Oct 16, 2014
Executives
Michael Kneeland - Chief Executive Officer William Plummer - Chief Financial Officer Matt Flannery - Chief Operating Officer
Analysts
Ted Grace - Susquehanna Seth Weber - RBC Capital Markets David Raso - ISI Group Joe O’Dea - Vertical Research Eric Crawford - UBS Nicole DeBlase - Morgan Stanley Scott Schneeberger - Oppenheimer Matt Rybak - Goldman Sachs & Company
Operator
Good morning. And welcome to the United Rentals’ Third Quarter 2014 Investor Conference Call.
Please be advised that this call is being recorded. Before we begin, note that the company’s press release, comments made on today’s call and responses to your questions contain forward-looking statements.
The company’s business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release.
For a more complete description of these and other possible risks, please refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2013, as well as 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 and today’s call include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.
Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr.
Kneeland. Mr.
Kneeland, you may begin.
Michael Kneeland
Good morning everyone and welcome. And thank you for joining us on today’s call.
Listen, before I begin, I want to mention that obviously we’re aware of what’s going on in the stock market. It’s been a wild ride and there are some big issues that need solving in other parts of the globe.
But this morning, we’re going to be focusing on our business and the operating conditions as we see them here in North America, so let’s get started. Last night, we reported another strong financial performance and a positive operating environment.
In fact I’ve used those words before and I am happy to say that they’re true again this quarter. It confirms that our strategy is on track and the construction and industrial recoveries are both gaining momentum.
And it shows that we know how to manage the business with continuity and discipline through the early stages of the up cycle. I want to talk more about our environment before Bill goes through the numbers in detail and then after that we’ll take your questions.
The first notable thing about the quarter is that our end markets are continuing to rally. Demand is up and we reported a robust 16% increase in rental revenue for the quarter.
And more importantly, we accomplished this with record margin and adjusted EBITDA and year-over-year gains in volume, utilization and rates. Volume increased 9.5% year-over-year.
Time utilization was very strong at over 71% and we improved rates by 4.7%. I’ve talked about the importance of these three metrics before and they’re all valuable measures of performance.
And while we manage our assets very strategically over the life of the equipment, we’re always hungry for more and that’s particularly true of rates. Our return on invested capital was 8.4% in the quarter which is our best yet and it’s another indication that our strategy is on track.
And free cash flow increased to $312 million through September. And as you saw last night, we raised our free cash flow target to a range of $475 million to $525 million and we reaffirmed the other five components of our full year outlook.
Now, I want to mention a few of the dynamics that help shaped our quarter. One is our new pump business.
With the integration of National Pump behind us, we’ve begun cross-selling these assets to a broader base. We now have four specialty lines in place, trench safety, power and HVAC, pumps and tool solutions.
These are high touch, high value services that build loyalty and engage our customers in using other types of fleet. Our specialty segment had an 88% increase in rental revenue in the quarter and a 98% increase in gross profit so are improving our margins as we expand these operations through acquisitions, cold starts and organic growth.
Now, it’s worth noting that excluding acquisitions, revenue was up about 27%. And that’s outstanding organic growth.
In August, we announced eight specialty cold starts year-to-date and we opened three more in September and we plan another 8 to 10 branches in the fourth quarter, all in specialty. Another area that ties to reoccurring revenue is national accounts.
Our national account revenue kept pace with the company performance in the quarter at 16% growth. It’s our strongest growth rate for national accounts this year.
Now that large projects are picking up, these relationships are becoming increasingly important to our base. And right now, they account for about 40% of our rental revenue.
And while national accounts have the small constraint on rates because of negotiated pricing, they support our strategy for the long haul which is to drive returns over time and to mitigate volatility throughout the cycle. Now moving on to the regional front, every one of our region has delivered year-over-year rental revenue growth in the quarter excluding the impact of FX.
And in fact, half of our regions showed double-digit growth. Now, one of the standouts was our industrial region which was up 22% due in large part to manufacturing and certain energy verticals that we’re seeing strong demand from plant expansions and modernizations, particularly in the chemical sector.
And while there is a healthy variety of projects across our footprint, our regions are reporting certain types of projects more frequently, they include renewable such as wind and solar farms, hospitals, sports arenas, pharmaceutical and chemical plants and urban office construction. Now looking at the U.S.
and Canada as a whole, I would characterize our current operating environments trending upward with fluctuations in local and regional markets. Underlying fundamentals of the recovery looks strong, just as they did when we had our call in July.
This coincides with what we’re hearing from our customers. They are very optimistic, which is probably the most valuable indicator of all.
We have a lot of ways to take the temperature of our markets, but our customers are just that much closer to the action. So it’s good to know that they’re seeing the same momentum we do.
Also on a national front, we’re seeing continued strength in used equipment market, [a solid] [Ph] good sign of healthy demand for equipment. Our adjusted gross margin for used sales was about 48% in the third quarter consistent with the prior year.
Now we’re obviously aware of the volatility in the stock market right now, but most of that’s global and we don’t see it relates to our industry any meaningful way here in North America. There will always be bumps in the road and our end markets as we move to recovery.
But there are far more ups than downs and secular penetration is adding an extra layer of demand. And we’ve shown that we can navigate the business successfully through much greater macro uncertainty than this.
Now turning to our internal initiatives, I want to give you a quick update on two programs that should have significant impact for years to come. The first is lean and the second is technology, specifically Telematics.
