聯合設備租賃 (URI) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals second-quarter investors conference call. Please be advised that this call is being recorded.

The statements in this conference call and the answers to your questions are intended to provide abbreviated and unofficial background information to assist you in your review of the Company's press releases and official SEC filings. In addition, certain of these statements are forward-looking in nature. These statements can be identified by the use of forward-looking terminology -- such as believes, expects, projects, forecasts, may, will, should, on track or anticipates -- or the negative thereof, or comparable terminology, or by discussions of strategy.

The Company's business and operations are subject to a variety of risks and uncertainties, and consequently, actual results may differ materially from those projected by any forward-looking statement. Factors that could cause actual results to differ from those projected include, but are not limited to, the following -- unfavorable economic and industry conditions that can reduce demand and price for the Company's products and services; governmental funding for highway and other construction projects may not reach expected levels; the Company may not have access to capital that it may require; any companies that United Rentals acquires could have undiscovered liabilities and may be difficult to integrate, and costs may increase more than anticipated. These risks and uncertainties, as well as others, are discussed in greater detail in the Company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K and subsequent reports on Form 10-Q. The Company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.

Speaking today in Greenwich for United Rentals are Bradley Jacobs, Chairman and Chief Executive Officer; Wayland Hicks, Vice Chairman, Chief Operating Officer; John Milne, President and Chief Financial Officer; and Fred Bratman, Vice President of Corporate Communications.

I will now turn the call over to Mr. Milne.

Good morning, everyone, and welcome to our second-quarter earnings conference call. As you may have seen in our press release this morning, lower demand in our end markets continued to impact our results. Nonresidential construction spending was down nearly 10% year-over-year, and demand for our traffic equipment was well below expectations, as budget shortfalls at the state level delayed or reduced highway construction spending. In addition, our results were negatively impacted on a year-over-year basis by higher operating costs, additional interest expense from the senior notes we issued in the fourth quarter of 2002 and in April of 2003, and from a planned reduction in our used equipment sales. Now, despite the challenging environment we are seeing out there, we saw increases in our same-store rental revenues, and our rental rates increased on a year-over-year basis. This is the first quarter in two years where we have seen rates improve on a year-over-year basis. Our rates were up 1.5% for the full quarter, and 2.6% in the month of June. And as we track through the first three weeks of July, we see these positive trends on rental rates on a year-over-year basis continuing.

So let's now turn to the first-quarter results, and I will give you some details on the financial information. But first, I need to mention that the results for the first six months of 2002, and the EBITDA for that period that we are comparing against, are adjusted to exclude the cumulative effect of a change in accounting principle that related to goodwill impairment, and that resulted in a non-cash charge net of tax of $288.3 million in the first quarter of 2002. You can find the calculation of EBITDA and the reconciliation to our GAAP results in our press release that is also posted on our Website.

So, turning to the results, total revenues in the quarter were $728.1 million, and that is compared to $744.8 million in 2002, or a decline of 2.2%. That decline was caused by a slight drop in our rental revenue, a 24% decrease in our sales of rental equipment, and slightly lower sales of our new equipment, merchandise and other, which was off 1.7%. Declines in that line of business were all due to slowing in our new equipment sales, which were down 16.5%. Our sales of merchandise, service and other were up 11.2 % year-over-year on a combined basis, and that includes a 12.4% increase in our merchandise sales in the quarter on a year-over-year basis.

Rental revenue in the second quarter was down slightly, by 0.2%, and that decline was caused by weakness in our traffic control rentals, which were down 7.1% year-over-year, or $6.5 million. The decline in our traffic control rentals reflects the weaker road construction environment we see, which is caused by lower highway spending attributable to the state tax shortfalls. Excluding traffic control rentals, our rental revenue was up 1.1%. Rental rates contributed 1.5% to that increase, and as we've said in the past, the intense focus we are placing in the field on raising rental rates is having an impact in our operations.

The year-over-year increase in rental rates we saw during the quarter accelerated as we went through the quarter, and continues into July. If you look so far in July, in the first three weeks, we have seen a 3% increase in our rental rates on a year-over-year basis. On a same-store basis, our rental revenue, excluding the traffic control group was up 3%. And that was offset by our store closures, which resulted in our volumes being down slightly, by 0.4%.

Looking at our fleet, our dollar utilization was 58.1%, compared to 59.8 % in 2002, or a decline of 170 basis points. That decline in dollar utilization was caused by a shift in our fleet mix, as we continued to add more high-reach fleet to meet the higher demand we are seeing in this line of business. Higher rental rates in the quarter increased our dollar utilization by 75 basis points, but that was offset by declines in our traffic control rentals, which reduced our utilization by an equal amount.

Looking at our gross profit, our margins were down to 30.6% versus 34 %in 2002. That decline in gross margin was almost entirely driven by slower rental gross margins. In our remaining lines of business, our rental equipment sales also were down slightly on their gross margins by 110 basis points, and our gross margins on sales of equipment, merchandise and other increased slightly, by 50 basis points. And most of this improvement was due to higher margins we saw on our new equipment sales. Our margins on our merchandise and service were flat on a year-over-year basis.

