United Rentals, Inc.
Q3 2011 Earnings Call Transcript

Published: 19 Oct 2011

[Operator:]

Good morning, and welcome to United Rentals' Third Quarter Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments by presenters 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, 2010, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that today's call will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; and William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may now begin.

[Michael J. Kneeland:]

Thanks, operator. And good morning, everyone, and welcome to today's call. With me today as the operator mentioned is our CFO, Bill Plummer, and other members of our senior management team. Last night, as you know, we reported a very strong quarter. It started at the top with a rental revenue increase of more than 19% and ended with an EPS of $0.91 per diluted share. Now behind those numbers was a solid 7.5% increase in rental rates and some exciting milestones for United Rentals. We reported time utilization of 73.5% on a larger fleet, and that's a record for us. And our adjusted EBITDA margin was 39.6%, the highest margin we've ever achieved and almost 4 points better than last year. Now all of that credit goes to our employees. They've been really putting their backs into driving our performance. They believe as we do that customers will see us as the best choice for equipment rental at any level of demand. Now I want to spend the next few minutes on demand and then I'll talk about our operating environment. As you saw last night, we've updated our full year outlook for rates to an increase of about 6%. And we think that time utilization will run about 3 percentage points higher than last year, so there's demand for our equipment in the marketplace. And more than you may expect, given the fact that construction as a whole is still weak, now here's what we're seeing and how we're responding. We attribute the increase to our business to a mix of factors. First, we believe that we're taking share from smaller rental outfits that make up the bulk of the industry. The recession left many of these companies starved for capital, with downsized fleets and fewer service capabilities, and we compete very effectively against that. Then there's the secular penetration, meaning companies of all sizes are opting to rent more of their equipment they need rather than buy it. And third, our push for customer service leadership continues to gain traction where it matters most with our Key Accounts. In the third quarter, Key Accounts were 53% of rental revenue. That was up 23% year-over-year on a dollar basis. And National Accounts, which is a subset of Key Accounts, also grew 23%. National Accounts were 34.4% of rental revenue in the quarter. Now you compare that to 4 years ago when rental revenue from National Accounts was just 19.6% for the same period. Now in addition, our customers themselves are optimistic about where things are going in the coming months. Experience has shown us that feedback from the field can be an excellent yardstick. So when our customers have an opinion about future activity, we consider that very carefully, along with leading indicators like the Architectural Billing Index. Now although the ABI Index declined overall in September to 46.9, our sectors, commercial and industrial increased to 52.4. Now this supports our belief that the worst is behind us. And Global Insight, the research firm that tracks our industry, expects rental revenues to grow by 5% next year. Now I'll talk more about 2012 in a minute. It's still a bumpy recovery for construction, but as you saw last night, our company is outperforming the environment. All of our regions had positive year-over-year growth in the quarter and 88% of states we serve had an increase in rental revenues. And Canada remains particularly strong, as do the East and Gulf regions. Our Midwest and Southeast regions still face the most challenging conditions, but both regions showed stellar improvement in the third quarter. So that should give you an indication of how our strategy can supersede the environment. Now from a sector standpoint, commercial construction, lodging and office space are not yet in recovery. But infrastructure projects, like power and water and transportation have picked up, and energy remains strong. Also, healthcare is still a very viable part of our business. Now in addition, our industrial business is performing well. Manufacturing has been especially strong for industrial, as has energy. And right now we're tracking hundreds of industrial projects in our system, in those 2 sectors alone. We're also finding that our industrial expertise carries a lot of weight with these customers, and once we've established a relationship, it often leads to cross-selling. Another highlight is our specialty rental operations, which had a very good quarter as well. Rental revenue for our Trench, Power and HVAC operations was up 56% in the quarter, including the benefit from acquisitions. And most of that increase came from industrial growth in the Gulf, where energy construction and expansion is booming. And disaster recovery, which creates demand for our power and climate control equipment. We're also seeing a lot more internal lead generation and that's a two-way street between our traditional rental branches and our specialty operations. Everyone has figured out that we can keep our customer in the fold and build more share of wallet if we're considered their single source for all their rental needs. So as you can see, there's a lot of different engines driving demand out there, and even though we're not at full throttle yet. Now I want to talk about how we're responding to those drivers. Demand for us is a calculated opportunity, and by that I mean, our CapEx decisions is very disciplined and analytical. There are near-term and long-term considerations. As you saw last night, our gross rental CapEx this year will end at around $775 million, which is significantly higher than we originally projected. That tells you something about our outlook for 2012. We expect nonresidential construction to grow next year, and with the fact that we can make these investments while still maintaining adequate liquidity is an important advantage in the upturn. And some of this CapEx is going to replace older fleet, although not necessarily in the same equipment categories. Replacement CapEx is an opportunity to redistribute capital to assets that command better rates or to position us for even better utilization as construction projects move through their phases. And that's equally -- that's an important point, the way we spend our capital. We're investing when we see opportunity to move the needle on returns. Equally as important, we can adjust our spend if warranted, without impacting our customer services. We've worked very hard to establish our reputation for service and believe me, that's not going to change. So we're very focused. Capturing profitable business now, positioning ourselves for the year ahead and cementing large scale customer relationships for the long term. This morning, I can tell you that we feel very good about all 3 of these objectives. Now we hear the same talk you do about the possible double dip. But let me be clear, from our vantage point here today, and our end markets we serve, we do not see a general decline in 2012, and our customers agree. And we recently surveyed 2,700 customers with a wide variation of rental spend. 80% expect their business to be as good as or if not better than 2011 in 2012. And only 14% expect their business to be down. Now we're encouraged by that. However, if things change, we have the flexibility to adjust our plan and mitigate our risk. Now that gives us a safety net for 2012 as conditions evolve, and I'm talking specifically about rental CapEx, which Bill will discuss in a minute. Now there's also talk about the American Rental Association's new standards for fleet, rate and utilization calculations, which we'll adopt starting in 2012. As you may be aware, we've been working with ARA and other rental companies for 18 months on this project, and we're very pleased with the end result. We encourage the industry to adopt these metrics as a consistent basis for reporting performance. Now most important, you will see us continue to leverage every arm of our strategy in 2012 just as we're doing this year, that is customer segmentation, price optimization, customer service differentiation and cost efficiency. We have an ambitious vision for United Rentals, and our entire company has embraced this challenge, and now that we're seeing the results. Now with that, I'm going to ask Bill to review our third quarter numbers in detail and then we'll go to your questions. So over to you Bill.

