聯合設備租賃 (URI) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the United Rentals Second Quarter Investors conference call. Please be advised that this call is being recorded.

The statements in this conference call and the answers to your questions are intended to provide abbreviated and unofficial background information to assist you in your review of the company’s press releases and official SEC filings.

In addition, certain of these statements are forward-looking in nature. These statements can be identified by the use of forward-looking terminology such as ‘believes, expects, projects, forecasts, may, will, should, on-track, or anticipates,’ or the negative thereof of, 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: One, unfavorable economic and industry conditions can reduce demand and prices for the company’s products and services. Two, governmental funding for highway and other construction projects may not reach expected levels. Three, the company may not have access to capital that it may require. Four, any companies that United Rentals acquires could have undiscovered liabilities and may be difficult to integrate. And five, 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 & 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.

You should note that reference may be made to certain non-GAAP financial terms. These include free cash flow, EBITDA, and any financial measure that is described as either excluding charges or being adjusted.

Today’s earnings press release explains the non-GAAP terms, details of the excluded charges, and reconciles the non-GAAP numbers to the company’s GAAP results. You can access this press release on the company’s web site at www.unitedrentals.com.

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, Al Colangelo, Vice President Finance, and Chuck Wessendorf, Vice President Investor Relations And Corporate Communications.

I will now turn the call over to Mr. Hicks. Mr. Hicks, you may begin.

Thanks, Operator. And good morning, everyone. Thank you for joining our Second Quarter conference call. I want to kick this call off and share with you some highlights of the first quarter, and then I’ll pass the call over to John Milne.

To start with, our earnings per share during the quarter excluding charges was up 68 percent, from 25 cents per share in the second quarter of ’03 to 42 cents in the second quarter this year. Our general rental segment which represents the lion’s share of our business had a very strong quarter with total revenue up 11.9 percent, same store growth up 9.6 percent, and rental rates up 7.9 percent. Operating income for the general rentals segment of our business increased by 33.6 percent, reflecting the operational leverage we have in this business.

The growth in our general rental segment was achieved despite only slight growth in our principal end market, private nonresidential construction, which was up 1.5 percent during the first five months of this year. Now that being said, 1.5 percent growth while modest is a reversal of the downward trend that we’ve seen over the past three years, and so that’s clearly a positive sign for our business.

It was noteworthy that we were able to beat expectations for the quarter in spite of the very poor performance of the traffic control business. Traffic control revenue was down by $27m year-over-year or 29 percent, and we recorded an operating loss of $11m.

Now for the first six months of this year we have generated free cash flow after spending $322m on the fleet, which just to remind you was 56m more than we spent in the first half of last year, and almost equal to the 336m that we spent throughout the entire year last year. Additionally, we benefited during the quarter by $20m in a reduction in our interest expense, which is attributable to the recent refinancings that we accomplished.

Given expected continued lower interest costs and increased rental rates we are raising our full year outlook to $1.20 per share from the range that we had previously given you, which was $1.00 to $1.10. We also expect that EBITDA excluding charges be towards the high end of the 775m to 825m range that we had previously talked about.

Now with that as a very brief introduction, I’m going to pass this call over to John Milne. John will go into a lot greater detail.

Thanks, Wayland. Good morning, everyone. I think the Operator did a good job of explaining some of the non-GAAP terms we’re going to be talking about on the call today. But let me just highlight again that if you want to see a full reconciliation of the non-GAAP numbers to our GAAP results you can look at the schedules attached to the press release.

And I just want to spend a minute up front reconciling for you what the one charge was in the second quarter that we’re adjusting out to go from GAAP to non-GAAP. Basically, we reported GAAP results of $35m of net income in the quarter, and that’s EPS of 36 cents. Now, those GAAP results were impacted by one charge which was the final piece of our refinancing that we completed on April 1st, 2004. On that day we did the redemption of the nine percent senior subordinated notes, and so the redemption premium on those notes caused us to take a $6.5m after-tax charge.

And so when you back out that one event and exclude the charge we reported net income in the quarter of $41.5m and EPS of 42 cents. And as Wayland pointed out, that’s a significant increase year-over-year. In 2003 we had net income of $23.4m and EPS of 25 cents a share. And so the reported results we’re going to be talking about now for the balance of the call will exclude this one charge from the redemption of the senior subordinated notes.

