Jul 24, 2015
Executives
Michael Kneeland - President and CEO William Plummer - EVP and CFO Matt Flannery - EVP and COO
Analysts
Tim Robinson - Susquehanna Financial Seth Weber - RBC Capital Markets Steven Fisher - UBS Nicole DeBlase - Morgan Stanley Scott Schneeberger - Oppenheimer Bernan Jack - Goldman Sachs George Tong - Piper Jaffray Nic Coppola - Thompson Research
Operator
Good morning, and welcome to United Rentals’ Second Quarter 2015 Investor Conference Call. Please be advised that this call is being recorded.
Before we begin, note that the Company’s press release, comments made on today’s call and responses to your questions contain forward-looking statements. The Company’s business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected.
A summary of these uncertainties is included in the Safe Harbor statement contained in the Company’s earnings release. For a more complete description of these and other possible risks, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as well as to subsequent filings with the SEC.
You can access these filings on the Company’s Web site 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
Well thank you and good morning everyone and welcome. I want to thank everybody for joining us on today’s call.
I want to focus most of my comments today on the dynamics of our operating environment. I'll discuss how our industry is adjusting to the recovery and I'll talk about the non-residential construction is hitting its stride particularly in the commercial sector.
And then Bill will cover the financial results followed by your questions. So, first look at the quarter, we turned in a solid performance with nice gains and profitability, margin and returns.
Our EBITDA margin increased over 49% in the quarter and we reported earnings per share of $1.95 on an adjusted basis. And these were both second quarter records for us.
Free cash flow was very strong at $432 million through June. Now taking in an entirety these numbers reflect the fundamental strength of our operating environment.
There is clear evidence of demand for our equipment and demand is growing. However, taking individually to the underlying metrics reflection challenges in our environment.
The rate and time utilization, rate came in softer than expected at 1.5% higher year-over-year and time utilization was down 150 basis points to 66.6%. Now it's important to understand what these numbers do and don’t represent.
For one thing, they do not reflect the macro weakness in demand. Now we spend a lot of time analyzing industry behavior, and we believe that rental demand in North America has multiple years of growth ahead.
We also think that 2016 will be even stronger than in 2015 for our end-markets and the growth will be led by non-residential construction spending. And that’s what most industry experts believe and we agree.
And what the metrics point to are two dynamics that are more like micro cycles within our larger operating environment. These dynamics will run their course but right now they are not doing us any favors.
The first issue is upstream oil and gas. Last quarter we told you this sector was a significant constraint with both a direct and knock on effect.
And I've given an idea of the impact in the second quarter, if we exclude the branches with the most exposure of upstream oil and gas, time utilization was only down 30 basis points year-over-year and sequential rates were slightly positive. In April we said we thought this sector would continue to be a drag on numbers to at least the third quarter.
So it is no surprise that we're still dealing with that challenge particularly in our pump operations. So obviously there is not much we can do about the price of oil but we are taking action.
So far we have redeployed over $125 million of fleet away from the upstream oil and gas markets and will continue to use this lever where we see the opportunity for higher returns. The second dynamic is on the supply side, where it is more of a timing issue with our industry as a whole.
Right now Rouse will tell you that there is some excess fleet in rental yards that needs to be absorbed into the marketplace. It's non-usual for our industry to add fleet in an upturn and to do so slightly in advance of the demand.
In this case however the imbalance was exaggerated by the decline in upstream oil and gas. This will allow but until it happens it continues to be a drag on the rates and the utilization.
Our own plans to invest $1.6 billion of gross CapEx this year which is $100 million less than our original projection. And while we have taken that number down it still represents plenty of growth CapEx to serve our large accounts and to expand our high margin specialty business.
On the other side of CapEx management used equipment sales, the market is going strong. Used sales continue to be an important mechanism for us in fleet management.
The second quarter our adjusted margin on new sales was a robust 50% which is an increase over last year. And given these various considerations, we're being realistic about the short-term impact on our performance.
And as you saw last night, we lowered our expectations on rate to 0.5% gain. Our time utilization target is now approximately 67.5% and we've adjusted our revenue and EBITDA ranges accordingly.
At the same time we expect free cash flow to remain very strong. I want to be clear about our sights are set higher than this outlook as they always are with any guidance we give.
I think you know by now that our nature is to be hungry for more and in this case, if there's rate we're going find it. We have a lot of runway ahead of us in this cycle.
Secular penetration is still in play and commercial construction is nowhere near its peak. Global insight is forecasting solid growth for the U.S.
rental industry this year followed by similar increases in 2016 and 2017. And Dodge sees the construction market growing for at least the next three years.
At the same time we're careful to maintain our Company in a strong position to handle any issues that arise. We've been building up our scale, technology, processes, our skill sets for nearly two decades, and even if the environment throws us a curve ball, we can handle it.