We’ve been talking to you about our lean program for the better part of this year. The philosophy of continuous improvement based on the kaizen process.
314 of our branch managers and over 2,100 employees have now participated in kaizen event since our pilot a year ago. And that was enough history with lean, we can share some metrics and they are very encouraging.
For example, the branches that have been through the kaizen’s for order accuracy; we’ve seen a reduction of about 16% in the credit memos issued as a percent of rental revenue. And while the kaizen focus has been to bring down transportation cost, our main branches are seeing measurable improvement.
Results like these have an immediate ramification on productivity and customer service. Our three year target of a $100 million in efficiencies should be very achievable.
We will already identify the run rate of approximately $18 million in utilization and cost efficiencies. And as always we’ll push for more to see the opportunity.
The other area I mentioned is Telematics, which [bolstered] the way we use GPS technology to manage the performance of our larger assets. We currently have GPS on about 6,000 machines mostly generators and select big equipment.
And we plan to extend Telematics to another 160,000 units by the end of 2015. These will be units with diesel engines and other types of powered equipments such as Electric Scissor Lifts.
The Telematics could potentially increase utilization. The benefits are going to be in the areas of preventive maintenance, employee productivity and most of all customer service, because Telematics can reduce downtime.
We’re the industry’s biggest advocate for technology and this initiative is right in line with our focus on innovation. It also supports our strategy for rental CapEx which is to manage and protect our assets as we move them through the rental process in a way that generates optimal returns.
I want to conclude my comments this morning by recapping my three main points; number one, the macro environment stable when end markets are in recovery. Demand in 2014 is up over last year and the forecast is even stronger for 2015.
And we don’t see anything that suggest otherwise. Number two, we’re comfortable with our full year guidance.
We raise those numbers in July based on our internal and external visibility and we’ve raised our free cash flow range last night as our other targets -- nothing has changed. And finally, we have the right strategy in place to deliver the value creation.
And what’s more, we have a record of very strong execution. There will always be puts and takes to our metrics, but taking in aggregate, our results reflect the trajectory that’s consistently outperforming the recovery in our end markets and that’s an exciting endorsement of our business model.
2014 is playing out as a record year for us, but even so we’re confident that we’ve demonstrated just a fraction of what this company can achieve over a multiple years in our cycle. So the present is pretty great, but from where we stand the future looks even better.
So with that I’ll turn the call over to Bill for the financial results and then after that I will take your call and questions. Over to you Bill.
William Plummer
Thanks Mike and good morning everyone. As always, I’ll add a little bit more color to the key headlines that you’ve already seen in the press release and the numbers that Mike has outlined.
Starting with the revenue picture which as we said is a pretty strong one for us in the quarter; rental revenues in the quarter were up 15.6% and it reflected the strength that Michael mentioned in rates and volume and other components of our revenue generation. Within that 15.6%, our owned equipment revenue was up about 15.4% and I’ll go through the components of what drove that.
But let me start with just the re-rent and ancillary component of our rental revenue growth, very robust growth in those two components in the quarter totaling about $25 million of year-over-year improvement in revenues from re-rent and ancillaries. Within the OER component, rental rates were up 4.7 as we said.
And that contributed about $46 million worth of rental revenue improvement. Volume was up the 9.5% that Mike mentioned which drove about $94 million of year-over-year rental revenue improvement.
The story there was the story of a larger fleet and better utilization of that fleet in the quarter. We spent about $456 million on fleet in the quarter and that drove our average fleet size up 8.4% for the year in the quarter and then we utilized that fleet more effectively with time utilization in the quarter coming in 71.5% or 70 basis points better than the comparable period last year.
That resulted in the 9.5% OEC on rent growth that we call out as volume. And I’ll point out that even if you exclude the addition of National Pump in the quarter, our OEC on rent growth was still an impressive 6.9%.
So it wasn’t just the impact of the acquisitions driving that volume growth. Fleet inflation as always has been a headwind for us in the quarter as we sell out older fleet and replace it with newer acquired fleet at higher prices.
The impact there on a percentage basis within OER was 1.7% headwind that translates into about $17 million worth of headwind in the year-over-year rental revenue performance. We call out FX for the last few quarters because it’s been a material impact in the year-over-year drivers, so this quarter was no different.
The Canadian dollar year-over-year was down about 5%. So that cost us about $7 million of year-over-year revenue, 7 million of headwind which translates into about a minus 0.7% against the OER growth.
Mix and other was robustly positive again in the quarter, call it 3.6% or $36 million of positive impact in the quarter. Now obviously, adding an attractive segment like pump in the quarter was a big driver of the positive mix there, call it 30 of the 36 from the mix impact of National Pump.
But even aside from that, we had a positive impact from sweeter mix of products in the rest of our business along with some other minor positives. So the net effect mix was a real robust $36 million.
So all of those components added together give you the $177 million of year-over-year rental revenue improvement. And the momentum that we’re feeling as Mike pointed out is robustly positive going into fourth quarter as well.
Moving to used equipment sales, another good quarter in used equipment sales, a $140 million of proceeds from used and a very nice 47.9% adjusted margin in the process. So, we’re seeing continued robust demand overall in all of our channels for used equipment in the quarter.
Our retail channel mix was down a little bit in the quarter, roughly 10 percentage points, not due to anything other than the fact that we did a little bit more in the quarter in some of the other channels. Retail contribution was still up nicely on a year-over-year basis, up more than 20%.