Looking at the results on a consolidated basis we had total revenues in the quarter of $776m, and that’s up 6.6 percent year-over-year. The components of the growth consisted of a 3.5 percent increase in our rental revenues, a 34 percent increase in our sales of rental equipment, and an 11 percent increase in our sales of new equipment, contractor supplies, and other items. That increase gave us a gross profit level of $240m in the quarter, and a gross profit margin of 31 percent, which is up 40 basis points year-over-year. And the increase in the gross profit margin was caused by the 110 basis point increase in our rental revenue gross margins. Offsetting that partially was the weaker gross margins we saw in our other revenue lines, which I’m going to talk about in more detail when we go into the segment results.

Continuing down on the consolidated results, our SG&A expense ran at 15.2 percent of total revenue, and that’s versus 15.3 percent in 2003. And so as a percent of revenue we’re pretty much flat year-over-year. We did see an increase, though, in the dollar amount of the SG&A costs, it was up $6m year-over-year, which is about 5.4 percent. Now, when you eliminate one of the items which is the impact of higher commissions in our general rental business, because of our higher rental rates and higher rental revenue, which added up to about $3m year-over-year increase in our commission costs on that $75m higher revenue level. It takes you back down to the three percent increase year-over-year for our SG&A costs which is line with our original outlook at the beginning of the year.

Our operating income for the company was $107m in the quarter, and that’s up $12.5m year-over-year, and that resulted in an operating margin which improved 80 basis points year-over-year to 13.8 percent.

Our interest expense was down year-over-year, we were down by $20m and that’s caused by significantly lower interest rates we’re seeing on our debt. In the second quarter of 2004 our average cost of debt was 4.6 percent, and that’s versus 8.1 percent in 2003. To give you a sense of what's driving that year-over-year decline, two-thirds of the year-over-year reduction in our interest costs is a result of the refinancings we completed in the fourth quarter of last year and the first quarter of this year. And then the balance of that improvement in our cost of debt is because we’re carrying a higher level of floating rate debt this quarter than we did in the prior year.

So clearly our interest rate savings are on a pace to exceed our original expectations we gave you at the start of the year. We’ve benefited from and we’re continuing to benefit from better than we forecasted swap rates, when we swapped out some of the fixed rate debt, and a lower [LIBOR] [ph] environment as we’ve gone through the course of the year. And so for the full year we now anticipate our interest expense reduction year-over-year will be about $45m.

So now that we’ve hit on the highlights of the consolidated results, I want to talk about our two business segments. And let’s first start with the largest of our segments which is the general rental business, and that represents as Wayland pointed out, an overwhelming portion of our revenue, over 90 percent of our reported revenue this quarter.

Operating income in the general rental segment was up 34 percent on a total revenue increase of nearly 12 percent. Now revenue increase of 12 percent was primarily caused by a 10 percent increase in our rental revenues, which was the result of same store rental revenue being up 9.6 percent year-over-year, almost all driven by the 7.9 percent improvement we saw in our rental rates.

In the general rental segment our gross margins were up 140 basis points year-over-year which is the result of the 260 basis point improvement in our gross margins on rental revenue. Again, the rate increases in our rental rates we’re seeing led to that improved gross margin, and was only partially offset by the 2.9 percent increase we saw in our rental costs and the higher levels of depreciation we’re carrying.

Now, it’s important to point out that the increase we’re now seeing this quarter in our rental costs and our depreciation expense is tracking in line with our original outlook. And so as we expected in the first quarter the cost pressures we saw last quarter didn’t continue.

Our rental equipment sales in our general rental segment came in at $55m, and that’s an increase of 32 percent year-over-year, which is quite significant, but I should point out that it’s right in line with our plans to generate full year sales of $200m to $225m.

The margins on our sales of used equipment were down year-over-year, they’re down by 540 basis points, so that we reported 28 percent margins on used equipment sales versus 33.4 percent last year.

