聯合設備租賃 (URI) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the United Rentals Third 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. Consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following. Unfavorable economic and industry conditions can reduce demand in prices for the company’s products and services. Governmental funding for highways 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 10K, and subsequent reports on Form 10Q. 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 is Bradley Jacobs, Chairman and Chief Executive Officer; Wayland Hicks, Vice-Chairman and 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. Mr. Milne, please go ahead sir.

Thanks very much, and good morning everyone. Welcome to our third quarter conference call. As you can see from the press release, earnings in the quarter were $31.9m, and earnings per diluted share were $0.34. Now this includes a non-cash charge of $11.7m, or $0.10 per share, which resulted from the vesting of restricted shares, which were granted in 2001. I am going to describe in more detail that charge in a few minutes. But first I want to highlight some of the core operating results.

Putting aside the charge, operations performed a little better than we expected. Net income for the quarter would have been $42m, and earnings per diluted share would have been $0.44. And that’s compared with net income of $40.8m, and earnings per share of $0.43 for the same period in 2002.

Demand continues to bump along at what feels like the bottom. We don’t feel any upward demand trends from our customers’ activities. But, on the other hand, we’re not seeing any further deterioration. The continued improvements we’ve made in rental rates are having an impact. We saw our rental rates up 3.4% year over year. And that offset the negative variances that we saw in our rental costs, so that overall our gross margin increased slightly on a year over year basis.

Just to take a moment to briefly recap the results, our rental line of business contributed $10.5m of additional profits, and our used equipment gross profit was up $2.5m in the quarter. Offsetting those increases, our interest expense was up $4m. We had $5m higher bad debt expense. And we had a higher non-rental depreciation by $2.7m, so that the net result was an increase in our PBT of $1.3m, excluding the charge.

Now before I move on and review the results for the quarter, I want to talk about the third quarter charge that was attributable to the vesting of restricted stock. In 2001, the compensation committee granted shares of restricted stock to senior management under a shareholder approved plan. And then earlier this year, when the stock was trading around $10 per share, the compensation committee established vesting triggers that were based on stock price performance targets of $15 and $20 per share.

So when the stock averaged over $15 for 20 consecutive trading days in the third quarter, 635,000 shares vested. I should also point out that if the stock trades over $20 for 20 consecutive trading days, a further 400,000 shares vest.

Now let’s turn to the results for the quarter. And before I do that, I should mention that the results for the nine months ended 2002 and the EBITDA for that period have been adjusted to exclude the cumulative effect of the change in accounting principal that was related to the good will impairment that resulted in a non-cash charge net of tax of $288.3m in the first quarter of 2002.

You can find a reconciliation of our EBITDA, our free cash flow, and a reconciliation of those numbers to our GAAP results both attached to our press release, and also on our Web site. So, turning to the results, total revenue in the quarter was $805.1m. And that’s compared to $783.1m in the third quarter of 2002, which is an increase of 2.8%.

Within that number, we saw a 1.7% increase in our rental revenue, a 12.6% increase in our sales of rental equipment, and a 5.3% or $6.8m increase in our sales of new equipment, merchandise and other. And in that line item, almost all of the increase was driven by merchandise being up year over year 16.5%.

Our rental revenue in the third quarter increased $10.3m year over year. Now when you drill into that number, you will find that our traffic control rentals were down 2.5% year over year, or about $2.6m. So looking at the rest of the businesses, excluding traffic control, we saw rental rates were up 3.4% year over year. And on a same store basis, our rental revenue was up a little over 4.5%. So we also saw a volume increase of about 1.3%.

Now offsetting the same store volume increase and the rate increase we saw was the impact of store closures that took place primarily in the fourth quarter of 2002. That reduced our rental revenue, so that overall, excluding traffic control, our rental revenue was up $12.9m, or 2.5%.

Looking at our dollar utilization, we saw dollar utilization in the quarter at 65.1%. And that’s compared to 64.1% in the prior year, or an increase of about 100 basis points. The traffic rental business had no impact this quarter on our utilization rate. Utilization rate increase was driven by higher rental rates, which added 190 basis points to our dollar utilization, and was offset by a fleet mix change, as we have continued to see a higher portion of aerial equipment in our rental fleet, which reduced our dollar utilization by 90 basis points, so that the net increase was the 100 basis points.

Total gross profit in the quarter was 32.1% versus 31.4% in 2002. Our rental gross margin is up 120 basis points. The gross margins we saw in our rental equipment sales were also up by 200 basis points. And that’s driven by a slight increase in prices in used equipment sales. We’ve seen prices go up by less than 1%. But they are up year over year. And we also saw an improvement in our margin because of the mix of equipment we sold in the quarter.

Gross margins on our sales of equipment, merchandise and other decreased from 26.6% to 25.1%. And that decline was primarily driven by lower new equipment sales margins and lower service margins. Looking at our merchandise margins, they were pretty much flat on a year over year basis.

Looking to our rental line of business, our rental gross profit increased 110 basis points year over year to a level of 33.4%. And that resulted in gross profits being up $10.5m year over year. Our traffic control rentals had profits down slightly by about $1m, so that in the remainder of the business we saw higher rental rates, which increased our gross profits by $17m. And that was offset by higher costs, and slightly higher depreciation.

Our costs in our business, excluding highway, were up about $4m, or about 1.6% year over year. And the primary components of that consist of fuel and delivery, which were up $1.6m, our workers’ comp and insurance, which was up $1m, and repairs and maintenance costs, which were up $1.5m year over year. And all of those increases in our cost line were partially offset by a labor reduction, where our costs were down about 5%. On our depreciation, we saw our rental depreciation up about $1.5m to $85.7m. But, as a percent of rental revenue, it remained at 13.7%, which is the same level as 2002.