So we’re continuing to focus to drive used equipment sales through our retail channel as well as the other channels as well and that contributed to the very strong used results in the quarter. On the profitability front, you saw the adjusted EBITDA of $761 million in the quarter at a company record 49.3%, actually both those numbers were company records in the third quarter; actually EBITDA margin was a record overall.
That was a $119 million of year-over-year adjusted EBITDA improvement and 30 basis-point improvement from the prior year. The key drivers of that $119 million of improvement were as follows: Rental rate contributed about $45 million of incremental EBITDA, that’s the 4.7% rental rate improvement flow through at about 95%.
The volume component, we counted $66 million of impact on EBITDA. The fleet inflation component was a headwind of $10 million at EBITDA from the previous inflation revenue impact that I talked about.
Our ancillary improvement, ancillary revenue improvement was another $11 million of EBITDA impact and again that’s driven by the improvements that we’re making in our pickup and delivery revenues as well as certain other ancillary items like our RPP program. Used equipment sales, the margin impact there was $19 million contribution to EBITDA in the quarter.
And then the other components were a variety of one-off items. So, we had an increase in our cash incentive compensation programs in the quarter that cost us about $10 million.
Cash comp went up, because our performance for the year is coming in strong and so we’re accruing more for cash compensation and we made the adjustment in the third quarter to the tune of about $10 million year-over-year. Merit increase, that’s our normal merit increase throughout the course of the year.
In the quarter, it was about $6 million worth of headwind and then a variety of other components contributed to the remaining $11 million of headwind of which bad debt expense was about $4 million of that headwind, reflecting not so much any deterioration in our experience with bad debt, but more just the size of the accounts receivable balance requiring a larger reserve to be set aside. So, those are the key drivers of the $119 million of year-over-year adjusted EBITDA improvement and again reflect all of the components that we talked about before.
You put that revenue and EBITDA performance together you get an adjusted flow-through for the quarter of 51.1% and that flow-through while below the 60% that we’ve been guiding to you for the full year still puts us in line to deliver the full year 60% flow-through. In fact if you look at flow-through for the year-to-date period, we’re right at 59.7% year-to-date flow-through.
So we’re well positioned to be able to deliver the flow-through of 60% over the course of the full year. We have been getting questions about what was it that drove third quarter flow-through to be less than a 60% to be indeed at that 51% or so.
And the couple of things that I would point to you there are the bad debt impacts that I called out that alone was worth about a 0.5 of headwind against our flow-through in the quarter. The cash comp increased that I called out as well probably caused us about 3.5 points of flow-through in the quarter.
And then the robust other lines of business; used equipment sales, new equipment sales in particular very strong growth in those two lines. So the mix effect of those lower margin revenues coming in, in the quarter was probably another 0.5.
So, call it 6.5 or 7 points worth of drag on flow-through just from those three items. Add those back to the 51% you get pretty dollar on close to the 60%.
So that’s how we’re thinking about flow-through for year-to-date and more importantly how we’re going to get to the 60% for the full year. EPS in the quarter was also a very strong $2.20 and on an adjusted EPS basis that compares to the $1.63 that we reported last year.
So 35% improvement and obviously EPS reflects all of the other points that we’ve made. Before I go to the outlook; just a couple of points on free cash flow, capital structure and liquidity.
Free cash flow was very strong as Mike pointed out, $312 million. Remind everybody that includes the impact of our merger-related cash outflows.
Those were about $16 million in the quarter. So if you look on the ex-merger basis, free cash flow in the first nine months was $328 million, very robust free cash flow picture.
And of course, that’s after we spent on capital in the quarter. Total capital was $1.750 billion that includes the rental capital plus the non-rental capital.
So even after the capital investments were on track for very robust free cash flow year. And in fact that pace is what gave us the courage to increase the free cash flow outlook for the full year.
We’ve seen a very robust delivery of operating cash flow year-to-date. We’ve seen very strong collections against our accounts receivable year-to-date and the timing of our accounts payable year-to-date has broken favorably.
So you put all that stuff together and that’s what prompted us to raise our outlook for free cash flow by about $25 million for the full year. On capital structure and liquidity, liquidity was a total of about $1.1 billion at the end of the quarter and that included $900 million of ABL capacity plus about $170 million of cash in the bank.
So our liquidity position is very strong. We did during the quarter amend our accounts receivable facility, it’s $550 million facility that we amended to extend the maturity for another year.
So that positions us with that facility as well. The share repurchase program, you heard us announce that we are accelerating the completion of that program to the end of this year.
We have spent $389 million on the program life-to-date that includes $152 million during the quarter and it positions us very nicely to be able to finish it out by the end of the year. The combination of slightly stronger free cash flow plus as Mike said, we’re paying attention to the real world, our stock price being down, prompted us to say look, let’s just get it done during calendar 2014 and then figure out where we go from there.
So that’s the rational for accelerating the repurchase. ROIC was strong as Mike mentioned for the quarter trailing 12 months, 8.4%, a company record that’s 1.3 percentage points better than the same period last year and it’s a 30 basis point improvement compared to where we were at the end of the second quarter.
So, we continue to be on track to drive our ROIC higher, targeting cost of capital and ultimately that 10% hurdle rate that we talked as a target, nice progress against that in the third quarter as well. On the outlook, we reaffirmed all the components with the exception of free cash flow.