Looking now at our rental gross profit, our rental gross profit margin was down 450 basis points year-over-year. And that resulted in our gross profits being down $25.3 million in the rental line. In total, our rental costs, excluding traffic rentals, increased by $27 million on a year-over-year basis. And that reduced our rental margin by 480 basis points. Now, that increase in cost was partially offset by higher rental rates, which increased our gross profit by $6.7 million, or 70 basis points. And one last factor, the decline in traffic control rentals, further reduced our gross profit by $3.5 million, or about 40 basis points.

Looking at our depreciation, our rental equipment depreciation was $82.4 million, which is up 2.3% year-over-year. And that has been caused by the increase in fleet size that we saw through the course of the back half of 2002. As a percent of rental revenue, our depreciation rose to 15% from 14.6%. Year over year, our SG&A increased in the second quarter by $5 million, and as a percent of revenue, it increased from 14.3% to 15.3 %. Our bad debt year over year was up $3.5 million, but that is tracking in line with our expectations. For the full year, we will still be flat on a year-over-year basis in bad debt expense. Our non-rental depreciation and amortization is up $3 million year over year, and this increase resulted from the upgrading that took place in 2002 on our delivery fleet and our branch facilities.

Our EBITDA for the quarter was $195.4 million. That's down 15.2% or $34.9 million year over year. And our interest expense in the quarter was $58.1 million, up $5.9 million. Although we benefited from lower average rates on our floating-rate debt, where we saw our rates down about 24 basis points, and we also benefited from the fact that our debt balances were lower throughout the course of this quarter versus the prior year, this improvement was offset by the higher interest costs from our senior notes offerings that we completed in 2002 -- the fourth quarter of 2002 -- and in April of 2003. For the full year 2003, we still see interest expense higher year over year, by about $20 million, which is less than we originally expected, due to improvements we see in the floating interest rate environment.

So in total, our earnings per share for the quarter were 25 cents on a share count of 95 million shares, and that is versus 51 cents in 2002 on 100 million shares.

Turning to our cash-flow statement, our cash from operations in the second quarter was $97.5 million, which was slightly better than we had expected. We had done a better job of managing our working capital throughout the quarter. Our proceeds from rental equipment sales were $41.5 million, so in total, we generated $139 million of cash from operations and equipment sales. As planned, we purchased $163.2 million of rental equipment and $15.1 million of non-rental equipment during the quarter. If you want to look at the six-month period, our cash flow from operations was $180.1 million, and proceeds from sale of rental equipment was $76.6 million. So in total, during that six-month period ended June 30, we generated $256.7 million of cash from operations and rental equipment sales, and during that same time period, we purchased $265.7 million of rental equipment and 24 million of non-rental equipment. Those purchases are consistent with our planned CapEx program, which is always front-end loaded in any calendar year. Overall, our plan for 2003 calls for 300 million of rental CapEx and 50 million of nonrental CapEx for the full year.

Reviewing the balance sheet, we had total assets at June 30 of $4.8 billion, which included cash of $30.4 million. As of June 30, our rental fleet totaled $3.7 billion of OEC, and the average age of that fleet was 36.5 months. Now, that's down a little bit from the first quarter, but we are still targeting a 42 month average age as we end the year; and that now that we have spent most of our CapEx program, you will see the aging start to increase. The fleet includes $530 million of rental fleets on long-term leases, and the expense in the quarter for our rental fleet on long-term leases was $23.1 million.

At the end of the quarter, on June 30, we had $434.4 million available on our revolver, and that is after our letters of credit, which totaled $163 million, and a balance drawn of $52.6 million. Now, in addition to our revolver, we had 179 million available on June 30 under our new accounts receivable facility, and that's based on the eligible receivables in place as of that date, and is after borrowings under that receivable facility of $13 million. I want to point out, as you may recall during the quarter, we termed out this accounts receivable facility so that it no longer requires annual renewals, and it has a final maturity date of September 2006. So, in addition to our revolver and our accounts receivable facility, we had 639 million of senior secured-term debt, 861 million of senior unsecured debt, 952.4 million of subordinated debt, which gives us a total debt balance of 2.59 billion at the end of the quarter, which is down 67 million from June 30 last year.

We continue to operate in compliance with all of our bank covenants. Our interest coverage test was 1.41 versus a minimum level of 1.25, and our total debt-to-EBITDA was 3.97 versus a maximum level of 4.25.

So let's turn, now, and talk about our outlook for the balance of 2003. We see weak nonresidential construction and continued delays and cutbacks in the highway spending continuing. And that will probably go on for at least the next two quarters. So based on this, our EPS outlook for 2003 will be in the range of 70 to 80 cents per diluted share. Our EBITDA should come in at between $740 and $755 million, and we project cash flow from operations plus the proceeds from the sale of rental equipment to be in the range of $620 to $630 million. So that after our 350 million of CapEx, we anticipate free cash flow for the full year of $270 to $280 million. Now, obviously, these projections exclude any possible write-offs or charges we will have to take for FAS 142 Goodwill impairment or for FIN 46 implementation, although both of those charges would be non-cash charges, and would not impact our free cash flow, nor would they impact any of our covenant tests.