[William B. Plummer:]

Thanks, Mike, and good morning to everyone. As normal, I will try to offer some color on the actual results for the third quarter

[Operator:]

[Operator Instructions] Our first question comes from the line of Seth Weber from RBC Capital Markets.

[Seth Weber:]

I wanted to see -- can you spend a little bit of time talking about time utilization, how you were thinking about it, how high can you push that number? It sounds like you're going to end this year at about 68.5%, which would be a record. In prior years of strength, you never got that high, but your CapEx was higher than the number you're talking about for this year. So can you help us reconcile what your -- how you're balancing those 2?

[Michael J. Kneeland:]

Seth, this is Mike. Yes, your point is well taken that we have been driving time utilization up. As Bill mentioned, it's the sixth consecutive quarter that we've had significant improvement in our time. I think overall, as we become much more efficient at how we do things going forward, I think that there's still a point to 2 points that we could get out of our business. Keep in mind, it's also how we change our products as we go forward. All the capital that we're spending goes to a plethora of different products that we have out there. So each one will have its own dynamics, but I think overall, we have the capacity for the future to get a couple of points out of it.

[Seth Weber:]

Okay. Well, I guess a follow-up to that. I mean, it sounds like when Bill was going through the cost change in the quarter, you didn't really call out repair maintenance. Has that basically anniversary? We had some headwinds there in the first half, I guess. So repair and maintenance costs are no longer -- I mean, you've brought fleet age down now a little bit. So is that the right way to think about it that we're not going to see, even though utilization is high, we're not going to see those repair and maintenance costs be as much of a headwind then going forward?

[William B. Plummer:]

Yes, I think that's fair, Seth. We didn't call it out because as we look at the year-over-year performance of R&M, we feel better about where it is in the third quarter than we did in the first quarter, for example. So I think that's a fair characterization. We think it's in the range of noise now.

