United Rentals' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.17.12 | About: United Rentals, (URI)

United Rentals, Inc. (NYSE:URI)

Q3 2013 Earnings Conference Call

October 17, 2012 11:00 AM ET

Executives

Michael J. Kneeland - President and CEO

William B. Plummer - EVP and CFO

Matthew Flannery - EVP and COO

Analysts

Scott Schneeberger - Oppenheimer & Co.

Vance Edelson - Morgan Stanley & Co.

David Raso - International Strategy and Investment Group

Joe Box - KeyBanc Capital Markets, Inc

Nicholas Coppola - Thompson Research Group

George Tong - Piper Jaffray & Co.

Philip Volpicelli - Deutsche Bank Securities

Jerry Revich - Goldman, Sachs & Co.

Eric Crawford - UBS Investment Bank

Yilma Abebe - J.P. Morgan Securities LLC

Operator

Good morning and welcome to the United Rentals Third Quarter 2012 Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the Company’s press release, comments made on today’s call and responses to your questions contain forward-looking statements.

The Company's business and operations are subject to a variety of risk and uncertainties, many of which are beyond its control and, consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2011 as well as the subsequent filings with the SEC.

You can access these filings on the Company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.

You should also note that today’s call will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Executive Vice President and Chief Operating Officer.

I’ll now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael J. Kneeland

Thanks, operator, and good morning everyone and welcome. With me today are Bill Plummer, our Chief Financial Officer, and Matt Flannery, our Chief Operating Officer and other members of our senior management team.

The financial results we reported last night were strong. They reflect an operating environment with a solid level of demand and integration with RSC that’s very much on track and most important the successful execution of our strategy as reflected in our margins.

Now we will talk about all three of these things today, but also I want to give you some – our current thinking about the months ahead. But before I begin, I want to remind you that any year-over-year comparisons we give you are on a pro forma basis that is measured against combined results of United Rentals and RSC for 2011.

So just take a look at the quarter. It incorporated the most intense three months of our integration plan. From July to September, we completed the harmonization of most of our major account relationships, realigned our sales territories and closed 126 branches bringing the merger related closings to a 187 so far. We deliberately set the bar high to get most of the heavy lifting behind us by September 30th and I’m very happy to say that we met that goal. And while we’re managing all that change, we generated a solid 9% increase in rental revenue year-over-year and $570 million of adjusted EBITDA at a 47% margin. That’s the highest margin, yeah. And in addition we’re running ahead of plan and cost synergies.

We realized another $45 million of savings in the third quarter and we now expect to reach a $100 of realized cost synergies in 2012 for our ultimate goal of $230 million to $250 million on a run rate basis. Our cost – our progress on the cost side and a magnitude of our flow through sale bought up our internal discipline in the quarter.

Now turning to the external environment, let’s look at the drivers of rental revenue. And they really reflect two things, a favorable market condition for the equipment rental and a successful execution of our strategy. The number one driver is rates. Our rates were very strong in the quarter, up 7.5% from last year and our volume of equipment on rent also improved 7.9%. As these numbers show, we saw a continued robust demand for our equipment that was also universal. All but one of our regions reported year-over-year increases in rental rates.

It’s also significant that we were able to raise rates and what continues to be a modest and somewhat uneven construction recovery. But there are something more work here and we believe it’s the rental penetration. The rental options continue to gain traction as an economically sound way to solve equipment needs and its adding an extra layer of demand.

I also want to talk about time utilization. It declined 200 basis points in the quarter compared to a robust level of utilization last year. So what were the impacts on time? For one thing we absorbed those 187 branch closings and we put more than a $1 billion of new fleet into the field. On a year-over-year basis, our time utilization was about 67% through September. And that’s a healthy number and we feel very comfortable with it.

And so far for the fourth quarter utilization is running more than 72%. Our record margin makes it clear that were reflecting – managing rates, utilization, and costs. Nevertheless we want to be as accurate as possible about the numbers we put out there and that’s why we’re updating our full-year outlook.

We now expect time utilization to be approximately 67.5% for the year, which is a half a point below our prior outlook and we raised our outlook on rates to reflect a gain of approximately 7% year-over-year. We also think that will do better than expected on our free cash position. Our outlook is now free cash usage in the range of $25 million to $50 million excluding a merger related cost. And our guidance for total revenue, EBITDA and CapEx remains unchanged.

A minute ago I mentioned branch closings. We typically have a revenue dyssynergy when we close a location, title loss of business from small to mid sized customers and over time that revenue gets replaced. Now given a reduction in branches and headcount related to the merger, the impact in the third quarter could have been substantial. But our field organization did a great job of keeping our larger account relationships on even keel and this went a long way toward offsetting that impact.

You’ve heard me say many times before that large customers are the foundation of our strategy and for the most part they reacted very positively to the integration. In the third quarter, our key account business which accounts – which includes national strategic, assigned and government accounts grew by 17% year-over-year.

To summarize, the headwinds from the integration are largely behind us. And the top line impact from the branch closings should stayed over in the next six months. Our entire field organization has done a great job at business retention and we now have our sales force focused on growth and our fleet is settling into a new footprint and is more available to meet demand.

