United Rentals, Inc (NYSE:URI)
Q3 2016 Earnings Conference Call
October 20, 2016 11:00 AM ET
Michael Kneeland - CEO
William Plummer - CFO
Matthew Flannery - COO
Robert Wertheimer - Barclays
Nicole DeBlase - Deutsche Bank
Seth Weber - RBC
David Raso - Evercore ISI
George Tong - Piper Jaffray
Mili Pothiwala - Morgan Stanley
Nick Coppola - Thompson Research Group
Joe O'Dea - Vertical Research
Scott Schneeberger - Oppenheimer
Jerry Revich - Goldman Sachs
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 to subsequent filings with the SEC. You can access these filings on the Company's website at www.ur.com.
Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the Company's earnings release, investor presentation in 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. My. Kneeland, you may begin.
Thanks, operator. Good morning, everyone. 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 1st in New York. We hold this conference every two years and the webcast is the most dependent event. This time, we’re 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 continue to trend up driving an increase in volume of equipment on rent. Our specialty operations continue 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.
Now, these gains were offset by three ongoing headwinds in our industry. They are the Canadian economy, upstream oil and gas, and the current fleet balance. But overall, the market continues to move in our favor. I guess this backdrop we did a good job with rental revenue. On a year-over-year basis, revenue was essentially flat despite softer rates. We were pleased to deliver adjusted EPS of $2.58 per diluted share and as well as adjusted EBITDA of 747 million and a margin of 49.5%. And free cash flow continued to be a robust 846 million through September while our CapEx spending stayed on plan.
Now, based on this performance and given the visibility into the fourth quarter, we've narrowed some of our guidance to help you model our business. We now expect full year adjusted 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 declines we forecasted earlier with no significant impact time utilization. And we expect record free cash flow of more than a billion dollars which would exceed our original guidance. And as we considered the best way to service our large contract wins, we made by and up to an additional $50 million of fleet in the fourth quarter. So, no surprise as in terms of the cycle or our own performance, I would characterize as it's being right on track.
Next, I want to spend a few minutes on our operating environment. There are some positive indicators. Dodge has reported that new constructions starts are up over 22% sequentially in August with the most meaningful gains coming from commercial and public construction. Non-residential starts increased significantly overall a 43% in August and another 5% in September. This is consistent with other U.S. construction data, which show the 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 prospectus 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, which show that jobs in the U.S. construction sector increased for the first time in months. While there is some 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 widely marketplace for us in the U.S. with the 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 have four major construction projects that will run through at least mid-year 2017. Another two sites are staring up this quarter. Solar power and automotive, our two key verticals in government spending in California remains robust.
In the Mid-Atlantic, our business is trending up from the past two quarters with the healthy mix of projects. These include power and pharmaceutical plans, 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.
Now, I want to give a shout out to our employees in the Southeast who've been working long hours in disaster recovery mode following Hurricane Matthew. Our people are doing a stealer job of helping hard-hit communities in Northern Florida, Georgia and the Carolinas. And the restoration in these states could take years to complete. As to U.S. snapshot by contract, 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%, and 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 and balance of fleet.
So, we're walking at that line really well in 2016, continued to use a balance strategy of deploying our CapEx in a very important manner while also relocating our existing fleet away from softer markets. The major beneficiary to our growth CapEx as we noted before is our specialty segment, in the third quarter especially 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 & 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 a turning point and neutralizing to 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 a $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 summer from first-time customers though achieving both of our objectives of e-commerce, which are to increase the stickiness with our current based and to capture more customers to our new channel.
So to recap the quarter, there were no surprises. The Company is solidly on track, and we’re continued to focus with the many leverage 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 one way ahead. And our full year results should be nearly upper half of our prior guidance and a number of key metrics, and we expect our free cash flow to be more than a $1 billion this year. Now, 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 great deal of confidence in managing the business for strong full year performance we have reaffirmed today.
So with that, I’ll ask Bill to discuss the numbers and then we’ll take your questions. So over to you Bill.
Thanks, Mike, and good morning to everyone. As usual, we’ll step to 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's still represented a headwind. Excluding Canada, our U.S. revenue -- U.S. 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 if there are questions.