Now, let’s – I want to focus on this, because we don’t see that as a trend continuing throughout the year. As we mentioned on the – in the original outlook in the year we’re going to be increasing our year-over-year sales of underutilized and off spec equipment. And we’re really taking advantage here of what is clearly an improved used equipment market.

Now, these sales of off spec equipment and underutilized equipment is having an impact on our margins, though. We’re having to sell them at discounted prices and low margin levels. When you eliminate those sales the year-over-year decline in gross margins on rental equipment is about 200 basis points rather than the 540 basis points that we saw overall. And so for the full year we’re very comfortable that we’ll be able to achieve gross margins on rental equipment sales at 30 percent or better.

Turning to our sale of new equipment and contractor supplies in the general rental segment, those were up 13 percent year-over-year. And the gross margin at 27 percent was pretty much flat with 2003. And so the $6m increase we saw in this revenue line was comprised of a $9m increase in our contractor supply sales which were up 22 percent and a $7m increase in our new equipment sales which were up 13 percent.

And so in summary, in our general rental segment we saw a year-over-year improvement in operating income. Our operating income of $118m in 2004 was an increase of 34 percent year-over-year from the $89m we reported in 2003. And our operating margin came in at 16.7 percent, versus 14 percent in 2003, or a 270 basis point improvement.

Now, let’s turn to the traffic control segment where we had some disappointing results. We had an operating loss in the traffic control segment of $11.2m compared with operating income last year of $6.1m, and that’s a decline year-over-year of $17.3m. That decline was on a revenue base that shrunk year-over-year by $27m in the traffic control segment.

The decline in our traffic control revenue was a result of a 33 percent decline in same store rental revenue year-over-year, and so we’re continuing to see significantly weaker demand in our traffic control group. Our seasonal increase, it’s important to point out, that our seasonal increase that we normally see as we move from the first quarter to the second quarter was much weaker this year. In the second quarter we were up, in ’04 we were up 47 percent over the first quarter, whereas if you look back to ’03 we were up 77 percent year-over-year. And so clearly as we trended through the second quarter the up tick in revenues didn’t occur.

Now, we have been reacting to this weaker demand. We cut $10m of costs out of the business year-over-year, which included reducing our headcount by over 600 people, or about 15 percent of our work force. And we need to take more costs out. As we go through the third quarter we’ve started already to identify cost reduction opportunities that could result in closing some branches in the traffic control group or consolidating them, although we haven’t identified those yet. But as we go through the course of the third quarter we’ll identify these opportunities and give you the details of the actions we’ve taken in the third quarter call.

So moving from the segments and going back to our consolidated results, let’s shift now to our cash flow. Cash flow, we had EBITDA in the quarter of $214m which is up $19m year-over-year. Our total cash flow from operations plus the proceeds of our used equipment sales was $212m in the quarter which was up $73m year-over-year.

Now, how did we use that cash flow? Well, in the quarter we purchased $169.2m of rental equipment, and our total capex was about $188m. When you add that to the first quarter total capex year-to-date was $359.5m, and that includes $321.7m of rental equipment purchases.

Clearly our capex is up significantly year-over-year. For the six months we spent 70m more in 2004 than the prior year, but our capex program is tracking consistent with our full year plan. At the end of the quarter our fleet size ended pretty much flat with 2003 at $3.7b.

And so when you net out those capital expenditures from the cash generation of the business our free cash flow in the second quarter was $23.7m, which means for the first six months we had free cash flow of $110.4m, and that six-month number includes the benefit we got from improvements in working capital in the first quarter, which totaled a little over $100m.

Now, it’s interesting to compare 2004 free cash flow with 2003. In 2003 the business had negative free cash flow of $32.9m in the first six months. And so we’ve had a positive improvement year-over-year of $143.3m.

Looking now at the balance sheet, at the end of the quarter our total debt outstanding was $2.87b, and our [CPS] [ph] balance which is our convertible preferred, was $221.6m. We had $504m available under our $650m revolving credit facility, and that’s after borrowings of $90m on that facility and letters of credit totaling about $56m that we’ve got drawn on the revolver. I should also point out that we had nothing drawn on our $250m accounts receivables facility, which based on receivable balances at the end of the quarter had availability of $213m.