So just to recap where we are, we still expect the full year revenue, total revenue coming in the full year between 5,550 million and 5,650 million. That includes of course rental rate performance in the rental revenue component that we continue to expect at about 4.5% year-over-year for the full year.
Time utilization, robust in the quarter and positioned us well to be able to deliver the 68.5% time utilization that we’ve given as an outlook, we’re sticking to that as well as the adjusted EBITDA range of between $2.650 billion and $2.7 billion for the full year. CapEx and cash flow, we touched on already.
CapEx, we continue to expect to invest, net rental CapEx of $1.2 billion and that of course is after gross spends on new rental equipment of $1.7 billion and the free cash flow range I touched on. So, those are the comments that I’d offer as color for the numbers.
Obviously we can go into more detail in the Q&A but let me add my thought to Mike’s thought. We’re well positioned and everything that we see in hear keeps us on that path for 2014.
We certainly are not naïve to what’s going on in the outside world, but we feel good about where we are, what we’re hearing from our customers and how we’re running our business. So, we’re going to continue to drive forward and we’ll talk to you as we go forward about the results that we achieve.
So, with that I’ll open up the call for questions and answers. Operator, can we open it up?
Operator
Thank you. (Operator Instructions).
And we’ll go first to Ted Grace with Susquehanna. Please go ahead.
Ted Grace - Susquehanna
Hey guys, congratulations on the quarter.
Michael Kneeland
Thank you.
William Plummer
Hey Ted, thanks.
Ted Grace - Susquehanna
I was hoping just to kind of come back to the 2015 outlook, and I know you haven’t provided kind of formal guidance. But Mike, your body language is quite positive.
And if I didn’t hear your right, I think you said that the business feels to be accelerating and there is obviously seasonality. But could you maybe just touch on at least a framework for how you’re thinking about 2015?
And I think a lot of questions that we get are kind of on energy and energy exposure and kind of what you’re picking up from those customers and maybe how much of that business that constitutes.
Michael Kneeland
Yes, I’ll talk part of it then I’ll ask Matt and maybe Bill to chime in as well. We’re looking at the forecasts that obviously are produced by Global Insight as well as we’re looking at IIR which is an industrial resource and looking at how they’re seeing the world.
And they continue to see 2015 stronger than 2014. Obviously, they can always update but we haven’t seen any material change.
As we went through the quarter, we saw momentum building and then that’s particularly true in our time utilization as we went through. The other thing I would tell you is just a data point Ted is another thing that we look at is the construction backlog indicator which is produced by the American builders and contractors in August; it reached an all-time high.
We’re still waiting for the report to come out sometime in October or in early November. But those are some other indicators that we see.
As I mentioned in my opening comments, talking to our customers and their outlook of how they see the next 12 months, again as we went through the quarter that progression of optimism grew as well. So, those are the things that we look at.
With regards to the oil, I would point out oil and gas is how we look at it. We don’t bifurcate the two because of how we go after the market.
All-in and I am talking about upstream, downstream and midstream, and looking at 10.5% of our total business. If you take a look at I think where you’re trying to drive to is the area of where we would see exploration on oil would be around 5%.
Now that 5% will also include pump, it would also include the gas, natural gas as well. Natural gas, the LNG plants and everything that we’ve seen is continuing to go along.
Matt, if you want to?
Matt Flannery
Yes. Mike covered that we don’t necessarily have a lot of exposure to oil and gas.
But I think more importantly is the fleet that we use to serve that vertical market is compatible to the rest of our fleet. So if something did change in that sector, we have robust growth throughout our network and throughout many verticals that we could move that fleet because it’s core to our offering to other verticals and other end markets.
And when I talk about the breadth of our end markets, Mike mentioned that more than half of our regions had double-digit improvement in the year-over-year rent revenue. Well, we had over 30 states that had double-digit improvement in rent revenue year-over-year and 5 of our 10 provinces in Canada.
And all, but four states showed year-over-year rental revenue improvement and 8 of our 10 provinces. So when we say we have broad demand, we really do have broad demand throughout our network.
Ted Grace - Susquehanna
And then the follow-up I’d ask is just from the standpoint of just kind of taking share on your competitive positioning, can you just maybe give us a sense for how you think you’re doing relative to kind of a broader growth because honestly my sense is non [Inaudible] your market’s probably are not increasing double-digit rates. So just from the standpoint of how you think about market share capture next year, maybe can you just touch on that?
Michael Kneeland
Well, we haven’t gone through the process and obviously we’re going to have our December meeting coming up for our investors. But the way I would look at it is what is projected today by global insight for our industry for 2014 is 8% growth.
We just reported a 16% growth and I think you can get a sense of how we’re outperforming. I want to make sure everyone understands.
Well, I’m not thinking about just growing for market share, I’m talking about growing for profitable growth and returns and those are the things that we’re most interested in. So again, I think that we’re performing well.
I think that our specialty business clearly is outperforming the industry by a multiple. And I think you can see the power of the cross-sell that we’re actually benefiting from right here and now.
William Plummer
Yes. I’m a simple guy, Ted, I just step back and I say, have we driven our business throughout the course of the year, rental revenue year-to-date is up 14.2%.
I would guess that there aren’t a lot of rental companies that can say the same thing. And so I think we’re positioning ourselves against the overall environment and against the competitive set pretty well.
That positions us well to be able to continue to do that next year.