In fact we're better equipped to handle it now than any time in our history. From our current vantage point the cycle is right on-track.
We're finding that customers are bullish about their prospects and the level of activity seems to bail that out. In some cases we're hearing about project backlogs that are approaching pre-recession levels.
And here I'll give a few snapshots from the field. In our Mid-Atlantic region where we had double-digit growth in the quarter or our nuclear power projects, roads, bridges and industrial manufacturing plants.
In the Southeast we're seeing government projects start-up as well as healthcare construction and highway expansion. Florida's picked up, and customers are saying they expect a strong finish to the year with upside in the 2016.
And in the Mid West where heavy rains and a labor shortage delayed some brick construction starts, we still had solid growth. And we're now seeing a range of projects get underway including a fertilizer plant, auto manufacturing and commercial buildings.
That should give us momentum right through the winter. Now turning to our specialty segment, trench safety, power and HVAC both had stellar quarter.
Trench safety revenue was up 15% year-over-year and power posted 39% growth. Our specialty segment got a boost from 10 new branches we opened in the first half of the year and we plan to open another eight before the year-end.
But this segment is also generating solid growth organically. All of the 15% growth in trench in the quarter came from same-store performance and power and HVAC had 27% same-store growth.
Now in addition to being important revenue streams in their own right, specialty rentals have a role in strengthening our key customer relationships. The larger the customers the more likely that the rental needs extends beyond the basics.
And we're doing a good job of ramping up our cross-selling efforts to serve these accounts more completely. And in the process we're building loyalty that holds up on the competitive pressure.
National accounts are a good example. And year-over-year in Q2 we grew our cross-sell revenue by almost 30% with national accounts.
In the second quarter we grew our rental revenue but in the same group by more than 7%. So we're piloting a steady ship and we're being extremely disciplined about our business development efforts.
And finally I want to mention our share repurchase plans. As we announced last night, we're accelerating the $750 million program we initiated last year.
We now expect to complete that program before year-end. And then we'll start a new program for additional $1 billion of share repurchases.
It's a sign of our confidence in our future earning power and our commitment to earning that returning value to our stockholders. And on closing, I want to come back to our operating environment and the many levers that we've at our disposal.
We use these levers and inherent strengths of our strategy to manage our business to the best possible outcomes and in the second quarter you saw the benefit of the organic and inorganic moves we made. Our focus on operational excellence, our efficient cost structure and our ability to scale for our advantage, all of which contributed to a strong financial performance in many respects, now we continue to take decisive action where we see opportunity to build on these results and generate even higher returns.
So with that I will ask Bill to cover the financial results, and then we'll take your questions. Over to you Bill.
William Plummer
Thanks Mike and good morning everyone, I'll try to add a little bit more color to the numbers that most of you've seen in the press release or heard in Mike's remarks. Starting with rental revenue.
Rental revenue for the quarter was up 3.5% year-over-year that's $42 million of an increase. Within that increase owned equipment revenue represented a 3.7% year-over-year growth for about 37 million of that 42 million.
The remaining rounded 4 million was ancillary and re-rent items which were up nicely over the prior year. Within the OER growth, rental rate the 1.5% year-over-year rental rate that we delivered in the quarter it placed to about $16 million of the 42 million year-over-year growth, the volume growth 2.8% volume growth represents about $29 million worth of rental revenue growth year-over-year.
The replacement CapEx we sold replacement the CapEx average age of 86.9 months in the quarter inflating that over the average life of equipment that we sold resulted in about 1.9% or $20 million of rental revenue headwind in the quarter and that leaves about $12 million of mix and other impacts resulting from the strong growth in specialty and other mix effects throughout the business. So those are the key components of the $42 million year-over-year rental revenue growth.
The only other point that I would emphasize is that Canadian currency effects are at place without all of those lines with the exceptional rental rate. Canadian dollar is weaker by 11% in the quarter and that result in about $15 million of headwind in the quarter compared to last year.
So a significant component to the overall performance that said we still delivered the 3.5% in spite of that particular challenge. Moving to used equipment sales we generated $124 million of proceeds from used sales in the quarter that’s down about 10% from the second quarter last year.
And even thought the total revenue was down the margin performance was very good 50% adjusted margin for our used equipment sales activity that’s 140 basis points better than the prior year and particularly proud about the fact that we are able to do that while still supporting the overall fleet strategy of selling the oldest fleet as I mentioned earlier just under 87 months of average age per fleet sold. Continuing to do a good job of disposing of used equipment through our retail channel, retail represented just over 60% of our sales in the quarter and that was about a percent better than this year that it represented last year.