Looking at our SG&A line, year over year our SG&A increased by $16.6m. And as a percent of revenue, it increased from 14.2% to 15.8%. Now if you exclude the non-cash charge of $11.7m from the vesting of restricted shares, our SG&A as a percent of revenue was 14.3% in the quarter. So that’s pretty much flat with last year.

Now, in addition, we saw bad debt expense in our SG&A line up $5m in the quarter year over year. And that means that to date, year to date, in the first nine months our bad debt expense is running about $7m higher than the first nine months of 2002.

Now, as you recall, we said that for the full year we expect bad debt expense to be flat year over year. And we still have that view, since we’ll benefit from a positive variance in the fourth quarter of 2003 of $7-8m, which would wipe out the negative variance we’ve seen year to date. Non-rental depreciation and amortization was up in the quarter by $2.7m. And that just continues to show the impact of the upgrading of delivery fleet and facilities we have done over the last 18 months.

Looking at our EBITDA for the quarter, our EBITDA was reported at $217m, which is down slightly by $2.2m year over year. But the EBITDA at 217 includes the non-cash compensation charge. So, if you added that back, our EBITDA would actually be up year over year by $9.5m.

Interest expense in the quarter was up, as I mentioned. It was $57m, which is up $3.7m over 2002. And although we’ve benefited from having a lower average rate on our floating rate debt, this benefit was offset by the higher interest cost we carried from the senior note offerings we completed in the fourth quarter of 2002, and in early 2003.

So, when we look at the full year 2003, we anticipate that our interest expense will be higher year over year by about $12m. So in total, that takes us to earnings per diluted share in the quarter of $0.34, and after adjusting for the non-cash compensation charge, earnings in the third quarter would have been $42m, and earnings per diluted share would have been $0.44 on a share count of 97 million shares. And that’s compared to $40.8m, and earnings per diluted share of $0.43 in 2002, on a share count of 95.7 million shares.

Moving from the income statement to our cash flows, our cash flow from operations in the third quarter was $146.3m, which is in line with our expectations and right on track to achieve $450m to $460m for the full year 2003. Our proceeds from rental equipment sales were $44.4m. So in total we generated $190.7m of cash from our operations, and from our equipment sales.

During the third quarter, we purchased $54.9m of rental equipment, and $2.5m of non-rental equipment. In addition, we paid off $56.5m of operating leases. And we also reduced our debt by $28.1m. Looking at the full nine month period in 2003, our cash from operations was $326.5m. And proceeds from the sale of rental equipment was $121m, so that in total we generated $447.5m.

During the first nine months, our cap ex program, we purchased $320.6m of rental equipment, and $26.5m of non-rental equipment. And I want to point out that that does exclude the $56.5m of the operating lease buyouts. We’re likely to end the year with the total cap ex program slightly above our original $350m plan. We’ll probably end closer to $360m.

Looking at the balance sheet, we had total assets at the end of the quarter of $4.9b. And that included cash of $76.3m. As of September 30, our rental fleet totaled $3.6b of OCE. And it had an average age of 38 months. We’re still targeting about 42 months by year end. But we’re likely to end up just a little bit below that level when we get to December 31. So we’ll end up a little younger than we thought.

Our fleet includes $510m or rental fleet on long-term leases. And our expense for rental equipment on long-term leases for the quarter was $23.1m. At September 30 we had $433.2m available on our revolver. And that’s after letters of credit, which totaled $164.2m. And, in addition, we had $52.6m drawn on our Canadian revolver.

In addition to the availability under our revolver, we had nothing drawn on our accounts receivable facility at the end of the quarter, which has a maximum size of $250m. Looking at our remaining debt balances on our balance sheet, we had $639m of senior secured term debt, $861m of senior unsecured debt, and $952.5m of subordinated debt, so that in total as of September 30, our debt was $2.56b, which is down slightly from June 30.

Turning to our outlook for the balance of 2003, we think construction activity for the balance of the year will basically remain stable at current levels, obviously adjusting for the normal seasonality. Excluding the impact of charges relating to any good will impairment, the restricted stock vesting, or any other refinancing charges or other charges, we still anticipate EPS for 2003 should be in the range of $0.70 to $0.80 per diluted share. And our EBITDA should come in at between $740m and $750m.

Now when you factor in the restricted stock charge that we incurred in the third quarter of 2003, the earnings would be $0.60 to $0.70 per diluted share for the full year. And EBITDA would be $730m to $740m.

We’re projecting our cash flow from operations, plus the proceeds from the sale of rental equipment, to be in the range of $620m and $630m for the full year 2003, so that after cap ex we anticipate seeing free cash flow for the year of about $260m, down a little bit from our original expectations, because we’ll probably spend about $10m more in cap ex.

Now this outlook is before charges. And we do anticipate a good will charge in the fourth quarter. We have done some preliminary estimates on that. And we expect that number could be about $300m, based on the results for these last 12 months.

One thing I do want to point out, some of you may be familiar with this, but FIN 46 has been delayed. Originally it was scheduled for implementation on July 1 of this year. It has been delayed, and will not be implemented until the fourth quarter. We modified the structure of our synthetic leases during the third quarter. And FIN 46, as it’s currently drafted, would not apply to our leases at this point. So we do not expect to have a charge when FIN 46 is implemented.

Now, looking forward to 2004, first of all I want to say we’re only at the beginning of our annual planning process. So these are very preliminary views of our outlook. But overall, we don’t see yet that nonresidential construction is going to significantly improve over the next few quarters. Nonetheless, in this environment, we can still achieve growth, both top line and bottom line. We think we can accomplish a price improvement next year of at least 1-2%.