So in summary, notwithstanding the weak construction markets out there, we will be solidly profitable in 2003. We will generate considerable cash flow, and we will see continued outperformance in our business versus our competitors, and also versus our end markets in both of the nonresidential construction and the highway spending.

So on that note, I would like to turn it over to Q&A. Operator, can you please give everyone instructions on how they can ask questions?

(CALLER INSTRUCTIONS). Alan Pavese Credit Suisse First Boston.

This is a two-part question. John, you talked about the lower EPS expectations kind of in the context of the weaker construction environment. But your revenues seemed to be holding up, and the price and the internal growth seems to, as you pointed out, be doing better than it has been. And it seems like more of the surprise has come from perhaps some of the cost of operations in the cost of rentals line. And I was just wondering if you could maybe break out how much of that lower expectation is due to the different factors, and give us a little bit more color on what's behind the cost of rentals margin movement for the last couple of quarters?

Let me try and tackle all of those pieces. First of all, our revenue is holding up, and we are getting improvements on our rates year over year, as well as same-store growth in our non-highway side of our business. Clearly, on our highway side, that's a big factor in our overall shortfall from our expectations. If you looked at stepping back rather than on a year-over-year basis, the shortfall from expectations, about half of the miss is due to lower profitability in the traffic control business in the quarter, which is down $5 million. The balance of the miss was from higher rental costs in the non-traffic side of the business, and those were primarily in the areas of Workers' Comp and liability insurance, delivery and in fuel. We have programs in place to reduce those negative cost variances, and you will see for the balance of the year, we will continue to reduce the variance on a year-over-year basis in each of those categories. You have seen it, actually, from the first quarter to the second quarter, for example, where we have cut our negative variance on Workers' Comp and insurance from 6 million down to 3 million in this quarter.

Now, stepping back, obviously the weaker environment in the end markets is impacting us. If environments were stronger, we would have opportunities to pass on more of these costs, number one; and, number two, we would also see improvements in our volumes. Don't forget that every increase in our volumes -- a 1% increase in our volumes, because of our fixed cost base, adds at least 7 cents to our EPS. So clearly, weaker end markets are having an overall impact on our business.

But just in the context of when you provided the guidance six months ago for the full year, is it fair to say that the revenues are a little bit closer to what you had expected? It sounds like the mix maybe is less in traffic and perhaps more in other areas, but the costs are a little bit more out of line with what you were expecting for the year? Is that a fair statement?

It's fair that the costs are a little higher than we expected; that's true, and certainly, we're disappointed in that. But we have a number of initiatives in place to reduce that, and also we have some easier comparisons on the cost basis, since a lot of these costs were in the third and fourth quarter of last year for the improvements we made in the facilities and the delivery fleet. And as the second piece is, as you point out, shortfalls in the revenue and profitability on the traffic side.

David Raso Smith Barney.

Just following up on the question about the operating costs, obviously the model really has been waiting for a long period now to get the rates up. So the rates going up is obviously a tremendously positive sign for what could drop to the bottom line. Can you flesh it out a little bit further on these operating costs? You mentioned that in the second half, you began to feel some of these higher costs, so your comps get easier. I guess I'm trying to figure out, how do we get back to the 48 to 49 percent rental margin, if we can begin to bake in some of the July comments you had made about -- maybe we can work with rental rates up 2 to 3% during the second half of the year.

Okay, David, let me try to give a little more detail on that without spending the entire rest of the Q&A on it. But let me just hit the highlights on that. If you look at this quarter on a year-over-year basis, our rental costs were up $24 million. Within that, we had highway rental costs down $3 million, but not down enough to offset the decline in revenue. So that clearly impacts our bottom line by about $5 million. But rental costs in highway were down. In terms of increased costs, we saw depreciation up, which we anticipated, by about $1.8 million.

Is that in that line item, though? I'm really focused right now on the line item that's --

Okay. I'll exclude that piece just in the cost of rentals. In addition, we saw repair and maintenance costs up $3 million. Again, we anticipated for the full year our repair and maintenance would be up 10 million, and we are dead on track to hit that number for the full year. So, for the balance of the year, you'll see about $2 million a quarter of additional costs year over year in repair and maintenance. Our fuel was up $1.5 million in the quarter, and now, based on the fuel prices at June 30, we will be having no negative comps in the third and fourth quarter on fuel, unless that price goes up from the $1.49 level. Our delivery costs were up in the second quarter by $1.5 million. I am anticipating you will see negative variance in each of the third and fourth quarter of somewhere between 750 and $1 million on your delivery costs. So it will be down based on some steps we have taken out in the field, but it will still be a slight negative variance for the balance of the year.