Ted Grace - Susquehanna
Okay. Well, that’s great.
Best of luck this quarter and I’ll get back in queue.
Michael Kneeland
Thanks.
Operator
And we’ll go next to Seth Weber with RBC Capital Markets. Please go ahead.
Seth Weber - RBC Capital Markets
Hey thanks. Good morning.
Michael Kneeland
Good morning.
Seth Weber - RBC Capital Markets
I want to talk about the rental metrics a little bit for the quarter. So time utilization was actually much better than what we were expecting, rate was good.
But I’m wondering does the upside to the time utilization, should we infer anything into that that you’re pushing time versus rate anymore going forward and is that any kind of reflection of the national account growth that we’ve been seeing? Thank you.
Matt Flannery
Hi Seth, this is Matt. We absolutely are continuing to push both rate and time and we feel that the demand is there to get both.
We saw record realized rate in Q3 and we saw record time as we closed Q3 in September. And I’m pleased to say that that kind of demand is as we sit here today in October, we’re seeing sequential rates continuing to grow at about half a point and the time utilization gap that year-over-year which was a 1.6% positive, a 160 basis points positive in September, as of last night, we maintained that 160 basis points gap.
So, we’re seeing the demand continue and we feel that rate and time are both again there for us for the taking.
Michael Kneeland
The other thing I would add to that is the only thing that we saw in September is our national account did grow faster than our core business. And as I mentioned, a lot of these larger projects are coming on line.
Seth Weber - RBC Capital Markets
Right. Mike, you mentioned, I think the phrase you used was “negotiated pricing” and I’m just -- I’m trying to understand this market a little bit better, because some of your competitors have talked about going after the national account market more aggressively.
So, I’m just trying to understand how that -- as this market becomes a bigger part of your mix and as other competitors are going after it, your ability to sustain rate here and your ability to continue to -- for that business to grow at these types of levels, at a profitable level; I mean have you noticed any change on the competitive front, I guess on a national account business.
Matt Flannery
Overall in aggregate, no. I think there maybe some movement within who is the number two, number three, number four players for some accounts.
But as Mike had mentioned, our September growth for national accounts was almost 19%. So, that’s as high a number as we’ve had in the quarter.
So we’re actually seeing our momentum pick up. Is that a slight drag on sequential rate?
It can be in a quarter but we’re -- I think Bill guided properly of where we get to see rate going forward. We’ve talked about that and we think that 3% is the entry level for us and somewhere between that 3% and/or about 4.5 guidance for this year is the goals that we look for going forward.
Michael Kneeland
The only thing I would only add is look, we can’t be complacent. We have to continue and as I mentioned in my comments to be innovative and think about how we can enhance our value proposition to our customers.
I just mentioned that we announced that we’re going to have 160,000 units by the end of next year with GPS. I guess there are other competitors who have GPS capability, they typically will put it on and charge for an extra charge.
December, we’ll give you some understanding of what we intend to do with the GPS technology and how we think that we can continue to focus on improving our value proposition in comparison to the competitive environment. That’s what we’re learning and that’s our job.
And I am very happy to report that the team is very active and thinking that through.
Seth Weber - RBC Capital Markets
Okay. Thank you for that.
If I could just ask a quick follow-up kind of piggybacking on Ted’s question about 2015, Bill, is it fair to think about pull-through margin at the same levels, is high 50%, 60% pull-through margin you think sustainable into 2015 and how much of this $100 million lean initiative you think is part of that?
William Plummer
We said in the past that we believe 60% is a reasonable way to think about pull-through margins for the next couple of years. So yes, 60, if you’re thinking about 2015 is a good starting point.
Obviously we’ll sharpen that as we finalize our plan for the year and talk about it at future points. So that feels about right.
I’m sorry; the second part of your question was…?
Seth Weber - RBC Capital Markets
Just how much of the 100 million of initiatives, the lean initiatives that you see on cash during 2015?
William Plummer
Yes. We haven’t boiled it down to an expected realized dollar amount.
Again, as we go through our planning process and think about what our guidance for ‘15 is going to look like, we’ll figure out what more we might want to say on that. So stay tuned.
Seth Weber - RBC Capital Markets
Okay, thank you very much guys.
William Plummer
Thanks Seth.
Michael Kneeland
Thanks Seth.
Operator
And we’ll go next to Dave Raso with ISI Group. Please go ahead.
Michael Kneeland
Hey David.
David Raso - ISI Group
A quick question on ‘14 question then a question on ‘15. The utilization I know seasonally peaks in October but still just given the way you’ve started the quarter, it would appear to get to your full year utilization increase to 40 bps.
The drop off in November, December in utilization appears to be a little heavier than normal seasonality. Am I reading that correctly or is it maybe utilization is the area that maybe is little upside to the guide but then the rate is that the trade off on it.
I’m just trying to understand are we seeing something for November and December that would imply a little further decline in normal seasonality over the last two months of the year.
William Plummer
Maybe I’ll start. I think we saw a very robust utilization result in the third quarter.
And it’s hard for us to extend that thinking too aggressively in the fourth quarter. Obviously we’re working very hard to make sure that we get as much utilization as we can in November, December.
But we haven’t really aggressively moved those utilization months up from what we thought earlier in the year. So we’re continuing to look at it.
If October finish is out the way started then maybe we’ll have to revise our thinking. But right now there is nothing dramatic negative going on in the November, December timeframe that we’re protecting against or concerned about.
