聯合設備租賃 (URI) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals' Fourth 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 statements.

Factors that could cause actual results to differ from those projected include, but are not limited to, the following: 1) unfavorable economic and industry conditions can reduce demand and prices for the Company's products and services; 2) governmental funding for highway and other construction projects may not reach expected levels; 3) the Company may not have access to capital that it may require; 4) any companies that United Rentals acquires could have undiscovered liabilities and may be difficult to integrate; and 5) 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 is Wayland Hicks, Vice Chairman and Chief Executive Officer; John Milne, President and Chief Financial Officer; Mike [Kneeland], Executive Vice President, Operations; and Chuck Wessendorf, Vice President, Investor Relations and Corporate Communications.

I would now like to turn the call over to Mr. Milne. Mr. Milne, you may begin.

Thank you, Operator, and good morning, everyone. Welcome to our fourth quarter and full-year 2003 earnings conference call.

I'm sure we don't need to hear any more disclosure language, but let me point out one thing about the call. I'm going to be referring to some non-GAAP terms, such as earnings excluding charges, EBITDA excluding charges, free cash flow, and diluted earnings per share excluding the positive impact of repurchases of our equipped securities. And just to point out to you, our press release lays out all the details of the excluded items, and that reconciles the non-GAAP operating results to our GAAP results. So take a moment to read the press release if you want to see more detail on those reconciliations.

So let's move on. We've got a lot of information to cover here today. Before I dive into the details, I want to touch on some of the highlights.

Let's start off with rental rates. Rental rates continue to improve. We were up 5.6 percent in the fourth quarter, which means for the full year, we were up 2.1 percent.

Our Contractor Supplies program, the merchandise program we launched a couple years ago, got off to a bit slower start than we expected at the beginning of this year, 2003 that is, but we're now seeing growth levels over 20 percent on a year-over-year basis, and we feel confident we can keep this pace up.

Moving on to our margins, we were adversely impacted by higher costs, weakness in our traffic control rentals, and [inaudible] rental volumes, but we were still able to make our full-year expectations for earnings. And as we look towards 2004, even though we don't expect the construction cycle is going to show a strong recovery yet, we're projecting significant increases in our earnings to a level of $1.00 to $1.10 per diluted share.

And lastly, looking beyond 2004, when we do see construction activity recover from these trough levels we're sitting at today, we're confident we'll see strong revenue growth, which will lead to substantial improvement in our earnings.

So with those highlights, let me turn to the details of the results.

For the fourth quarter, we had total revenues of $742m, and for the year we had $2,867m of revenues. We reported a net loss in the quarter of $306m, which is a loss per share of $3.97, and for the year we reported a net loss of $260m, or $3.36 per share. Now, it's important to point out that those losses were generated by a total of $332m of charges net of taxes that we incurred in 2003, of which $320m were in the fourth quarter.

So without the excluded items in the fourth quarter, we had 77.6m of operating income and 14.2m of net income, or 15 cents per diluted share, on a diluted share count of 98.1m shares.

And when you look at the full year with the excluded items out, we had 338m of operating income, 71m of net income, or 75 cents per diluted share, on a share count of 96.1m shares. And as I said, that's right in line with our forecast of between 70 to 80 cents of earnings.

Take a moment to just recap the charges we saw in the fourth quarter. All of these charges we've talked about leading into the fourth quarter, but it's worthwhile reviewing the final numbers. And I'm going to review the numbers all on a net-of-taxes basis.

Our non-cash goodwill write-off totaled $239m in the quarter. We had a charge of $57m in the quarter from the buyout of equipment leases that we did as part of our fourth quarter financing. We wrote off $17m in costs related to the redemption of the subordinated notes we completed in the fourth quarter.

And, lastly, we wrote off two notes receivable that we had with third parties that were generated when we sold businesses to them a few years ago, and that resulted in a $6.6m charge.

So that, in aggregate, represents the fourth quarter charge numbers.

So moving on to the operating results, looking at the core operating results without the excluded items, in the fourth quarter, total revenues increased 6.9 percent over 2002, and that increase was generated by a 3-percent increase in our rental revenues, higher sales of rental equipment, which were up about 40 percent in the quarter -- but it's important to point out that they were only up slightly for the full year -- and higher sales of equipment, new equipment, merchandise, contractor supplies, and other. That was up 13.1 percent, and that was generated by two main components in the quarter -- higher sales of new equipment, which were up 10.7 percent, and higher sales of merchandise and contractor supplies, which were up 24.2 percent in the fourth quarter.

Breaking out the components of our growth in the rental revenue line in the fourth quarter, we had same-store rental revenue growth of 6.1 percent, and that was primarily driven by an increase in our rental rates of 5.6 percent. We also had a very slight increase in our volumes on a same-store basis.

Now, I just want to pause and point out that that 5.6-percent rental rate improvement is the highest year-over-year improvement we've seen in our history. When you adjust for the impact of the lower fleet, which was down about 3 percent in the fourth quarter, that eliminated and took down our overall rental revenues to the lower level that I mentioned earlier.

Looking at dollar utilization, in the fourth quarter, it was 58.3 percent compared to 55.7 percent in 2002. The increases that drive that dollar utilization were the rental rate improvement and the improvement we saw in our time utilization, which was up 1 percent.

Now, we had some offsetting negatives. Our traffic control rentals were down, and we had a slight mix shift in our rental fleet to a little bit more aerial. We had about 1 percent more aerial fleet, which has a slight negative impact on our overall dollar utilization.

Turning to our profitability, our gross margins in the fourth quarter were 28.6 percent, and that's versus 30 percent in 2002. If you break that into the components, you had rental gross margins which were down 130 basis points year over year. We had rental rates improving our rental gross margins. That had an impact of about 300 basis points of positive improvement to our margins. But these increases were offset primarily by the cost pressures we saw. We also saw a slightly lower profitability in our traffic control rentals, which had a 75-basis-point on our overall rental gross margin, 75-negative-basis-point impact.

Let's take a moment and talk a little bit about the costs. We continue to experience in the fourth quarter the same sort of year-over-year cost pressures that we've been seeing all year in 2003.

