聯合設備租賃 (URI) 2004 Q3 法說會逐字稿

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

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

In addition, certain of these statements are forward-looking in nature. These statements can be identified by the use of forward-looking terminology such as ‘believes, expects, projects, forecasts, may, will, should, on track, or anticipates,’ or the negative thereof 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: unfavorable economic and industry conditions can reduce demand and prices for the Company’s products and services; governmental funding for highway and other construction projects may not reach expected levels; the Company may not have access to capital that it may require; and companies that United Rentals acquires could have undiscovered liabilities, and may be difficult to integrate; and costs may increase more than anticipated. Litigation, arbitration, or regulatory investigations could have adverse results or consequences.

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 financial measures 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.

Thank you, Operator. Good morning, everyone. Welcome to our third quarter conference call. I’m going to begin by covering a number of highlights for the quarter. I’ll then pass the call over John Milne. John will go into some of those highlighted areas further. He’ll also comment on a number of other related areas, as well.

Let me begin by just saying our earnings per share for the quarter were at 58 cents, up from 44 cents in the third quarter of last year, reflecting a 32 percent improvement. Dollar utilization increased by 2.3 percent from the third quarter of last year, up to 67.4 percent during this year’s third quarter.

Our general rental business, which represents more than 90 percent of the total business, had another strong quarter and was up 10.7 percent. Rental rates for the general rental business were up 8.5 percent year-over-year which is the highest quarterly increase we have achieved in the history of the Company. Same-store rental revenue growth for general rentals was up 12 percent, and it’s probably worth noting that the last time we achieved double-digit same-store revenue growth was the third quarter of the year 2000.

Of the 29 percent growth we reported in operating income for the general rental business, offset the poor performance in our traffic control business which saw a revenue decline during the third quarter of $30m. Later on this call, John will talk about the steps we’re taking to further reduce our costs and improve the performance of our traffic control business.

I’d like to point out that we’re beginning to see a pickup in our primary end market. Private nonresidential construction was up 6.3 percent year-over-year from the months June through August, which reflects a major improvement over the first five months of this year. For those of you who participated in the second quarter conference call, you may remember that I mentioned that a private nonresidential construction was up a point-and-a-half through that first five-month period. So moving from a point-and-a-half to 6.3 is a really positive move, and hopefully this will continue as we go through the remainder of the year, and as well as into the year 2005.

Let me just spend a minute on cash flow. Year-to-date through the end of the third quarter we’ve had total capital expenditures of $524m, which is up substantially from the $378m we spent throughout the entire year last year. Notwithstanding the significant increase in expenditures we nevertheless have generated $199m in free cash flow through the first nine months of this year.

Now, before turning the call over to John, let me very briefly comment on one other area of major investor interest, that being the SEC inquiry that is underway. As you know, we announced on the 30th of August that the SEC is conducting a non-public fact-finding inquiry of the Company, and has subpoenaed certain of our accounting records. We have begun providing the SEC the requested documents, and we intend to cooperate with them on this matter.

Let me also say a few words about a class action lawsuit that was recently filed. Several weeks after the announcement of the SEC inquiry a class action lawsuit was filed against us. This is not surprising since an SEC inquiry frequently serves as a catalyst for class action lawsuits. In general, the complaint alleges that the Company made materially false and misleading statements during the periods between October 23rd, 2003 and August 30th, 2004.

I would just say we intend to vigorously defend against these allegations in this class action lawsuit. I understand that many of you may have questions about either the SEC inquiry or the lawsuit. Our lawyers advised us that since the SEC inquiry is a nonpublic one we should not at this stage take further questions relating to the inquiry. We will also refrain from responding to questions regarding the class action lawsuit. Accordingly, we do not plan to answer questions relating to either of these matters during our q and a. Even though I know everyone is interested in both of these subjects, I would ask you to respect this position.

And with that, I’ll turn the call over to John Milne. John.

Thanks, Wayland. And good morning, everyone, As the Operator mentioned in her opening comments, during the call I’m going to be referring to some non-GAAP terms. And also, during the third quarter of both this year and 2003 we had certain charges that we’ll be excluding from our discussion of our operating results. And if you turn to the press release you can see a full reconciliation of the non-GAAP to the GAAP numbers.

So, as Wayland mentioned, excluding the charges we reported earnings per diluted share of 58 cents in the third quarter which is on an adjusted net income of $57.5m. Now, that’s an improvement over 2003 when we reported earnings per diluted share of 44 cents and adjusted net income of $42m.