Lastly, our fleet under long-term operating leases, our rental fleet, was $227.5m at the end of the quarter, and the expense we saw in operating lease, on these operating leases was $13.7m. Our operating leases on rental fleet increased a little bit throughout the quarter, but part of that is increasing in anticipation of seeing some operating leases roll off as we go through the balance of the year. And so we should end out the year at a little bit under $200m in total.

Last part of the call, I want to just touch on the outlook for 2004. Wayland mentioned in his opening remarks that we see for the balance of the year that the improvements in the rental, general rental business and the favorable interest rate environment through the balance of 2004 caused us to raise our original outlook. We’re now looking for an adjusted EPS for 2004 of $1.20 per share, and that excludes any charges we’ve had year-to-date, or any further charges that may occur for the balance of 2004, including any possible goodwill impairment, or any possible costs we may have with closing branches in the traffic control group.

Let’s talk about some of the key components of that revised outlook. First of all, our revised outlook calls for total revenue to be up five to six percent year-over-year, which is actually within our original range. We originally said revenue would be up four to six percent. What’s changed, though, are the components of what’s driving that growth.

Our general rental business we expect rental rates for the balance of the year will be up five to seven percent in each of the third and fourth quarters, and so overall, we should see rental rates up for the full year above five to six percent, which is significantly above our two to three percent outlook we originally gave at the beginning of the year.

Offsetting that positive improvement, traffic control revenue we think will continue to be down significantly year-over-year. In total, we expect the traffic control group to be down about $60m in total revenue from our original outlook, and so we should come in at about $240m of total revenue in this segment for 2004.

On the cost side, we haven’t changed our outlook on the cost side. We think the cost of rentals will still come in at about three percent for the full year, and the trends we’re seeing in the second quarter give us increased confidence of that level.

Our SG&A, though, that’s likely to track a little bit above the three percent year-over-year increase target. I’m now looking for an outlook of four to five percent increase in our SG&A costs for the full year rather than the three percent we originally gave you guidance on.

Our EBITDA, again, Wayland mentioned this earlier, I think our EBITDA will end up in the original range but in the high end at between 800 to 825. Our capex plans remain unchanged, and after all of that, our free cash flow for the full year should end up between 150 and 170m, and that’s after all capex but before any acquisition costs. In the first quarter we had about $62m of acquisition costs, and so that’ll be out of that $150m to $175m. But that’s a significant improvement from our original outlook.

With that, I’d now like to open up the call for questions, and ask the Operator if you could please explain to the callers how to ask questions, please.

[Caller instructions.]

[Alex Blanton] [ph], [Ingalls and Snyder] [ph] is on the line with a question. Please state your question.

Good morning. My question relates to the rental capex. You just said that your forecast had not changed for the year. And on April 22nd that was a range of 500 to 650m, with 100m to 200m of that being growth capex, and the rest maintenance. In the year-to-date you’ve done 322m of rental capex, so that means that you’ve planned to do 178m to 328m in the second half.

And so my questions relate to that. That’s a very wide range for the second half. You haven’t narrowed the range for the year, and that’s the reason. But what does that range depend on? What would cause you to spend at the lower end of the range? And what at the higher end of the range? And what would be the breakdown between the third and fourth quarter? And one other part of this is what kind of average age of the fleet does this get you to by yearend and what size?

Alex, this is Wayland. And I’m going to give some comments on it, and then John may fill in some detail, as well.

I think your point is right. We have given guidance, $100m to $200m of growth capital. We believe that coming out of the quarter we should probably be towards the higher end of that growth capital. We have some constraints that may limit us from going all the way to the 200 number. In fact, we’re beginning to see some of our manufacturers getting – back-up a little bit in terms of their ability to deliver equipment. And to the extent that we can’t bring that equipment forward into say the August timeframe or very, very early September, we may end up canceling some of the orders that we see outstanding.

But that being said, I would guess that we would probably end up spending in the neighborhood of $150m on growth capital. And I think we’ll probably still be comfortably within that range of $425m to $450m on replacement capex.

Okay. And so you’re a little bit lower. But how much in the third and how much in the fourth? Typically you don’t spend much at all in the fourth.

