currently our utilization is up nicely on a year-over-year for the month. So that continues. You also heard that our rates are flat to slightly down.

I think the industry overall is being more responsible in the way in which they are managing it. The imbalance is continuing to get better and better, so I give the industry a lot of credit for being responsible. So that would be part of it.

There going to be a necessity for the industry in total to try to achieve higher pricing or drive better efficiencies or manage their business much more efficiently. So that, to me, gives me confidence as I see those trends play out, as we've seen it over the course of the year. And then Matt or Bill, if you want to add anything more to that.

I would say in addition to that, the math give me confidence, right? We've now experienced 9/12 of the year. The remaining three months would make it pretty hard to move that full-year rate down significantly.

Just to give you a specific set of numbers, in order to get to that 2.1 decline in rental rates for the full year, October, November, December would all have to be down 0.2 each. That's not a ridiculous notion. But in order to get to the down 2.3 scenario for the full year, each of those months would have to be down 0.6 sequentially. I think it's highly unlikely that we are going to do that, and certainly even more unlikely that it will be worse than that.

So just look at the raw mathematics of what it would take in order to come outside of the range of rates that we've given. That 2.1% to 2.3% seems pretty well assured and it's not ridiculous to think that could we see minus 0.2% each month for the remainder of the year? It's not completely ridiculous. Even if we didn't see minus 0.2%, if we saw something worse in like November or December, we're still going to end up in a pretty decent place within that 2.1% to 2.3% decline range.

One other one just to preempt a question that we may get from someone, our carryover for next year, if we hit the 2.1% scenario would be positive 0.1% for the full year. So if we finished the year, October, November, December down 0.2% each month sequentially, that gives the full year 2.1% decline. And our carryover going into next year would actually be slightly positive.

On the flip side, just to be fair, if we finish with the down 2.3% scenario, our carryover next year would be minus 9/10 of a percent. Not an incredible headwind to overcome in order to get to positive rate, but certainly in the current environment, that would be a tougher starting point, but still one that doesn't make 2017 a complete wash. So that math is what gives me confidence, George, in saying that we are going to be in that 2.1% to 2.3% range that we gave.

Very helpful, thank you Mike and Bill. And just a housekeeping question around the guidance. Free cash flow guidance is increasing by about $100 million but EBITDA is only going up by $50 million. Can you talk about where that bridge is coming from in terms of cash flow?

Sure. To be clear, the EBITDA guidance range, the bottom of that range, it went up by $50 million. So I don't think it's exactly accurate to say EBITDA guidance went up $50 million.

But to try to be a little bit more helpful, of the $100 million or so increase in our free cash flow guidance, the bulk of it was driven by a refinement in our view of working capital uses during the course of the year, and a reduction in our view about how much non-rental CapEx we're going to spend over the course of the year.

That working capital, there's a contribution from accounts receivable, there's a contribution from timing of payables. And the non-rental CapEx was just refinement in our view about what it is that we are going to spend in the way of leasehold improvements and non-rental assets like delivery trucks and service trucks. So, working capital and non-rental CapEx were the primary drivers of that improvement.

Very helpful, thank you.

Mili Pothiwala, Morgan Stanley.

Thanks. My question is on M&A. You've been pretty clear about your priorities here and your preference for specialty, but as you look at the industry, do you see scope for further consolidation in this end market environment? i.e., could this be a way for some of your larger competitors to gain share?

This is Mike. M&A has always been part of our overview and strategy. It really comes down to timing. It comes down to price. It comes down to two individuals coming together and agreeing.

But yes, we think consolidation will continue to play out over time within our industry. Timing is always one where you don't always get to pick and choose your time. But we're very, I would say, very disciplined in our approach of how we go about it.

So there's a lot of things that we look at, and we are pretty stringent as to the hurdles that we have to go forward. So I would say, it will continue. There will be further consolidation in our industry over time.

How would you rate the pipeline right now? Trying to hone in on how people are thinking about M&A in the context of the current end-market environment. Have you noticed any shifts recently?

I wouldn't say shift. Our pipeline has always been full. Our business development team has been very active, creating a lot of communication, relationships across a broad spectrum. But our pipeline is there.

Okay, got it. Thanks. I will get back in queue.

Yes, thanks.

Nick Coppola, Thompson Research Group.

Hi, good morning. In your opening comments you talked a bit about the cycle, but wanted if you could add any additional color there. Surveys of customers were positive, it sounds like. What do conversations look like with customers and what is your visibility at this point?