So a good used equipment result even albeit with the slight year-over-year decline. If we move adjusted EBITDA we delivered $706 million of adjusted EBITDA in the quarter that’s at a margin of 49.4% both records for the second quarter for our Company.
That’s $43 million of improvement year-over-year and 200 basis points of greater margin from second quarter last year. The components of that $43 million improvement year-over-year are as follows.
The rental rate improvement resulted in about $15 million of year-over-year EBITDA improvement. Volume is about $20 million of improvement and the ancillary that I called out earlier all of that is $4 million revenue improvement drops to an EBITDA improvement so a nice result there.
Working against this fleet inflation resulted in about 14 million of impact at EBITDA and used sales year-over-year was about 5 million of impact at EBITDA both representing headwinds. We're also having a year-over-year bad debt expense increase.
So that was a headwind of about $10 million didn’t represent a problem or challenge in bad debt collections this year it shows that a comparison period last year was still strong. Last year we had a really nice collection result along with an improvement in the aging buckets of our accounts receivable that really took down our bad debt expense last year.
Incentive compensation was one of the adjustments that we have made in order to offset some of the challenges that Mike mentioned. Our incentive comp benefited us year-over-year to the tune of about $18 million for the cash incentive compensation programs across the business.
So that was an $18 million benefit and it help to offset some of the headwind I mentioned previously. Merit increases are always there they were about $6 million of headwind for the quarter and the remainder which is about a total of $20 million represents mix and other benefits.
Of that 20 about 10 is pure mix whether it's mix from growing specialty cap class mix day week month mix all of those mix factors net out to about $10 million of benefit year-over-year. And that leaves about $10 million of all other which encompasses a wide variety of net benefit.
So within that all other we had fuel cost saves with the lower price of diesel and gasoline. We had lower professional fees year-over-year lower T&E and that’s where you would see the benefit of our lien and other productivity focused programs.
So those are the pieces of the $43 million of year-over-year improvement in adjusted EBITDA and here again I'll call out the impact of currency which is scattered throughout a number of those lines when you step back and aggregate it all currency cost us in an unfavorable impact in the quarter about $7 million versus last year. Flow through for the quarter the top-line number was very robust 143%.
But I'll remind you that does include the impacts of the incentive compensation if you adjust for that incentive comp $18 million. You get that closer down to about 83%.
I'll also point out that the flow through was helped by the fact that our year-over-year used equipment sales were lower. We're selling used equipment at roughly 50% margin that’s lower than our margin for the rental business, but when you take out used equipment you are actually helping the overall flow-through.
If you adjust for that used equipment effect you get flow through that was down around 70% and still a nice result of 70% in any given quarters more in line with the roughly 6% that we've guided to for the full year. Looking at our adjusted EBITDA we delivered $1.95 of adjusted EPS for the quarter that compares to a $1.65 in the second quarter of last year.
That’s an 18% increase year-over-year and as I pointed out for the other measures it also includes the impact of currency. Absent currency it would have been about $0.04 higher.
Moving to free cash flow year-to-date we have generated free cash flow of 432 million that includes $2 million merger related payments and that compares to 240 million on a comparable basis for the first six months of 2014. The driver of the increase was largely result of the year-over-year improvement in EBITDA performance as well as some benefits in other lines including a variety of other items.
CapEx in the quarter was $693 million and that brings the total first six months capital spend for this year to just over $1 billion and that leads our net rental CapEx for the second quarter and first six months at $570 million and $776 million respectively. If we move to capital structure and liquidity as you know we took several steps to improve our capital structure in the first quarter with refinancing issues.
We issued two new notes totaling about $1.8 billion and called a comparable amount of notes out of three different issues either fully or partially during the first quarter. And as I noted on the first call, the actual settlement for those transactions would happen in the second quarter and indeed in this quarter we did record a charge of approximately $121 million to cover the redemption and write-off of other amortized costs in the quarter.
The details of all those transactions are in our 10-Q and I'll refer you there if you would like to see more. As of June 30, our total liquidity sat at $880 million and that included an ABL capacity of about $680 million along with the cash balance of right at $200 million, so we feel we are very well positioned with liquidity.
Mike mentioned the share repurchase program but just to hit a couple of points there. We did continue to execute under the 750 current authorizations during the quarter.
We bought $155 million worth of shares and that brings our total purchases against that program through June 30 up to $573 million, which leaves us with about $177 million to complete that program. Our initial target was that that program would run until about April 2016 but given our performance especially the robust cash flow performance as it's rolling in this year.
We accelerated our timeline and now expect to finish that program by the end of this year. And as Mike also mentioned we have announced that our board authorized a new $1 billion share repurchase program.
That program will begin after we have completed the current $750 million program. We have put an 18 month timeline on execution of the billion so the 18 month clock will start once we start purchasing under this program.