The main components of that were higher costs to repairs and maintenance from the aging -- the planned aging of our fleet. That ended up being up a little over $10m for the full year, which was consistent with our plan, which resulted in it being up $4m in the fourth quarter.

Our fuel prices are still under pressure. We saw our delivery and fuel costs higher by $3m in the quarter, and that's driven by higher fuel prices in the market, which are up about 15 percent on average for the full year.

And, lastly, our insurance costs continue to track a bit higher. They were higher in the quarter by $4.5m, which for the full year means they were up about 9 percent year over year to a total of $14.5m increase.

If we keep moving down the income statement, our SG&A expense in the fourth quarter was down $6m, and as a percent of revenue, it decreased to 15.8 percent. This decline in SG&A was caused by a lower bad debt expense in the fourth quarter.

You may recall in the fourth quarter of 2002 our bad debt expense increased by approximately $10m as we started to see some -- our agings push out. The bad debt expense in the first three quarters of 2003, you may recall, has been tracking higher year over year, and the fourth quarter of 2003 is finally the quarter where we see positive year-over-year comparisons. So the result of all that is bad debt expense for the full year is flat.

So overall, our operating margins ended up $9m in the quarter at a level of 10.6 percent versus 9.9 percent [inaudible] 2002.

Turning to our interest expense, interest expense in the quarter was up on a year-over-year basis even though our average costs and our floating rate debt was down 25 basis points year over year. We saw an increase in our interest expense from the 10-3/4 notes that we issued in the fourth quarter of 2002 and the second quarter of 2003 that weren't outstanding for most of the fourth quarter 2002.

So in total, taking that all in aggregate, excluding charges, our diluted earnings per share were 15 cents in the quarter on a diluted share count of 98 million shares, and that compares to 9 cents in 2002 on a diluted share count of 93.7 million shares.

Let's move off the income statement and talk a little bit about cash flow in the quarter.

Our cash flow from operations in the quarter was $129m, and that number is prior to the operating lease buyout cost of $88m. In addition, we generated 60m of proceeds from the sale of rental equipment so that after a capex program in the fourth quarter, which was $10m for rental capex, we ended up with free cash flow in the quarter of $172m. Again, that's adjusted for the $88m we spent on the lease buyout.

What did we do with the cash? Well, along with the proceeds in the fourth quarter financing, we used the cash to buy out 347m of operating leases and to redeem 405m face amount of subordinated debt.

So let's move off the quarter and talk about the full year 2003.

In 2003, we had total revenues of $2,867m, which is up 1.6 percent from 2002, our rental revenue was $2,177m, up 1.1 percent, and same-store rental revenue was up 3.7 percent. The same-store rental revenue was driven by a 2.1 percent increase in our rental rates and a slight increase in our overall same-store rental volumes. Now, our same-store increase of 3.7 percent was partially offset by our lower traffic control rentals, which were down 6.3 percent, and also by our reduction in our overall rental fleet and, therefore, our overall rental volumes.

Moving to our equipment utilization, it ended up at 57.1 percent in 2003, compared to 57 percent in the prior year. And our time utilization for the full year was up about 1 percent year over year.

Moving on to our other revenue lines, our rental equipment sales for 2003 were up slightly by about 2.9 percent, and the margin on these sales were down about 100 basis points. But it's important to point out that that decline in margin doesn't reflect any trend in our declining trend in used equipment prices.

When you look at the full year, used equipment prices are flat year over year, and in fact, in the third and fourth quarter, we saw about a 1-percent improvement in our used equipment pricing.

Sales of new equipment in the full year were up 3.7 percent, and growth in this revenue line was driven by a 15-percent increase in our sales of merchandise and contractor supplies.

So in total, our gross margins were 29.6 percent versus 31.4 percent in the prior year, and that decline in our gross margin was almost entirely caused by the 210-basis-point lower rental gross margin.

Our SG&A in 2003 was $440m, up slightly from 2002, but as a percent of revenue, it was pretty much flat. It was about 15.3 percent versus 15.6 percent.

Moving on down, the income statement, non-rental depreciation and amortization is up $10m for the full year, and we talked about the increase in this line pretty much throughout 2003. It's really been driven by an improvement in our facilities and our non-rental fleet. As we look at the program we completed in 2003 to improve these facilities in non-rental fleet, I'd expect to see this expense to stay more or less at the levels we saw it in the fourth quarter run rate, and that's going to lead to an increase in 2004 of about another $5-6m.

Moving on to our cost of debt, our interest expense for the full year 2003 was $9.8m higher, and that increase ended up being a lot lower than we'd originally expected. The interest expense we carried that was higher on our 10-3/4 notes was offset by the lower rates we experienced on our floating rate debt and on our interest rate swaps.

So, again, taking that all in total and excluding the -- without the excluded items I mentioned, in 2003, our diluted earnings per share were 75 cents, and that's on a share count of 96.1m shares.

Let's again turn to the cash flow for the full year. For the full year, our EBITDA, excluding charges, was $743m. Again, that's in line with our expectations of between 740 and $750m, and when you add back the $88m charge from our operating lease buyout, we had 234m of free cash flow for the year, which is a little bit short of the target we set out for ourselves.

After our capex -- I should point out our capex was slightly higher than we'd planned. Our rental capex for the year was 336m, and our non-rental capex for the year was $42m.

Turning to the balance sheet, we had total assets at year-end of $4.7b, and that included $79.4m of cash. The original cost of our fleet, our rental fleet that is, was $3.5b, and that's down from $3.7b a year ago. We beat our age targets. We ended up with an average age of 40 months, and we originally thought we'd finish the year between 41 to 42 months.

We had total debt at year-end of $2.8b, and we significantly reduced the amount of fleet we had under long-term leases. At year-end, that balance stood at $170m, down $380m from a year ago.

As far as the expenses from our long-term leases, in 2003, our expense was $84m, and for the fourth quarter, it was $16.7m.