Our used equipment sales results 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 benefitted from a much stronger use of the retail channel and much less use of auctions this year compare 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, costs us about $15 million compared to last year, and the used equipment result cost us another 12. 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 the components that we talked about here previously. Just a quick update within that EBITDA performance was our lien contribution for the year. Updating that progress, we ended the quarter at an annualized run rate of $96 million contribution from our lien and other savings initiatives and 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 the 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.
Our adjusted EPS $2.58 for the quarter was up a $0.01 versus last year and again it had de minimis impact from currency in the year and obviously reflected the impacts of the operational results that we talk about, as well as the benefit of the share repurchase that I'll touch on a little bit later. Free cash flow during the quarter -- 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, right for the year-to-date period. We also had a lower cash taxes roughly 41 million and the timing of working capital was a benefit versus last year roughly $110 million. Those were the positives and they offset on a year-over-year basis to decline in adjusted EBITDA that we seen year-to-date.
Our net debt finish 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 to the year-end. But we’re still going to finish with very, very significant reduction in our overall net debt position, and I think that 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 a 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’ll touch on again in a minute. Net rental CapEx for the quarter was $311 million, that's up from last year and 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 finish 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 redemption. We completed those actions during the course of the third quarter by redeeming the remaining $200 million of our 7.375 note. 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’re at a annualize savings of about $30 million of interest for the future periods.
So quick update on the share repurchase program, we brought $152 million worth of shares during the course of Q3 that brings our year-to-date total for sharing purchase to $476 million. If you extent the look back to the beginning of this current authorization, the billion dollar authorization, we’ve now spent $587 million of that billion dollar of authorization that we have. Our plan for the remainder of this year to continue on the pace that we’ve been, we’ve been talking about a pace of spend of roughly 150, 160 a quarter, and we plan to continue on 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 finish the quarter with about $560 million worth of capacity for share repurchases under our restricted payments limitation plus the cash on the balance sheet. Let we finish out with an update to our outlook for the full year and 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 9 of the 12 months already in the books. And so our rental revenue is now within the $100 million range between 5.650 billion -- total revenue is within the range of 5.650 billion to 5.750 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 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 in 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 are 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 to October, our rates performance so far in October is trending toward a flat to slightly down result for the full months of October on a sequential month basis.
And if you look at where we are on 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 a 100 basis points over where we were on the 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 or 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'll stop there, and ask the operator to open up the call here for questions-and-answers. Operator?
[Operator Instructions] Our first question comes from the line of Robert Wertheimer from Barclays. Your question please.
Pretty straight forward, so thanks for that. I actually have just kind of more general question. As you see your national competitors expand and then well I just had a sort of five-year plan, that was put out, I mean as they come into market or expanded markets for you, are you seeing most of the shared come out from the smaller, less formal competitors in the world. Are we seeing a steady, the big people in the industry steadily winning out of the smaller ones or do you see a big depth in each market as I do? I'm just little bit curious, if the expansion is accelerated in 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's still got some growth ahead of them from a filling out their footprint. But at the small de minimis market share that they are at, I'm not sure that drives the changes in the market place 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 I participated in has somebody trying to get some shift, for various different reasons. So, this is part of being the rental business, you are going to need to sometimes protect share, sometimes gain share. I'll tell you that where 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 in. And just to put context, when you think about all the local regional and maybe some semi-national competitors, 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 of the fleet in the industry, and we’re encourage by that.
Thank you. Our next question comes from the line of Nicole DeBlase from Deutsche Bank. Your question please.
So my first question is around oil and gas. I was hoping maybe 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 has been much improvement in the upstream. There has been some noise about the rig count being slightly up over a much lower base, and we even have put out what we call few frac packs, but really a small amount compared to historically what we used to out to those basis. The good news is, we do feel it’s bottomed out. And so, we don’t know, we’re not counting on much of an uptick in upstream right now, but we are positioned in the case, there is one. I think the surprising element that not everybody on the call may recognize is that refining is still pretty robust end market for us. We're up almost 10% 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’re encourage 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 kind of on a similar topic, if we could talk a little bit about Canada, you guys provided a little bit of color and opening remarks. But have you seen any signs of stabilization in Canada or trends still deteriorating?
I would say similarly that Canada, the good news is that they bottomed out. The difference is, we still have some -- I think we still have some more year-over-year headwinds in Canada than we do just strictly in upstream. But the team up there is actually fought pretty well to even getting some sequential positives in the last couple of months; just a 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 there, what we see on rent 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. So, they’ve done a good job mitigating that 10% through the P&L without weakening our position. Hopefully, next year, they get some tailwinds.