And we just delivered a record EBITDA margin. Fortunately this is playing out against favorable conditions in the rental industry. However, we’re aware the speculation is out there and we’re watching the macro environment very closely for any signs of deterioration. But we’re not seeing any cost or concern at this time and we don’t see any reason to alter our plan.

As you may know a couple of equipment manufacturers did voice some concerns about the economic recently – about the economy recently. And while rental companies and equipment manufacturers serve similar customer basis, we believe our industry is in a better position right now because of rental penetration. That’s why our top line is outpaced in construction spending because a very cautiously recovery can be create more demand for rental – for the rental industry while reducing demand for product purchases.

Now Matt will be giving some color about our performance by region and also describe what we’re hearing from our customers. Overall, they’re feeling optimistic about next year. Global Insight also believes the recovery we will continue and are holding firm to their forecast for an increase between 8% and 9% in equipment rental revenues in 2013 and we share that feel.

And we will be talking to you again on our Investor Day, on December 4th, and we plan to update you on our thoughts on 2013 at that time. Right now, we’re focused on delivering a strong finish to the year that comes down to one word, execution. Now I want to remind everyone that our destination has been long-term profitable growth from day one of our strategy. We put that strategy in place four years ago and at a time our vision was for 40% EBITDA margin within five years.

As you saw last night, we’ve already exceeded that goal and now we’re looking for ways to expand on it. So stay tuned. We’ve lot of confidence in our ability to deliver even greater value for the future.

So now, I will ask Matt to give you an update on our operations, and then Bill will cover the financial results. And after that, we will take your questions. So over to you Matt.

Matthew Flannery

Thanks, Mike, and good morning everyone. I’d like to start with the progress report on our integration efforts and then give you a brief overview of market conditions across our regions. On our call in July, we reported that our integration efforts got off to a very strong start and we’ve made significant progress since our call. Our field team has heard me say from the very beginning of this merger that we need to focus on moving the big rocks. This means making sure we’ve communicated with our key customers and our sales territories are realigned to eliminate confusion and that we communicate with our new operational footprint will be to serve our customers.

So let me take a minute to tell you what we’ve done. I will start with the customer first. Our sales team has done a great job of focusing on our key accounts which grew by 17% in Q3. Now this was partially due to the fact that this past quarter we finalized over a 125 new national account agreements. And we’re negotiating while complete the remaining 260 throughout Q4.

Additionally, we realigned over a 1000 sales rep territories. Now this was a large and necessary undertaking due to the overlap in coverage between reps from the two legacy companies. Our reps have now been in their territories for over 60 days and they’re well on their way to further penetrating their new territories and the customers that they’re calling on.

To assist the sales team, we’ve implemented an early warning report for declining revenue customers and we’ve given them multiple tools to identify additional revenue opportunities, like our dormant account program. After eight weeks of this program, we reactivated almost 2,500 accounts that have rented over $60 million worth of fleet. And we feel that this is work well worth doing to help recapture some of the revenue leakage that occurred during our consolidation efforts.

And operationally as Mike mentioned, we completed a 126 branch consolidations in Q3 and that takes our year-to-date total to 187. We’ve integrated the teams into common facilities, one technology platform and most importantly one voice to the customer in the effective markets. We’ve charged forward with an aggressive closure schedule and that speed of execution has allowed us to capture $45 million in cost synergies in Q3. So as a result, we’ve increased our 2012 achieved cost synergy target to a $100 million.

Additionally, we’ve increased the top side of our range of our fully developed synergy guidance from $230 million to $250 million. When I break out the $45 million in cost saved in Q3, closures contributed about $18 million, and field staffing and corporate overhead reduction contributed $11 million each. Those three buckets totaled $40 million of the $45 million we achieved.

We’ve also seen significant improvement in our branch productivity related to cost of rentals. This is specifically evident in markets where we’ve consolidated stores and taken advantage of the economies of scale. Our average store sizes increased by 30% in Q3 year-over-year. That’s how we’re able to grow our fleet by almost 10% over last year, while reducing the headcount that serves that fleet by more than 5.5%.

Now we did face a few bumps in the road while moving through the integration. We’ve seen that our closure markets didn’t grow quite as fast as our non-closure markets. And that’s with this synergy that we feel comfortable we will recover through the focused sales efforts I discussed earlier.

I’d like to emphasize how proud I’m of our employees for coming together as a true team. Almost half of our employees have had their jobs or reporting structure changed in someway as a result of the merger. But their commitment to United Rentals is as strong as ever and this is supported by a voluntary turnover which is down from last year as well as the tremendous engagement we encountered while conducting town halls in over 50 markets.

Now switching over to our Q3 regional results, we saw a positive rental revenue growth in all, but one of our geographic regions. And we had over 27% growth in our specialty regions. Some of the higher growth markets are across the Gulf States and in the Southwest, but we’re also seeing strong growth in Western Canada, the Mountain of west and the Midwest regions. All but one of our business units are seeing strong EBITDA growth and improved rates.

During my travel the past few weeks, I’ve had many long standing customers inform me that their backlog is strong. And they want assurance that we will have the fleet ready to serve their major projects. These comments are consistent with results we’re seeing from our monthly customer surveys where over 90% of participants say they expect their business next year to be at least as good as this year and almost half of those participants feel they will up 10% or more in 2013.