[Seth Weber:]

Okay, so if that's coming down and then presumably maybe fuel prices come down, should we think about pull-through next year being north of 60% again?

[William B. Plummer:]

Yes, I think it's fair to say that it will be north of 60%. Don't have a definitive number right now, but I think it will be north of 60%.

[Operator:]

Our next question comes from the line of Manish Somaiya from Citigroup.

[Manish Somaiya:]

It's Manish Somaiya from Citi. A couple of questions, beginning with Bill. Bill, could you talk about why the new ABL does not have a rating? And then, I guess when you increased the size of the ABL, how did you go about deciding between the largest ABL and the impact on ratings on the bonds in particular?

[William B. Plummer:]

Sure. So why no rating is pretty straightforward. We don't feel that we need a rating on that facility. I guess we had a rating from S&P. They elected to withdraw the rating upon the new facility, and we just didn't think that it was warranted to go and pay for adding a rating. In terms of the impact -- the thinking about the impact on debt, there is no impact with S&P. And at Moody's, there's no impact on the family rating of the company, overall. I can't remember if we've actually seen a decision out of Moody's. Sorry?

[Unknown Executive:]

It came out this week.

[William B. Plummer:]

So, I guess, we did get the decision out of Moody's to notch the unsecured and then that's really a function of their process for secured debt. They assume that the entire facility is drawn. And so they put that facility in as drawn at $1.8 billion and then they work through their process and look at the impact on that basis of the securities that are underneath the secured loan. And it's a mechanical process, quite honestly, not terribly logical in my mind, but that's the way they do it. So I guess I direct you to Moody's to ask how they do it. As far as our consideration, we certainly understood that they were likely to notch down, but our view is that the fundamental credit characteristics of the company haven't changed. And so we feel pretty comfortable that the market will understand that and there won't be a significant impact, if any, to our bondholders.

[Manish Somaiya:]

Okay, that's helpful. And then just turning to Slide 5 of your presentation where you talked about the 4 initiatives, under the soft 2012 scenario. I think, Bill, you touched on the replacement CapEx portion, but is there a way or can you kind of give us more color on what you're thinking on used sales, branch footprint, additional cost savings. Obviously, on cost savings you guys have been at it for the last 24 months. Clearly, you've done a good job, but how much more is there to do?

[William B. Plummer:]

So used sales will certainly reflect the overall approach to the fleet decision, but we've been focused on driving -- as our fleet's gotten bigger, we've been focused on driving greater used sales over the forecast horizon that we've been talking about. And we'll continue to look to drive used sales. I think you can -- that replacement number that I gave you, of about $500 million to $600 million is probably the OEC amount of the used sales that we would target, at least, initially in thinking about next year. As it relates to other cost opportunities, we certainly are continuing to look at branch closures and consolidations as part of how we think about the business. So we'll continue to make those choices and if need be next year, we can pull that lever to respond to a softer environment. We're going to have some closures in the current quarter. We'll announce those as we get through the quarter, that results from our look at our cost structure. But that is in the nature of sort of a normal review of our footprint. If things get tough next year, we would take a harder look on branch footprint. Similarly in other lines of cost, we think that we have some opportunities, either in good times or in tough times to take a little bit more in the way of cost out. We're looking at our strategy, for example, of how we align operations in a given geography, right? It's not just about what branches you open, what branches you close, but how the branches in a given geography work with each other. We think there's some opportunity there. We think there's some opportunity in some of the G&A lines, and taking a harder look at what we do where and how we rely on outside support versus inside. So we think there's some more cost opportunities. It's obviously much harder now than it used to be, but we think there are opportunities there.

[Michael J. Kneeland:]

Manish, this is Mike. I just want to reiterate what Bill said, is that we're not done. We are clearly focused on driving much more efficiencies and the other thing that we've talked about, and we've talked about with you and other investors, is about FAST and the way in which we deliver equipment. We think that there's significant opportunities to further improve our cost structure, while improving our services to our customer. So stay tuned, more to come.