Thank you. Our next question comes from the line of Seth Weber from RBC. Your question please.
So, I want to ask about the large contract wins that you called out in the press release. I mean, can you give us any color on what that involves? Were those conquest wins from other rental companies or those projects that the companies had previously furnished equipment themselves internally? And can you maybe give us some idea the duration of this project to justify going out and buying new equipment at a time when utilization levels are okay, but they’re not rising? Thanks.
Yes, this is Mike. Let me just say that, it's always competitive about there. So regardless of when you say, are we taking this or away from somebody, it is a competitive marketplace. So it's very broad. We were very fortunate to be able to be - to take a multiyear contract that we need to make sure that we be able to meet the customer demand. As Matt mentioned earlier, we've been very good about looking at our fleet, managing our fleet, and if you remind everybody that we really didn’t put any growth capital in our core business into 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 as we said, we would spend up to and that's 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'll do that. But right here in now and as Bill mentioned about what we're seeing in October on 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 said. But I would say just the simply answer, it's a yes on that 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 match with Mike referred to in his opening comments, including some nice infrastructure projects. This represents a very small single digit percentage of what would be needed on the life for that project, so we'll be able to take existing capacity to put on this project. But if we don’t feel 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 projects will mostly be served by the $9 billion of fleet that we are already on.
And just to emphasize, I know you know this, but to emphasize, even if we spend the incremental 50, the cash flow for the year still in that 1 billion to 1.1 billion range. So, it includes the possibility of spending that incremental 50.
Sure. I appreciate that's helpful. Thanks, Bill. And then just a quick follow-up on the lean initiatives, it sounds like you said you are very close to kind of 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're 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.
Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your question please.
When I think about where your better visibility lies, I would I think would be national accounts and maybe large projects. So, if you can keep your answer to those accounts, those projects, what are you seeing and when you reprise 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 first half 2016? Obviously, I'm trying to think about the fourth quarter, you feel pretty good about utilization growing. I think you said about 80 bps. Rates obviously seasonally were down November, December, but in general rates were still a little bit of struggle sequentially as we saw in August and September. So, not the short-term business where you really have visibility, are you re-pricing national accounts at a higher or lower levels and what kind of visibility do you have on the utilization into next year?
So, David, this is Matt. I would say on national account pricing, what we’re experienced 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 could imagine that national accounts are going to leverage that spend. But that’s already built into the baseline, so we’re not seeing a tremendous amount of difference between our overall business rate performance and national account. 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 are 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. But I don’t think, there is a lot of headwind to a 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 key focus. And they do most of the large projects, so they kind to go hand and hand when your question was about project and national accounts.
And that’s what I’m trying to figure, and we all can have our own view on the shorter term rentals swing on how we view activity for next year. At least the start the year still sounds like more of a lean on utilization growth, and the rate for now we could all assume what we want. But it does 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?
I would necessary say 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 to similar to the Company average had to absorb almost all of the oil and gas experience, which is negative on the year-over-year perspective. So, I wouldn’t necessary characterize it that way. The truth is, we'll 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.
So when we start re-pricing those contracts and that will be an interesting thing to delve into. When do those contracts come up? I know you’re generalizing a lot of different accounts, but when, I mean, want to be positive and say, hey, oil is a little bit higher today and is that a different tenor in the conversation about what you could charge? When do those conversations start-up?
So the 25% on net of fixed-price all had 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 projects are in as far as the price volatility and who is more capable of supplying of the assets that are needed. And we feeling on some of the ones that we recently won, we’re very well position. And we’ll continue to focus on where we’re very well positioned versus chasing down somewhere where we may not have it as much a competitive advantage, and that’s part of our focus on profitable growth versus just revenue for the sake of revenue.
Thank you. Our next question comes from the line of George Tong from Piper Jaffray.
You're at the point in the rental season where a lot of re-change co-insides with the equipment coming off rent, which implies less control over rate compared to the beginning of the cycle. In line 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'll ask Matt and Bill also to chime in. But as you heard from Bill that currently our utilization is up nicely on a year-over-year for the months, 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 is going to be a necessity for the industry as a 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 that those trends play out as we've seen it over the course of the year. And Matt or Bill, you want to add anything more to that?