Before I turn the call over to Bill for the financial update, I’d like to state how positive I feel that strategically we’ve never been in a better position to win in the marketplace. And that’s really what this integration is all about. We’ve been building deeper partnerships with our industrial and national accounts, we’re focused on cross selling the strength of each legacy company and we continue to focus on improving our customer scorecard.

Those are the pillars of our strategy and our roadmap to success. So thanks for your time and now over to Bill.

William B. Plummer

Thanks, Matt, and good morning to everyone. As is usual, I will add a little bit more color to the third quarter results and I will also spend little time updating our outlook for the full-year. And before I get started, I will just remind everyone as Michael did that all of the comparisons and comments that we make are about the pro forma company combined basis comparing to as though we’ve combined in the prior period.

So let me start with net revenue first. Net revenue was up 8.9% in the quarter with strong contributions from both rental rate and fleeted on rent. Rates were up 7.5% compared to the third quarter last year and they were 2.8 percentage points better sequentially versus the second quarter of this year.

I will touch on it a bit later, but given the strong pricing performance that we’re seeing throughout, we’re comfortable increasing our outlook for the full-year and now expect rates to be up 7% for the full 2012.

Looking at our volume performance and time utilization, you all know that our measure of time utilization is obviously on rent. That measure was up 7.9% in the quarter to a record for us of $5.2 billion of fleet on rent on average throughout the quarter. So clearly there was a strong demand environment and that certainly supported our investment in the fleet.

Time utilization for the quarter was 69.8% and that is a very strong absolute level and it’s certainly consistent with the demand environment that we’ve been dealing with. Unfortunately, time utilization was down 200 basis points compared to last year and that reflects a few factors. So maybe I will spend a second on those factors.

First as Michael mentioned, we had the consolidation effort really at its peak during the quarter, closing a 187 branches in total, 126 of them happened during the quarter. So that was the largest factor we think in the year-over-year decline and time utilization. The closures were essentially completed by the end of the July, but when you move that much fleet as Matt pointed out when you change that many sales rep territories and leadership changes, it has an impact on the business and we certainly saw that in the third quarter.

The second factor was the higher absolute level of fleet. We’ve been talking about this all year. We have brought in a tremendous amount of new fleet. We spent $1.3 billion on new fleet purchases year-to-date and in any sense that’s a large increase to our fleet overall and it makes it tougher to achieve the same levels of time utilization that we did last year.

Lastly the second half of the year last year was a very robust time utilization environment. It was a record for both companies or the combined companies and that makes for a very difficult set of comparisons this year.

So before I turn to used sales, I’ll spend a couple of minutes on the impact of mix in our rental revenue this quarter. We’ve gotten questions from several folks about the fact that our rates are up 7.5%, our volume is up 7.9%, but we only increased total rental revenue or rental revenue by 8.9%, so where’s the difference? What's the key driver of that negative mix if you will?

In our view the key drivers were – it started with our monthly mix. Our business shifted more toward monthly during the quarter by a significant amount, 75.5% of our revenues in the quarter were from monthly business and that’s up 270 basis points compared to last year. Now remember the higher proportion of monthly rentals will drive revenue in the quarter down because the revenue per day that you generate from a monthly transaction is lower than it is on a daily and weekly transaction, that’s just a fundamental feature of our pricing structure. So that monthly mix impact was pretty significant in the headwind that we experienced in the quarter.

We also had an impact now from ancillary items. So within our rental revenue, our rentals that are – items that are ancillary to a rental – delivery is one example. So when we look at those ancillary items, there are fewer opportunities for us to realize ancillaries when we have more monthly transactions, and it shows up as part of the mix headwind that we’re experiencing.

So for example if you look within our rental revenue and look at just the owned equipment rental, the revenue that comes from the owned equipment being on rent, excluding the ancillaries that was up a very healthy 11.6% in the quarter. But when you look at some of the ancillaries like delivery for example; delivery was only up 1.5%. So that impact also plays to the mix headwind that we’ve seen.

Keep in mind now that this is all very consistent with the strategy that we’ve been pursuing since the last four years. The higher monthly mix certainly brings along a better margin opportunity because it certainly reduces the amount of cost associated with generating that revenue. So when you put it all together we feel very comfortable that the 8.9% revenue growth was a very solid base for driving our business forward and more importantly it allowed us the opportunity to delivery very strong profit improvement.

Speaking of profitability, the numbers you saw. Adjusted EBITDA was $570 million for the quarter and an adjusted margin of 46.8% and as Mike said that’s a record for the Company. That’s an improvement of 700 basis points in margin compared to last year, and it delivered a flow through of 127% for the quarter, so clearly outstanding result on flow through. The synergy contribution is obviously significant there with the synergies adding $45 million in the quarter. But even when you exclude the impact of synergies it was still a very impressive flow through performance, 81% taking out the $45 million from synergies.