One thing to mention regarding our share repurchase program we do have to be mindful of limitations on restricted payment transactions that are inherent in many of our debt notes, as I'm sure most of you are familiar RP limitations are typical in these notes and typically they give you a basket which builds with net income. So as you growth net income you build up that basket.
The basket gets depleted with RP transactions of which share repurchases represent one type. At the end of June we had roughly $400 million of available capacity for executing repurchase or other restricted payments.
That 400 includes the RP basket along with the cash capacity that we have at the holding company level which is outside of the restricted payment limitations of the operating note issues. So we have plenty of room, the short and sweet as we have plenty of room to complete the $750 million program this year and to get deep into the $1 billion program as we executed over the course of the next 18 months plus.
On ROIC, the ROIC result for the quarter was 8.9% and that was an increase of 80 basis points over last year, although down slightly from the first quarter sequentially in this year. And the decline really was a result of the way that we calculate ROIC, we use the five-point average for the IC component in the denominator and as you crossover the quarter that includes pump in that five point average versus doesn't include it, it had a slight impact on our ROIC on a sequential basis.
So, certainly we continue to be on the path as the year-over-year number indicates toward improving our ROIC performance and as all of you know that is a very intense focus of our company. Regarding the outlook for 2015, again Mike hit most of the key components, we will just to add a little bit more color, our total revenue range is now $5.8 billion to $5.9 billion, within that rental revenue will be driven by the rate and time utilization assumptions that we have revised.
So, rate we now expect up about 0.5% year-over-year and really that rate assumption reflects very heavily the experience that we've had so far this year. Time utilization also reflects that experience, we now expect the full year to come in at about 67.5% and those will result in an adjusted EBITDA range of about $2.8 billion to $2.85 billion.
We have reduced our capital spending plan for the year by $100 million. So, net gross capital, we now expect to stand about $1.6 billion and we think this line is -- and this changes in line with what we've been focused on very recently which is to be very disciplined around our CapEx spend.
Free cash flow, we maintained our range there at 725 to 775 and if deliver that we expect the year to end with adjusted debt-to-EBIDTA of 2.8 times, that's slightly higher than the 2.6 times that we've shared in the past. It clearly reflects the decrease in adjusted EBITDA, but it also assumes now the accelerated completion of the $750 million share repurchase program by the end of this year.
So, those were the key comments I wanted to make, I just wanted to reemphasize a couple of the points that Mike made. It is a solid quarter for us, albeit with some headwinds that were more challenging than we certainly expected.
Upstream oil and gas, that impact will continue to work through, but it is the matter of working through it, rather than it being a major impact to the Company's longer term future. The supply dynamic across the industry is one that we're also focused on and making sure that we're focused on adjusting properly to what we see as a short term supply dynamic.
And of course currency is another effect that we'll continue to play in our future coming up. But with all of that, the results that we delivered in the quarter represent what I think are really solid performance.
Record revenue, record EBITDA, record EBITDA margin, record EPS, all put us in a great position for the future. So, with that I'll ask the operator to open it up for questions and answers, operator?
Operator
[Operator Instructions] Our first question comes from the line of Ted Grace from Susquehanna, your question please.
Tim Robinson
This is Tim Robinson on for Ted, thanks for taking my question. First question I had was I was wondering if you could provide us with a framework for how you see the industry supply situation currently, and how you see that unfolding over the next three, six, nine, months.
William Plummer
So Tim I will start and please Mike and Matt chime in. I think I hit on it in my comments and Mike did as well.
There's the dynamic of oil and gas is a major factor that we continue to work through, but we feel like we are making good progress in working through it. The industry as well as working through it and I think overtime they will.
As long as there is not a major down leg on oil and gas drilling activity given what we've seen and we put some more information in our investor deck to share with you the trends that we've seen in oil and gas activity. We think that the impact from oil and gas is stabilizing and even if it goes down a little bit more, it's not going to be a major change from here.
The supply dynamic is one that I think we're also very focused on. Some of the mid-sized and smaller players according to data that we've seen from Rouse and elsewhere have been growing their fleets in the early part of this year.
What we've seen and heard more recently, let us call it over the last couple of months is that they are much more attuned to the challenges that the oil and gas dynamic have put to the industry and so people are now focused more on making more disciplined decisions we believe around their supply in the current environment. So, that's what frames our thinking that we can work through this supply excess if you will in the relatively near-term, couple that with the demand back drop that we've talked about says that we'll get through this and times should be better going ahead.
I don’t know if you guys want to add anything Mike or Matt.