We’ll continue to see strong growth in our merchandise, our contractor supply sales, which should be up $30-50m. We believe we can continue to squeeze slight improvement in our time utilization, just better operational efficiency. And we should see pocketed growth in certain areas around North America, where the unique economic and construction activity is going to allow us to invest in growth capital. That should drive our top line volume growth by 1-3% next year.

So overall, this would give us a 3-7% revenue growth in 2004, without a recovery in non-residential construction. Now although we’re going to see normal inflationary pressure on our operating costs, that’s only going to partially offset our top line growth in 2004, which should lead to increased profitability as we look at the 2004 outlook.

So on that note, I think we’re ready for q-and-a. I am going to ask the Operator to please give everyone instructions on how to ask questions. Operator? Operator, are you there?

Yes sir.

Can you give instructions on how to ask questions please?

Yes sir. (Caller instructions.) The first question is from Sarah Thompson with Lehman Brothers.

Hi. Good morning. I may have misheard this. So if you could just repeat it, did you say that volume was up in the quarter?

Volume was up on a same store basis Sarah. But when you factor in the closures, volume was actually down slightly. It would be less than 1% down.

Okay. That makes more sense. Okay. Thank you. And then just one other question. On the repurchase of the operating leases, what does that save you in rent expense in the fourth quarter? Or actually you can give me for a full year – either one.

Let me just estimate that number for you. It’s going to be a savings of about $3m a quarter -- $2-3m a quarter.

Okay. And do you guys expect to repurchase more operating leases in the fourth quarter?

We definitely are always looking for that opportunity. I mean it’s an attractive way, from both a leverage and earnings point of view, to improve our performance. As you well know, we have a large amount of synthetic leases, as well as some smaller operating leases out there. So it’s one of the things we’re targeting to evaluate. Each of them has to be separately negotiated. So it’s hard to predict ahead of time.

Okay. But we could expect potentially some of the free cash flow to continue to go to stuff like that, as opposed to straight debt reduction?

Yeah. That’s more likely than straight debt reduction, because it’s a little bit more favorable improvement, because typically the maturities on most of those leases are anywhere from 2005 to 2007. So it’s much earlier maturities. And it tends to be higher cost as well.

Great. I’ll get back in queue. Thank you.

Thanks Sarah.

We’ll take our next question from [Mark Reader] with Goldman Sachs.

Yeah, hi. The free cash flow target of 270-280, in order to achieve that, you’ll have to generate, I guess, a significant amount of working capital in the fourth quarter. What are you expecting for a decline in working capital?

For the fourth quarter, let me pull out my numbers. For the fourth quarter we’re looking for free cash flow to be approximately $160m in total -- $150-160m in total. The working capital component of that – one moment – working capital would be a source of about $20m in the fourth quarter.

Okay. If I take what you have generated so far this year, and I add that to the $150, that gets me to the $270?

Yeah. You’d have to add – well the $160 factors that in.

Okay. Perfect. And just the second question, the subordinated bonds are trading in at call prices. And I was just wondering if maybe you could elaborate your thoughts on any potential refinancing of those bonds.

Well we’re always looking at possible refinancing. So you can imagine we get any number of calls from our banker friends. We’re not there yet in terms of seeing proposals we want to do. We’ll keep monitoring the situation. The high yield market certainly is attractive. But we’ll keep monitoring the situation. And if a deal makes sense, we will look at refinancing some of those series of callable bonds.

Okay. And just two small numbers – housekeeping questions. What was the amount of preferred dividends that was included in interest expense? And then just the availability on the AR facility at the end of September?

The AR facility has a maximum size of 250. But of course it’s dependent on qualified balances of accounts receivable. And generally those run around 220 to 230 at any point in time. So, technically, our full availability in the third quarter would have been closer to 220 to 230. The interest component on the quips in the third quarter was $3,600,000.

Thank you.

You’re welcome.

We’ll take our next question from Alex Blanton with Ingalls & Snyder.

Good morning. My questions are on the rental cap ex, gross cap ex before used equipment sales. You said it was 320.6 for the nine months. And what’s expected for the fourth quarter and for next year?

For the fourth quarter our total cap ex will be somewhere between $10-15m. For next year, the – again, we haven’t done a detailed plan. We haven’t completed our detailed plan. We’ve just started that cycle. But I would expect us to increase our replacement cap ex from the level we had this year. I think that you could see a level of somewhere between $425m to $450m of gross replacement cap ex, against which you would see roughly $225m of sales of used equipment.

The $425m to $450m is just equipment rental cap ex?

Yes. That would be the replacement cap ex, so up from a little bit over 320 this year.

And the age of the equipment at the end of the year is going to be what average age?

Based on where we are at September 30, I think it’s going to be closer to 40-41 months. We originally targeted 42. But I think we’ll come in a little younger.

So you said in the past that to maintain it at the same age in ’04, you would have to spend $500m. So if you’re going to spend $425m to $450m, it looks like you’re planning to age it a little more. What’s your target for the age at the end of ’04?

We’ve built a preliminary plan that suggests we might age it one to two months in ’04. Now a lot of that will depend on how much growth capital we also bring in. As I mentioned, I expect somewhere between 1-3% volume growth as pocketed areas of the country can demand additional growth capital. If we put in the high level of 3%, you would actually see our age probably settle out and not – it might even go down a bit on a year over year basis.

Okay. Two more things. One, how much of the spending now is in aerial versus last year? And if nonresidential construction were to pick up – you’re assuming it’s not going to do very much. But if it picks up substantially, would you then see a higher level of spending for equipment?