Now, rather than go through the debt balances as they were on 12/31/03, I think it's more useful to look at a pro forma for the financings we completed in the first quarter of 2004. So what we've done is included with the press release a schedule that pro formas the impact of those '04 financings. And when you reflect those financings, our debt balance actually would've been a bit higher. It would've been $3b at year-end, which is $183m higher. The reason for that increase was the tender premium on our 10-3/4 notes and the redemption premium on our subordinated notes that we redeemed. There was also obviously the cost of some -- there were some financing costs built into that as well.

We're really pleased with the results of the $10b refinancing we recently completed. It included a $1b 6.5-percent senior note offering, and it includes $370m of 7-percent subordinated notes. And although it increased our debt balances, it had very significant positive impact on the Company. It reduced our interest costs that we're going to experience in 2004 by $30m. It extends our maturities on our debt outstanding so that we now have our first maturity at 2011 and beyond versus 2007 before we completed the refinancing. And, lastly, it gave us the opportunity to update our covenant package to reflect the current size of the business, the current business conditions, and, as importantly, our future growth plans.

So as we sit here today after the refinancing, we have $523m of available borrowing capacity on our $650m revolver, and that's after our letters of credit issued under that revolver, which now stand at $35m. We also, of course, have $150m of letters of credit, which are drawn under our new LC facility.

It's worth pointing out, also, that in addition to our revolver availability, we have nothing drawn today under our $250m accounts receivable facility.

Let me take a few moments at the end of the call here to give us -- talk about our outlook for 2004 and give you our views on where we think 2004 is headed.

Over the past two years, we've seen spending on non-residential construction, which I think everyone knows, is our primary customer base. We've seen spending down about 20 percent over the past two years. Now, this rate of decline has certainly tapered off as we went through 2003, but there's still no clear signs that spending's going to significantly rebound in 2004. Industry experts are mixed, but generally, they are looking for about a 1- to 3-percent increase in non-residential spending in 2004.

We've built our business plan based on an outlook that 2004 nonresidential construction will be flat. And in that environment, we think we can achieve modest rental revenue -- modest rental volume growth, say, between 1 to 3 percent, and that's going to call us to invest about 100 to 200m of growth capital into our rental fleet.

Moving down to the next line of revenue, on our rental equipment sales, our rental equipment sales will certainly be up in 2004. You may recall that we cut those back in 2003 to age out our fleet. Our view is we don't plan to age our fleet in 2004, so our rental equipment sales will climb to about 200 to 225m, and that's going to lead to replacement capex of between 425 and 450m.

Next, we see continued growth in our next revenue line, and that will be driven by contractors' supply growth. We continue to see success in our sales of contractor supplies, and we're targeting growth of a further 20 percent in 2004. That will add at least $35m of additional revenue, which historically has had a gross margin of about 25 percent.

And, finally, our sales of new equipment should remain pretty much flat in 2004, so when you factor that all in, all of our revenue lines, we expect -- and build in a little bit of rate improvement for 2004 -- we think that total revenue will grow between 4 to 6 percent.

Now, moving down to the costs, costs are likely to continue to increase in 2004, although certainly not at the rate we saw in 2003. Our outlook is that rental costs, including depreciation, are going to increase between 2 to 3 percent in 2004, and that's compared to about 4.5-percent increase we saw in 2003.

Now, we're comfortable with this lower cost outlook because much of the year-over-year increase we saw in 2003 shouldn't repeat, primarily in the areas of repairs and maintenance and delivery expenses. If you strip out those two key areas of the cost pressures we experienced in 2003, our total costs of rental were up only 2.7 percent for the full year 2003, so that gives us comfort that our outlook of 2 to 3 percent is achievable.

Overall, in 2004, excluding charges, we're targeting to achieve EBITDA of 775 to 825m, and operating income of 345 to $365m.

As I mentioned earlier on, we expect to see interest savings of approximately $30m in 2004, but it's worth pointing out here and take a moment to talk about the timing of that because, remember, we just finished our refinancing. In fact, there's still a couple of pieces left in terms of the subordinated note redemptions that haven't yet been finished.

So the earnings in the first quarter are not going to see the benefit of the interest savings. And even though in the first quarter our rates are likely to be up about 4 to 5 percent, you'll note that our fleet size in the first quarter is going to be down about $200m. And, you know, we've always indicated that a high amount of fixed or semi-fixed costs we have in this business, so that lower fleet is likely to offset the rental rate improvement in the fourth quarter so that overall -- I'm sorry, the first quarter -- so that overall in the first quarter, we're going to see about the same level of loss this year as last year, so about a 10- to 15-cent loss per share, excluding charges.

But as we move into the second through the fourth quarter of '04, we'll get the benefit of the revenue growth from the added fleet that we're planning to invest and the interest savings. And that's going to drive significant increases in our earnings. Our earnings outlook for 2004 is between $1.00 to $1.10 per diluted share, excluding any charges.

Turning to cash flow for 2004, we expect to generate cash flow from operations in the sale of rental equipment totaling over $700m. And even though our capex will be up slightly -- or sorry, significantly in 2004, we're still going to have free cash flow. We'll generate over $100m of free cash flow in 2004.

So on that note, with that outlook, I think I'd like to open it up for questions. Operator, maybe you can give people directions on how they ask Q-and-A.

Thank you. [Caller instructions.]

We'll go first to David Bleustein with UBS.

Good morning, everyone.

Hello, David.

John, let me just make sure I've got -- I understand your 2004 capex. You've got 400 to 425 of replacement capex. Did I get that right?

Correct, David.

Then you've got another maybe 50 million-ish of non-replace -- of property and equip -- property capex, right?

Yeah, it'd probably be a little less than that, David, but, you know, 50 would be the up side, the maximum side.

Okay. And then on top of that, you've got 100 to 200m of growth capital.

That's correct.

So if I’m banding this thing right, I'm roughly looking at somewhere between 550 and 675?

Yes, that'd be correct.

Okay. So if you're going to do -- but then you said if your operations are going to generate over 700m and you're going to have at least $100m after capex, you really won't be going over 600, unless there's something I'm missing?

There's some other components of the cash flow statement that, you know, we'd have to run through, but it's targeting -- the range I've given you, if I went up to 200m, David, there's probably a little bit more in the cash flow statement. The 700m would be too low for a $200m capex program because I get some incremental revenue that I'm not fully counting in there.