Matt Flannery
No I think Bill you covered it well when Mike referred to the time utilization in the non oil and gas stores only being down 30 bps and imagine how much that they have to absorb into those end markets that they are participating in from the oil and gas this location. As well as everybody getting a little bit head on their fleet purchases and that’s an encouraging sign that bolsters our opinion.
Michael Kneeland
I would only add one data point that I pointed to in my opening comments was Rouse and they’ve got a wealth of information on this particular subject. And if Gary was here on the phone he would probably say that exactly what Bill mentioned that as we went for the seasonal side it is being absorbed and the utilization and we always see on ramp is increasing.
Tim Robinson
Can you just give us an update on July trends for rate and time?
Michael Kneeland
Sure, Tim. Just the way we've characterized it is that July rate is very much in line with our expectation for the remainder of the year.
The time and fleet on rent growth are a touch ahead of our expectation for the remainder of the year. And maybe I'll offer up a little bit more here.
Your natural question is what is your expectation Bill? We're not going to give the exact number for the month of July, but our expectation for rate sequentially over the months remaining in this year, are flat to down slightly on each of the remaining months, so that gives any little bit better frame for the rate expectation.
Tim Robinson
When you think about that flat to down slightly for rate sequentially how would you compare the rate expectations for the non-oil and gas exposed places as opposed to the oil and gas branches?
William Plummer
I would say they would fare better as they have they’ve been almost over half of point better through the second quarter and we'd expect to see that combination. And flat to down there could be some lumpiness in there but if you do the math that’s needed to happen for us to reach our current guidance.
And if there is more to be half out there as Mike stated we will go after and we do think the opportunity will be in the non oil and gas segments.
Operator
Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets.
Seth Weber
I want to go back to the CapEx discussion. I appreciate that the Company wants to be positioned for an improving environment, but I'm really struggling with the way that you frame the second half for rental rates and fleet utilization.
I'm just struggling with why you can't bring the second half CapEx number down. Do you have line of sight that you really feel like you need the equipment for the start of next year?
Given the rate and utilization outlook that we're looking at for the third and fourth quarter, I'm just trying to reconcile why you wouldn't bring the CapEx down further at least for the second half of this year. And as a tie-in to that question, you brought your long-term -- longer-term rate guidance down from 3% to 2%, and I would think that one of the ways that you could ensure that the rate stays higher is with less -- with having upward pressure on fleet utilization, so I'm just trying to tie all this together, if you could?
Michael Kneeland
Yes and Seth this is Mike and it's a great question. And it is one that we've been debating internally here for the last few weeks.
Actually I would say the last few months. Well I think we have to start let me breakdown the CapEx for you to begin with of the 1.6 billion of rental CapEx.
If you take away the inflation adjusted replacement CapEx of 114 that leaves you with a growth capital of about 460 million. And this is all seen in our investor deck that we have out there.
We will spend on that 460 we will spend $70 million of that this year to refurbishments for our rental assets and the investments in our GPS or telematics for the fleet. So this is surrounded and that leaves about $400 million that is split evenly between our specialty business and our gen rent business.
Now as I mentioned our specialty is doing quite well and we're funding the 10 cold starts that we started and we've eight more to go this year that’s a high margin business, high return. And it also provides an entanglement with our customer base.
So now we're talking about roughly $200 million for the gen rent and we're the growth really goes into our national key account business where we've had some new wins and we're also investing in high time utilize assets. But when we think about the Investments, we don’t think about it just as a point in time.
We are investing in what we think is the cycle that has multiple years of growth apparatus. But I want to also point out that, you mentioned that of dropping our CapEx this year.
I'll point out in the investor deck that we also dropped it coming in the next year and that’s always subject to change just as the -- as we go through this year and we think about next year and we going to December and we come out to the investment community, we'll update you. If we think that the worse is behind us completely and there is some rational behavior is going on and we can see more, we're going post more.
But that said, we're actually very comfortable on our inventor plan as far as the rates are concerned, just to address that, yeah you are right. It declined and if I recall -- when I talk about rate, people are asking me -- they use to ask me when we were coming out of the recession.
Mike how do you see this? Well, used priced margins improved than you see utilization, than rate.
Our rates been impacted but time utilization because of the influx or working through that as we go through the back half of this year. Now I will tell you quite honestly Seth if we have to adjust next year.
We will. But I just don’t think about it as a point in time, I think it is a continuum because we buy these assets after the life cycle.
And it's really it comes down to a judgment call, and this is how we've debated this and this is where we came out and we're comfortable with it at that point.
Seth Weber
I appreciate that, Mike, but I mean when we used to talk about the business, we would talk about -- so you did almost 69% utilization last year and we used to talk about line of sight or runway to pushing that over 70%, and it just seems like with adding this fleet you're moving away from that objective and in conjunction with that the rate is coming down. So it seems like there is at a minimum an opportunity here for the second half of the year to take CapEx down and just wait and see how things progress because really nobody knows how the oil is going to play out and whatnot.