Our rent and our occupancy cost was up $3 million in the quarter, but that cost was spent in the back half of 2002 to upgrade our facilities, so you can anticipate about $1.5 million per quarter of incremental cost for the balance of the year. Our insurance costs, as we said in the first quarter, insurance and benefits were up $6 million in the first quarter, $3 million in the second quarter. And the programs that we implemented to cut those costs will benefit us for the balance of the year, so you will see somewhere between $1 to $1.5 million per quarter of additional costs in that area. We had some property tax increases in the quarter that were one-time hits from states and local authorities going after tax revenue. And in the other line -- other any number of small pieces, including our acquisition costs that rolled in on a year-over-year basis -- you'll go from a negative variance of 10 million in this quarter to about 3 to 3.5 million per quarter for the balance of the year. So you can see that, for the balance of the year, you'll start running a negative variance of about $5 to $7 million per quarter for the third and fourth quarter.

So if we have rates up 2%, which should add roughly about that amount, if not even a little more, really -- you know, 10 million -- net-net, there should not be any reason -- unless, obviously, fuel moves against you or whatever may be -- you should be able to have a higher rental margin year over year in the third and fourth quarter than you did in the second half of last year.

Well, except that you are still going to have a little weakness pushing through on the highway line. There will be a couple of million dollars of negative variance there.

Barry Bannister Legg Mason.

When I analyze the fleet utilization on a trailing 12-month basis, it looks like it's 56.1%. It was 61.9 in the peak year of operations, in 2000. If I'm calculating right, and you are about 580 basis points down on utilization, which means you are about 200 million overfleeted, could you comment on that? And I have a related question related to CapEx. First, could you comment on whether you are overfleeted, and how you could address that in the second half?

We don't believe we're overfleeted. If you look at our statistics of fleet down and underutilized fleet, we are running below the industry. We are running, I believe, at 12% of fleet down and not available for rent, which is below industry statistics. The number-one reason why our dollar utilization is down year over year is the shift we have seen where we have added more aerial fleet, more high-reach fleet. Let me explain that point. Inherently, high-reach fleet has a lower dollar utilization; it tends to have more monthly contracts, it has a longer life of assets while it's in your fleet, and it has a higher profitability because your operating costs are lower. But it does have a lower dollar utilization. So we increased, on a year-over-year basis, our aerial fleet by 1.9%, and that impact took down our dollar utilization. If you actually look on each of our categories of equipment, our time utilization year over year is running strong. In June, we had 63.5% time utilization, which is a positive variance on a year-over-year basis. So we are tracking well on time utilization. We have just seen the fleet mix take down our dollar utilization.

Just related to that, before the follow-up, it seems like if you're looking at going from 36.5 months to 42 months, you could chop off some of the older equipment at the bottom there, sell some more fleet in the second half and avoid the aging of the aggregate fleet into the low 40's. I just don't understand why there isn't a move afoot to do that.

We don't see the need to keep our age down below the 42 month level. We're comfortable with that 40 to 45 month level. From an operating point of view, we see that as an attractive point from a return-on-asset basis, in terms of the costs of the incremental CapEx we would have to put into the business. And from our customers' point of view, we're still operating a very attractive fleet, very reliable fleet. So I think the best model is to keep it in that 40 to 45 month range.

If I look at your free cash flow at 270 to 280, however, and it would take approximately maybe 500 to 600 million to keep the fleet age flat, and you are doing closer to 300 this year, then I would essentially subtract that from the free cash you state you're generating, and in a sense, your free cash in the year 2003 would be close to zero, and the debt reduction would be less than 100 million, just to stay still at the current level, in terms of fleet age. Is that a right way to look at it?

You're just missing one point there, and that is the fact that when we are spending 500 million to keep our fleet age constant, we will be selling about 260 million of fleet instead of the 160 that we're planning to do this year. So we actually will reduce our free cash flow by roughly $100 million to keep fleet age constant. All things being equal, by the way, improvements in used equipment pricing, reductions in the cost of new equipment and overall improvements in our business profitability would obviously drive that number up. But on a same-store basis, you would net out 100 million rather than 200 million.

Sarah Thompson Lehman Brothers.

I am not sure -- I thought the rental rates would be up more than 2.5% in the second half of the year, because didn't you start to see the real fall in rates in the second half of last there? Or am I confusing?

We actually, saw rates decline as we went through the year. We had about a 3.5% decline in the first quarter that inched up to about a 4.2% decline in the second quarter, then it peaked in the third quarter at 6.1% and then began to decline or drop down a little bit. It was 5.2 in the fourth quarter. And that will contribute to year-over-year more favorable comps.

Right. But if you are already seeing it up -- maybe I'm just confusing the math. If you are already seeing it up 2.5% in June or 1.5% in the second quarter year over year, and your decrease last year versus 2001 was the worst in the third and fourth quarter, shouldn't you be seeing more of a spread? Are you just being conservative in your expectation that prices will be up 2.5% in the second half of the year?