When you look at EPS, we reported an adjusted EPS in the quarter of $1.35. We pointed out in our press release last night that, that EPS benefited from a low tax rate 22.3% in the quarter. But even if you use a more normal tax rate it’s an impressive EPS result; we would call it $1.27 if you would use a tax rate right around 35%. So EPS performance was also very strong for the quarter. Before I move to the outlook, let me touch just a couple of minutes on used sales and liquidity.

First on used equipment sales; we generated $101 million of used sales proceeds and that was at a robust 40.3% gross margin and that’s the gross margin adjusted to exclude the impact of the purchase accounting activity. That margin certainly reflects overall strong demand, but we also had a very healthy mix of retail transactions in the quarter as well supporting the margin. When you look at liquidity and our cap structure, as of the end of the quarter we had total liquidity of $751 million and that included $683 million of available capacity in our asset base loan facility.

I’ll point out also that during the quarter we increased the size of our accounts receivable securitization facility. We took it from $300 million up to $475 million and we did that clearly to take advantage of the very low cost of those facilities, very attractive financing and it makes a ton of sense to do so.

So, before I move on to questions and answers, just real quickly on our outlook, to update it. First on rental rate, as we mentioned earlier we expect rates now to be up 7% on the full-year and that’s compared to our prior outlook of 6.5%. On time utilization, we now expect time utilization to be down about a half a point for the full-year but still at a very healthy 67.5% over 2012.

Our CapEx outlook is unchanged. We still expect to spend gross capital of about $1.5 billion to $1.6 billion, with that netting out to a net rental capital of between $1.075 billion and $1.125 billion.

Free cash flow expectations have increased. Previously we were guiding to a free cash usage for the year between $90 million to $140 million. We now expect that free cash usage to be between $25 million and $75 million for the full-year and remember that view of free cash flow excludes the impact of the merger related cost, but it does include the impact of converting the RSC accounts payable policies to the shorter United Rentals payable policies.

Those are the key comments that I’d offer right here and now. Certainly we’ll be glad to address any questions in Q&A. So, if we can ask the operator to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Scott Schneeberger from Oppenheimer. Your question please.

Michael J. Kneeland

Hi, Scott.

Scott Schneeberger - Oppenheimer & Co.

Hey, Mike. Thanks. Good morning, guys and a nice work. If I can make my one question a two parter, the first part would be, could you discuss the utilization trend months to months to months sequentially as you progress through third quarter into fourth quarter. And my second question is; with regard to this CapEx guidance for this year; could you give us an idea of what you’re thinking for next year and how CapEx would compare to this year and perhaps how free cash flow would compare to this year? Thanks very much.

Michael J. Kneeland

Yeah. Sure. I’ll give you the time and then I’ll shift it over to Bill on the capital. Once you look at July, we were at 68.6%. For August we were at 69.7%. For September we were at 71%. As I mentioned in my opening comments as we stand for the month of October we’re slightly above 72%.

William B. Plummer

And Scott on CapEx, I’ll start with just an additional comment about 2012. We’re maintaining the range of $1.5 billion to $1.6 billion, but we’re focused more on the lower-end of that range for 2012 and we think that that’s an appropriate way to think about it right here and now. As we look at 2013, we haven’t definitely set a plan, but our general thought is that, our capital plan will look pretty similar next year to what it does this year, about flat it could be a touch lower and by a touch $50 million is sort of where I define a touch.

If we do what we think we’re going to do next year in terms of operational results, with that kind of a capital plan our free cash flow is probably going to be in the range of $400 million to $500 million. That’s consistent with the forecast that we put in the S-4 that we released earlier this year and it’s still consistent with how we’re thinking about the next year or so.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks Bill. I appreciate it.

William B. Plummer

No problem.

Michael J. Kneeland

Thanks Scott.

Operator

Thank you. Our next question comes from the line of Vance Edelson from Morgan Stanley. Your question please.

Vance Edelson - Morgan Stanley & Co.

Great, thanks. Just following up on the last question; so the free cash flow will continue to improve over the next year, you’ve upped the guide and you’ve – you started to build out your fleet early in the cycle maybe ahead of the cycle and you’re going to see the benefits. So you’ve laid out some targets for reducing leverage over the next 12 months, any update to the specific leverage ratio you’re looking at Bill, say a year from now. And then beyond that, what do you see happening with free cash flow beyond 2013, and what's your ultimate thought’s on where the leverage is going to go other uses of cash and so forth?

William B. Plummer

Thanks Vance. So, we’ve spent some time recently with our Board talking about this very topic and we’ve aligned around a view that we will be targeting a lower level of leverage to sustain over the next number of years. So if you look at leverage just as total debt to EBITDA and I know that’s overly simplistic, but just to keep it simple we’re now targeting a range of between 2.5 and 3.5 times total debt to EBITDA and we feel comfortable that we can maintain that range over the next number of years and it reflects the cash flow profile that we expect to see over the next few years starting with that $400 million to $500 million range next year. 2.5 to 3.5 will be a normal operating range, so in good time we’ll trend down towards the lower-end of that range.

Right now we expect by the end of next year, if you look in our investor deck if we give you some very broad brush forecast. We expect that by the end of the next year we’ll be solidly in the middle of that range, right at about three times, and from being just below four times on a trailing 12 basis right here and now. So nice robust de-levering over the next year to two, and we think that it makes sense for us to maintain those leverage levels as we go forward.