So are you locked into contracts that are --this $200 million of gen rent, are those deals you can't get out of, or you really feel like you have line of sight to things getting better in the early part of next year that you need this -- or is there specific customers that are teed up for this equipment?
Michael Kneeland
I'll start a part of it and I will Matt to chime in, our national account represents about 40% of our total business and it's up 7% in the quarter. These are contractual long-term obligations for us.
So line of sight on those is pretty long in comparison to the rest of the industry. I will ask Matt to talk about time utilization and some of the dynamics.
Matt Flannery
Yes sure Seth so and as Mike said that additional 200 million of the flexibility to take that away without the kind of the risk of long-term relationships and long-term revenues and accretive positive good return revenue, so that’s why we came to that decision but when you parse out the gap year-over-year between was about 130 basis points and if you look at our full year guidance this year versus our full year actually this year. Half of that is a call that we made to continue our path on pump.
So we've got a little over $70 million in pump assets that -- with that business being down we could monetize if we thought that was the right long-term decision. But we want a fund the additional cold start growth as well as can't really not fire sell assets that have plenty of trade left on them and will have value for us long-term as we see this other recovery for that business.
That’s an investment we made for our longer term gains. So that’s half of that, 130 bps of year-over-year decline.
Bill as pointed out that we moved a 125 million of assets at the oil and gas. That’s only two-third to what we have to do.
We have about another 60 million that we have to move out in the balance of this quarter and we have action plans, individual assets identified. When we tie those two components together, those are the best to drag that’s the 1.3 year-over-year drag that we're dealing with and it's not unfortunately as simple as us saying we are not going to buy the remaining 200 million of high time assets in general business and replace some with those assets that are dragging the time down.
And that’s why it looks a little dislocated from afar when you dig into the detail which we've obviously done. We're comfortable with our plan.
Operator
Our next question comes from the line of Steven Fisher from UBS, your question please.
Steven Fisher
Just wondering how you approach the guidance on rates for the second half compared to how you approached it in April. Was there any more caution or conservatism this time, or different analytical work?
Just looking for your confidence that it won't be any worse than this barring a real fall-off in oil prices?
William Plummer
So, Steve it is Bill we're human beings so to the question that is their more cautioned probably. Look, we had a view of rates starting the year.
We had a view of rates at April and both were wrong. So we thought very deep and hard about what we expect from the remainder of this year.
And that's influenced by our experience. So, how much it is harder to put a number on it, but we feel like this is a realistic view and look I mean we've set about 0.5%, could it be 0.4 or 0.3, yes, could it be 0.6 or 0.7, yes, so I think it's fair to say that our thinking was influenced by the experience and we don't want to be in a position of missing this time to be brutally honest about it.
Steven Fisher
And then in terms of the non-oil related business, can you parse out the 30 basis-points of lower time utilization as a function of just the reallocated oil equipment, or is it other trends within the non-res construction market, and what is your confidence that you'll start to see that utilization improving in the second half?
William Plummer
I think we certainly expect that the non-oil and gas parts of our business as the oil and gas dislocation continues to be absorbed should see less of a headwind going forward. How to quantify that is a tough one to respond to.
Matt or Mike, would you add anything?
Michael Kneeland
No I would just say when you break it down market-by-market and you see that more -- half of our reasons have had sequential rate improvement in Q2 as opposed to the overall company. And nine of our 14 regions have shown year-over-year growth.
We see that there are still markets that even absorbing extra capacity in the near term or performing well. And that what's gives us that confidence that we can -- we continue on the path that we re-guided to -- more importantly that '16 and '17 end market still strong for us.
William Plummer
I know you pointed out to it on the investor deck, which by the way we've broken it into two segments, so it's easier for people to go through. One is the financial deck and one is the background information but on Page 6 you'll see a non oil and gas locations.
And you'll see greater than 20% upstream exposure the one with less than 20%. And we always see a ramp build is very similar to what the pattern you saw last year.
You'll see that in the oil patch, particularly the upstream, you'll see the bifurcation of where it actually pivoted in March, and the drag it's been, but it seems that it is moderated as far as the timing. One thing we will tell you, is according to Rouse is that for the company, for the rentals, we still lead the industry in our peer group on time utilization.
That being said, we don't have time, we got more to do as Mike mentioned. We got some more assets to get it clear out of here.
We're going to get that done. So, this is a -- this movie hasn't played out yet, but we're focused on it.
Operator
Thank you. Our next question comes from the line of Nicole DeBlase from Morgan Stanley, your question please.