We haven’t given those numbers out in the past, but you could assume that the vast majority of that would be spent during the third quarter. We always leave a little bit for, you know, things that come up that you just have to deal with in the fourth quarter, but not a substantial, not a substantial amount.

Okay. And what kinds of equipment is getting backed up?

Well, we’re seeing it from a number of our suppliers. Aerial equipment is relatively tight. By the way, that’s not even across-the-board. You’ll find some products are readily available, others are less available. Some of the earthmoving equipment is also a little tight in supply. I think a lot of this is attributable to probably stronger demand and maybe a little bit of that because of the steel shortages this country is experiencing.

Okay. And so, but you have a lower end of the range here. What would cause you to – you think you’re going to be at the higher end of the range as of now, is that correct?

That’s correct.

All right.

As I said, we probably will not go all the way to the top end, but maybe $150m worth of growth cap which would probably put us closer to what, 600, John?

Yeah, 600. And so if you get to the 600 what would be your average age? And what would be the size of the fleet at yearend?

Alex, I don’t like to do this. I’ll answer that question, and then I’m going to invoke the one question rule, because …

Okay. Well, it’s all one question! With several parts.

This is one question with 100 parts!

Right. Okay.

We’re at 39 months right now.

Right.

And my sense is that we will end up being plus or minus one month from that as we go through the remainder of the year.

Okay. All right. Thank you.

Thank you.

And Joel Tiss with Lehman Brothers is on the line. Please state your question.

My 12-part question! Just can you give us a little bit of a tone, you know, the tone in the marketplace that gives you room to raise prices so much? And also, it seems like your traffic business is fluctuating a hell of a lot more than the end market would say. And so can you just give us a little bit of a sense of what’s happening behind the scenes in those two areas? Thank you.

Sure. Thanks, Joel. Well, let me start with the general rental business. I think, as I said in my opening comments, we’re up, our nonresidential construction which represents about 75 percent of our customer base is only up a point and a half. And you can see the growth that we talked about in our general rental business vastly exceeds that, a large part of which, as you pointed out is coming from pricing. That being said, I don’t think it ties at all to the growth in the market. I think it’s very much of our own doing.

We’ve been working, as you know, or as many people on this call know, for over two years in getting our rates up. And we’ve had a lot of success with that, almost in spite of the environment. In fact, in the fourth quarter of last year we were up 5.2 percent, and construction was still negative as was the case in the second quarter, or the first quarter of this year.

And so that part of the business I would say, we’re getting our revenue and our rates up, and just hope that this expansion, the nonresidential construction market will grow and help us even more as we go forward.

The second half of your question, there’s a lot of confusion in the data that we’re looking at in terms of traffic control market. How much? You’ve got the Commerce Department with construction put in place, up slightly, 6.4 percent during the first five months of the year. And then if you look at contracts awarded, on the other hand, which we track very carefully, they’re down substantially. In fact, during the first six months of the year they’re down like 14 percent. Worse than that, in some of the States that we’re doing business in, for instance, Texas was down 16 percent, Minnesota was down 46 percent, Illinois down 32 percent. These are States that we have large concentrations of highway business in. And so what we’re seeing is a real reduction in contract awards being let in those, in a number of key States for us.

Now set all of that aside, I also think we’re losing market share, and that contributes partially to the decline in revenues that I talked about earlier. I would say that the reason we’re losing market share is because within traffic control, much like we’re doing with the rest of the business, we’re trying to get our rates up. And we have walked away from some business, probably because we were a little bit more aggressively, a little bit more aggressive in raising rates than some of the contracts that we bid on.

And so that’s, I think that’s the long and the short of the traffic business. John talked about some of the actions that we have in place, or that we’ll put in place, rather, as we go through the third quarter to improve the performance of that business.

Thank you.

Our next question comes from David Bleustein with UBS.

Good morning.

Good morning, David.

A couple of quick ones. Operating cash flow, John, around $156m? Is that about right?

One sec, David. I’ll get my cash flow statement.

And then if you could just the D&A, deferred taxes, any of those components that you have readily available?

Okay. Operating cash – net cash provided by operating activity in the quarter was $156.5. What was the second question?

What was depreciation?

D&A, 108.4.

And deferred taxes?

Deferred taxes? Deferred taxes, 21.6.