What do we do with the cash flow beyond 2013, can I answer that question next year. I think we want to think very carefully about where we reinvest the free cash flow that we have. We’re certainly going to be bringing down debt consistently over the next several years and – but we also want to make sure that we’re looking for the opportunities that makes sense for our investors.

Vance Edelson - Morgan Stanley & Co.

Okay, that’s really helpful. And then may be just a clarification on something earlier. You talked about the shift towards the monthly renting and the impact that, that has which makes perfect sense, but I might have missed it, but what's driving the shit itself. I would have thought in this uncertain environment with the elections coming up and so forth that, if anything rental periods would get even shorter. So, what do you think the driver is there?

William B. Plummer

I think it’s the strategy. We’ve been targeting the key account groups that historically have rented the equipment for longer periods of time, and as we grow the share of revenue from those accounts, it’s a natural outgrowth of being with those accounts and its playing very well. It’s playing very much according to the strategy. As you grow with those folks you give yourself a better margin opportunity, because the cost fall away and it’s driving to that result as we speak.

Vance Edelson - Morgan Stanley & Co.

Okay, that’s great. Thanks.

Michael J. Kneeland

Thank you.

Operator

Thank you. Our next question comes from the line of David Raso from ISI Group. Your question please.

Michael J. Kneeland

Hi, David.

David Raso - International Strategy and Investment Group

Hi, good morning.

Michael J. Kneeland

Good morning.

David Raso - International Strategy and Investment Group

Hi my question is about rates heading into ’13. Two angles on it; when you speak with your larger customers, some of the larger accounts you mentioned earlier you’re in conversations with. How are the rates looking from current levels looking out to the new contracts for ’13? And then secondarily if we kept the rates where they are today and just ran them out flat; how do you see that rolling into next year for full-year rental rates or maybe how first quarter ’13 would look? Just trying to get some sensitivity.

Matthew Flannery

David this is Matt, I’ll talk about the key account rate harmonizations that we’re doing. We have – as I stated we’ve already inked and completed a third of those. We’re in negotiations with the other two-thirds, and the improvement is falling in line with our overall improvement and certainly we feel it accretive to our goals.

Michael J. Kneeland

And David on 2013; if we do what we expect to do what we’ve said we’re going to do at 7% for rate this year, that will give us a carryover benefit next year something like 2.5% even if we don’t advance rates any at all during 2013. So, pretty good tailwind to start, but let me be clear. We certainly do expect to drive rates beyond that carryover, but we’ve got a nice starting point.

David Raso - International Strategy and Investment Group

Okay. And then on the debt reduction comment. The total debt at the end of this quarter over trailing EBITDA, pro forma is about 3.9%.

Michael J. Kneeland

That’s right.

David Raso - International Strategy and Investment Group

To get to your full-year free cash flow, the fourth quarter is going to be significant cash flow. And then you have the $400 million to $500 million as a baseline you’re talking about for next year. You’re using total debt in your comment, a set of net debt, just so I understand what you plan on doing with the cash that comes in, in the fourth quarter and next year just for the pure calc? I was trying to understand the exact math because the 3.5% seems like something especially EBITDA grows at all you’re going to be below that pretty quickly. I just want to make sure how you look on that calculation?

Michael J. Kneeland

So, the cash that flows in during the fourth quarter we’ll immediately reduce the ABL and that will drive down that overall debt through the ABL balance. And then as we go forward as I said, we’re going to be right at about three times debt to EBITDA by the end of next year on our current view. And so you’re right, we’ll certainly be in the lower-end of the range pretty quickly, and we’ll be looking very carefully at how we should deploy that cash flow with a bias toward initially continuing to pay down our overall debt balance.

David Raso - International Strategy and Investment Group

[Obviously] I’m trying to back you into giving an EBITDA guidance for next year essentially because if you got …

Michael J. Kneeland

I might avoid it.

David Raso - International Strategy and Investment Group

Yeah, I know, but I mean, so you can certainly do the math now, right? I mean you’re basically saying that the total debt the way I’m calculating this quarter was about $7.375 billion. You’ve generate 375 of cash roughly in the fourth quarter to get to the free cash flow full-year roughly. So if you’re at $7 billion going into next year and you generate say 450 mid-point, you’re down to 655 for the year divided by three, it’s implying EBITDA next year slightly below 2.2.

Michael J. Kneeland

Yeah.

David Raso - International Strategy and Investment Group

And I just want to make sure that’s – for me person that’s a little bit lower, but I am thinking for ’13, so I’m just trying to make sure you’re not backing into something, you’re not trying to imply?

Michael J. Kneeland

No we’re certainly not trying to imply a specific number certainly not that low, right. You look at the S-4 data that we put out earlier this year. If you just add those, the RSC and the URI together plus synergies I think you get a number that’s beyond 2.2, so that’s certainly not what we’re trying to imply. I think there are a huge number of assumptions that we would have to guide you to in order to get to the right number and that’s why I’m trying to avoid that discussion right here now because there are just too many assumptions to walk down that road.