The results in the third quarter of this year were impacted by a non-cash charge of $122m after tax, and that charge resulted from our decision to write-off the balance of the goodwill in the traffic control segment. So after you factor in that charge the net loss for the quarter was $64m or a loss per share of 83 cents.

What triggered our decision to take that charge was the weak performance that we were seeing in the traffic control segment with no immediate signs that we were going to see a recovery or a significant recovery in the profitability of that business. So that led us to conclude that the impairment charge was appropriate this quarter rather than waiting for the mandatory tests we have to do every fourth quarter. So, for the rest of the call the quarter results I’m going to be talking about will exclude the impact of these charges. And, again, you can see these reconciled on the press release.

So, on a consolidated basis in the third quarter this year we had total revenues of $850m, and that’s up 5.5 percent year-over-year. And the components that drove that 5.5 percent increase were a 4.7 percent increase in our rental revenues, a 9.1 percent increase in our sales of rental equipment, and an 8.2 percent increase in our sales of new equipment, contractor supplies, and other revenue.

Gross margins on the overall business on the Company for the quarter were 32.7 percent, and that’s up 60 basis points year-over-year. The increase in our gross margins was primarily driven by an increase of 60 basis points in our rental revenue gross margins.

Our SG&A expense for the Company ran at 15.2 percent of total revenue, versus 14.4 percent in the third quarter of 2003. And that SG&A cost increase that we’re seeing this quarter is outpacing our original expectation, so for the full year it’s our view that SG&A costs will now come in slightly above last year’s level of 15.2 percent of total revenue.

Operating income for the third quarter was $133m, which is an operating margin of 15.7 percent, up 20 basis points.

And finally, on the consolidated results our interest expense was down $18m year-over-year in the quarter, which is $5m better than we expected this quarter.

So, I’d now like to pause and drill into each of the business segments, and talk about the results of those segments. Starting, of course, with the largest segment we have, general rentals.

As Wayland pointed out, general rentals continues to perform well in an improving business environment. Our operating income this quarter was up 29 percent on a total revenue increase of nearly 11 percent. Our 11 percent revenue increase was caused by a rental revenue increase of 11 percent, primarily driven by an 8.5 percent rental rate improvement year-over-year. And that rental rate improvement is outpacing our expectations by at least 200 basis points in the quarter as we continue to see sequential improvement quarter-to-quarter as we go through 2004 in our rental rates.

Our total gross margins in the general rental segment were up 200 basis points year-over-year, and that’s primarily caused by a 200 basis point improvement in our rental revenue gross margins. Our rental equipment sales in the general rental segment were $48m which is an increase of 8 percent year-over-year, and probably better look at this on a nine-month basis. On a nine-month basis we have total rental equipment sales of $159m, and that’s right in line with our plans for full year sales of $200m to $225m in 2004.

The margin on our rental equipment sales was 29.7 percent, so for the nine months we’re seeing a margin of about 30 percent on our rental equipment sales which is down from last year, but as we said in the second quarter we’re comfortable we’ll be able to achieve an overall margin for the full year of 2004 of 30 percent. And we’re clearly on track to do that.

Our sales of new equipment, contractor supplies, and other revenue in the general rental segment was up 10.2 percent year-over-year, and had an overall gross margin of 27.3 percent. Within that line of revenue the number one driver is our sales of contractor supplies, and those were up 25 percent year-over-year in our general rental segment, and had a margin of 25.4 percent.

So in summary, our general rental segment’s operating income, up 29 percent, as I said, and had an operating margin of 18.5 percent, a 270 basis point year-over-year improvement.

Moving from general rental and now looking at the traffic control segment. We continue to see weakness in the traffic control segment. Our revenue was down $30m year-over-year which led to an operating loss of $9.1m, compared to operating income of $15m in the prior year. T21 delays, and extensions, and cutbacks in bid letting continued to impact this business.

For the full year 2004 we expect our revenue for this segment will be approximately $250m, and with our loss through nine months tracking at $34m we think we’ll come in for full-year losses of above our original target of $40m, probably closer to $45m.

Now, on the last earnings call, as Wayland mentioned on the onset of the call, we said that we’d review with you our plans to improve the performance in our traffic control segment. And I want to give you some high level details of what we’re doing here.

The primary thrust in this area is we’re looking to sell or close 13 of our traffic control branches. And, in fact, we completed the sale of one of those branches on Monday of this week, so the process is underway.

These branches that we’ve targeted to close or sell collectively generate about $60m of revenue in 2004, and are going to have a loss this year of between $15m to $20m. So, obviously, we can’t be certain of the exact timing of when we’ll complete this program, but my sense is that we’ll get at least two-thirds of the benefit of closing or selling these branches in 2005.