[Manish Somaiya:]

Got you. And then just lastly on the potential adjusted EBITDA slide that you guys have, that you've had for some time. It looks like you are sort of there on sort of many operating metrics. Any part on updating the slide?

[William B. Plummer:]

Well, we've tried to update it at the beginning of the year, for the last couple of years. So we'll talk about it in the context of what we talk about when we report fourth quarter.

[Michael J. Kneeland:]

It's safe to say that we're marching closer and closer and we're running as fast as we can.

[Operator:]

Our next question comes from the line of Scott Schneeberger from Oppenheimer.

[Scott A. Schneeberger:]

The question I've received a lot is -- it's kind of a 2- or 3-parter. The impact of benefit you're getting from one, weather; two, government stimulus, local or national; and three, energy. And then the concern is the sustainability of it. So if you can just address that please, Mike.

[Michael J. Kneeland:]

Yes, well, weather is something you can't control. It comes and it goes. Obviously, in the last quarter, we had some storms. We had some areas along the East Coast that had a minor effect, nonetheless it was an effect that drove some of our utilization a little bit higher, and particularly in our Trench, Power, HVAC business. As far as the government, we see the government as a unique opportunity and we think that the story of behind rental is a very strong story for the government. And so we look forward for continuous improvement. Right now, there's still continuous [ph] small numbers with regards to the government spending, as you know. We haven't been large participants of the stimulus dollars. But I will just say, any dollars that are put into the economy can't be seen as negative. It's got to be seen as positive. So we'll take whatever comes our way. With regards to energy, I think energy has been an ongoing dispute, not a dispute but question for many, many years. First, oil, now frac-ing is a widely used term. I don't see that ramping up at the speed it did this past year, but I don't see it declining. I'm seeing it kind of leveling off and continue to grow. But nonetheless, I see that as a viable -- it's very low-cost energy that's here in the United States and all indications are that, that's going to be a -- continue to grow forward. So I see that as a positive within our industry.

[Scott A. Schneeberger:]

Just following up on that, can you guys give us a rough breakout of your big verticals. You did mention in prepared remarks at the beginning, healthcare, energy, a few others, can you give us a feel about how they break out and the percentage of the total revenue? And maybe how they're comparing to 2 years past, the stronger ones and the weaker ones I guess highlighting?

[Michael J. Kneeland:]

The way in which we look at things, I mean our year-to-date, and this is by SIC code, and this is how we have an internal report. In construction today is around 48.2% of our business. We have services and manufacturing, one, is 12.5%, the other is 10.5%. We have transportation for government, 3.4%. Mining, just under 3%. It's a long list of different SIC groupings that we track inside of our industry. Construction, as you know, the way we track it for SIC codes, electrician's an electrician. We don't change that, and we don't know exactly what job he's on, whether it's a hospital or whether it's a power plant. We just track it by their SIC code. So I don't know if that's answering your question, specifically or are you talking about...

[Scott A. Schneeberger:]

No, that was really helpful, Mike. I guess just to round it out, if you can compare and contrast how that looks versus 2, 3, 4 years ago? And just how different is the mix of your customer now versus back then? And what are the main trends that you've seen in that change? And I guess, taking a step further, what you see going forward, which you've covered mostly, but if you can just kind of finish that out.

[Michael J. Kneeland:]

Yes, let me put it this way. I mentioned in my opening comments that National Accounts has grown from 19.6% to 32.4%. That has been a growing trend. I see that going to continue to grow forward. But most importantly is the Key Accounts and the reason I mentioned Key Accounts is that you know -- our go-to-market strategy is by account management. And we have identified what we consider very critical accounts, whether it be a National Account, whether it be a strategic account, which is multistate, but not multiregional and then we have the assigned account and the assigned account would be someone, and I've used this analogy with you before, Scott, someone who's say, in the 5 boroughs of New York, he doesn't have any reason to go anywhere else. But he is getting at the lion's share of that business and that market. That's how we look at the world. That's how we're measuring ourselves. Today, we're around 53%. I see that trending up closer to 60% over time. But there are always going to be the other portion of that business that we bring in new accounts, we classify them and then we'll assign an account to them. But that's how I look at the world. That is very different than the way we looked at the world, 3, 4, 5 years ago. We kicked off Operation United in 2009 to focus in on these Key Accounts.