It’s just we haven’t gotten to the point of saying, yes third quarter and October let’s goose up November, December based on those results, haven’t got there yet.
David Raso - ISI Group
Okay. So that’s someway go there.
On 2015, I know that the stock supple out today, but obviously stocks been off, it influenced your use of cash and the time of the repo for 2014. Can you walk us through the cash flow for next year, the use of it?
How the stock price may influence your thoughts on moving forward with more repo versus maybe what you’re seeing in the M&A market?
William Plummer
I think it’s important to say that the stock price isn’t really the guiding light for our decision about whether we do a repurchase and how much of a repurchase that we do. That comes out of our consideration for how to allocate our capital and our free cash flow.
And we try to think about that question in longer term strategic terms. That’s what led us to the $500 million program that we’re currently on.
And that’s what we would think about as we consider whether and how much of a follow-on program we could or might do. So that thinking is going on right here now.
The stock price at the margin may prompt us to say let’s go a little bit faster, a little bit slower within the broad framework that we established. So in this case, the current 500 we said initially it was going to be 500 over the period extending till April of 2015.
As we got into it, and so our cash will come in and so the stock price come down, we adjust it as we thought appropriate. And so tactically that’s the way we would manage any future program as well.
But the program itself both existence and scale would come out of what we think our cash flow is going to look like over the long-term over the next number of years. And we’ll continue to talk about that as we sharpen our thinking about 2015 and future.
Michael Kneeland
Yes. And David on an M&A front, our principles have never, they haven’t changed one bit.
They have to be strategic, it has to be accretive and you know our goal around return on invested capital and the other part would be a cultural fit. So, and it’s a pretty high hurdle and we’re very comfortable with that.
David Raso - ISI Group
The net debt to EBITDA 2.9 at the end of the year; when I think about how you’re going to manage that through ‘15, are you comfortable maintaining the 2.9, obviously I’m trying to figure out whatever I believe the cash flow will be for next year. Can I assume you’re going to put that all to work?
I know you’ve got roughly about a $125 million of earn out you have to pay to the National Pump deals assuming you hit their target. But are we comfortable assuming where the net debt to EBITDA ends this year?
Is a comfortable ratio for the end of ‘15?
William Plummer
I think and we’ve said that next year 2015 we believe that the leverage should trend lower, so lower than the 2.9. And in fact I think I’ve said in the past, we see it toward the lower end of the 2.5 and 3.5 range that we’ve talked about.
That thinking certainly would have us using our cash flow to both pay down debt, but also to finish up our current share repurchase. And we would continue to think about it that way, the leverage path that way even if we decided to do another share repurchase.
Obviously that all assumes de minimis in the way of acquisitions if a significant acquisition comes along, we would reassess that path of leverage that we’d want to be on. And we talk about it at the time of announcing the acquisition, right.
But our thinking right now ex acquisitions is that we’re going to trend toward the lower end of the range during 2015 and finish up toward the lower end of that range.
David Raso - ISI Group
Okay. I appreciate it.
Thank you.
William Plummer
Thank you, Dave.
Michael Kneeland
Thanks Dave.
Operator
And we’ll go next to Joe O’Dea with Vertical Research. Please go ahead.
Joe O’Dea - Vertical Research
Hi, good morning.
Michael Kneeland
Good morning.
Joe O’Dea - Vertical Research
First question on lean and it looks like from the slides that employee participation was higher in 3Q versus 2Q that the actual branch participation was more or less in line. And so as you approach year two of the implementation, could you talk a little bit about how lean evolves and what the key goals become in year two of that process?
Matt Flannery
Sure Joe. Part of what you see as far as more participation is the aggregate, right, we aggregate how many folks have been through lean as our goal to get through as many of our 12,000 employees as we can.
I’d say, the bigger opportunity for us is you’ll see in that slide, I am sure you’re referring slide 21; we’ve done 141 branches but 314 branch managers. We do believe there is an opportunity for us to spread through our line management some of the lean processes and procedures as well as push out some very simple best practices that we’ve discovered during the lean projects and the kaizens that we’ve done and push them out through the broader organization.
One example of that would be counter accuracy and you’ll see the term BPRO in there. That was a designed rollout as a result of findings during kaizen events at multiple branches that we felt we’d share with the broader organization and we are seeing metrics very favorable throughout kaizen and non-kaizen branches in our order accuracy because of that.
And I think you’ll see us continue to work down that path in our lean management process.
Michael Kneeland
That’s right. Just to add, that’s the process for driving the culture change that lean represents.
We recognize that it is fundamental culture change, the different way of looking at your business. And we’re taking the variety of the paths to drive that culture change whether it’s direct training, whether it’s rolling out BPROs best practice rollouts whether it’s just generally talking about what lean means to an organization.
We’re deploying all of those and doing it in a structured reason way to make that lean implementations stick, because that’s how we’re going to deliver the 100 million and beyond of benefits from that change in mindset. So, we’ll continue to work on it and talk about it and welcome your questions about it.
Joe O’Dea - Vertical Research
Okay, thanks. And then, second question just on National Pump and with respect to CapEx plans, how are oil prices right now influencing your equipment spend plans and if no change so far, how long before $80 oil leads to hold off on some considered investments?
Matt Flannery
I’d say no change so far is definitely the way to think about our capital plans. Unless and until we actually see a pull back from our customer base, we’re going to continue to invest.