David Raso - International Strategy and Investment Group

Okay. So we’ll leave it wherever it is, either a movement in the $400 million to $500 million of free cash flow and/or if that’s what you generate in cash you’ll be below at three times. All right, so if the EBITDA is above 2.2 and you generate that cash you’re below three times total debt-to-EBITDA – I mean, its kind of leave it as that, right? You’re not implying below 2.2 of EBITDA next year?

Michael J. Kneeland

We are not implying an EBITDA of that level.

David Raso - International Strategy and Investment Group

Okay, just making sure. Okay. Thank you very much.

Matthew Flannery

Thanks, David.

David Raso - International Strategy and Investment Group

Bye, bye.

Operator

Thank you. Our next question comes from the line of Joe Box from KeyBanc Capital Markets. Your question please.

Michael J. Kneeland

Hi, Joe.

Joe Box - KeyBanc Capital Markets

Hey, good morning guys. I just have a high level question for you Mike. It feels like the RSC deal has kind of really steered the pot in the industry. I guess with almost six months under your belt, I’m just curious how you’re seeing competitors respond to the deal. Specifically any color on how industry pricing has been impacted, the prospects for future consolidation or just how competitors maybe thinking about fleet growth going forward?

Michael J. Kneeland

Yeah well I will tell you – I think if you – obviously you’ve been hearing from all the other competitors that are out there publicly and those of that public debt out there, their rates all have been improving and also its supported by Rouse what he’s been – he recently had a call I think yesterday with one of the analyst. So that supports that data that overall the industry is improving on price. So that continues to grow.

With regards to the way people are putting their fleet in, I think each one has their own strategy on where they’re going and what they’re trying to do. Each one is completely different. When you look at what we are doing, we said we’re going to focus on diversifying our customer mix, our portfolio and we’ve done that. And then we’re enhancing that, we’re growing across our footprint.

We have the broadest footprint, that’s one of our – what I believe is a significant advantage for United Rentals particularly with larger accounts and that’s what we’re focusing on, and we’re utilizing the best of both worlds between both organizations and growing on that. Does that mean we have competitors in certain markets? Yeah absolutely, but on balance, I think that the industry is still reeling back from the declines of ’09 on the rate and they haven’t really levered-up or I should say levered-up or brought a lot of fleet in as if yet, I think it’s still challenging for a lot of smaller tier players to get access to capital. It’s better than it was, but not where it was before the downturn.

Joe Box - KeyBanc Capital Markets

So I guess with respect to the last part on the fleet growth side. Is it your expectation and that industry fleet growth is going to be somewhat muted next year?

Michael J. Kneeland

That's hard for me to say. I don’t know what happens in the credit market, if things get opened up, I don't know. It’s hard for me to call. I can only tell you what Bill mentioned, how we’re thinking about the world and what we’re focused on.

Joe Box - KeyBanc Capital Markets, Inc

Great. I appreciate the color. Thank you.

Michael J. Kneeland

You’re welcome.

William B. Plummer

Thanks, Joe.

Operator

Thank you. Our next question comes from the line of Nick Coppola from Thompson Research Group. Your question please.

Nicholas Coppola - Thompson Research Group

Good morning, guys.

Michael J. Kneeland

Good morning.

William B. Plummer

Good morning.

Nicholas Coppola - Thompson Research Group

One thing I wanted to do is just kind of clarify what specifically changed relative to your previous expectation on the synergy front. You were able to get 12 up to 100 million for cost synergies and now, the fully developed range of 230 on the cost side – moving up from 230 to 250 on the cost side?

Matthew Flannery

Sure. This is Matt. We – first of all for the accelerated achievement of the branch closures and some of the other corporate savings that we’ve got that guided us to the $100 million for this year. As far as for the top end of the range, we are starting to see that there may be more opportunity and some of the central dispatching we are doing, some of the branch efficiencies I mentioned earlier about the productivity improvements in some of our larger scale facilities and we think that there is some upside there that we are going to get at and we should definitely be able to get at before our fully developed plan in 2014.

Nicholas Coppola - Thompson Research Group

Okay. That’s helpful. And then on utilization, I mean, I was noticing for fleet mix that aerials ticked down sequentially as a percentage of your fleet. Was there any impact there on utilizations or anything else based on fleet mix that you would want to call out?

Michael J. Kneeland

This is Mike. I’d tell you that it has some effect over time. It’s – we don’t look at it that way, but it’s a valid point. What we’re doing is we’re expanding what we call the other, inside of that you would see the power side, the trench side, and the tool side because we are going to leverage our footprint. We are going to leverage the relationships that we’ve and expand the expertise that RSC brings to the table.

So to some degree you will see some changes. I think when we do our investor presentation, we will try to give a better view on what that would look like. It’s too early. We're going through it and we’re trying to see what the opportunities are. We know they’re there and we are actually investing so that we can capitalize on it.

Nicholas Coppola - Thompson Research Group

Okay. That’s helpful. Thank you.

Matthew Flannery

Thanks, Nick.

Operator

Thank you. Our next question comes from the line of George Tong from Piper Jaffray. Your question please.

George Tong - Piper Jaffray & Co.

Thanks and congratulations on the quarter.

Michael J. Kneeland

Thank you.