[Operator:]

Our next question comes from the line of Peter Chang from Credit Suisse.

[Peter Chang:]

The first question I had was on a clarification. Of the 80% of the customers you polled, was that weighted by revenues or just by a number of customers? And then what percentage of the Key Account customers would you say were bullish on 2012?

[Michael J. Kneeland:]

Well, I mean, the large portion of those customers were probably some of our Key Accounts. We didn't weight it by revenue. It is by actual count. So we didn't break it out by National Accounts. We could do that, but we don't have that data readily available.

[Peter Chang:]

Okay, that's fine. And I guess if we could focus on a different business, the used equipment sales for Q4, how should we think of the mix of that sales sold via auction given the Ritchie Bros. announcement. Is it going to be kind of like 2009, where it's about 40% of sales or more like 2010, where it was in the low-20s?

[William B. Plummer:]

Yes, Peter, just to be the clear, the auction share that we expect for the remainder of the year is going to be fairly small. Let's say in the 10% to 15% range just to give you a ballpark. The Ritchie Bros. announcement specifically was -- let's call it an experiment that we're running with Ritchie Bros., with the idea of saving on the cost and aggravation of shipping all of the equipment to a Ritchie Bros. auction site and instead leaving the equipment at United Rental sites and asking people to either visit the equipment at those sites or to access data on Ritchie Bros.'s website or our website. We think that we can take some complexity and cost out of the process for us and still get a pretty good participation in the auction. So that's what you saw out of Ritchie Bros. It's not a signal that we're going to ramp up the amount of auction selling that we'll do significantly. We've said that we're going to do more selling to vendors in the fourth quarter, so you'll certainly see more of that. Vendors represented about, I think I said, 25% of what we sold in the third quarter. They'll probably be that or higher in the fourth quarter. And then we're going to push everything that we can through our retail channel. So hopefully, that gives a little bit more insight. But if not, ask another question.

[Operator:]

Our next question comes from the line of Henry Kirn from UBS.

[Henry Kirn:]

On the volume increase, is it possible to talk directionally about how much was from growth with existing customers, penetration into new accounts and how much came from the acquisitions?

[William B. Plummer:]

So penetration with new accounts, growth with existing accounts, we haven't broken out historically. I think it's fair to say that the existing accounts were the big drivers of the volume increase, as we've really ramped up our focus on driving more share of wallet and so that's been the biggest chunk. In terms of the acquisition impact, we added -- I can talk about it in terms of revenue rather than OEC on rent. The acquisitions contributed about $22 million of total revenue in the quarter. And I'll just -- you didn't ask, but I'll add that, that $22 million came with an EBITDA margin of north of 50%. So that gives you a sense of the impact on the financials of the acquisitions. If you really want what part of the OEC on rent, yes, we can probably talk about it offline.

[Henry Kirn:]

That's helpful. And it seems that part of the fleet purchase is to take advantage of opportunities that you've had to let go over the last couple of quarters. I know you can't perfectly quantify how much better the third quarter would have been if you had had the additional fleet in place, but in your thinking, would the third quarter have been much better had you had this fleet available?

[William B. Plummer:]

Clearly, it would have been better. How much is very hard to say. The key discussion that we had about whether we should have been spending more in the third quarter was around, how do you trade off what would be a better third quarter against investing more fleet in the face of uncertainty about what next year is going to look like, right? That's the eternal tension in our business. Do you take what's in an up cycle at least? Do you takes what's in front of you today and bare the risk that you may be carrying too much capital at some point in the future? And we ultimately decided, you know what, we've got enough confidence about 2012 and what's going to happen then, so that it was worthwhile spending some more in the late third and through the fourth quarter. That's why we raised our guidance. That help?

[Henry Kirn:]

Yes, that's helpful. One final one if I could. How much impact was there from the hurricane in the East and the Midwestern flooding during the quarter and is there any carryover benefit in the fourth quarter?

[Michael J. Kneeland:]

Henry, this is Mike. Like I said, it affected our -- if any one of our segments, it would have been the Trench, Power, HVAC, with the other generators and the digi magnification and it wasn't really a significant number in the quarter.