I'd say in addition to that, the math gets me confidence right. I mean we've now experienced 9 to 12 of the year, right. The remaining three months are going to be -- will 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 two times each. It's not a ridiculous notion, but in order to get for 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 I just look at the raw mathematics that what it would take in order to come outside of the range of the 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. And it's not completely ridiculous even if we didn’t see minus 0.2, if we saw something worse than like November, December. We're still going to end up in a pretty decent place within that 2.1 to 2.3 decline range.
One other point just to preempt answer 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. Right so, if we finish the year October, November, December down 0.2 each months sequentially that gives us the full year 2.1 decline, and our carryover would go into the next year would actually be slightly positive. On the flipside just to be fair, if we finish with the down 2.3 scenario, our carryover next year would be minus 0.9%. Not an incredible headwind to overcome in order to get the 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. Just housekeeping question around the guidance. Free cash flow guidance is increasing by about 100 million but EBITDA 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 end up, it went up by 50 million. So I don’t know it’s exactly accurate to say EBITDA guidance went up 50 million. But 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 of refine 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 were going to spent over the course of the year. That working capital, there is a contribution from accounts receivable and the contribution from timing of payables and the non-rental CapEx was just a refinement in our view about what is that we’re 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.
Thank you. Our next question comes from the line of Mili Pothiwala from Morgan Stanley. Your question please.
Thanks. My question is on M&A. So, you’ve been pretty clear about your priorities here and your preference for specialty. But I guess as you look at the industry, do you see scope for further consolidation in this end market environment i.e., could this be away 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 overtime within our industry. Timing is always one where you don’t always hit to pick and choose your time, but we have, we’re very, I would say very discipline in our approach of how we go about it. So, there is a lot of things that we look at and we’re pretty stringent as to the hurdles that we have to go forward. So, I'd say it will continue. There will be further consolidation in our industry overtime.
I guess how would you rate the pipeline right now just kind of trying to hone in on how people are thinking about M&A in the context of the current and market environment? Is there have you noticed any shifts recently?
I wouldn’t say shift. Our pipeline is always been full. Our business development teams have been very active creating a lot of communication relationships across the broad spectrum. But our pipeline is there.
Thank you. Our next question comes from the line of Nick Coppola from Thompson Research Group. Your question please.
Bill, In your opening comments, you talk a bit about the cycle, but one if you could add any additional color there relate to customers were positive. It sounds like, what conversation looks like with customers and what is your visibility at this point?
Well, I think I articulated in my opening comments and we talked about the Dodge starts and talk about Dodge momentum. To look at, it's been up five for the last six months through the strongest result for us 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 on the backlog versus 12.2, and those are the 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 horizon. Our customers overall as I mentioned in our opening comments are optimistic. They're seeing the same thing in the build-up of their backlogs.
And then just wanted to ask on Hurricane Matthew as well, how do you expect that impact your business in Q4 and then in the following quarter?
For those you to know me weather has not been one that won't be always hung our hat on. But unfortunately, there was a lot of devastation as I mentioned in Northern Florida, Georgia and the Carolina's. And our people have been there, it's not material for us simply because of our size. We're across all of the U.S. and Canada, and even if you look at what happen in during the Sandy Storm, it wasn’t the material impact. It will take years to recover as they rebuild will say will do, and that will play out overtime.
Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Your question please.
First question is just on, on used equivalent pricing. i think when we look at the reported adjusted margin in the quarter, it was down a little bit sequentially and so maybe to talk about in any channel or next considerations there, but then more broadly just what's you are seeing on more 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 that all has the data from Q2 right here to give you a number I'd certainly on a year-over-year basis 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 it touch 3% to 4% let's say on a year-over-year basis right. So we have been seeing some pricing pressure just on a raw basis year-over-year and that's been the case for a number of months. I think it's encouraging now that we can still move the equipments 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 compare to Q2. It wasn’t a significant change right on a sequential basis, price as a percent of OEC, that didn’t change significantly Q2 to Q3. So that might give you a little bit of an indicator of those sequential experience that we had in the fleet. That helped
Got it. Yes, that’s helpful. Sounds like stabilization sequentially, if you put it in those terms. And then just when we think about the outline you’ve given on 2017 CapEx, 1.2 to 1.6 and I think you talked about how there been no firm decisions there, but could you talk about the planning process, and if where you are in that, when that really hits 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 do you think about that when you will have a firm decision on it and where you are in the planning process?