All righty. And can you breakdown that chart you took into a pre-tax and after-tax – well, we know the after-tax, but what was the pre-tax amount of the charge?

$11m was the pre-tax amount.

All right. And Wayland, just following up on that, on the weakness in traffic control, how much of it do you attribute to the absence of a road building bill this year?

Well, that’s clearly, David, affecting it. There’s a lot of uncertainty. From what I see, or what I hear when I talk to our guys about it is a number of the larger contracts are not being let because the States are afraid to start something not knowing exactly what the level of funding is that they’re going to get, or when they’re going to get it. I don’t know how to quantify that and say, you know, a third of it is attributable to that. I’d just say it throws uncertainty in the air which is not helpful.

So quantify, tell me when it’ll get a fix? I mean when do you expect?

When do I expect it to get fixed?

Or a new road building bill gets signed?

I read something yesterday afternoon that says the House and Congress is scrambling to try to get something done between now and the beginning of the August recess. I frankly would rate that a very low probability. But there is certainly an effort underway to make that happen.

The problem is you’ve got the White House and Congress at such polarized positions, you know, the Senate approved $319m and the Bush Administration, I think, feels more comfortable with a level of about $258m. And so you really have a lot of conflict in their position. My sense is that that this is something that could drag on through the end of the year and not be settled until after the election.

Fair enough. Thanks.

Which is not good news, obviously.

Our next question comes from Brad Coltman, Longbow Research.

Thank you, and good morning, guys.

Good morning, Brad.

I’ll just follow-up on the answers to the expense question, because as you noted interest savings in the second quarter were 20m, versus I think originally thought there’d be 10m the second, and then again a third and fourth. I know you raised your guidance for interest savings to 45.

But I’m wondering, I guess, what assumptions are you making for anticipated increases by the Federal Reserve? Through the second half of this year? Are you building in higher rates from that, or is that the – would that take away from some of those expected savings?

Hey, Brad. It’s John. We are building in, when we do our forecast we basically take the yield curve that we see out there in the market. And so what we’ve forecasted is that we’ll exit the end of 2004 with LIBOR at 225. And so essentially you’ll see it move up about, LIBOR will move up on the yield curve about 83 basis points from where we are today. We’re at about 142 today and exit at 225.

Okay, that’s roughly what I was thinking, too.

Secondly, I just wanted to clarify, with the used equipment margins did you say the reason why it was down a second quarter and that was like a one quarter event was because you had to kind of flush out some of the underutilized and other stuff? Is that the way, the correct way to look at that, that’s all done now?

No, it’s not all done. The impact was more material in the second quarter. I think that for the full year, overall we’re going to see some depression in the normal margin levels we see. I mean we’re normally significantly above the 30 percent level in our gross margins. And I would say for the full year we’ll come in 30 percent or just slightly above. And so I think that you’ll see in the third quarter much less, but still a little bit of suppression in those margins year-over-year.

Okay. And then just real quick, a last question. With regard to the traffic control business can you give us sense of what the expected operating loss would be for this year?

Sure. For the full year operating loss would be approximately $40m.

Okay. Thank you.

Thank you. And we’ll go next to Barry Bannister, Legg Mason. Please go ahead with your question.

Yeah, this is Barry Bannister. How are you doing?

Good morning, Barry.

I just need to clarify, you switched reporting assets that makes comparing the year-over-year metrics very difficult, kind of in midstream. And so for the rest of the year till the anniversary I’m going to need the year-ago comps, or at least breakouts. With same store sales and pricing for the consolidated company, what was it in the quarter?

Same store for the consolidated? Just one sec, Barry, let me dig that out, because I have the segment stuff in front of me. On a consolidated basis same store was up three percent, and so you have the 9.6 in general rental, and then the 32.9 down in traffic, which nets up to up three percent.

3.0, okay. And what was the pricing?

You know, we don’t normally breakout pricing on our traffic control group, because that’s a, you know, bid, contract business for a very large portion of that. And so we don’t normally track pricing in the traffic control sector.