[Operator:]

Our next question comes from the line of Emily Shanks from Barclays Capital.

[Emily Shanks:]

I wanted to see if you could give us a little color around how demand trended intraquarter? Was there any volatility or was it fairly steady? Any color you can give would be helpful.

[Michael J. Kneeland:]

Let me just, I'll give it to you, the time utilization as we went through the quarter. In July, it was at 72.5%, August was at 73.7% and September was at 74.3%.

[Emily Shanks:]

That's great. That answers it.

[William B. Plummer:]

Emily, I'll add, all of that while we were adding fleet in each of the months.

[Emily Shanks:]

Okay. Great, thank you. And then in terms of, I know I asked this on the last call, but I'm just curious if there's any update in terms of the competitive landscape, how you would describe it currently and specifically as it relates to pricing trends by your competitors?

[Michael J. Kneeland:]

Well, I think that the competitive landscape obviously is -- I think everyone's growing. I think you saw the results from one of our competitors last month. My sense is that -- and we saw some of the early indications from one of our competitors. I think they're all -- I think we're all benefiting from the secular shift. I think that we're all going to see rates improve as well. And as I mentioned, I think that some of the lower tier, smaller local players, I don't know that capital is readily available for them. All indications are still very tight, which has enabled the larger companies to capitalize on this momentum. And I don't know that that's going to change relatively soon given the uncertainty in the marketplace. So I think everyone is acting great. I mean, it's good stewards of the industry. They're focused on driving their businesses, improving profitability and improving rental rates.

[Emily Shanks:]

Great, thank you. And then if I could just one final question, just housekeeping. Can you give us the dollar utilization for the quarter? I don't know if I missed that somewhere.

[William B. Plummer:]

I'll get that one. 55.1%.

[Operator:]

Our next question comes from the line of Philip Volpicelli from Deutsche Bank.

[Philip Volpicelli:]

My questions are regarding the revolver and there's a couple of pieces to it. So first I just want to make sure I understand the mechanism. You actually can only borrow $1.3 billion on the revolver currently because there's $500 million uncommitted. Is that correct?

[William B. Plummer:]

No. So it's $1.8 billion of available borrowings on the existing facility. There is an additional $500 million of uncommitted that we could add on at some future point.

[Philip Volpicelli:]

Okay. So we could go to $2.3 billion?

[William B. Plummer:]

Yes, exactly.

[Philip Volpicelli:]

And then what is the amount that your borrowing base would currently permit you draw?

[William B. Plummer:]

It's a good question. Against the $1.8 billion, there is suppressed availability. So the full $1.8 billion is available.

[Philip Volpicelli:]

Great. And then with regard to covenants, your previous facility had a mechanism where you have no covenants unless availability drops below 125 or 10% of the size. What's the new mechanism? Are there still covenants and are they still springing?

[William B. Plummer:]

They are still springing, they are sprung off initially. So they are sprung off today and it's the same threshold, 10%.

[Philip Volpicelli:]

Okay, great. And the rate, I'm sorry, is LIBOR plus 200, is that accurate?

[William B. Plummer:]

L plus 200 is what we're paying today. There's a grid that could go as low as 175, and as high as, help me Irene, as high as 225. So we're at 200 today.

[Philip Volpicelli:]

What leverage would you need to get to, to get down to 175?

[William B. Plummer:]

It's a fixed cost -- excuse me, the leverage ratio?

[Irene Moshouris:]

It's availability.

[William B. Plummer:]

It's availability. Where is the trigger point for 175?

[Irene Moshouris:]

Between $500 million and $1 billion of availability [indiscernible]

[William B. Plummer:]

Between $500 million and $1 billion of availability, we're at 200 basis points. So the breakpoints are at the either end of that range.

[Operator:]

Our next question comes from the line of Ted Grace from Susquehanna.

[Ted Grace:]

Just a real quick question on 2012 free cash flow to the degree you're willing to give us some framework. And so, if we just go through kind of some of the stuff you've outlined adding OEC, the pricing momentum and the encouraging signs on utilization next year, I think that the logical read-through is that cash flow from operation is likely up. When I kind of think through the gross CapEx you outlined and then thinking about the sales at OEC and applying a normal kind of discount rate to figure out the net cash, it looks like CapEx on that basis will be down year-over-year. And so I was wondering if you'd be willing to kind of give us some form of field post to think about what cash generation might look like next year?