Okay. And then kind of reconciling from the guidance you gave us at the end of Q3 to the guidance that you gave us -- and that you're giving us now, did the market meet your expectations? Did the market exceed your expectations? What got better, what got worse, you know, in your own mind?

Are you looking at for the quarter or for the full year?

For the full year. I think, you know, we're using, what, 3 to 7 percent revenue growth. I mean what -- just basically, how do you see market -- how did markets develop and how do they look today through February? Just give us a market update.

David, this is Wayland. I would say the market has not changed very significantly at all from what we saw as we went through the back half of the year, actually almost full year. Non-residential construction was down during the fourth quarter, I think, about 5.4 percent private non-residential construction. That was pretty much a mirror image of what we saw for the full year. It was actually 5.3 versus 5.4 but pretty much the same. We don't see any substantial change taking place, at least during the first quarter, other than what we're doing ourself. John mentioned that we were able to get rates up in the fourth quarter. We expect to continue to have rate improvement as we roll through the first quarter without the benefit of a stronger market behind us.

Okay, terrific.

I think, David, the one thing to point out is we did up our capex from when we originally talked in the third quarter, and that's really in response to the business plans that the field developed where they identified some additional cold start opportunities, particularly in some of our specialty lines of business, like the trench business. So that's one of the drivers that is a little bit different than when we last talked with you.

All right. I'll give somebody else a crack. Thanks.

We'll go next to Sarah Thompson with Lehman Brothers.

Hi, good morning.

Morning, Sarah.

I guess more kind of along the lines of the same question, you -- if I got the numbers right, you had said that volume increases should be 1 to 3 percent this year, but that was predominantly going to come from some growth capex?

That's correct.

Does that suggest that you don't -- and that's just all new business opportunities? You don't think the base business utilizations are getting any better?

Well, our time --

[Inaudible] saying that right?

I'm sorry, our time utilization was up in 2003 by 1 percent, and, you know, a lot of that growth capital will be going into some existing branches. I don't mean to suggest it's all going into cold starts. We have about nine cold starts scheduled for 2004, and they will be absorbing, you know, a good portion of that capital but certainly not all of it. So we're not budgeting for any increase in time utilization.

Having said that, we did get 1-percent improvement this year. We think we're running at levels that are pretty close to the top levels that we can achieve, but we might be able to squeeze a little bit more out depending on the strength of the environment that we're operating in.

Okay, so that was actually my next question is kind of -- if we looked at -- you know, if construction spending ends up being better than expected this year or even into 2005, do you think you're pretty much at what you can get out of these existing fleet?

As I said, I think if we weren't having to move fleet around as actively to respond to, you know, such a high degree of volatility in the market-to-market changes in demand, we'd be able to squeeze another point or so out. But right now, we're running -- in the fourth quarter, we ran 63-percent time utilization. For the full year, we ran 61 percent. And if you look, you know, piece by piece, could we have room to bump that a point or two? In a strong environment, I would say yes.

Okay. And then just the last question. On acquisitions, is your thought -- what's your thought process around it right now as we go into a stronger economy? Would you rather build out your fleet and expand it organically, or would you go after acquisitions again?

Sarah, we will actually do both. John and I have talked about growing the company, doubling the size of the company over the next five years. We will do that with a lot of organic growth, but we will also -- again, assuming a favorable economic environment and a favorable stock price -- we will also do that by acquiring companies. I don't anticipate anything in the near term, particularly with the stock trading where it is, but as we move forward, we would like to continue to grow the business, both organically and through acquisitions, and we're positioned very well to do that. I think for those people on the call that have followed us over the last several years, we've demonstrated an ability to acquire companies and rapidly integrate them into the business, and if anything, that would be easier to do today than it has been in the past.

We'll certainly stick to the guidance we've been giving all of the Street, including all the bondholders and banks in our most recent refinancing of not significantly increasing the leverage levels. So that'll be the most constraining factor in our overall acquisition program.

Terrific. Thank you very much.

We'll take our next question from Brad Coltman with Deutsche Bank Asset Management.

Actually, it's Deutsche Bank Securities, but thank you, and good morning, guys.

I was going to say, did you move over to the asset management?

I should be so lucky! No, a couple questions. First of all, with the margins, you mentioned that they were under pressure because of maintenance, fuel, and insurance, and I'm wondering if you could elaborate a little bit on that, particularly with respect to '04. First, with maintenance, with you increasing the amount of replacement capex and adding growth capex, you know, I would think that would help a little bit on the age of rental fleet, perhaps reduce some of that pressure. What are your -- I guess, how are you managing the fuel expenses and then maybe elaborate on the insurance?

Sure. On the repairs and maintenance, for the full year, we saw that cost up 10.5 percent -- I'm sorry, $10.5m. And that was really driven by the aging. You may recall we pushed out the age of our fleet a little over four months from year over year.

Right.

It was tracking a little higher than that, actually, until the fourth quarter when we sold off some older assets. We don't expect that to recur in 2004. Our outlook is that we'll not see any meaningful increase in our repairs and maintenance. I think we'll actually have room to take it a little bit out of that. I mean it'll be offset a little bit by some inflationary pressure, but with a younger fleet, our newer capex coming in, I think you'll see that positive change in the 2004 numbers.

So if you look at our overall increase in our costs of equipment, which for the full year was running about 55m, you could -- in my view, you could strip out that 10.5m and not expect it to reoccur.

On the delivery and fuel side, a few things that are happening. First of all, I know delivery -- fuel prices are still under some pressure in the market out there. No one's exactly sure where the price of oil's going to end up. There's some talk that it might actually go up from current levels.

Our plan is that it's going to stay flat, which would mean that the $11.1m increase we saw in 2003 would be much lower in 2004. But we're not going to rely just on the market to save us there. We've implemented an annual increase in our fueling charges. That kicked in in the first quarter, so our view is that even with a slight increase of about 5 to 10 percent in fuel prices, we should be able to offset it with improving fueling charges -- improved fueling charges.