Nicole DeBlase
I guess my question is kind of on the medium-term rate outlook. So in the slides it was already mentioned that you guys have moved from 3% to 2% and I think that the footnote says 1.8% over the next four years.
But I'm just curious when you look at what you are embedding now for free cash flow in '16 and '17, which the targets came down a bit, does your 2016 free cash flow estimate assume that '16 is the year that rates turn positive and when might things wash out from an excess equipment perspective and rates could possibly turn positive year-on-year?
William Plummer
And Nicole it is Bill our '16 forecast does assume rates turn positive year-over-year in '16 and so the note that we've put in the investor deck about it averaging 2% thereafter reflects a positive year-over-year in '16 and then a greater positive in '17. So that's the profile that we expect.
The fleet absorption issue that we're playing through right now, we've talked about it being a 2015 or perhaps early 2016 phenomena. And that's shaping our thinking about how we approach allocating fleet capital and so forth.
Nicole DeBlase
And my second question just shifting to EBITDA drops, so you guys talked about some of the puts and takes there but you still had 70% EBITDA drop-through minus all of the one-time-ish items this quarter, so I'm curious, I'm calculating implied drop-through of about 48% in the second half. Could this possibly be conservative?
Is there something to think about there, maybe incentive comp, just curious about your thoughts there?
Michael Kneeland
There is nothing major and specific that we have baked in or our forecast for the second half. And so if you want to interrogate that has been conservative, I guess you could reasonably do it that way, but we don't want to get too far down the road of forecasting higher flow through unless and until we've got a better sense of where that’s going to come from.
And we put the best foot forward on flow through and our comments year to date and we're going to work really hard on it in the second half.
Operator
Our next question comes from the line of Scott Schneeberger from Oppenheimer, your question please.
Scott Schneeberger
First one, Bill, for you, just following up on talking about the outlook for price going forward, could you speak -- thanks for the cadence of what you're going to see sequentially over the months of the back half, how is that going to flow into 2016? You mentioned a little lighter in '16 and better in '17 and beyond.
Just curious at the transition at the end of the year and into the next year the rate flow-through? Thanks.
William Plummer
So if you're looking for statement about how the sequential in '16 will shape up we certainly have looked at that differently then we might have done have we not have the oil and gas location that we have right. So we tempered our view of how the sequentials in '16 will play out versus where we were before oil and gas.
Hopefully that responsive to your question, if you got another question ask it a different way Scott.
Scott Schneeberger
Kind of a follow up, trying to figure out the right way to ask it, maybe I'll come back to that. In the meantime, I'm curious, maybe Matt this might be for you.
Rental rate trends by asset class. Can you give us a little bit of color of what you're seeing with regard to the equipment itself?
I think it's probably intuitive with regard to pumps perhaps, but maybe stabilization and then some other things that anecdotally might be helpful to us. Thanks.
William Plummer
Sure Scott so when we look at two major cats some of our larger products are similar to what you'd imagine the overall company is and maybe hair better. So the aerial products the reach fork products are similar a hair better than what we're seeing is the overall company.
Some of the higher return assets that are in the oil and gas whether it's some dirt product or light towers they're seeing a little pressure because of the extra capacity moving into different and moving them into different markets. So I guess the way I'd answer is the more fungible the asset the more it seems to act like the overall business and those are less fungible life comp like some of these high hour assets that have been in the oil and gas for a while where we're seeing a little more rate pressure.
And these aren’t huge swings but there is some delineation between the two.
Scott Schneeberger
Bill, if I could circle back just really quick, historically you've talked about, hey, we're ending this year, we have been running at 3%. Now hypothetical, and that's going to trickle 2% into the coming year.
That is essentially what I was asking, and then what we should think about in comps this year-over-year comps in the first half, with that in mind, just to get us a -- leading into '16 and where that may start?
William Plummer
I do this without going through a quarter by quarter breakdown in 2016. Maybe I'll approach it this way if we finish the year the way we have in our forecast for the second half of 2015.
Our carry over into 2016 will be about a quarter over point negative. So that’s where we would start the year and if we got any reasonable sequential progression from that and that will start digging us out of that negative carry over position.
Is that helps.
Operator
Our next question comes from the line of Jerry Revich from Goldman Sachs.
Bernan Jack
This is Bernan Jack on behalf of Jerry. Can you give us a sense for time utilization performance for national pump in the quarter, maybe quantify the headwinds of total business?
William Plummer
We haven't broken out national pump utilization sort of separately. You know, as you might imagine, it is on a year-over-year basis it is down materially.
But that is about as far as, you know, as we have broken it out. Matt, do you want to.
Matt Flannery
Yes, if you look in the industry background deck on Slide 32, you will see that we have acknowledged there has been 11% year-over-year decline in revenue in the pump business and to Bill's point we haven't pointed out time utilization but we showed that in the slide, in the deck, and that's the best that we talked about earlier, right? About our longer-term view of this business and holding those assets that have a lot of tread left on them for the longer-term gain.