There's obviously some level of conservativeness in that number, Sarah. The thing that we have to be cautious about is it's still an unsettled environment, with a number of our competitors facing liquidity challenges. Their behavior -- so far, we have been able to raise markets in the markets that we have been participating in with them, but we have to be cautious, given the unsettled environment. And we also have some seasonal trends that start working against us as we go through the back half of the year, that we're a little worried about setting up too high a bar on our rental rate comps on a year-over-year basis.

Obviously, you guys are generating a lot of free cash flow in the second half of the year, and you don't have any real pre-payable debt, or at least nothing significant. What do you intend to do with all that cash?

Well, we have always said that we have a number of things that we have to constantly monitor and look for the best returns. If the market is strong, we'd love to put it in the rental fleet, because we get the highest flowthrough to the bottom line by expanding the size of our fleet and putting it into good use, putting it into rental use. We're not anticipating that this year. We will look at acquisitions, but again, they have to be favorably priced so that, at the end of the day, we are seeing strong returns. And, more importantly, the rating agencies and the bondholders are comfortable that we're doing deals that don't hurt them from a credit point of view. So after that, we look at our balance sheet. And as you say, we don't have a lot of debt that is revolving debt, but we're looking at a number of our off-balance-sheet transactions, as well. A number of our operating leases have embedded interest rates at anywhere from 7 to 10%, and we are working through with the treasury group to go after those, and we will probably pay off a number of those throughout the course of the third and fourth quarter.

I wonder if you can help me understand why Accounts Receivable, at almost $500 million -- like just give me a sense of where there comes from, and why is it so high.

John Milne Well, obviously the Accounts Receivable kick up, as we go through the year. On a year-over-year basis, we are seeing Accounts Receivable at 688 million versus last year they were at -- I'm sorry, 488 million. And last year, actually, at this time of year, they were at 499 million. On a year-over-year basis, our Accounts Receivable are down about $11 million, as we continue to aggressively manage that and make sure we don't have further deterioration in our bed debt. So we see that as normal seasonal increase from year end, as we go through the year, and then we will start to recover that more as we go through the back half of the year.

But just from a logical standpoint, how does that fit into your business? Where does that come from, or the bulk of it?

John Milne Most of our Accounts Receivable comes from our rental line of business. You are typically running anywhere from 50 to 55 days on our rental revenue.

John Milne Right now, we are running at 59 days, and that is exactly where we were this time a year ago.

And also, can you give us a little more color on the competitive environment? It seems like we're getting a little bit of mixed signals, and I would love to hear just what you guys are thinking about what's going on out there.

You still see a pretty choppy environment. John mentioned there are a number of companies that are wrestling with liquidity, staring at the spectrum of bankruptcy, or in some case have actually gone into bankruptcy and are now coming out. We are, in that case, seeing a little bit more discipline. We believe that we will see some price stabilization, particularly as a company exits from bankruptcy. On the other hand, there is still a number of companies that we against that are going after -- they are pricing their product at rates that, to us, just don't make a lot of sense. But on balance, if I had to look at the whole industry at the same time, I would say there is a little bit more stability this year than there would have been this time 12 months ago, probably a little bit better behavior this time than there was 12 months ago.

Joel, our problem is not the competition; it's still pretty fragmented out there. I still think that we have significant advantages over the competition. The problem is the end markets. And really, that's in two places -- nonresidential construction, which in most categories is still suffering, and the states not spending the money for the highway. Those are the two issues that have to get resolved. We can take care of the competition.

Christina BoniCredit Suisse First Boston.

Two questions -- one with respect to SG&A. What should we think about SG&A costs as we go into the second half of the year? I know we talked a lot about cost of goods. Any commentary on what is happening on the SG&A line?

Sure. Last year, in the third and fourth quarter, our SG&A ran 111 million in the third quarter and 123 million in the fourth quarter. Our expectations for the third and fourth quarters will be flat to slightly up in the third quarter, no more than about $1 million to $2 million in the third quarter, and then in the fourth quarter, you recall we took a $10 million adjustment to our bad debt reserve. So I am anticipating being down in the fourth quarter year over year by at least 10. Actually, a number of initiatives we have in place, I think it will probably be down closer to 12 to 13.

And just one follow-up on your comments on the aerial equipment. You said that you have added fleet; is that by design that you have added fleet? I know that there has been some significant oversupply in the market. If you can give some commentary on what is happening in aerials and why the expansion, if there is any, in that area?

We have added fleet to meet market demand. And in fact, if you look at our aerial fleet right now, the aerial region is running at a 78% time utilization. And that will climb a little bit as we go through the rest of the summer months into the peak construction period. So we're seeing strong demand for aerial equipment. That's across the board, and then of course we participate in a number of very large jobs that pull a lot of that equipment in.

Are you seeing the same kind of rate improvement in aerials as you are for the rest of the business?