I’ll mention the aerial side. And then I’ll have Wayland comment on the growth. The aerial side of our business, we haven’t significantly increased the mix. Typically – I’ll give you a number there. Typically our cap ex for aerial – it ran around 28-29% of our total cap ex spend this year. And that’s up from about 26-27% in prior years.

Okay.

And Wayland?

If we’re in a more favorable environment, construction environment, we would expect to benefit in a couple of ways. One would be probably more favorable pricing. We’re currently outlooking with the environment being the same – 1-2% price increase or rate increase. I think we would assume, again depending on how much of an uplift you get in construction, that that could go up maybe as much as 2-4%. That would postulate a fairly strong environment, which we’re not planning on.

Then the other point is the point that John made. We’ve ranged volume growth between 1-3%. We might pick up another one or two points from volume, if in fact it was much stronger.

But what would you do to cap ex if that happened? I mean would you go another 100 million? Or would you start expanding the fleet and spend even more? Or what?

The easy way to always look at our business is we have $3.7b of fleet. So every 1% of growth requires another roughly $36m of cap ex.

Right.

So, to the extent we increased our growth to a level of say 5%, you would see us increase our cap ex by about $180m.

Got you. And if you –

You also have to look at that and say when does the growth start occurring, because we factor our capital based on the seasonality. To the extent that the growth began occurring later in the year in the third quarter or the fourth quarter, we would not likely take advantage of that opportunity, because we don’t like to put capital out late in the year.

It would be the next year.

Yeah. It would be the next year.

And finally, would you age the fleet some more if the environment got better? Or would you keep it the same at 40 to 41?

The way to really look at our business is the replacement cap ex, excluding growth, we always want that fleet to be hovering in the low 40s – 40 to 45 months old. And then as you layer in the growth cap ex, that will drive down your age. So you can imagine if your growth cap ex came in, and you increased your fleet by 10%, even keeping at a 42 month level, you would automatically knock out about two or three months of age.

Got you. Thank you.

We’ll take our next question from Joel Tiss with Lehman Brothers.

How you doing guys?

Hi Joel. Good morning.

I have two questions. One, Wayland, if you could give us some of the moving pieces within construction. And the second one is it seems like we’re seeing a little more strength on the OEM side versus the after-market. And I wonder if you could just help us understand what some of the dynamics are in there.

When you say moving pieces Joel, could you elaborate a little bit on that?

Yeah, just residential versus commercial construction versus hotels, and all the pieces in construction.

Right. Nonresidential construction continues to get less bad, if I could use that expression. In the month of August, I think the nonresidential construction was down like 2-1/2%. So we’re seeing a lower level, but each month it seems to have been down just a little bit more than the month before.

If you go back – just to refresh your memory – during the first quarter we were down 11%, or nonresidential construction was down 11%. In the second quarter that dropped down to 6.5%. And through August it was only down 2.8%. So as John said earlier, we think we’re bubbling along pretty close to the bottom.

Okay.

Your second question was something to do with the OEMs?

Yeah. We’re seeing a little bit of strength on the OEM side, up 3-5% or so. And you’re not really feeling it on the rental side. Can you just explain the dynamics that might be going on there?

We’ve looked at that, and kind of wrestled with that ourselves. It’s difficult to say. I think the only logic that we can apply is that a number of the OEMs have markets that are much broader than just the nonresidential construction market, and including agriculture, public housing construction, and other areas. So I think that’s the only understanding that we can help to share with you.

Okay. Thank you.

We’ll take our next question from Manish Somaiya with JP Morgan.

Good morning. Most of my questions have been answered. But I did have one question, which pertains to pricing. Pricing is a significant –

You’re cutting out there one sec please. Can you repeat that?

How’s this?

Much better. Thank you.

Okay. You bet. I just had one question. And that pertains to pricing. We saw rental rates go up about 3.4% year over year in 3Q. I’m just trying to figure out were there any sort of specific regions where you saw more increases vis a vis other regions?

We actually saw pricing coming up in a number of our regions. In fact, I think I’d say it the other way around. There were only two regions of the country that we had, or two regions that were actually down. And they were only down slightly. So we’re seeing pricing coming up pretty much across the board.

Okay great. Thank you so much.

Thanks Manish.

We’ll take our next question from Barry Bannister with Legg Mason.

Hello gentlemen. How are you?

Good. Hi Barry.

I noticed that same store sales minus pricing, which is unit sales, is down year over year, and has sort of dipped in the last couple of quarters, peaking in 1Q of this year, and then on a year over year basis it looks like the unit sales have been down. Are you giving up units on account of raising prices? Is that part of what’s going on there?

No Barry. I don’t think that’s the case. There’s really two components to the units sales being down. One of the large drivers of that is the traffic rental business. And, as you’ve seen in pretty much every – well, in every corridor, we’ve seen our traffic rental revenue down. Although certainly it was down a lot less this quarter. It was only down 2-1/2%. But it was still a negative trend. So when you look at our overall unit sales on that rental revenue line, that is one of the contributors.

The other part is when we entered 2003 we did say that our rental stores, excluding our traffic rental stores, would be experiencing a slight decline in their rental revenue overall due to the closures that took place in the fourth quarter. We knew we’d lose a little of that walk-in and local traffic that inevitably won’t transfer to the new store that you move the fleet to.

But we did see a slight – for example in this quarter, we did see a slight unit decline in our non-traffic stores. But overall the benefit of moving that fleet to more profitable locations was quite significant. If you actually look at those regions who are getting price increase, you don’t see any unit volume give-up in those stores that have positive pricing trends.