So, although 2005 is likely to still be a tough year given the T21 build that’s been delayed now through May, or extended through May, we will, we should definitely see some more losses in 2005 traffic control segment with the steps that we’re taking.

So, moving away from the segments and back to the overall Company’s results in the quarter. Cash flow and focusing on cash flow, EBITDA in the quarter was $242m, and that’s up $14m year-over-year. Our total cash from operations and the proceeds we generated from the sale of used equipment totaled $253.5m. In the third quarter we purchased $143.4m of rental equipment, and our total CapEx was $164.5m.

When you take a look at that from a nine-month basis our cash flow from operations plus the proceeds of our used equipment sales was $723m, and that’s up $276m year-over-year. During the nine months we’ve bought now $465m of rental equipment which is on track for our full-year fleet plan.

In total in the third quarter we generated $89m of free cash flow, and that means for the first nine months we had free cash flow excluding acquisitions of just under $200m, $199.4m. And so, when we look at that number and project out for the balance of 2004 it’s clear to us that our target we gave you in the second quarter call of $150m to $175m of free cash flow is too conservative. We’re going to revise that target, and for the full year 2004 we expect to see free cash flow excluding acquisitions of $250m. And just to bring you up-to-date, within that number about $50m will be generated from improvements we’re seeing in our working capital.

Moving from the operating results to the balance sheet, at the end of the quarter our total debt was $2.9b, which is essentially the same level as June 30 the end of the second quarter except for some impact we’ve seen from the movement in the Canadian exchange rate.

We had [quips] [ph] balance, our convertible preferred with 221.6, again unchanged. And our cash balance at the end of the third quarter stands at $149.2m, which is up from a level of $72.4m on June 30, just 90 days ago.

At September 30 we continue to have a lot of availability under both our revolver and our AR facility. We have $498m available under our revolving facility. And that’s after $97m of borrowings and letters of credit totaling $55m. And we should also point out we have no thing drawn on our accounts receivable facility, which you may recall is a $250m accounts receivable facility.

Our fleet under long-term operating leases is $229m at the end of the quarter, and the expense we saw in the quarter for our operating leases was $13.5m.

So, let’s turn now and talk for the last few minutes about the outlook for the balance of 2004. We expect to continue to see favorable conditions for our general rental business. We also expect we’ll continue to benefit from better than expected interest expense savings. For the full year in our general rental business we think rental rates will be up about 7 percent overall in 2004.

And then, offsetting this improvement in the general rental business, as I mentioned earlier, we think traffic control will track a bit weaker than expected. Probably ending up closer to a $45m loss than the original $40m expectation.

That should all translate to an EBITDA for 2004 that will be between $800m to $825m, and our CapEx plans remain unchanged from the second quarter. We expect to spend between $425m and $450m on replacement CapEx, and approximately $150m on growth capital.

Given all of those components we’re remaining with our EPS outlook we gave in the second quarter when we raised our guidance of $1.20 for the full year, which would translate to 26 cents of EPS on a fully diluted basis in the fourth quarter.

Now, I do want to point out that there’s some pending accounting changes out there that could impact the results for 2004 and going forward. For those of you who track that, there’s a change called EITF 04-08. And now, let me explain what it is rather than just give the numbers. Many of you may be familiar that the accounting policies are looking at the convertible debt that companies have issued over the last few years that has a contingent conversion feature. That’s a standard feature that a lot of companies and a lot of banks have put into these convertible securities over the last couple of years. In fact, I’m not aware of one that doesn’t have it that was issued in the last couple of years.

The impact of that is previously you did not count those shares underlying the debt in your fully diluted number. If this bulletin, or this policy gets adopted, we will have to start counting those shares. For United Rentals, that has about a 5 cent EPS impact in 2004 and going forward. It’s a little over 5m shares that would be added to the overall fully diluted share count. Now, obviously, we don’t know if this will or will not be adopted in the fourth quarter, but certainly the trend seems to be that if it’s not the fourth quarter it’ll be coming soon. So that will impact us depending on when it is adopted.

So moving back to the results for the full year 2004, on the free cash flow outlook level we expect free cash flow, as I said, of $250m, and that’s after all CapEx. The only thing that we would exclude is any acquisitions, any proceeds we get from these divestitures we’re working on of our traffic control branches. And, of course, any money we use to pay-down debt or reduce our debt balances.

So, when you look back at what we’ve accomplished over the last three years when the business would have been in a downturn, and over 2004 as we see the recovery, we’ve seen in that total four-year period free cash flow generation at United Rentals of over $900m, so that’s certainly a number that we feel very good about.