Our aerial business last year suffered the most, and if you look at the aerial business on a year-over-year basis, we are still down slightly, whereas for the rest of the business, the rest of the equipment rental business, excluding traffic control, we are up. But I would say we are seeing improvement in the sequential performance coming from aerial, so we're benefiting a little bit there, as well.

One of the things that you have to recognize on that aerial side is that so much of our business on the aerial side, the growth in our business is driven by large projects. And when you see that price decline, even on a year-over-year basis, a lot of that is by virtue of the fact that we continue to be very successful in our big gun program to roll out and take market share in the large projects, which tend to have slightly lower rates than our overall high-reach business.

Cliff Ramson (ph), Fundamental Research.

Can we go back and look at this issue of the sequential increase in rental rates? I know this question is a little bit of a when-did-you-stop-beating-your-wife category. Would you say that those increases are due to market action or to URI leadership?

I think it's definitely URI leadership. We have been working hard. If you go back to the second and third quarter of last year, we had significant -- as I mentioned earlier -- rate deterioration. We were also going very aggressively for market share at the same time, and added some 300,000 customers as we went through the year. We began to believe, as we went through the third quarter, that we were doing some of the rate damage to ourselves. We met with our field management team in late September, and redirected away from market share, and from that day forward, we have been really pushing very hard to get rates up in a variety of different ways that I won't go into. But I would just say that sequentially, we have had, every month since October of last year, rates up, and I don't think anybody else in the industry would feel comfortable with making that statement.

Let me take the other side of that coin. Do you feel at all constrained because it may not be in your interest to put some of your competition out of business, because of the potential effect on the resale market, residual values, return calculation, et cetera? In other words, to the extent you have been pushing to get rates up, do you sometimes have to throttle that back because you don't want your competition to go the hell out of business?

No, Cliff. Really, we don't even think about that; that's not our problem, so to speak. We are focused on our assets, divestiture on our assets -- our customers, serving our customers, keeping them happy and getting a fair rate for the service that we provide, and earning a good rate -- earning a good rate with our customers. What happens with our competition is really -- obviously, it affects us, but it's not something that determines how we're going to act.

Well, let me just -- this is the last follow-up. The issue becomes residual value of equipment. And if you put -- I know that this is a highly fragmented industry and no one person drives it all. But to the extent that you go damage one asset class -- take aerials as an example, because they are so profitable. If there's a glut of aerials on the market, that has an effect on your residual values, which is a big part of your return calculation. I guess the answer is you're saying no, but with that further elaboration, is it still no?

I think you have to look at the industry and think about how much used equipment is in the industry. It's estimated that someplace between $50 and $100 billion of used equipment is sold each year. So when you look at the rental industry in its entirety, we represent a relatively small part of the total used equipment that's out in the market. I don't think that there is any one single thing that we are doing that would cause prices for used equipment to drop materially. We have seen softness in prices, but that's basically because there's less demand right now. People are buying less equipment, and that's kind of consistent with what we felt people would do in a softer economic -- literally, since we have been in the business.

A very complete answer; thank you. I tell you, as a shareholder, I love hearing you say that you understand that if volumes go up 1 %, it's 7% to EPS, and less talk about pounding on your suppliers.

David Bleustein, UBS.

What is your current dollar utilization on aerials?

Once second. Let me grab that for you, David.

While you are looking for that one, can you give us some sense for activity in the used equipment markets? What are seeing in pricing?

While John is checking that number, I would say we are beginning to see some firming. Our gross margins were down slightly on a year-over-year basis. But as we came through the quarter, we are beginning to sense that used equipment prices are firming. I don't think we're going to see much movement upwards, but hopefully we are bottoming out.

David, I'm sorry I don't have that exact detail. At this time of year, that would typically run somewhere in the mid-40's.

Okay. And the last real question -- one of your suppliers -- actually an ex-supplier in this case -- commented that they were seeing some pickup in activity from the major rental players. They implied that there was some buying going on from your industry. Who do you see out there spending money, and does that pose some risk to your strategy of aging your own fleet?

Well, I think, first of all, there has been buying going on. As John said, this year we will spend $300 million worth of capital on the fleet. There are some companies that may be adding -- particularly companies coming out of bankruptcy, that may be adding some fleet in. But all things being equal, we have one of the youngest fleets, if not the youngest fleet, in the industry, and I don't think that that's likely to change.

None of the competitors are aggressively expanding their fleets. The ones that are coming out of bankruptcy have some pretty tight covenants. So they are adding some replacement CapEx, but we don't see any significant increase in fleet sizes overall, David.

And John, I know you gave us a lot of detail on your cost experiences in the quarter. Do you have any total negative variance cost experience for Q1 and Q2, and an expectation for Q3?

Yes, let me try to highlight that. In Q1 -- and I'm looking only at rental expenses at this point, if that's what you are focused on, David. On rental expenses including depreciation, your Q1 variance was about $21 million. Your Q2 variance was $24 million. And for each of the third and fourth quarters, I'm estimating a total variance combined of between $12 to $15 million.