Well, I think I articulated it in my opening comments. We talked about the Dodge starts, talked about the Dodge momentum. If you take a look at it's been up five of the last six months. It's been the strongest results since late 2012, early 2013.

The backlog, I think, is another way of looking at it. The backlog is a new peak at 14.1 months. The backlog versus 12.2. Those are things that we look at that sees the visibility that goes forward.

And by the way, we talked about Canada earlier. Even in Canada building permits were up non-res, sequentially up 12%. So we do see a lot of activity that is on the horizon.

Our customers overall, as I mentioned in our opening comments, optimistic. They are seeing the same thing in the build-up of their backlogs.

Okay, I think that's helpful. And then I just wanted to ask on hurricane Matthew as well, how do you expect that to impact your business in Q4 and then into following quarters?

Yes. For those of you who know me, weather has not the one that we always hang our hat on, but unfortunately there was a lot of devastation, as I mentioned, in Northern Florida, Georgia and the Carolinas. Our people have been there. It's not material for us simply because of our size. We are across all of the US and Canada.

And even if you look at what happened during the Sandy storm, it wasn't a material impact. It will take years to recover, as they rebuild, which they will do. And that will play out over time.

Understood. Thanks for taking my questions.

Yes, thank you.

Joe O'Dea, Vertical Research.

Hey, Joe.

Hi, good morning. First question is on used equipment pricing. I think when we look at the reported adjusted margin in the quarter, it was down a little bit sequentially. And talk about any channel or mix considerations there. But then, more broadly, what you've seen on more an apples-to-apples basis sequentially, and how you feel about where things are trending in used equipment prices.

Hey, Joe, it's Bill. Don't think about it sequentially because I don't have that data from Q2 right here to give you a number. Certainly on a year-over-year basis, I talked about the adjusted margin experience being up. If you look at the pricing underneath that margin experience, on a year-over-year basis it's certainly down a little bit from last year, let's call it 3%. On a comparable unit basis, maybe a touch, 3% to 4%, let's say on a year-over-year basis.

So we have been seeing some pricing pressure on a raw basis year over year, and that's been the case for a number of months. I think it's encouraging, though, that we can still move the equipment through the channels that are most attractive and still keep the margins at a pretty attractive level.

If you look at pricing relative to the original equipment cost of the fleet that we sold, in Q3 I do have that compared to Q2. It wasn't a significant change. On a sequential basis price as a percentage of OEC, that didn't change significantly Q2 to Q3. So that might give you a little bit of an indicator of the sequential experience that we had in the fleet. Does that help?

Got it. Yes, that is helpful. Sounds like stabilization sequentially, if you put it in those terms.

And then when we think about the outline you've given on 2017 CapEx and $1.2 billion to $1.6 billion, I think you've talked about it, how no firm decisions there. But could you talk about the planning process and where you are in that, when that really heats up? I think some of the tone of your comments today and feeling a little bit more positive about things, it suggests that we see some improvement year over year in that. But how you think about when you will have a more firm decision on it and where you are in the planning process.

I characterize this as being midstream in the planning process. As we sit right here and now, we are targeting a presentation of our plan to the Board in December, at least a preliminary presentation, so we've got to be finished by then. Right here and now, as we think about next year, we haven't put a stake in the ground. But our view will certainly be impacted by our view of how well the cycle is developing and also impacted by our view of how well we're going to perform in continuing to win major projects and win just general business go-forward.

We are looking at initiatives that are going to have impact in 2017, some of which we will talk about at our Investor Day in December. And those initiatives, the overall cycle and how effective we expect to be, are going to determine the end number.

What I would say about the range is, is the range still live, that $1.2 billion to 1.6 billion? Yes, at this point we could end up anywhere in that range. But keep in mind that if we are going to spend more going forward than we're spending right here and now, we've decided that we want to have a very clear view of where that spend is going and how it's going to contribute to improving our performance as a Company before we decide to spend that incremental amount. So more to come as we get closer to the end of the process and into January.

That's great, thanks a lot.

Scott Schneeberger, Oppenheimer.

Hey, guys, good morning. You know, I have to ask this. The digital platforms sounds pretty exciting.

If you guys could rehash the quantification of the run rate now, what you think longer-term though that can get up to? I feel like that could be a very significant percent of the mix. And have you given any thought to SG&A savings on that yet? Thanks.

Scott, this is Mike, I will start. And then please, Matt or Bill. Look, we think that, as I pointed out in my opening comments, we are offering a way in which our customers can ease-of-use, place their own orders, manage their own business. And this is just a follow-on from what we've heard from customers over time.