So on that note, let me open it up to questions, Operator. And maybe you can explain to the callers how they ask questions.

Thank you. We will now begin our question and answer session. [Caller instructions.] [ph]

Our first question comes from David Bleustein with UBS

Good morning, everyone.

Good morning, David.

John, or Wayland, with used equipment prices so strong and rising why are margins on used equipment sales down this year, or at least in the third quarter?

Hey, David. There’s two main drivers to that, David. The first piece is that we continued to take advantage of these used equipment, the strength in the used equipment market, to push-out some of our older or some of our off spec fleet that is underutilized, having low performance. And we saw that in the first and second quarter, and we continue to see it. If you eliminate that, that has a significant impact.

The second piece of it, David, as you recall we bought out the synthetic lease in the fourth quarter, and those assets came across at fair value, so as we sell those those are essentially at breakeven or very low margin numbers. So if you eliminate those two factors you climb back-up over the 30 percent level and they’re much more comparable year-over-year.

How much of that off spec fleet is left, as opposed to homogeneously?

I would say it’s someplace north, slightly north of $100m.

Okay. Terrific. And then, John, on the cash flows can you walk through, can you almost reconcile us from net income to the $250m worth of free cash so we get some sense for, you know, what’s sustainable and what was special to 2004?

Sure. And you want to do that just in the quarter, or do you want to do…

No. Really for the full year. I mean how much of it is less cash taxes versus – I just want to get a sense for what’s sustainable next year?

Let me take you through the full year. Obviously, you know, different people have some different models on this so it will vary a little bit. But your deferred, your cash tax portion is going to be running essentially zero, it will be very small, maybe $5m in cash taxes. Your D&A, of course, 100 percent add back on your D&A. The working capital generation for the year of $50m. If you look at that over the last few years it’s $50m positive this year. Last year it was negative, I believe it was negative $40m last year. And the year prior to that it was positive $35m.

In terms of a sustainable trend on that, I think the $50m is too high from a sustainable trend level. A lot will depend on how quickly the contractor supply business ramps up in terms of inventory build-up, but, you know, when I model out projections for multiple years I think about it in terms of a $15m to $20m source in future years, assuming that our contract of supply growth pace is allowable around the 20 percent.

Source or use?

Source.

So, while you’re ramping, while you’re building your contractor supply and building your inventories it’s going to be a source of cash?

Yeah. Primarily driven by the benefit I think we can get on our receivables in an improving business environment. I mean we can – we saw this year a continued improving in our aging just from the small and, you know, the modest improvement we saw in the overall business environment this year. And I think we can continue to drive that for another year or two.

Also, David, as we roll-out the contractor supply strategy we’re putting in a number of warehouses across the country. The warehouses will help us pull inventory out of the branches which makes us much more efficient than we have been in the past. So, the cost of filling those warehouses is not as significant as you might think.

Okay.

The other thing to point out is in this year our non-rental CapEx is going to be running higher, so in terms of measuring sustainable cash flow our non-rental CapEx will probably be up in excess of $60m for the full year. If you look into that number there’s $21m we’ve spent year-to-date buying nine pieces of real estate for new branches that we plan to develop either this year or next year. And, you know, typically we lease our facilities from third parties. These were opportunities that, you know, were unique situations that we felt made sense to go ahead and buy the property. But I don’t see $20m a year of property purchases as a target, I would back that back down and say that we have additional potential there.

Okay. Terrific. Thanks.

We’ll go next to Brad Coltman with Longbow Research.

Yeah. Thank you, and good morning. Just wanted to ask about the SG&A expense in the quarter, kind of being a little bit higher than was expected, and do you expect that to continue through the fourth quarter? Is that being driven by increased litigation expense, or legal fees? And should that continue through '05?

Hey, Brad. It’s John Milne. It’s driven primarily by two factors, Brad. It’s driven by not legal fees, it’s driven by compliance costs on the, our whole SOX compliance program. That program is, I guess, probably every other company is experiencing the same thing. But that program is costing us significantly more than we originally estimated when we came into the year by order of magnitude, it’ll probably end up costing us in excess of $6m for the full year. I think it might even climb up closer to $8m, most of which has been flowing through in the back half.

The other thing that is a big driver of that is we continue to underestimate the impact of insurance and benefit costs year-over-year. We thought we could hold that down below 10 percent increase year-over-year, and it continues to track closer to 15 percent year-over-year.

The combination of those two account for the biggest variance year-over-year from where we thought we’d end up.

Okay. And then, with regard to the traffic control, all those branches are closing, is it an either or, or first you’re trying to sell them and at some point you’re just going to shut them down? And are you expecting any incremental charges from doing that?