Okay. And then if I look at the purchases of PP&E excluding rental, what was the figure you gave for this year? And why is it down so much in the last three years?

Well the number that I think it will come out to the full year is likely around $20m, $27m, $28m. This year to date we’re at $26.5m. We’ll probably put somewhere between $1-2m more to our PP&E in the fourth quarter. And the reason why it’s down so much is when you look at all those acquisitions, unfortunately when you buy good companies, you don’t always buy good delivery fleets.

And a lot of times the fleet in those businesses was quite old, and needed to be upgraded significantly. And also, just with expansion of the business. I mean certainly many of those companies we bought, we significantly expanded and grew the business, particularly in the more robust period, back in 2000 and 2001.

So the replacement cycle there had to do a lot with upgrading facilities, upgrading pick-up trucks, upgrading delivery vehicles. And now we’re on a more normalized replacement cycle as we flow through this year and into next year.

That’s just a really big drop, from 7-8% of sales in 98, 99, 2000, to only 1% of sales this year. I mean you have a lot of trucks. Are you just making more use of operating leases? Or are they just getting pretty old?

No. I think we replaced a lot in the early days. I would say that this year we probably cut it down below the normalized level. I mean to end up below $30m this year is a little light. I think on a normalized cycle you’d see that closer to a $50-60m level.

Barry, our guidance has been controlling capital very tightly. And that was part of the strategy that we had when we entered the year. We were worried about the overall economic environment. And we asked people to really tighten up on capital. As you know, we didn’t put any growth capital in it, or didn’t plan for any growth capital. And I think your point is right. We’re probably a little tighter there than we – well certainly tighter than we have been in the past. And I would expect that to come back a little bit as we move into 2004.

I apologize. One last question. What was the amount of replacement cap ex you’re going to need in ’04 to keep the fleet age flat? I think I missed that.

If we wanted to keep it absolutely flat, it would be approximately 475 to 500 of gross cap ex. We’ll probably age it out a bit though Barry.

Okay. Thanks guys.

We’ll take our next question from David Bleustein with UBS.

Hi. Good morning.

Good morning David.

Let me just ask the first one. How many individuals benefit from that $11.7m of vesting?

That was two people – Brad and myself.

Okay. Two, you gave us the year over year change in pricing. What was the sequential change?

It was up about .6% on a quarter to quarter basis.

Okay. And in your 2004 outlook, did you say volumes up one to three and total revenues up three to seven?

Yeah. Volumes up one to three on the rental line.

Okay. And does that get you to the $1.10 per share, albeit in the preliminary plan?

I haven’t pushed it through all the way David. I am really not prepared to give an EPS outlook for ’04 quite yet.

Okay fine. And then finally, Brad if you’re there, how does the strategy and outlook for United Rentals change as you move on to your next endeavor? How should we view the company?

Oh I guess detractors would say it improved. I don’t think that United Rentals changes a whole lot with me passing the mantle over to Wayland. Wayland, John, and now [Mike Whelan] will come up through the ranks, will run the business in the exact same strategy we’ve had along – take advantage of our economies of scale, to run the business very professionally, very tightly, to take hold of rental rates, and train our salespeople to get the best possible rental rate for the quality of equipment and service that we provide.

So I don’t think you’re going to see any radical changes. There will always be little style changes here and there. And I’m sure those will all be for the positive.

Wayland, maybe I’ll ask the question of you a different way. I mean how do you believe you would run the company differently? Do you have the same appetite for making acquisitions that Brad has evidenced?

Well the company is a different company today than it was when we first started it. We clearly grew the company through acquisitions very rapidly in the early years. But if you look back over the last couple of years, we have not been particularly acquisitive. That being said, I think we constantly scour the market, scan the market, look at what’s available.

We would have no hesitation to do acquisitions if the property out there was right, and it made sense, and we could buy it for the right price. Our stock is trading at a point right now where we would be very reluctant to use equity to raise capital to buy companies. But that hopefully will change as we go through time as well. So I would be very interested in buying companies, if they’re the right companies, at the right price. And I think that’s the key part.

I’d like to just re-echo the point that Brad made too about the strategy. We feel comfortable with what we’ve been doing. We’ve kind of guided the company through a pretty tough market, and held together very well. We believe that as the market rebounds, we’ll benefit substantially from that, because of our high fixed and semi-fixed cost base.

So I don’t see a need for a change in the strategy. I think Brad said it well. I think if anything it’s a little bit more change in style than it is a change in strategy.

Great. Terrific. Thanks.

Thanks David.

We’ll take our next question from Christina Boni with Credit Suisse First Boston.

Yes. Good morning everyone. My first question is just follow-up to pricing. Could you give us a sense of how much of pricing you think is driven by oversupply kind of working itself through the system? And maybe you can comment a little bit on – as we see some companies reorganizing, such as The Nation Rents – what kind of impact that’s having on the overall market per se.

I think it’s not so much oversupply or change, although some of that is taking place in the industry. I think a number of our competitors have reduced the amount of equipment that they have. Our sense is that what we’re seeing is a direct result of what we’re doing ourselves.

We have been working with our field organization now for literally a year, and have put a lot of attention on pricing practices from one part of the country to another, from one district to another. And sharing those ideas, cross-pollinating those ideas across the company, we will continue to do that. But to answer your question very directly, I think it’s our own actions that are changing rates in a favorable way, rather than either the environment, or what’s happening with our competition.

Great. And just one housekeeping item. Your EBITDA guidance for this year – does that include or exclude the non-cash $11.7m charge for the quarter?

Right. I actually gave it both ways. So let me give it – 740 to 750 excludes it; 730 to 740 would include it.