William B. Plummer

Thanks, George.

George Tong - Piper Jaffray & Co.

You've noted time utilization has been improving sequentially over the past four months, reaching just slightly north of 72% so far in October. Could you give us color on what’s driving the improvement and whether you expect these factors to persist?

Matthew Flannery

Sure, George. This is Matt. I think what has driven the improvement is demand first and foremost, but we’ve also moved further away from those closures that started towards the end of June and as Mike stated, we are really ramped up between July and August and we're starting to move away from that.

So, our team is much more focused on trying to grow revenue versus our early focus candidly was making sure we stabilized the base business. So, I think that’s given us some tailwind in time utilization.

Michael J. Kneeland

Yeah, I will also add that I made the comment – in my opening comments about penetration. Penetration to me is one of the drivers in the industry. It’s also a seasonality. The third quarter is always our strongest, so we did see it build up and as Matt mentioned – as we mentioned in the call – in our results that we did have a disruption. But there is a seasonal trend, but when you step back away there is a shift towards rental penetration.

George Tong - Piper Jaffray & Co.

Great. Thank you.

Michael J. Kneeland

Yep.

Operator

Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please.

Michael J. Kneeland

Hi, Phil.

Philip Volpicelli - Deutsche Bank Securities

Good morning.

Michael J. Kneeland

Good morning.

Philip Volpicelli - Deutsche Bank Securities

I was hoping you could walk me through the different components of what changed in your free cash flow guidance from previously being negative $90 million to $140 million to now being negative $25 million to $75 million, is that just better EBITDA and less net CapEx or is there some interest savings there? Could you just walk us through the pieces?

William B. Plummer

Yeah, Phil. The biggest drivers are in working capital and CapEx. Working capital we – as I said earlier, we – we've revised our expectation about the impact of shortening the payment terms for fleet purchases for what we buy for RSC, that was probably the biggest factor. And then we are working at the lower end of our CapEx range and that contributed a little bit more as well. So, those were the two predominant drivers.

There is a little bit of a benefit from profitability improvement as we started to realize a little bit more in the way of synergies, but it’s CapEx and working capital, the big drivers.

Philip Volpicelli - Deutsche Bank Securities

Great. And Bill if I could sneak a second one in there, earlier you gave guidance for 2013 in terms of CapEx, but you talked about gross. Can you talk about on a net basis, if possible?

William B. Plummer

So, earlier I was talking about gross. Net is probably not going to be dramatically different than this year either. We are on target to realize new sales proceeds somewhere around $440 million and it’s probably going to be something like that again next year.

Philip Volpicelli - Deutsche Bank Securities

Great. Thank you very much. Good luck.

Michael J. Kneeland

Thank you.

William B. Plummer

Thanks.

Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Michael J. Kneeland

Hi, Jerry.

Jerry Revich - Goldman, Sachs & Co.

Good morning.

Michael J. Kneeland

Good morning.

Jerry Revich - Goldman, Sachs & Co.

Bill can you talk about how monthly rates you’re signing today compared to prior cycle highs? I think spot rates are back at prior cycle highs and I’m wondering if your new monthly businesses as well, if you can give us a broad update? Thanks.

William B. Plummer

So without the specifics here in front of me, Jerry, I do know that what you call spot rates are – let’s call it what we call it, our daily rates are already above the prior cycle highs. The weekly rates are about at the prior peak and we're still below on the monthly rates, somewhere in the neighborhood of 7% below the prior peak. So, some room to go on the monthlies to get to the prior peak.

Whenever people raise this point though, I always have to ask the question, why does the prior peak matter? Is the prior peak some kind of physical law that limits where rates can go? We don’t believe so. That was five years ago and the environment is different now and so, I think it’s interesting to talk about where we are versus the peak. I don’t know that it really defines where we can go though in the future.

Jerry Revich - Goldman, Sachs & Co.

Yeah, so the question is from the standpoint of understanding how much room the monthlies have to catch up because obviously they roll on a delayed basis, so I’m assuming the 7% number you mentioned is the entire book of monthly business and I’m wondering if you are comfortable commenting on the monthly business that you are signing today not the overall book?

William B. Plummer

No. That’s the monthly rate that we’re experiencing today compared to what we experienced back in the early part of ’07.

Jerry Revich - Goldman, Sachs & Co.

Okay. And in terms of thinking about the timing of the CapEx spend over 2013; I’m wondering if you could just give us more context there? Earlier this year you mentioned that you because of how front half weighted the CapEx budget was there were some utilization pressure, I’m just wondering how that factors into your timing decision of when to pick deliveries next year and how should we think about utilizations heading into next year, first quarter looks like a pretty tough comp. So I’m wondering and if you could just provide some broader brush comments to the extent you are comfortable on those topics? Thanks.

William B. Plummer

Yeah. Just, I think next year you will see timing of our CapEx that’s more normal. There was a specific strategy behind front-end loading of the CapEx this year and I don’t know Matt if you want to flush that out a little bit?

Matthew Flannery

Yeah. We did a big pre-buy of multitude reasons last year and we won’t need to do all of that this year and we won’t need the timing to be the same. If projects accelerate and demand peaks up we will always hold the right to adjust, but I don’t think it will be as frontloaded next year.