Debbie Downey (ph), Fuller Private (ph).

I missed your availability on your revolver. I got to 163 million of over fees (ph) and the 52 outstanding. So what is the actual availability? Second, what is your current composition of your fleet right now, broken down by equipment?

Our availability on our revolver is $434.7 million, and then in addition, we have availability under our Accounts Receivable facility. That facility was recently termed out, and we have availability of $179 million on that facility, as well. So combined, we have in excess of $525 million.

In terms of fleet composition, right now, we have added about 1.9% to our aerial fleet. So just one moment; let me give you detailed statistics on that. If you look at our mix, our aerial fleet would be running about 28.5 -- about 28 to 29% aerial. We are going to be running about 11 to 13 % earthmoving equipment, 8 to 9% forklifts. And then the balance making up all the other hundreds of categories we have of equipment.

Mark Koznarek (ph), Midwest Research.

I apologize if this has either been asked or is really a naive question; I got on the Q&A a little late. But last week, we heard Caterpillar talk about aggressively maintaining their fleet at 24 months for the rental stores. I know there is a difference in the kind of customers that the two of you target and the kind of jobs you are after, but I'm sure there is a fair amount of overlap. And what that means is that if they are successful, their oldest piece of equipment out there is going to be four years, and your oldest piece at 42 months -- that means there has got to be one piece out there that will be seven years old. And can you explain to me why that is not a competitive disadvantage?

First of all, customers have a tendency to focus on a couple of things. One, is the equipment reliable when they get it? Does it work, does it function well? And does it stay reliable during the period of time that they have it? We have done fairly exhaustive studies on our fleet, and we do not see any significant deterioration in reliability from, say, 30 months up through about 45 months. You get a little bit, but it's imperceptible to the customer. So what the customer wants to see is a piece of equipment that works, and that's what we're providing to them. I would go back and say, with Caterpillar, there's a fairly minimal overlap with us in the marketplace. They have a tendency to go after the large yellow construction equipment much more aggressively than we do -- not surprisingly so, given that that's the main thrust of their business. We have a tendency to look at, say, a backhoe as pretty much the top end of our line and equipment that are running below that as the bread-and-butter. They would look at the skids there, the backhoe, as more or less the very bottom of their product line.

So you would assert that there is not much overlap between your revenue base. Would it be less than 50%, then, in terms of similar customers that you're targeting?

It would be much less than 50%. Cat has about 60-some-odd dealers across North America that have Cat rental stores. I think all the Cat rental stores add up to maybe 300, 300 and change -- something like that -- stores around the country. We have a little more than twice that number of stores in the same place. They are not in the traffic business, which, by the way, right now is good for them and bad for us. That's a cycle which someday will turn the other way.

They are really not, in any large extent, in the aerial business, which is a quarter or a third of our business. They have some aerial in some of their stores, but to do some of the big projects that is our bread-and-butter for that group, they won't be able to compete, frankly, and they don't; that's not their focus. Their focus has been, wisely, on their existing customers that they have been selling equipment to for a long period of time, and have brand loyalty and a good relationship with the local dealer. And they've opened up a Cat rental store to service them. And, as Wayland said, mostly on the higher-end equipment. It's really not their focus, on the lower end. There's 60-some-odd different Cat rental store owners across the United States, and their approaches to the business are not entirely uniform.

They are quite separate, and there's been some parts of the country where Cat -- for that part of the business where we do overlap -- has been an excellent competitor, a very strong one. Wagner rents, up in Colorado, for example, comes to mind, which is a dealer that has been doing rental for a long, long time, way before someone thought up the name Cat rental store. And they are doing an excellent job and are a tremendous competitor there. You look at other parts of the country, like in parts of Texas, where just recently one of the oldest Cat dealers -- if not the oldest Cat dealer, I think they are -- Holt basically got out of the Cat rental concept. They fired 200-and-some-odd rental employees and tore down the Cat rental store sign. So it's different things in different parts of the country. In general, Cat is certainly a respected competitor, and one we have to take seriously.

Mark Reever (ph), Goldman Sachs.

The amount of preferred dividends that was included in interest expense in the second quarter, and your outlook for interest expense in the second half of '03 versus the first of '03? I don't know if you said that; I might have missed it.

The amount of interest expense from the quips in the second quarter was $3,681,000 -- 3.7 million. And that will stay pretty much flat for the balance of the year. As far as our interest expense for the balance of the year, I would expect the third and fourth quarter to run somewhere between $48 to $50 million, excluding the quips, per quarter.

And just one of the things that I was curious about is the breakeven level of EBITDA that you would need to be free-cash-flow-neutral. And I am calculating that to be, I guess, around 625 million. This sort of, I guess, goes back to Barry's question before, where if you keep the fleet age constant, I think you spend 500 and then you sell 250, subtract the gains out on the sales of used equipment, plus you have non-rental CapEx and interest taxes -- is that the right figure?

Mark, walk me through that again. I'm sorry.