Very good. Thanks for clarifying.

No problem. Thank you.

We’ll go next to Cliff Ransom with Ransom Research.

Good morning gents. What is going to have to pertain to have the traffic segment come back?

I think the principal thing that you would see would be a stronger economic environment. What we’re seeing today and have been seeing actually now for the last couple of years is state governments cutting back on the amount of revenue that they’re taking in, and therefore spending less. And I think a reversal of that, if we had a stronger economy, tax revenues in the space were up, you would see a return to higher levels of spending.

Virtually every state is wrestling with the issue of how they maintain and improve a seriously outdated infrastructure. A number of states, as you probably know, have put either taxes in or toll roads that are privately funded, to try to address this issue. Ohio just recently passed a $0.06 per gallon gas tax that was added on to what was already in place, just for the purpose of trying to improve the road structures, so they could invest more in that.

So long answer. But I think a return to a stronger economy will be the one thing that will trigger better performance. Now meanwhile, we’re working as we have done on all other aspects of the business to try to improve the efficiency of how we conduct that business. I think even as we go forward into 2004 without a substantial improvement in the revenue, we should be able to hold our own, or maybe even slightly improve the profitability of the business.

Okay. Bear with me a half second. Let me find the second question. When you look at your capital spending plans as a general rule, and I give you a lot of leeway there as to general rule, it’s still better to buy new equipment than to try to acquire assets from acquisitions of other fleets?

Yeah, definitely. I mean to buy fleets wholesale that are being liquidated, assuming this is your question, to buy fleets wholesale that are being liquidated, you’re often inheriting a lot of troubles, because typically the people that are doing that liquidation mode have not been adequately maintaining the fleet as they’ve gone into liquidity crisis. So the legacy issues that you acquire on picking up a liquidated fleet have a lot of complexity to it.

When you mentioned – thank you for that answer. When you mention that in the U.S. there are pockets of volume growth, can you talk about what sectors, geographic regions, equipment types that might be?

Sure. I think the equipment answer would be pretty much the same mix of equipment that we have across the board, maybe slightly favorable to aerial. We’ve increased the percentage of that fleet a little bit more, not much, but a little bit more than we have other parts of the business.

With regards to geographical areas, we’re still seeing very strong performance in the Southeastern part of the United States. The Gulf is running very strong. And we would expect to put some capital into both of those areas. And then you have some isolated areas, like the Fort McMurray area in East or Western Canada, where the oil sands fields are being developed. So we will end up putting capital into selective areas like that, but do have local areas, significant opportunities for growth.

Okay. I’ll thank you very much. That’s very helpful.

Thank you Cliff.

We’ll take our next question from Michael Kender with Salomon, Smith, Barney.

Yes. Most of my questions have been answered. I just had a couple of numbers I missed earlier in the call. What was your [inaudible] of over-ability?

434.

Okay. And the other one was –

433.2.

Okay. And what was the dollar amount of leases you repurchased during the quarter?

We purchasedTwo pieces. 56.5 was the total.

Okay great. Thank you.

We’ll take our next question from Brad Coltman with Deutsche Bank.

Yeah. Thank you. A couple of questions. Could you may describe, what was the trend in the rental rates? I know the second quarter you said that in July was running around 2-1/2%. Obviously it continued to trend up with your overall average. But can you break it down by month?

I don’t have that broken down by month. But I would say that the trend did continue to climb as we went through the quarter. And I might add that when you look at the month of October, that we’re continuing to benefit from an improvement in rental rates.

And would that also carry forward into the fourth quarter then?

We expect we will see something in the fourth quarter that looks similar to the improvement that we saw in the third quarter, maybe just a little bit more.

Okay thanks. And maybe if it’s not too early, with the expected good will impairment charge, could you maybe describe how many branches that covers, and whether you might be planning to do additional store closings?

We don’t have any major restructuring plans in place, no anticipated large numbers of closures. We’re always culling through our branches and identifying the under performers. And in any year you are always closing 6-12 branches. But there’s no large program anticipated.

And in terms of the number of branches it covers, I don’t have a number in front of me. It’s fairly broad-based though, when you can see that the EBITDA for the LTM is going to be down roughly 45 million. You can see that it will be fairly broad-based. Although with the heavy – a disproportionate amount is likely to come out of highway.

Okay. Yeah. And one quick other question. With the impact from last year’s restructuring, the loss of revenue, what would be expected for the fourth quarter?

You’ll see about the same negative effect. You probably see highway will be down a similar amount in the fourth quarter as we saw this quarter. And then you’ll probably see less than 1% volume decline on the balance of the business.

Okay great. Thank you.

We’ll take our next question from John McGinty with Credit Suisse First Boston.

Hello. Good morning – still, but not by much. I just want to follow up on a couple of things. One, the volume that – let’s take same store volume, ex the traffic, up 1.3%. That’s what we’re talking about. Geographically, how varied was that? I mean I assume that, because you talked a couple of the areas, the Southeast, Gulf, and so on, where you see some strength in the Northeast. But how varied – what variation did you see in that geographically?

We saw the Southeastern part of the United States, as I mentioned earlier, coming up more pronounced than the rest of the country. High results though, we had volume increases that were exceeding the average for the rest of the business. On the other side of the coin, if you were to go off the Western part of the United States, our Northwestern Region actually was down in volume.

We expect that will continue as we move into – ironically they were up in price, but down in volume, which goes back to the point I made earlier. I think we’re doing a good job internally of managing price. But that market has been, particularly in and around the San Francisco Bay area, has been languishing for some time.

Doesn’t that mean – does that include – when you say Northwest, that also includes the Washington, Oregon – I mean that’s in that whole of wax? Because that’s been just a flat market.