[William B. Plummer:]

Ted, we're certainly wrestling with those questions as we speak. Wrestling only in the sense of, we want to get our forecast for next year from an operating perspective set. So I'm really hesitant to say anything other than, we're mindful of what we want to do to manage the fleet. I mentioned the replacement CapEx spend that we think about for next year as being in that $500 million to $600 million range. We're also mindful of the demand that we're seeing from those Key Accounts that we want to build our strategy around. And so we're going to be very focused on what's the right strategic place to put our capital spend for next year. And that will be the big driver, and where we end up in free cash flow. We've been free cash flow positive as a company for at least 7 years in a row. I think maybe there's only 1 year in the history of the company where we haven't been. So we obviously take that as a standard seriously. At the same time, we are very focused on driving the strategy of the company and positioning the company for the long run. And we're in a mode now where there's a lot of demand for capital. So we're trying to balance those things and we'll talk about them more when we release earnings in January.

[Operator:]

Our next question comes from the line of David Wells from Thompson Research.

[David C. Wells:]

Looking at the fourth quarter in the used sales, a pickup in the rate that's going on there, it sounds like you're using more of the vendor channel for that. Can you talk about some of the incentives of why you would use that channel? Is there a trade-off where you're getting preferred pricing, something similar on the actual OEC that you're buying?

[William B. Plummer:]

David, it's really being driven by the fact that they represent another outlet for taking a decent size of equipment. And that's the main driver of why we do the deal with them. We're buying equipment from them anyway, excuse me, so we might as well use that as part of leveraging the overall relationship is the mindset. Do we get special deals and special purchase pricing in these deals? No. It's much more focused on leveraging the relationship and asking those vendors to step up and take some of the used equipment off our hands. The margins, the prices that they pay on the purchase side are certainly very competitive with the alternative of going to auction. And so that's the way we think about doing these vendor sales is, where does it position us versus taking that equipment to auction. Our first choice always is to sell it ourselves. But if they can step up and take a big chunk of equipment, do it at a price that is not as bad as we would get through auction, and we can leverage the spend that we're doing already, that's what will drive us to do some of those sales to vendors. That help?

[David C. Wells:]

Yes, that's helpful, I appreciate that. And then looking at the $500 million to $600 million number that you gave for next year, should we think about that then as a floor, and then based off of your forecast for your Key Accounts, then you could see a growth CapEx kind of in addition to that level? Is that the right way to interpret that?

[William B. Plummer:]

It's the right way to interpret it, if next year turns out to be a decent year. So I hesitate to say it's a floor only because if next year turns out to be a really soft year, we could spend less than that. But that's the natural replacement level of spend that we think about for next year, and as long as the market hangs in, you could look for us to do at least that and then add growth CapEx on top of that in response to what we're seeing from the market and from our customers.

[David C. Wells:]

Okay, that's helpful. And then lastly, as you look through that CapEx equation with rates where they are, can you talk about what's your, kind of assumed IRR is on the CapEx now versus 2 to 3 years from now? Hopefully you're further out. I mean, is it still such that it makes sense to accelerate now?

[William B. Plummer:]

Yes, again, it depends on the path of demand between now and a few years from now. But if 2012, 2013, 2014 play out the way that we hope and expect, the incremental return from CapEx is pretty attractive. Without giving a specific number, it's certainly going to be well above any reasonable view of what our cost of capital is.

[Operator:]

This does conclude the question-and-answer session of today's program. I'd like to turn the program back to Mr. Kneeland for any further remarks.

[Michael J. Kneeland:]

Well, thank you, operator. And I want to thank everyone for joining us today and as I always state at the end of these calls, I urge all of you to download our latest investor deck, which has been updated on our website. And I invite any investor who would like to go to one of our facilities to reach out to Fred Bratman, so that we can have an orderly presentation put together for you. So with that, I'll conclude and thank you very much, and look forward to our next call.

[Operator:]

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