But it was negative, but I mean …

Yeah, I mean it’s effectively negative because our margins on our contracts were down. But the big driver when we look at rental rates is in the general …

We’ve got that. And then just going through the general rentals segment, just to make it comparable to the year ago figures, what was the dollar amount of SG&A rental revenue, sales of used and sale of new and other? In other words, what was the dollar amount?

In the general rentals segment or total?

Yeah, general rental is fine.

In general rental, in the second quarter you’re looking for, Barry, or?

Yes.

Okay. In the second quarter of 2003 the – I’ll start with SG&A because I didn’t write down what other ones you were looking for. The 99.2 was the SG&A expense in general rental in the second quarter of ’03. Which other ones were there? You were looking for some others?

About ’04, really?

I’m sorry, I didn’t hear that.

About ’04, what was SG&A in ’04?

104.6 was SG&A and general rentals in ’04.

All right. And we’ll do it – I’ll call you later, and we’ll clear-up the rest of the numbers. It’s just very difficult when you broke out this segment, because most of us track same store sales and stuff before you start separating out this unfortunate business.

How much of the problems at traffic are just normal lagged affect from the fact that State and local budgets are a couple years behind nonres? And that, you know, they lag recessions and recoveries? And you’re just seeing the affect of a year ago when they got squeezed? Because I don’t attribute it to new contracts let, because a lot of the money spent in that segment is on existing contracts, they become tightfisted because they just don’t have the money in last year’s budget.

Well, that’s clearly part of it. And again, if you look at contracts let for the full year last year 11 out of the 12 months contracts let were negative. And on balance for the full year is down, I think five percent or something like that. But again, you’d have to look State-by-State. That’s a contribution factor. The good news is the last number I saw said that l31 States now have balanced budgets, and that looks like it’s improving every day unless the economy picks up, there’ll be more tax dollars coming in, which should make that ease as we go forward. But it clearly has had an effect on the business.

Okay. Thanks a lot.

Thank you.

Our next question comes from [John Novak] [ph], CIBC World Market.

Good morning. In the past quarters you’ve talked a lot about repair costs to the rental fleets having a negative impact. Can you give us sort of the status of that in the most recent quarter?

Sure. Happy to. Really didn’t see anything unusual in repair costs in the second quarter. It was up a little bit. We were up $3m year-over-year in the second quarter on our repair and maintenance costs and the general rental segment. And that’s on a fleet that’s about 2.7 months older year-over-year, but that’s significantly better that he first quarter. In the first quarter it was up 8$8.5m.

With the fleet still being older do you anticipate that improvement that you saw to reverse?

Yeah, we’ll keep seeing that trend go down. I don’t know if we’ll ever get quite to negative, but it’ll certainly be, you know, down to a diminimous amount as we go through the third and fourth quarter.

And one last one, can you just give us a couple of comments on the demand for used equipment? And any strengths or weakness in any particular segment of that?

Demand for used equipment is, we’ve seen good market, we’re seeing good markets for used equipment. That’s really what’s allowing us to push out some of these underutilized assets that have been, you know, on our books for a number of months. That typically these are off spec equipment. They’re not strategic suppliers, they’re equipment that we may have bought over the years or we may have picked up through acquisitions over the years. And our ability to sell these off spec brands or these less than top desirable equipment is certainly indicative of strong markets. Our pricing on our equipment sales, our used equipment sales, is up slightly year-over-year. Now, when you start stripping out some of these off spec sales and underutilized assets I’d say the pricing goes up two or three percent on a year-over-year basis.

And is it concentrated in any sector? Like is it aerial lift work, or earthmoving equipment? What is it?

John, we’re pretty much seeing it across-the-board, that the used equipment market is just showing much better signs. I mean I think all of the manufacturers are seeing it in the new side, much like we’re seeing it on the used side.

Okay. Thank you very much.

We’ll take our next question from [Caru Martenson] [ph], CIBC World Markets.

Good morning. Just as we talked about traffic control being a little variable by State are we seeing on the general rental side regional differences? Some areas stronger, some areas weaker?

Sure. Mike, do you want to talk about that?

Yes. Can you hear me?

Yes.