We basically, in our case, we have it in a separate region. But, that being said, your point is right. If you go up into the Portland, Oregon area, or go further up, that has been an area where volume has been softening.

And then if I can follow up, if we look at price, rates up 3.4%, you said geographically it wasn’t tremendously – it didn’t vary tremendously geographically. Were we to look at equipment type, would we find a difference? In other words, area work platforms, high rates, some of those kinds of things, much higher increases versus some of the other? Or was it if you went kind of across – if you would – across the product line, would you find that that was close to an average price increase?

Not a major driver, when you look at – when you dissect it, and break it by category and class of equipment.

Okay. I mean again this is the wonderful thing about this industry, is that there is no data out there. But just from anecdotal evidence, the kinds of price increases you’re getting are higher than the price increases that I’m seeing in some of the other places. And my question is how can you be comfortable that you’re not giving up – and it may be an absolutely perfect strategy to get higher prices and give up a little market share or a little volume.

But I mean to what extent – how comfortable are you that in fact you are maintaining your relative presence in the market, as opposed to giving up some of it? There’s nothing wrong with that. But I mean – but you seem to be very comfortable that you were doing both. And I’m just wondering how you can be that comfortable.

We are comfortable. That being said, you’re right. The market measurements are imperfect. But a couple of points. One, we’ve increased our customer base by almost 100,000 this year, which says we’re continuing to take customers away from other people in the industry. Our sense is that the number of customers in the industry in total, particularly going through the type of economic environment that we have, has not grown. So that would be something that would suggest that we’re taking share away from others.

Our time utilization, as John pointed out earlier, is up as well. That also would suggest that we’re probably not losing share. And we have added some fleet during that period of time too. So we’re reasonably comfortable that going after rates is not hurting us from a market share standpoint, and obviously benefiting us a lot on the bottom line.

Okay. Well then final question, and it kind of gets to the same issue of market size and so on, again, we deal in anecdotal. But logic says if we have too much supply, supply should shrink. And prices should go up if supply shrinks. But, on the other hand, you have some of the big guys that have gone bankrupt, that they seem to come out of bankruptcy.

But the other thing is you have crazy people, like Volvo, running around putting 30, 40, 50 people in business that weren’t in business before. You have some of the other major equipment manufacturers that have not been in the rental business traditionally starting to get in it. And what’s your sense on kind of the overall growth of the industry?

In other words, from an outsider looking in, just looking at anecdotal points, oddly enough it looks like there are more people going into the business than getting out. But, on the other hand, that kind of flies in the face of what rates are doing. So are we just looking at – are we missing at like a lot of small private guys going out of business? Or what’s going on in kind of the macro supply/demand issue?

I think the fundamental thing John – and demand, forget about supply. That’s plus, minus a little bit here and there. But demand is a big swing factor. The central fundamental thesis that’s been driving the industry for two decades is there still is a heck of a lot of equipment out there that’s owned by people, but used only a few months, a few weeks, in many cases a few days out of the year.

That’s going to change, little by little. More and more equipment that’s owned is going to be rented. I think there is room for everybody. Different people will prosper or suffer, depending on how they manage their fleet, and how well they train their salespeople to price their products.

Okay. Thanks very much.

We’ll take our next question from Devin Fitzgerald with Deutsche Bank.

Yes. Thanks so much. Just in terms of used equipment margins, it looks like they were up a couple hundred basis points year over year. Do you guys suspect that it was a – in terms of mix – was that the reason? Or was it more we’re turning the corner in terms of used equipment pricing?

It’s a combination of both. We definitely have seen our used equipment prices up in the quarter on a year over year basis. But it’s up less than 1%. So that did not account for all of the improvement. The balance of the improvement is if you look at the fleet mix of what we sold in the quarter, it was a lot of the smaller, more compact equipment – the skid steers, mini-ex’s, items that we typically get a better margin on when we sell them used anyways.

Would you suspect that in 2004 that we would see kind of a similar used equipment margin that we’re seeing in 2003 in terms of the low 30s?

It’s hard to predict prices. I mean certainly we saw deterioration in prices of about over 10% over the last two years. So it’s hard to predict where prices would go. But I would, if you looked at the year to date numbers, where we’re averaging margins somewhere around 34%, I don’t think you see any significant change. Maybe in the 33-35% range, depending on which quarter you’re looking at.

Mmm-hmm. And then Wayland, I know it’s very difficult to kind of project out to 2004 as it relates to the traffic business from a top line perspective. And I know that the T21 extension is going to be expiring in February. But would you expect, to the extent that the government were to allow the states to defer matched funding obligations, you could see some pick up in traffic spending? Or, as you guys said, is it going to be more attributable to the overall economy?

My sense is that you probably will not see a pick-up in state spending next year. And even though T21 funding may be up, what you typically see happen is the states will work hard to match the Federal spending that’s made available to them. But they will cut back in other areas. I believe the last number I saw said that like 45% of all of the roads and highways that are maintained are built by states, are not Federally financed. So they have quite a bit of room to maneuver in that regard.

I would go back to what I said earlier, and would say that the thing that will cause higher spending levels in the states will be an improvement of the overall economic environment, where consumers are spending more money. People are earning more money, and paying more taxes.

Okay. And then John, finally, as it relates to your covenants, can you just go over with me what the interest coverage covenant was, based on the credit agreement calculation?

Sure. No problem. The – as it’s called, the fixed charge coverage, or interest coverage, which his EBITAR, the interest plus rentals, we finished the quarter at 1.39 times. And that has a minimum required level of 1.25. So we still have significant room available under that covenant.