And even then, even if we saw a little bit of a pull back, we would have a debate about what does it represent and how does it impact our plan for investing in our pump business, in fact in all of our specialty businesses. It may not mean anything.
If you look at National Pump through the last recession, they were on a growth path that was so aggressive that they didn’t have a downturn back in the 2009-2010 timeframe. So we would have to ask our sales, are we positioned so that we can find demand outside of a slowing oil and gas sector that to continue on the growth path and therefore justify continued investment.
I don’t think that’s a ridicules path to have for the pump business or indeed most of our specialty businesses.
Michael Kneeland
As I say strategically on the pump business, I just want to remind everybody. It was a roughly $200 million tower volume play.
It was 50% of their business in that oil and gas arena. If you recall, 6% of our business or their business is in our sweet spot and we’re almost $5 billion.
So the idea was, is taking that knowledge and springing it and cross-selling it to our customer base as opposed to us going after their customer base. And that strategically we found very attractive.
Joe O’Dea - Vertical Research
Great. Thanks very much.
Matt Flannery
Thank you.
Operator
And we’ll go next to Steven Fisher with UBS. Please go ahead.
Michael Kneeland
Hey, Steven.
Eric Crawford - UBS
Hey, good morning. It’s Eric Crawford on for Steve.
Michael Kneeland
Hey Eric.
Eric Crawford - UBS
Hi. Circling back to Seth’s question on time utilization, with all your operational improvements with the lean and Telematics initiatives, how are you framing the puts and takes around what the new normal for time utilization can look like?
I mean clearly, it varies by equipment type, but do you think you can raise each category in other couple of hundred bps from where it sounds today?
William Plummer
Yes, Eric. We’ve talked in the past about operating in the 70s on average throughout the course of the year.
So yes, that would be a couple of 100 basis points from the full year 68.5 that we’re expecting this year. And we certainly feel like lean and some of things that we’re doing to change internally will help us get there.
So that’s how we’re thinking about it broadly, is in the 70s. If you got a couple of drinks and the three of us that we all might give a slightly different number in the 70s, but it’s going to be in the 70s and that’s couple of 100 basis points north of here at least.
Eric Crawford - UBS
Okay. We’ll work on getting those drinks with you.
I guess switching over to the dollar utilization, nice uptick year-over-year and sequentially across all the categories, but the largest step up was year-over-year at least was in earthmoving equipment. Could you speak to your availability in that category specifically and how the demand has trended relative to your expectations?
Matt Flannery
I think the demand is ticked up at about the same pace that most of our other core products. I think we made a little bit more consorted effort on fleet mix.
And therefore we’re calling on a broader customer base in the broad base we already had. So we continue to want to have broadened our offerings for a lot of reasons.
And we think that it’s part of that opportunity. And I think that’s what you’re seeing; you’re seeing the results of that.
And I think as we continue to tie our sales efforts to our fleet mix efforts, we’ll see continued growth in both scale of our other non-aerial, reach fork products, as well as returns.
Eric Crawford - UBS
Okay, great. Thanks very much.
Michael Kneeland
Yes. Thank you.
Operator
And we’ll go next to Nicole DeBlase with Morgan Stanley. Please go ahead.
Nicole DeBlase - Morgan Stanley
Yes. Good morning guys.
Michael Kneeland
Good morning.
Nicole DeBlase - Morgan Stanley
Congrats on a nice quarter.
Michael Kneeland
Thank you.
Matt Flannery
Thank you.
Nicole DeBlase - Morgan Stanley
So, most of my questions have been answered, but maybe the one box we haven’t kicked yet is just the M&A backlog what you guys are thinking from an acquisition perspective as a potential use of cash in 2015?
William Plummer
Nicole good morning, it’s Bill. I think the way we approach M&A, the way Michael articulated earlier, we certainly look at a variety of opportunities, we look carefully because it’s been an important part of how we’ve driven the company forward, but we’re also very disciplined in when we actually execute a transaction.
So, we’re continuing to look at opportunities as they come. As I’m sure everybody is aware there have been a number of opportunities, there are number of properties available in our sector over the last recent periods.
And we’ve taken a look at the ones that make sense for us and we’ll continue to do that. But nothing more to say on that front right here now.
Matt, Michael you guys want to add anything?
Nicole DeBlase - Morgan Stanley
Okay, got it.
Matt Flannery
Other than just to say Mike said it on every quarterly call we have the bar is high and if the bar is high for us and we’ll continue to keep that bar high.
Nicole DeBlase - Morgan Stanley
Okay. Good to hear.
And then maybe just one on CapEx into next year, I mean is it fair to assume that we’re going to have kind of another flattish year, 1.7ish billion of gross CapEx in 2015 or is there scope to increase given that you guys are seeing improvement in your end markets?
William Plummer
Yes. Well, certainly we feel there is justification for another $1.7 billion next year that’s our thinking right here now.
Could it go a little higher than that, yes, it could go a little higher. We’re in the midst of that plan process right now.
And that’s currently on the table. And I would say if the utilization trend that we’ve seen here late in the year continues right to the earlier discussion if November, December don’t fall off or indeed if they do a little bit better then I think we would have to put at least another $100 million on the table in that kind of environment.
Matt’s smiling here so. Our arm wrestling match is going to continue once this call is over but that’s the range that we’re thinking about and the market certainly as we sit today, the market feels like it supports that.