Let me walk you through the region, and I’ll start out with areas that we saw declined. That would be in the Gulf and the Midwest, really because of the environment. Areas that we saw where the market was flat but yet we were able to achieve growth through rates was in the Northwest, Southwest, and also in the Northeast which would also include Eastern Canada. And the areas or markets that we saw overall growth was in the aerial high reach region, the Southeast, and the Rocky Mountain which would also include Western Canada. And that would be a footnote to that, that’s also where we had the [Sky Reach] [ph] acquisition in Northern Canada, which we anticipate and we see that market to be very strong.

Okay. Thank you very much.

You’re welcome.

And next we’ll got to [Jason Voss] [ph], Davis Mutual Funds. Please go ahead with your questions.

Hi, guys. I want to know how much you guys can raise prices before you think your value proposition relative to buying of equipment by your customers is eroded? Thanks.

Thanks. This is John Milne. You know, we have a long way to go before our customers would find buying more attractive than renting. You know, if you look at – the simple way I look at it is our typical rental rate in any month for a piece of equipment is around five or six percent of the original cost. That’s our run rate right now, about five or six percent.

Contrasting that, if someone was to go out and buy a piece of equipment and say put it on an operating lease with a typical GE Capital or Transamerica, or whomever, they’d pay somewhere around 1.7 to 2 percent. And so you can see the differential today is very wide, and it’s wide because fundamentally they are paying for a service, they’re paying for a lot of intrinsic savings they get, and a lot of improved efficiency they get by renting versus owning. And so it’s not an issue of rates driving that decision one way or the other.

Thank you.

Our next question comes from Alex Blanton, Ingalls and Snyder.

Yes, this is just a follow-up on the prior question But if I assume 600m for the full year of rental capex, and assume for the sake of argument 28m for the fourth quarter, you’d have to spend 250m in the third quarter. And that would be up from about 55m last year, is that correct?

I’m not doing the numbers as you talk, Alex, but it’s certainly going to be a big increase year-over-year.

Yeah, I mean to get to 600 you really …

Which, you know, by the way it’s not unusual, if you looked at last year we spent 80 percent of our capex in the first half of last year which was very front-end loaded.

That’s right.

If you compare it to say 2002 or 2001, or 2000 we typically spend about 60 percent of our capex both replacement and growth in the first half of the year, and the balance we spend over the course of the year. Now this year we’re running closer to 50 percent, and I think Wayland highlighted some of the issues we're having on getting fleet delivered on a timely basis. And so that’s causing us to lag a little bit.

Okay.

Our first half targets. So right around 60 percent first half, and 40 percent back half. That’s a more normalized year.

Yeah, that was my next question as to why it was doing that. And you’re saying it’s delay, delivery delays.

Just one more thing, does anyone there have the second quarter spending from last year? I was looking for it and I can’t seem to find it.

Second quarter capex?

Last year, yeah.

Yes, last year our total capex – let’s see, purchases of rental equipment last year in the quarter was 169.2m.

That was second quarter last year?

Yes, second quarter of – oh, I’m sorry, that’s ’04. 163.2.

163.2.

Was second quarter of ’03.

Yeah, and so you’re virtually flat this year?

Yeah, which is a little bit lower than what we’d like it to be, but you know, with some delayed deliveries we’re running a little bit slower than we thought.

Okay, I understand. Thank you.

And this will conclude our question and answer session. Mr. Hicks, I’d like to turn the conference back over to you, sir, for any additional or closing comments.

Thanks, Operator. And thanks to everybody on the call for joining us. We really do appreciate your interest in the company.

I’ll just close by saying on balance we felt pretty good about the quarter. We were particularly pleased with the increase in rental rates, that’s clearly having a tremendous benefit across the business. We were also encouraged by the growth that we’re seeing in nonresidential construction. It’s modest growth but it’s, as I said earlier, it’s a complete reversal of the trend that we’ve seen over the last three, three-and-a-half years now. We clearly have some work to do in the traffic control part of our business, and we’ll do that and report back to you on the third quarter conference call. But notwithstanding that we really feel good about our prospects for the remainder of the year.

And with that, I’m going to close the call off by wishing all of you a good summer, and we’ll look forward to catching up with all of you on the third quarter conference call in September, or excuse me, in October. Have a good day.

Thank you. And this does conclude today’s conference. We appreciate your participation. You may now disconnect.