On insurance, our budget calls for insurance to increase again in 2004 by 10 percent. That's pretty much consistent with what it went up in 2003. It went up 9 percent for the full year 2003. Our outlook is 10 percent in 2004. The industry experts, if you survey all of the insurance companies and the company -- and the analysts that write on the insurance industry, they have indicated that industry insurance costs are going to go up anywhere from 5 to 12 percent in 2004, so I think we've fully factored in pretty well a cost improve -- increase there. So when you factor those all in, I think you'll see that our outlook is somewhere around 2 to 3 percent for the full year is pretty reasonable.

Okay, and let me just switch gears then. I guess the expected interest savings from the first quarter here, refinancings that you're projecting, are a little bit below what I was thinking they might be at, and I understand some of that was the financing and tender offer that I hadn't really accounted for, but I just want to be clear, with the amount of proceeds raised, that basically is absorbed by the financing costs and everything. What I am trying to get at, was there additional proceeds that are going to be used to pay down operating leases which would help your margins in ’04, or is that not the case? How much more in operating leases would you say you have outstanding?

I’ll break that into pieces. First of all, the biggest reason why it’s hard to tie out denominal interest cost savings versus the $30m number that I mentioned for 2004 is twofold. Number one, it’s only going to be three quarters and we’ll get the meaningful impact on it, and number two, we have a significant amount of our debt swapped into floating rate, so when you look at reconciling those items you won’t really see the full nominal savings, given that we are already carrying a high portion of our debt in floating rate even before the refinancing. We did pick up savings, but it wasn’t that significant.

Okay.

As far as operating leases, we have taken our operating leases down to $170m on our rental fleet and we are not anticipating any significant buy outs over the course of this year. We’ll be strategic, if there’s an opportunity where it looks very attractive we’ll do it, but we don’t have that specifically in our plans.

Okay, great. Thank you.

We’ll go next to Alex Blanton with Ingalls & Snyder.

Thank you. I want to go back and just clarify something on the rental capex. I thought in your opening remarks you had said replacement capex would be $425 to $450 but the first question that was asked, the person said $400 to $425 and you said that was correct. So which is it?

It’s actually $425 to $450.

$425 to $450 for replacement, and then $100 to $200 – this is rental capex for growth?

That’s correct.

And can we add the $100 to $200 to the fleet size, is that what you’re talking about?

Yes, on average throughout the year.

Okay. And so if we do all of this for the year, what do you wind up with in terms of the average age?

The average age will probably come down slightly, maybe a month or two by the time we get to the end of the year.

So 38 to 39 months?

That’s far.

And that’s why the maintenance costs may go down a little bit?

Correct. And also the sales we did in the fourth quarter where we eliminated a lot of our older fleet, knowing that we were going to be increasing the capex as we move into ’04.

Okay. But that’s quite a wide range of capex, isn’t it? I mean, in rental alone it’s $525 to $650.

Well it’s really driven by a need to be opportunistic. When you look at our growth capital, the reason why we give a range of $100 to $200 is some of these stores we are certain, because of our market presence or lack of market presence and the business conditions in some of these specialty segments that exist there, we’re almost certain that we’re going to be putting that capital into those markets.

We have other markets where if we look at today, it looks like we could absorb another $100m, but we have to be very strategic. I mean, we’re not going to be pushing capital into areas where the demand isn’t there. So we always have to respond quarter to quarter, month to month, depending on the temperature that we gauge the markets are at.

So I know it’s a large range, but in a market where it’s quite dynamic in terms of the supply and demand balance, we have to give that range because things shift as we go through the course of the year.

Okay, so finally how do you visualize the mix of purchases in terms of types of equipment?

We have – let me ask Mike Kneeland to pick that one up.

Hi Alex, this is Mike Kneeland. Our expenditures next year, although we had a slight change in our aerial equipment from 2002 to 2003 we see no significant changes in our fleet mix, nor do we expect any significant change in ’04.

No change in the mix, and what did aerial do last year?

Aerial was up about 1 percent.

Okay, so it’s going to stay constant, you said, this year?

Yes.

Thank you.

We’ll go next to Ben Turneski with Raymond James.

Good morning.

Good morning.

I’m sorry, I’d just like to ask you to clarify what’s happening to your fleet size. The age is going up, it looks like in the last quarter you sold more than you spent but on the balance sheet it looks like your assets are about flat to slightly up, at least from the third quarter. I think you mentioned something about going into the first quarter with a smaller fleet size. Can you just clarify what’s going on there?

Yes, no problem. You have to, when you are analyzing our rental fleet, you always have to add both the owned and the rental fleet that we have on long-term leases. What you saw is in the fourth quarter we bought out $347m of operating leases, so that had the impact of bringing the assets onto our balance sheet, but in fact it didn’t change our overall rental fleet because those assets had been with us for about three years already.

So that’s why the balance sheet GAAP numbers don’t seem to reconcile with the overall fleet size. Our fleet size did decline over the course of 2003, and if you looked at where we ended up at the end of the third quarter in September our fleet size was about $3.6b, and then it trailed down to $3.5b by the time we got to the end of 12/31/03.

And what would it have been at the start of the year?

It was pushing 3.7, the start of the year was 3.665.

So do you think, I mean just intuitively it would seem some of your utilization rates has to do with a reduction in capacity.

I think that’s right, I think our branches have responded to a little bit of weakness in some of their markets, and rather than ramping up and letting their time utilization drift down, are putting pressure on the rates. It’s always more prudent to prune back a little bit on their fleet.

And do you think the competition is doing something similar?

I think it’s pretty consistent across the industry, I think if you think about non-residential construction declining over the last couple of years by nearly 20 points, a number of the equipment rental companies have been lowering the size of the fleet. By the way, I think it’s healthy as we go forward, we’re trying to raise rates. My sense is a number of the other companies in this industry are trying to do the same thing, and that will be good for the industry.

Yes, it does sound encouraging. Thanks a lot.

We’ll go next to Jamie Cook with Credit Suisse First Boston.

Hi, guys. Can you talk a little bit about the pricing environment in terms of geography, whether you are seeing strength in one portion of the U.S. versus another. And then, could you give a little more color, if you could, on utilization by type of equipment?