What I was doing is I was taking 500 million of capital expenditures. You sell 250, you have a gain on the sale of used equipment that is embedded in EBITDA -- that's about 80 million, I would say.

Correct.

Non-rental CapEx, about 45?

Yes.

And I was just using round numbers -- interest expense, the quips, taxes, about 250?

I think your interest expense is -- yes, that would be about right, 250. That's a little high, but close.

Okay, with taxes and quips.

Oh, with taxes included, yes, that's fine.

Which led me to around, I think, 625 of EBITDA to be free-cash-flow-neutral?

That would be about right. That's a little bit high, I believe, because it's basically -- our outlook this year, less -- you can have $100 million more of CapEx; that will give us -- basically, our outlook this year less 150. That's pretty close, though.

David Rosso, Smith Barney.

Just a follow-up with some open items. The same-store rental revenue growth -- I apologize; maybe I missed it. I know you mentioned it was up. Did you give an exact number?

The same store is 1.8% including highway.

And then also, for the FIN 46 rule coming up, when will that be assessed, in the sense of when should we see the non-cash charge, and what does it do to the balance sheet?

Well, FIN 46, as you know, is effective July 1st of this year, so essentially three weeks ago. Any charge we see from the implementation of FIN 46 would ruin through our third-quarter results. We do have a couple of synthetic leases with the IEs (ph) that would -- the FIN 46 rules would apply to. That would bring the assets on balance sheet and would result in an accounting charge, which would be non-cash, of course. It would also be below the operating line. That charge, we'll estimate right now, could be between $50 to $70 million. Now, having said all that, we have been actively working on some amendments to those operating leases, synthetic leases, so that they would not be brought on balance sheet. So it's still not certain that we would be incurring that charge in the quarter.

And as it relates to the accounting charge or the new way to account for the equipment on lease in your fleet, will that have any implications on your choice of -- have more in a fleet on lease, or not, just given obviously it impacts your lined items? If you bring more on lease, it will hit your rental margin. Or if you go the other way, and have less on lease and more just ownership, it will affect your depreciation. I'm trying to get a feel for that.

As far as our actual liquidity, our credit statistics and our covenants, it will have no impact, because our covenants already treat our synthetic leases as if they were debt. So to the extent we bring it on balance sheet, we won't have any net impact from bringing it onto balance sheet. Now, as far as our P&L, we also think it will be pretty much a push in terms of the cost. It will move it into some different buckets, obviously, because our operating leases flow 100% through our cost of equipment rentals, whereas when we bring it on balance sheet, our depreciation and interest would split into those two categories. So it will move some of the cost around, but overall, on the bottom line it should be pretty much neutral.

So I should expect to see more in depreciation or less? That's what I'm trying to figure out. If you bring it into your balance sheet, the issue is that then it's still going to be accounted for as a lease payment, and that's in your equipment rental cost?

Well, if you bring it on balance sheet, our cost of equipment rentals would go down.

So it does change the dynamic; it should raise your depreciation below your cost of rentals. That kind of leads into my question about the second half of the year. Shouldn't we began to see an improvement in your rental margin simply from that accounting change?

Well, we are not contemplating in our outlook that we will have to bring the synthetic lease on balance sheet. As I said, we are working on some amendments with our other parties that are involved in that VIE . If those amendments go through, it's possible we won't have to bring it on balance sheet. So for the purposes of giving you outlook for the rest of the year, I have not built that in.

And if you don't have to bring those onto the balance sheet, there is no $50 to $70 million charge?

That's our view. We obviously have to work it through with our accountants and see where we end up.

Also, the D&A for the quarter? I apologize if I missed it. What was the D&A?

One more time?

Depreciation and amortization for the second quarter. What was the number?

Depreciation and amortization in the second quarter on rental equipment was $82.4 million. Is that what you're asking for there?

On the cash flow statement, the D&A for the whole company in the second quarter?

For the whole company. Okay. Let me give you the total. Once second. The D&A for the total in the second quarter was $99.3 million.

And also, on the couple of major players that went private recently, just philosophically, what do you think changes as it relates to you? I know you say there's a lot of fragmentation in the market, no competitors are that significant. But I'm just trying to see how would they approach the business differently now, as a private company, in your view?

It's not clear, David, that at least the one that I'm thinking of would do much to change the way they are operating their business. I think their business model has been more similar to -- a little bit heavier equipment than what we are accustomed to dealing with, more yellow construction equipment. And I frankly don't believe that that would change. That seems to be something they have been comfortable with historically. Whether they will have more flexibility financially or not is not clear. Obviously, that has been an inhibitor to their growth in the past.

And last question -- on the aerial purchases, and maybe more broadly, the equipment you are purchasing, how much of it is new equipment and how much of it is good late-model used? Obviously, with aerials, there is a lot of of good, late-model used equipment out there.

We have bought some late-model used, but I would say, if you looked at the equipment that we have bought this year, the preponderance of it would be new equipment.

And that concludes the United Rentals investors' conference call. Thank you, and have a good day.