Michael Kneeland
Yes. And the other thing I would say Nicole is that we are very disciplined in our approach and how we use CapEx and that will stay with the company and our belief.
Nicole DeBlase - Morgan Stanley
Okay, understand. Thanks, I’ll pass it on.
William Plummer
Thank you.
Michael Kneeland
Thanks Nicole.
Operator
(Operator Instructions). And we’ll take our next question from Scott Schneeberger with Oppenheimer.
Please go ahead.
Michael Kneeland
Hey Scott.
Scott Schneeberger - Oppenheimer
Thanks for taking the question. I just want to talk a little bit about the increase of free cash flow guidance.
Bill, could you talk a little bit about what some drivers were of the strength in the quarter and how you’re thinking about the multi-year free cash flow guidance right now? Thanks.
William Plummer
Sure Scott. I think I touched on it.
The key driver in the quarter and for outlook for the full year is the momentum that we’ve seen on collections. Our DSO performance is coming in nicely relative to what we expected.
So that’s feeling more confident around the collections that we’re going to experience. And then we got greater visibility on the timing of our payables for the quarter, during third quarter and a greater visibility to what fourth quarter is going to look like.
So, those were the two main drivers for the increase in guidance for this year. It sets us up nicely for next year.
We have talked in the past about being north of 600 million of free cash flow during calendar 2015 and we certainly continue to feel good about that. And again, we’ll sharpen that as we finalize our plan for 2015 and report more on it either in our Investor Day or when we deliver fourth quarter earnings.
So well positioned for next year to be in that north of 600 range and then beyond that ‘16 and ‘17, assuming the cycle place out, look better still.
Scott Schneeberger - Oppenheimer
Excellent, thanks. And then just following up on a question earlier with regard to M&A, it does seem like there are a lot of opportunities out that [wait].
Could you just kind of compare contrast looking in your traditional equipment rental business versus specialty on an M&A and maybe some of the areas you’re looking to branch out into in specialty or just [work] out there?
Michael Kneeland
This is Mike. I would tell you that obviously we’ve been talking about specialty as an area of growth for us.
And I’m sure we’ll talk more about that at the Investor Day. We have a keen interest in that arena.
And there is a lot of areas we don’t understand. And again we look at that strategic return and cultural fit.
So, all those things have to come into play. As Bill mentioned, there has been a lot of properties that have been up for sale.
And we’ve looked and we’ve cash, because of the high bar, that will continue. So I would say that we’re always acquisitive and we’ll always look and we’ll try to understand and how that can benefit the company, not just in a year over time for longevity but tie it to our strategy and the return metrics that we’re looking for.
Scott Schneeberger - Oppenheimer
Thanks.
Operator
And we’ll take our next question from Jerry Revich with Goldman Sachs & Company. Please go ahead.
Matt Rybak - Goldman Sachs & Company
Hey, good morning. It’s Matt Rybak on behalf of Jerry.
Just briefly wanted to talk on the capital allocation side and if you could maybe touch on what regions you are seeing outsized capital allocation towards, maybe where you are seeing the most growth and maybe give us one, two and three of the top regions within your company.
Matt Flannery
Sure Matt. It’s pretty broad based and we have a very rigorous process when we put out growth capital.
So, when you think about our capital, large portion of it is replacement. And because of the broad based opportunities we’ve seen throughout our network, we’ve been giving all of our regions the appropriate replacement capital.
And then they earn growth capital based on the returns, not just the demand in the end market. Mike said earlier, we’re chasing not just growth for growth sake, but profitable growth and we do allot our capital appropriately.
You can imagine where the hot pockets in the markets have been along the Gulf Coast, but we’re seeing growth in the Midwest and on the West Coast, as well as in Northeast as well. So, we’re really seeing a very broad-based growth and we’re allocating our capital appropriately.
Michael Kneeland
And the other thing I would add to that is a proportion of our growth capital has gone to our specialty business. And that’s what you’re seeing the fantastic growth that they’ve been able to produce.
Matt Rybak - Goldman Sachs & Company
Great. I know you touched on it, just to follow-up a little bit on the beginning of the call, but from an end market standpoint, Gulf Coast obviously large petchem potentially LNG build out there.
But can you maybe touch on which end markets are driving the strength in the Midwest and in the Northeast?
Michael Kneeland
Well, I mean I think if you take a look at, it goes in line with what you’re seeing, the consensus report. There are things like commercial, healthcare, power; manufacturing and multifamily are all seeing nice improvements.
So those are probably be the likely areas that you’re going to see where we’re putting it. As I mentioned in my call, kind of broad-based all the multiple different types of projects; I was just recently down at a race car facility where they’re doing a major expansion.
And so it’s just -- it’s very broad in general. But those will probably be the hot buttons that you can take a look at.
Matt Rybak - Goldman Sachs & Company
Great. Thank you very much.
Michael Kneeland
Okay. Operator I think this is a good time to wrap up the Q&A.
I do want to remind everyone to download our investor presentation if you haven’t already. Please give us a call in Stamford or give Fred Bratman a call, particularly if you want something to discuss or if you want to see a branch visit or go to a branch visit.
Also please make note that December 04, is our Annual Investor Day in New York, we’re very excited about it and I hope you’ll attend. But if you can’t, you can join us on the webcast.
So operator I think you can end the call now. Thank you.
Operator
This does conclude today’s conference. You may now disconnect.
And have a wonderful day.