Well pricing is coming up for us, literally across the board. I wouldn’t single out any specific region although I would say probably the most notable change was as we went through 2003 we did see a pricing weakness continue for our aerial equipment as we went through the back half of the year, that began to turn around. We are now showing positive pricing, a rate improvement for our aerial, and that’s a very important part of our business, as you know.

Aside from that, pricing has continued to be strong in most of the regions, probably the softest area for us though would be the Rocky Mountain part of our country or part of our business.

Next, could you talk a little bit, whether you are seeing a differential in strength in utilization by type of equipment?

Well, equipment obviously differs in terms of utilization quite considerably, but I wouldn’t say that there has been any fundamental change from I think the previous year, nor do we expect to see something this year.

When I say there is a lot of variability, if you look at time utilization obviously our aerial equipment has the highest time utilization and typically runs in the 70 percent to 80 percent range. If you look at the general rental equipment, it would operate more on the 50 percent to 60 percent range so there is clearly a variability.

We do think aerial will be a bit stronger and has been progressively stronger and that’s the reason we increased the size of the – or we’re projecting increasing the size of the fleet that was talked about earlier.

And then finally my last question, you talked a little about in the last question about the pricing environment in terms of the competition and you think they might follow the same route. Can you talk to whether or not you think there is an issue of oversupply in the market and that there are still too many rental houses out there?

Let me say that was clearly an issue two years ago, and we saw – you almost have to go back to the beginning of the [pully] companies coming into this industry, ourselves included. There was a lot of capital that came into the industry, I think a number of companies bulked up, over fleeted and then tried to wrestle with the additional size of the fleet that they had, and that had a tendency to put pressure on prices.

As we went through the last couple of years you’ve seen a number of the companies actually a couple of companies go into bankruptcy and a number of companies really suffer fairly weak performance. That’s had a tendency to cause people not to add fleet, in fact there’s been a downsizing of fleet on the part of several of our competitors as we’ve gone through that period of time and you can tell from the comments that we made earlier that we’ve tightened our fleet up as well as we went through the back half of ’03.

That is healthy. This industry is not getting the return on capital, as I mentioned earlier that it should, as you tighten up on the amount of fleet in the industry it is [Adam Smith] at work all over again, basic supply and demand. I think you’ll see that gives the industry an opportunity to raise rates and the number of companies that we’ve listened to are talking about doing that right now.

Great, thank you very much.

We’ll go next to Joel Tiss with Lehman Brothers.

Good morning, Joel.

Hi guys, this is Mark Livingston sitting in for Joel. I just have a quick question about your EPS guidance. When I go through your 75 cent base and you add 20 cent improvement from the interest, lower interest expense, and then it seems like you’re going to get another 8 cents or 9 cents keeping margins constant in the used equipment sales. You’re already at $1.05, so are you expecting a 5 cent plus or minus from the rental? I mean, is the rental division going to be down this year because of the increased cost?

No, the rental, if you look at the total gross margin it will stay flat pretty much flat year-over-year. You’ll see some increase in your SG&A costs, they will probably climb at inflationary levels of between 2 percent to 3 percent and as I mentioned, you’ll see the other expense, the non-rental depreciation I should say, will be running closer to $74m to $75m level, fourth quarter run rate.

I think when you factor that in you will see that the $1.00 to $1.10 is pretty much in line even with the $30m of interest expense savings.

Okay, thank you.

We’ll go next to Martin Lazinski; Bank Austria.

Yes, hello. I’ve got one question. What are expectations for the rising rental rates for 2004?

That’s a good question but a very, very difficult question to respond to. We have built into our plan about a 2 percent increase. You’ll see the first quarter will be higher than that because of very favorable comps, we’re looking probably in the neighborhood of 5 percent in the first quarter. That’s because rates were down about 2 percent, 2.5 percent during the first quarter of last year.

As we move through the year into the second quarter, rates last year began to turn around, we actually had positive rate increases, I think of about 2.3 percent, 2.4 percent and then in the third quarter that jumped up to 3.4 and of course we just indicated that we had 5.6 percent in the fourth quarter.

So as we go through the year, the comps become less and less favorable, so I’d stick with the guidance of 2 percent but that being said, we do have an intense focus on this and we’ll try to get as much out of it as we can.

We obviously have to balance that with demand and time utilization on our equipment, because we don’t want to get, we don’t want to drive rates up at the expense of chasing customers away.

I think that’s an important point. I mean, the main thing we’re trying to communicate to our organization is rate discipline. We know with weak demand we’re not going to see huge increases in our rental rates, but we can get some traction even in a soft market on non-residential construction. The key thing is by putting that discipline in place, when we get recovery in the volumes, recovery in demand, we’ll see a lot more traction and a lot more room to raise those rental rates down the road. That’s the key thing, is just getting the industry and our sales force and our organization focused on discipline around the rental rate issue.

Thanks a lot.

We’ll go next to Kyle Smith, Jeffries and Company.

Hi. Earlier you gave a little bit of detail on the size of your total fleets. It’d be great if you could give a quarter by quarter breakdown of total fleet and also operating leases, if you would. And if you could give rent expense, total rent expense for Q4 and for the fiscal year that’d be great. Thanks a lot.

Let me start with the size of our fleet. This is obviously the original cost. If you look at it, we ended on 12/31 of 2002 with, as I said, $3.665b. We ended the first quarter of 2003 at $3.7b. At the end of the second quarter, 2003 it was about $3.66b. And at the end of the third quarter of 2003 it was $3.6b. As I mentioned, we finished 12/31/03 at, it was just a notch under $3.5b, so call it $3.5b.

The second part of your question was the amount of leases outstanding by quarter. I don’t think I have that listed here, let me shift to the third part of your question which was the expense for our operating expenses in the quarter and for the year. I have that right here, just one moment. Sorry, I’ll look it up here. Okay, for the quarter it was $16.7m in the fourth quarter, and for the year it was $84m for the full year.

And if you want the other numbers, perhaps by the end of the call I’ll have them, and if not you can call Chuck offline and we’ll get you the detail.

We’ll take our next question from Mike Kinder with Citigroup.

A couple clean ups. One is, you put out the pro forma table, debt table in the back. The one number that went in there was cash, was there a shift in pro forma cash or should we just assume the pro forma numbers equal to the actual as of December?