Okay great. Those are all my questions. Thanks guys.

Thanks for your time.

We’ll take our next question from David Raso with Smith Barney.

Hi. Good afternoon. I have two questions. One, simple math on the ’04 top line guidance. If we use your used equipment sales number, as well as the merchandise increase, it implies the equipment rental revenue is up only about 2%. And I know traffic is in there as well. Just trying to understand, if you’re looking for a 1-2% rental rate price increase, is it implying flat volume? Or is it just – it’s not adding up?

Sorry David. I don’t know how you got to the math. I’d have to go through it off line. But certainly in equipment rentals, our anticipation is that highway would be generally flat or maybe down very slightly, but not have a significant impact on the overall business. Our unit growth would be 1-3%, based on investment growth capital. And then our pricing growth would be 1-2%. So, using those factors, I would say that the equipment rental line should be up anywhere from 2-4%, depending on the amount of growth capital we invest in the business.

Okay. The math simply is 225 of equipment sales rental, sales and new equipment merchandise this year is roughly 500 million. So you plug in 540.

Right.

And basically to get 5% total company growth, the mid point of what you gave, implies only about 2% on the equipment rental.

Fair enough. I think we may have understated it a little bit, because we didn’t fully factor in the used sales.

Okay. But again – so – well, that’s helpful.

No. You’re right. I didn’t fully factor in enough of used sales when I was looking at the 3-7% overall growth.

Yeah. Just – it should be stronger. Then lastly, the good will write down, that 300 million, that’s pre-tax, correct?

Yes.

Just trying to understand – the way I understand that the good will accounting changed. You reevaluate it every six months or annually. What’s changed that, I know the initial accounting rule changed, the charges took early ’02. You looked at it again at the end of ’02, took another charge. What’s changed in the last nine months to take another hit, where we’re up almost a billion dollars, or really close to 900 million, which is 40% of where good will stood at the end of ’02. I’m sorry, at the end of ’01. I’m just trying to understand – when do we capture what the inherent cash flow, or however we’re looking at it, per store, to stop these significant charges?

Yeah. It’s a very good question. The problem you have is you have to evaluate your good will in real time. And we’re basically evaluating it on trough earnings here. So when you see our EBITDA for the year, 2003 is going to be off by at least $40m year over year, applying the valuation metrics that the accountings apply to determine how much good will those stores are able to carry, versus what they may have originally carried from the acquisition date.

When you evaluate them in a trough earnings period, it certainly takes a good hit. So to answer your question directly, what changed over the last 12 months, essentially the EBITDA declining by over $40m is the biggest – is the impact.

I’m just trying to think that through logically. In the last three quarters you’ve had same store revenue growth up one-six, one-eight, four-seven. Pricing has turned positive again. I know the comps are easy. But again, we’re talking in the last nine months, twelve months. If anything, on the margin, the prospects, the top line looked better. It sounds like it’s a structural cost reevaluation, or something inherent to the business that’s changing. Then the question should be why aren’t you closing more stores.

It’s totally a look back analysis. So if the business improves in the future, you don’t take the benefit of that in evaluating what the good will should be carried today. So when we do a look back of LTM as of October 1 in the fourth quarter of 2003, to the extent that we have individual stores amongst our 750 that contributed to that overall decline in profitability year over year, those stores are likely to require us to write down their good will, because the last time we evaluated them they were doing over $40m higher EBITDA on an LTM basis.

So it’s totally because you do a look back as opposed to a look forward. You’re not allowed to take full cycle earnings. You’re not allowed to look at the average earnings. You’re not allowed to look at it over the prospects over the next five years. It’s purely what did you do on the LTM. And if it’s down, then you take the write-off.

I guess we’ll have to discuss it off line, because I’ve gotten a different story about you’re trying to project out your cash flows and you don’t discount them now the way you used to, and kind of reevaluate it that way. It’s not look back, because every time a cyclical company goes into a down turn, they should be writing off good will left and right.

The way we’ve applied it, and the way we’ve been advised to apply it when we initially adopted it, it’s a look back scenario, where you do an LTM as of October 1.

I appreciate it. Thank you.

Thanks David.

We’ll take our next question from Jim Ragan with Crowell Weedon.

Yes. Thank you. Could you just discuss quickly the national account program, the number of accounts that you have, and the revenue from the program during the third quarter? And then also, is there anything – any of the so-called big gun projects that have been coming into the fold over the last few months that you can talk about?

Let me just talk probably about the national account program. We have about 1,750 customers in the national account program. The business, if you go back to last year, the business was up – last year we did $422m worth of revenue. This year we expect that will be up to about $475m, $470m to $475m. So we’re continuing to get nice growth in that part of our business, and expect that we will grow that further as we go through time.

With regard to the big gun program, we have some, I think 38 different big gun locations underway. A lot of those are automobile plants, like the Hyundai plant right outside of Bessemer, Alabama, as well as the Honda plant that’s located in the same area. The Oshawa Plant, General Motors paint plant in Ontario – that type of project. And that continues to be an area that we like a lot. We follow our customers around. We provide them the same consistent equipment and service from one location to another, and become a very important part of their support system.

Operator, I notice that we’ve gone by the one hour time frame. So I don’t want to keep people too much longer. Why don’t we cut it off here? Wayland and myself and Fred and Brad will be around in Greenwich all day. So if anyone didn’t get their questions answered, please don’t hesitate to give us a call. And I’d like to thank everyone for participating in the call. We appreciate your interest in United Rentals. And we look forward to talking to you again in 90 days. Thanks everyone.

Thank you sir. That concludes today’s United Rentals Investor Conference Call. Thank you and good day.