I also believe we're very happy to see that about half of that revenue is from new customers. So as we continue to increase the experience for our customers, we think we can grab more.

Where it goes, I think that's yet to be determined. But the good thing is we are on the front curve of that. There are customers out there who want the simplicity, who want to be able to control, who want to be able to do those orders by themselves. We want to make sure that experience is there for both of them.

Importantly for us, it's also the stickiness with our current customer base. So, to me, adding in to the new customers is just frosting on the cake. So, Matt, Bill.

Yes, I agree with Mike. The customer service aspect of it is primary and I would say more than an SG&A play, this is more of a broadening your reach play, just getting more customers, more new customers than you can get to just knocking on doors and calling on job sites.

This is moving into the future. It's been received very well, early days, and we are encouraged by that. Hopefully this will open up some new channels and broaden our reach.

I agree with that. We have not put an SG&A save number to this initiative as of yet, Scott, and that's primarily because, A, it is very early days and, B, it wasn't done for SG&A saves, it was done to satisfy those customer needs.

As it scales, and as we start to have more visibility to the impact that it might have on SG&A, we will tack a number as appropriate go-forward. But we haven't done that as of yet because that's not where we were focused on, on this initiative.

All right, great, thanks. And Bill, could you discuss, please, the potential ranges for EBITDA flow-through in coming years? Let's just say that based on a flat rental revenue growth environment, obviously as you mentioned a few questions ago, it looks like you are heading into that with the upcoming year.

Yes, the EBITDA flow-through we've talked historically about in that 60% area. I think that is still a reasonable range to think about as you have growth significantly different than zero, right?

If you are around zero growth, the flow-through calculation gets very sensitive and that's, quite honestly, why we haven't talked about flow-through extensively over the last few quarters. This quarter it was 76% or something like that. But obviously you want EBITDA flow-through to be lower when you are declining in revenue rather than higher.

So it's that sensitivity of the calculation around zero growth that makes it hard to say much about the usefulness of flow-through as a measure when you are around flat. Our plan for next year is to identify opportunities to drive growth. If we drive material growth next year, I don't think it's ridiculous to think about 60% as a flow-through that you could start your modeling with.

All right, great. Thanks.

Jerry Revich, Goldman Sachs.

Yes, hi, good morning.

Hey, Jerry.

Hi, Bill. Can you folks talk about the cadence of mix as we head into the fourth quarter and early part of 2017? You've got, I believe, a fleet mix benefit that you called out in the EBITDA bridge, and I am wondering as we overlay our pricing assumptions, anything we should keep in mind as you folks continue to push at the specialty products? Should we look for a mixed tailwind to help offset whatever fleet inflation we dial into our numbers for next year?

Tough one, Jerry. There's so many things going on in that mix line that it is hard to give you much guidance on how to model it go-forward. We've got the growth in specialty, we've got the Canadian versus US mix, that effect. We've got Cat-class mix and so forth, the mix of day, week and month.

So I'm going to beg off of giving you much guidance there because it's just so complex, and just ask you to be patient with us as we play out the next several quarters. And ask you to earn your money and forecast the mix on your own.

(laughter) Appreciate that. And in terms of whether you folks are obviously not ones to look at weather, but other companies are. And so what we've heard is third-quarter projects effectively got delayed from weather in parts of the Midwest. Is that's what's driving some of the pick-up in the acceleration in you business on a year-over-year basis that you're seeing in October? So the weather is better and projects are starting to get done, is that playing into what you are seeing in the fourth quarter with the stronger pick up and utilization compared to the normal seasonality?

No, Jerry. This is Matt. I wouldn't really say that's been a major factor. There have been delays on some jobs but I wouldn't relate it to weather. I'd relate it to the supply chain and maybe other issues. But the good news is the demand is strong and it's carried well into October here, which is good for us.

Just to add, I know the mix answer you more mathematically, but I would say it's a good opportunity to remind everybody of the fact that strategically, we are still very committed to growing those high-return projects in specialty. And cross-selling those projects, not only for revenue reasons, but also for service reasons to our customers. The more solutions we can provide for them, we just feel that makes us a better partner for them. I will take that mix opportunity to promote that strategic view.

All right, thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Thanks, operator. Listen, everybody, I hope you feel -- please feel free to reach out to Ted Grace, head of our IR here in Stamford anytime to answer any additional questions, to see any of our sites, to get any kind of a tour. I hope you will listen and/or attend our Analyst Day on December 1 as well, so look forward to seeing you all there. Thank you very much and have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.