It will be more or less equal, Mike. It might be down $3m or $4m in total, but not meaningful.

Okay. And also you gave some rough EPS guidance for the first quarter. Do you have an EBITDA equivalent for that?

I think the best thing to assume is it would be pretty much flat with the first quarter of 2002 and in that quarter our EBITDA was – sorry, 2003, where it was about $138m in the first quarter of 2003. That’s probably the best bet.

Okay, thank you.

We’ll go next to Jason Vaas with Davis Mutual Fund.

Hi there, I actually have two questions. The first one is, percentage-wise, how far below your peak rental rates are you guys right now? And then the second question is, could you talk about the long-term effect on your customer base or revenue base by selling so much equipment to your customers. In other words, by selling a piece of equipment do you lose future business from that customer? Thanks.

I’ll take the first part of that one, and then I’ll hand it over to Wayland to take the second part. If you look at our rental rates, our peak rental rates as we sat at the end of the fourth quarter we were about 4 percent lower than our peak rates, so our goal is through 2004 to get within a couple of percentage points of our peak rate levels. Those peak rates date back to about three years ago.

So we’ve got about 4 percent full room and we think we’ll get about half of that this year in these weak economic conditions. Again, if we see some strength we can probably get beyond that.

The second part of your question, is there an impact of selling used equipment to our customers? In effect we have been in the industry that has been doing that for a long time for many, many, many years, and at the same time the industry has continued to show a fairly significant growth if you back out periods of recession like we have been going through.

I think the fundamental reason for that is that a number of our customers rent equipment from us, but they also have some fleet themselves. They will turn to us to buy used equipment to replace aging equipment they have in their own fleet, and that’s just kind of an ongoing process and I don’t believe that there is any impact at all from us selling either new equipment or used equipment to our customers.

We’ll go next to Tom Meyer with Lord Abbot.

Hi guys, just a couple of quick questions. You know, if I look at the guidance as someone pointed out earlier, we’re looking at, if you look at the low end of the range it’s not much other than the interest savings that is driving it. What I’m struggling with here is if I look at your company in terms of the potential operating leverage, not necessarily on the interest side but on the operating model, I’m not sure how or when we’ll see it without seeing an increase in capex. You talk about growth capex and I think you’re looking for a 1 to 3 percent volume increase.

Understood that you guys would need to do more capital spending if you had some volume increase, but it seems like a pretty heavy piece of capex for not that much volume increase. So what am I missing, and when would there be some leverage on the operating side for your model?

Let me try to tackle that first from the actual 2004 point of view. One of the things that is hurting our operating leverage in 2004 versus 2003 is even though we are showing $100m to $200m of growth capital in 2004, we are starting a little bit in the hole in terms of fleet size. So a portion of what we’ve allocated for growth capital is simply to true up to the levels we saw in 2003. So you are not really seeing pure incremental volume on a year-over-year basis. So that’s one thing to point out.

In terms of where does the business get operating leverage? Business has a lot of opportunities for operating leverage. Number one opportunity is rental rates. I mean, we are in clearly the trough earnings level, and trough construction level for non-residential private construction, and for road building as well, we’re seeing a lot of weakness. And nonetheless, we’re able to drive rental rates up. We think that as we get recovery in our core customers activity, those rental rate opportunities will be even more significant. There’s no doubt the rental rates are your number one driver of incremental leverage in the operating line.

On top of that, we will need to invest in capital to grow, that is an important component, but the incremental revenue you get when you start to get growth on the rental fleet is very much more profitable than the recurring margin levels you see. One more backhoe on the yard, with our fixed costs running anywhere from 55 to 65 percent, one more backhoe out on the yard gives you very significant flow through. So you will see, as we’re able to add significant amounts of capital a much richer flow through to the bottom line.

I guess the third piece I’d point out, and it’s a smaller piece, but our contractor supply program has been very successful, and that doesn’t require very much capital at all for us to invest. We haven’t put the money into improving our facilities, we do have to carry some incremental inventory but the terms we see there at 3X to 4X sales, we get significant flow through to the bottom line at the 25 percent gross margin level we operate at.

So I think there is a lot of excellent opportunities to drive operating leverage, we’re just unfortunately fighting a market where the demand is a little bit weak right now.

Okay, but it sounds like any of the operating leverage would certainly require additional capital expenditures. In other words, the leverage of your fleet, it seems like, it sounds like you are somewhat tapped out on a utilization basis.

There’s not a lot of unit growth that we’ll get out of getting more time utilization, but certainly we’ll get more operating leverage in terms of more profitability by rates and by merchandise, contractor supply sales. But in terms of getting one more rental contract on the same backhoe that we already own, we probably only have an opportunity of 1 percent to 2 percent improvement there.

Okay, thanks.

We’ll go now to Bill Doyle with PPM.

On that cash flow from operations number that was disclosed, the 15.8 for the fourth quarter, could you remind us, did that have the operating lease buyout in it, or is that before that?

The cash flow from operations number, that number has the $88m deducted from it.

Okay. And was there a number for the year for operating lease buyouts?

The total operating lease buyout for the full year, you have the operating lease buyout we completed in the fourth quarter, but on top of that we did – let me check the number, I think it was about $56.5m in the first three quarters, so the total for the full year is $407m of operating lease buy outs.

And how much lease expense does that remove? Is it dollar for dollar or did you quote a higher number before?

The lease expense it will remove is the $350m lease is going to eliminate about $30m of lease expense and the $56m lease will eliminate about $2m to $3m of lease expense a year.

So the $88m gets you $30m back, and the $56m gets you $2m to $3m per year?

Let me make this clear. The $88m is only a portion of the total cost. If you look, the total buyout cost in the fourth quarter was $350m, but the $88m represents the market to market value of the fleet that we had to take as a charge to our P&L and also the prepayment penalty that we had to pay. So the total buyout value was $350m, $88m of it had to flow through the P&L as a charge.

So $88m went through the P&L?

Correct. The other piece shows up on our cash flow statement as purchases of equipment at fair value.

So it’s on the cash flow statement and it’s hitting the cash flow from operations number?