So, I characterize this as being midstream in the planning process. As we said right here and now we’re targeting a presentation of our plan to the Board in December, at least a preliminary presentation and so we’ve got to be finish by then. Right here now as we think about next year. We haven’t put us take 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 and continuing to win major projects and when just general business, go forward. We’re looking at initiatives that they’re 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 expected to be are going to determine the end number. What I would say about the range is the range still live of that 2 billion to 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 and we’re spending right here now. We decided that we want to have a very clear view of where that spend is gone 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.
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please.
Good morning. I just, I have to ask the digital platform sounds pretty exciting and if you guys could rehash the quantification of the run rate now. What do you think longer term back and get up to I feel that could be a very significant percent of the mix and have you given any thought to SG&A savings on that yet? Thanks.
So Scott, this is Mike I’ll start and then please Matt or Bill. Look, we think that as I pointed out in my opening comments, we’re offering way and which our customers can easy to use place our own orders, manage their own business. And this is just a follow on from what we’ve heard from customer overtime. I also believe which 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 that what we can grab more. Where it goes, I think that’s yet to be determine. But the good thing is, we're on the front curve of that, and 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. And 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, and so to me, the adding into the new customers is just frosting on the cake. So Matt, Bill?
No, 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 the broadening your reach play just getting to more customers more new customers then you can get to just knocking on doors and calling on the upsides. And this is just moving into the future, and it's been received very well early days, and we're encourage by that, and hopefully this will open ups the new channels and broaden our reach.
Yes, 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's very early days. And B; it wasn’t done for SG&A phase, right. It was done to satisfy those customer needs. As this scales and as we start to have a more visibility to the impact than it might have on SG&A, we'll attack the numbers as appropriate go forward. But we haven’t done that as of yet because that's not where we're focused on this initiative.
Thank you, Bill. Could you discussed these potential ranges for EBITDA flow through in coming years unless you say based on a flat or rental revenue growth environment, obviously as you mentioned a few questions ago it looks like you are heading into that upcoming year?
Yes, the EBITDA flow through we've talked historically about sort of in that 60% area. I think that's still a reasonable range to think about as you have growth sort of significantly different than zero, right. If you are around zero growth, the flow through calculation gets very sensitive and that's quite obviously 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 one EBITDA flows could it be lower when you are declining in revenue rather than higher so if 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, and I'll think it's ridiculous to think about 60% as a flow through that you could start your modeling with.
Thank you. And our final question comes from the line of Jerry Revich from Goldman Sachs. Your question please.
Can you folks talk about the cadence of mix as we head into the fourth quarter and early part of 2017, you got to believe a fleet mix benefit that you called out in the EBITDA bridge, and I'm just wondering as we overlay our pricing assumptions anything we should keep in mind as you folks continue the specialty products, should we look for a mixed tailwind, to help offset whatever fleet inflation we dial in to our numbers for next year?
Tough one Jerry, and there is so many things going on in that mix line, that it's hard to give you much guidance on how to model it going forward. We’ve got the growth in specialty. We’ve got the Canadian versus U.S. mix effect. We’ve got care class mix and so forth, the mix of day, week and month. So I’m going to dig off of giving you much guidance there because it’s just still so complex. And just ask you to be patient with this as we play out the next several quarters, and ask you to earn your money and forecast to make on your own.
I appreciate that. And in terms of whether you folks or obviously that ones to look at whether, but other companies are so what we’ve heard is third quarter projects effectively got delayed from whether chance of the Midwest. Is that what’s driving some of the pick-up in the acceleration business on year-over-year basis that you’re seeing in October. So whether better projects are starting to get done, is that playing into what you’re saying in the fourth quarter, what the stronger pick-up in utilization compared to normal seasonality?
No Jerry, I wouldn’t really see that’s been a major factor have been delays on some jobs, but I wouldn’t delays whether, I delayed some 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. And just to add, I know the mix answer your more mathematically, but I would say it’s a good opportunity to remind everybody effect strategically we’re still very committed to growing high return project 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’ll take that mix opportunity to promote that strategic view.
Thank you. And this does conclude the question-and-answer session in today’s program. I’d like to hand the program back to management for any further remarks.
Thanks, operator. And listen everybody; I hope you please feel free to reach out to Ted Grace, Head of our IR here in Stamford at any time 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 in December 1st 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.
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