Bernan Jack
And then second, both the dollar and time utilization increased for aerial platforms, can you provide any color on what drove that improvement or what you're seeing in that market?
Matt Flannery
Sure. That is the aggregate of the improvement that we have been building so a little bit of that is the momentum that we've had over, you know, the last couple of years, candidly.
So that when is I had stated earlier in answer to Scott's question, that they're a hair better than what we're seeing overall in the company and when you pull out the oil and gas participation of those assets, that hair turns to be a little more significant, right? So that when is we're talking about the positive sequential rates in more than half of our regions and you have to imagine it is big a part of our fleet as aerial and reach fork are, they have to participate in that.
So hopefully that answers your question.
Operator
Our next question comes from the line of George Tong from Piper Jaffray, your question please.
George Tong
When you take a step back and look at the key metrics, rental rate growth slowdown/decline, time utilization reduction, CapEx reduction, those are typically classic signs of a peak in the cycle. What gives you confidence we're not at or near peak in the cycle and potentially a peak that is induced by overfleeting or oversupply?
William Plummer
That is a great question and so let me step back and say, if you recall, that used margins continue to be very strong. But more importantly we took a look at and if you take a look at just the U.S.
economy forecasted growth in '15, '16 and '17 on real GDP it is supposed to improve. When you look at residential investment, business investment, and even the state and local investment, it is supposed to improve.
Forward take a look at what Dodge has put out and we have this all broken down in our investor deck. Construction, excluding utility and gas plants, is going to be up in '15 by 9%.
Projected 12% and 15% and 14% in '17, and then we even break it down by NHS where they see real construction growth by sector over the outlying years. Again all public information, all independent, and all of the primary goals, or I would say the primary business of non-res construction, which is a big catalyst for our industry, remains positive.
So overtime we see that to continue to play out. With regards to the fleet, and I've talked about this, you know, the -- I understand the re-fleeting, I get it from all of the independents, they have been somewhat blocked out for some period of time.
They won't have a endless supply of capital available to them. And I also think that with the rouse information, at least 55 participants, aside from the United Rentals, participate in this.
So they have real data. They have real information by which they can help judge their business better today than ever before.
And I believe that they sign up for this so that they can understand how they can drive better returns, how they can drive better cash flow, so that they don't get themselves into situations when the cycle does turn. So I don't see the cycle turning yet.
I think there are still multiple years ahead of us, and we tend to agree with the experts that are out there.
Operator
Thank you. Our next question comes from the line of Nic Coppola from Thompson Research Group.
Nic Coppola
So I don't believe you guys talked about wet weather much. Clearly places like Texas, Oklahoma, and Colorado, saw a lot of rain in Q2, and so to what extent was that a drag in the quarter, any way to quantify that or speak anecdotally about it?
Matt Flannery
As we obviously saw in our largest year-over-year sequential time utilization gap, so it have a drag on the overall business we have since rebounded from that, so it certainly has some impact on the first half results. But candidly we don’t think that was the major reason it wasn’t a specific period of time.
But I think the overall dislocation of the fleet that was brought in then and faster than expected decline in a big end market of oil gas is probably have more to do with it. But May weather was certainly no helping and we did see our largest dislocation we were over 170 bits down year-over-year in the month of May and then rebound it up to 130 bits in the month of June.
Nic Coppola
And then last question here. Wondering if you could just talk a bit about the acquisition landscape right now and whether or not the current environment is giving you any pause.
William Plummer
Look we're in a very good position right now we're giving billion dollars of share repurchases in back stock holders, so this point of flexibility to do acquisitions. But I will tell you that we have a high bar and we look at these things we've cashed on a lot and some that we have been intrigued by but it's ongoing.
I would just say that the rigor is out there is not going to dissipate. I think that’s important for everyone to understand that this company has not change its view or its goals of where we are and where we intend to go on the returns whether it be capital whether the acquisition they all go in the same bucket acquisitions have to be on their own merit as to strategically, financially and culturally why we would do it.
Operator
Thank you. This does conclude the question-and-answer session of today's program.
I'd like to hand the program back to management for any further remarks.
Michael Kneeland
Well, thanks operator. And I do want to thank everybody for taking the time to spend with us.
If you have any additional questions, please reach out to Fred, but as I stated just a moment ago, this company is going to be remain focused on executing on its plan and making sure that we focus on returns and that our goals have not changed. We are better equipped today than we’ve ever have in our past.
And we'll pull that leverage we need to accomplish our goal. So thank you very much and have a great day.
Operator
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program.
You may now disconnect. Good day.