The $88m hits the cash flow from operations, the balance shows up in purchases of equipment.

So the 15 we see here excludes that, 15 of purchase of rental equipment?

The 15 excludes that, that’s correct. If you want I can walk you through it in a little more detail so we can reconcile it out, just give a call to see if I can help.

Thanks a lot.

We’ll go now to Adam Oheim with Midwest Research.

Hi, guys. I was wondering if you could give us a little color on your expectations for the highway environment right now with the highway bill about to be reauthorized, hopefully, and how that could boil down into the highway tech business.

Well it’s a very uncertain environment that we’re operating in right now. There is kind of a ping pong ball match between the president and Congress. Congress would like to approve a much higher level of spending for the replacement of T-21, in fact they are talking about $361m level. I think the president was more comfortable with the level, it was about $268m so I am not sure how that will work it’s way through. What we’re finding is until that’s resolved there’s kind of an extension to the existing bill and people are saying that now probably will not be resolved for another four months, or maybe three or four months, which puts a lot of uncertainty in the environment. People will not start up jobs not knowing exactly where that stands. In fact, I read recently that January jobs put in place – this was in highway construction was down nearly $1b, 37 percent from a year ago January, and I think that reflects a lot of that uncertainty. So hopefully we’ll get this thing cleared up.

Personally, or from a United Rentals standpoint, we are planning to see our highway construction business slow a little slower in 2004 than we saw in 2003 and this past year we finished with roughly $330m worth of revenue. That would probably drop, we’ll probably see that drop down to $300m, $310m so it is not a very attractive environment. And we don’t expect that to turn around in the near term, certainly 2004, even with the passage of I would say a higher T-21 replacement bill, you are still going to see states with a sharp fall in tax revenues and although they will match funds or for the most part try to match funds with the federal spending, they will cut back in other areas, much as they’ve done throughout 2002 and 2003. So until you really see the full rebound of the economy and the impact on tax revenue, I think that this is going to be a softer part of our business.

Okay. And then the second question I had was, I was wondering if you could elaborate on any kind of special charges that you are expecting for 2004, is there any kind of guidance on where that might land for the year?

Let me try and highlight a few of the things we know could be coming down the pike in 2004. First of all, in the first quarter with this refinancing we will have some charges from the redemption premium and from the tender premiums that it cost us to take out the bonds in the first quarter. The total that we estimate for that charge will be about $175m to $185m. Now the timing on that is a little bit uncertain because we haven’t completed the redemption process and some of it may slip into the second quarter but in aggregate, the charges, all of the charges involved with that $2.1b refinancing will be between $175m and $185m.

On top of that, you may recall that in 2003 the comp committee made a modification to stock vesting and that stock vesting was triggered in the first quarter of 2004, so there would be a $7m pre-tax charge impacting us in the first quarter from that.

And then lastly, you know, you don’t know about goodwill. Certainly our business plan with the improving profitability on the operating line should not drive a significant write down in our goodwill. We’re always going to have possibly two, three, four or a dozen branches that are having weakness in their markets, but the level of goodwill write off that we’ve been historically seeing, as profitability of the business has dropped over the last couple of years, should be a lot less as we go forward into 2004 and beyond with a stronger operating level.

Okay, great. Thanks.

And we have time for one final question. We’ll take that question from David Bleustein, UBS.

Quick, quick question. I mean basically, if you look at the fourth quarter results I think I saw Rand and Deer and Caterpillar, it’s fairly obvious that original equipment sales of – new original equipment sales to the same end markets you serve were up 20 percent to 30 percent. Do you think that – what do you think that’s a function of, given that you don’t seem to have seen that same type of improvement in your business?

David, we obviously saw exactly what you’re talking about, and let me just reference Caterpillar. Caterpillar, in their earnings release, indicated that their growth was not being driven by demand due to end customer activity, since construction was down. But it’s being driven by replacement buying that’s taking place, and I think that’s probably the best answer you could give. Additionally, obviously when you look at John Deere as well as Caterpillar, they have other businesses, the agricultural business, for instance, for John Deere is very strong and of course Caterpillar has a wide variety of businesses that we’re not in.

But I think it’s that replacement buying that is taking place, and by the way, that’s a positive sign. I think to the extent that you see that occurring there, it shouldn’t be too far behind that that we’ll begin to see a pick up in equipment rental.

I mean we experienced the same thing, David, when you look at our new equipment sales in the fourth quarter, we were up about 11 percent year-over-year. It’s certainly not as dramatic as 20 percent, but that’s a pretty significant increase, and it does seem that our customers are becoming more confident of the future, are more confident about spending money. They have cut back their capex over the last couple of years and I think they are feeling more comfortable that the recovery is coming and that they can afford to step out into this environment with relatively low cost financing available and start replacing their fleet.

Okay, I want to close this call off just by saying there were a number of things that we accomplished as we went through 2003 and the fourth quarter that we felt good about. Certainly the top of that list would be the increase in rental rates, and that was progressive as we went through the year from the second to the third to the fourth quarter, we kept getting stronger improvement. We were also pleased to add 200,000 customers to our base, gaining market share did not help us grow revenue a lot in the year that we’re in, but moving from 1.7m to 1.9m customers positions us very well as the rebound occurs in the construction environment.

And then finally, as John pointed out, we did successfully refinance a substantial portion of our debt with much, much lower interest rates and we pushed that debt out for a longer period of time, and that will have obviously a very positive impact on the business going forward.

I feel as a company that we’ve weathered the downturn in the non-residential construction market and the softer economic environment that we’ve been operating in, and we’ve come through it a stronger, more vibrant company. We have taken a lot of people out of the business, reduced our cost structure and I am confident that we are well-positioned for significant growth in revenue and profit when our key markets recover, and they will recover. This is not – if you go back through time, you will see that there are periods when non-residential construction has dropped off but every time following that you will see a strong increase and that’s just a matter of time when that occurs.

So I will close by saying that we appreciate very much that all of you joined the conference call this morning, we look forward to talking to you at the end of the first quarter on our conference call then. Have a really great day.

Once again, ladies and gentlemen, that concludes the United Rentals investor conference call. Thank you, and good day.