Michael J. Kneeland

Jerry just on your comment about the time utilization next year, we will try to give some guidance later on and during our investor presentation on the fourth. But to your point on the seasonal swing, we did have a very mild winter. I don't know what that is going to deal with us this year, but on balance we will continue to strive to expand it.

Jerry Revich - Goldman, Sachs & Co.

Thank you.

Operator

Thank you. Our next question comes from the line of Henry Kirn from UBS. Your question please.

Eric Crawford - UBS Investment Bank

Hey, good morning. It's actually Eric Crawford on for Henry.

Michael J. Kneeland

Hi. How are you?

Eric Crawford - UBS Investment Bank

Hey, good. Thanks. Bigger picture on time utilization, once you get past the branch consolidations, adjust the fleet mix and the business mix, what’s the ideal time utilization for the new URI? What’s the right range for the business post transformation?

Michael J. Kneeland

You know that’s – I think an earlier question we had was around the same thing and we are going to kind of give some guidance. We have to go through, we’re going to take a look at what is coming in from the – all of the regions on what capital they want to spend. As I mentioned before, we are expanding into the trench, the other side of the business, the tools as well as the power, which historically runs at lower time utilization with very nice returns.

So as we go through our business process, and our budget process, we are going to take a look at that and then we are going to come back on the fourth and give you some guidance. I don’t know that’s going to change dramatically because there is still opportunities we think in specific markets and areas that we can do better, but you can look forward on the fourth.

Eric Crawford - UBS Investment Bank

Okay. That’s fair. And then just a point of clarification on the rates, how they trended through the quarter?

Michael J. Kneeland

They – for July, they were up 7.5%, for August, they were up 8%, and for September, 7.1%.

Eric Crawford - UBS Investment Bank

Okay, great. Thank you very much.

Michael J. Kneeland

Thank you.

William B. Plummer

Let me just tack on to that real quickly. So that gave us the 7.5% year-over-year rate that we realized for the quarter, on our way to 7% for the full-year. I just wanted – I think there is – I’ve heard people talk about fourth quarter year-over-year rate realization and I’ve heard some pretty interesting numbers. So just to be clear, we think about the fourth quarter year-over-year rate realization needed to get to that 7% for the full-year as being about 6%. I’ve heard some numbers that were significantly higher than that and I just wanted to make sure that everyone heard it here that we are thinking of fourth quarter year-over-year of about 6%.

Eric Crawford - UBS Investment Bank

Thank you.

Operator

Thank you. Our next question comes from the line of Yilma Abebe from J.P. Morgan. Your question please.

Yilma Abebe - J.P. Morgan Securities LLC

Thank you. I was hoping if you could comment on how you’re looking at an overall credit risk and leverage specifically. The 2.5 to 3 times leverage target that you have, how does that compare in terms of the Company, it looked that leverage pre-recession as a standalone company. I was hoping if you can put this 2.5 to 3 times in historical context for us?

William B. Plummer

Yes, sure. We used to talk about the preferred leverage range being in the 3.5 to 4.5 times range and certainly 2.5 to 3.5 represents a shift in our thinking there. To give some context during the absolute depth of the recession in 2009, we peaked up just above 5 times on a trailing ’12 EBITDA basis. Clearly in the extreme, a higher leverage than we would want in our normal range. But that gives you a little bit of context of where we’ve been over the last number of years. So, 2.5 to 3.5 times is fundamentally different and I think it reflects our view that we want to maintain a reasonable level of leverage to make for very efficient capital structure. But we don’t want to go too far because you lose that advantage as you go too low in leverage.

On the other side, you don’t want to get too high because it really does amplify the volatility and cash flow and returns that we have from the business and that’s something that hurts the returns for equity investors and makes the debt investors – puts them in a riskier position as well.

Yilma Abebe - J.P. Morgan Securities LLC

So if I can add on to that, so – why do you have a lower – what’s the driver behind a lower target in terms of leverage based on [multiple] context? May I know, why have you reduced that target, if you can give a little bit context on some of the drivers behind this lower leverage target now?

Michael J. Kneeland

I think we – again, it’s about reducing the volatility of our results, so overall is an important driver for why we want to target a lower range. It will solidify our access to debt financing, although it’s pretty good right here now, but we want to make even more sure that we got free access to debt financing. It will reduce the volatility and cash flow and equity returns and that should make the equity more attractive. And it just gives us a firmer foundation for driving the strategy of the Company, whether we grow organically, whether we position ourselves for further acquisitions, it's all held by the somewhat lower leverage. So that was – those were the main drivers of the thought process.

Yilma Abebe - J.P. Morgan Securities LLC

Thank you. That’s all I had.

Michael J. Kneeland

Yeah. Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Michael Kneeland for any further remarks.

Michael J. Kneeland

Thanks, operator. I want to thank everyone for joining us today and I want to make sure that everyone goes onto our website to see our latest Investor Relation presentation. I had some new slides out there that hopefully you will find helpful. It talks more about the business and how we’re seeing the world and we look forward to talking to you again on December 4th at our Investor Day. So operator, this concludes our remarks and you can end the call.

Operator

Thank you. And 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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