It is an either, or. We will at some point, I guess, the saying would be ‘fish or cut bait.’ We’ll either close or sell, and we won’t continue to operate – it’s our plan we won’t continue to operate those beyond a certain date into ’05.

And in terms of the charge, you know, we may have to absorb some costs post-closing if there’s some contracts that have to run-out or if there’s some small severance for the hourly people. I don’t see it being a significant charge in any one quarter. It won’t be like a restructuring charge or anything like that, it would just be absorbing some costs to get the transaction done.

It’s possible that a couple of those deals we’re talking about we might take a bit of a loss on the sale, but you know, it’s not going to be a significant amount. We’re essentially selling them for net book value. It’s possible that a couple of the transactions we might take a little loss on the net book value.

Okay. Just two last kind of modeling questions. One, well, what is the share count you’re assuming for the $1.20 guidance?

100m shares fully diluted.

Okay. I forgot my other question so I’ll come back. Thanks.

No problem.

We’ll go next to [Yvonne Virano] [ph] with Jefferies and Company.

Thanks. I was wondering if you could give us a little more color on the factors in the market that have enabled you to keep those rental rates up so high, and whether or not they are going to be either going forward or if there's something that you see that might change?

Yvonne, good morning, Yvonne. I think I heard your question. It’s basically saying, ‘what are the factors that are contributing to the – our ability to get our rental rates up that high?’ And then also, ‘what do we expect going forward?’

There are a number of factors that are contributing to it. Partially, and when you look at it you’d say, ‘well, the environment that we’re operating is improving,’ and even though the first five or six months of this year were not particularly attractive they were clearly much better than what we experienced over the last three years where private nonresidential construction was down 35 percent. And so, we’re seeing an improving environment that’s clearly helping us.

The second thing is a number of our competitors are also raising their rates, so we’re not distancing ourselves in terms of what we’re charging our customer to what is being charged by other companies. And that’s very beneficial.

Now, going forward, when we look at the year 2005 we will expect to see some continued improvement in rental rates, but we expect that to be at a much lower level. And I would be hesitant to give you a specific number today. We’ll work that as we go through the operating planning process which we’re currently in the middle of, and have better insight into that when we next speak to you.

Okay. Great.

Our next question comes from Joel Tiss with Lehman Brothers.

Hi, guys. How are you doing?

Good morning, Joel.

Can you give us, John, a sense on the percent of the free cash flow from used equipment sales? And I think David was getting at that before, too. And the sustainability? Or maybe a little bit of a sense for 2005?

And also, you know, your free cash flow is a lot better in this sort of the beginning of the upturn than it’s been historically, and can you tell us if there’s a little bit of a change in strategy?

And also, you know, what are you planning to do with the cash? Thank you.

Okay. Let me hit on all three of those, Joel.

The first part, our used equipment sales for the full year will continue to be our target of $200m to $225m. And, you know, as we’ve said in the past, based on our fleet which is $3.7b, which is more or less flat, it’s a little bit up, it’s up $100m. But based on that fleet size, that $200m to $225m is a steady state level of maintenance replacement to maintain the age and the size of the fleet. So that’s a good starting point to use from the proceeds from used equipment sale target point of view.

The second part of the question was? I know what the last one was, it was how we were planning to use the cash? What was the middle one?

I’ll finish – Joel, are you still there?

Yeah. I’m still here. No, just about, you know, in the last up cycle you used cash more than you generated.

I’m sorry, yes. I blanked on you. Well, there is a little bit of a change in strategy, you could argue, in the sense that we focused a lot more of our time and effort, and capital on building out on a same-store basis or through cold starts our networks.

You know, the acquisition activity has certainly slowed, and as you may recall, when you do acquisitions you’re often buying companies with significantly older fleet or facilities that need upgrading. So, and a high level of acquisition contributes to a high requirement of CapEx to upgrade facilities and upgrade fleets. When you’re on a more normalized level and now investing in just building out the branches it’s a very high return prospect because of the flow-through you get on that incremental investment is very attractive, but it will drive to a more normalized and steady state cash flow level.

In terms of how we plan to use the cash? You know, we obviously have a number of different things we can use the cash for. You know, you’ve seen we’ve done one acquisition during the nine-month period, and then we did another small acquisition after the end of the quarter which was about $5m of purchase price. So we could look for other little pockets of opportunity, other little strategic fits.

We obviously, can pay-down some debt. We don’t have much outstanding on our revolver, and as I’ve said in the past, we like the current revolver is basically all Canadian borrowing which gives us some tax advantages. So, you know, if we’re to pay-down debt we’d probably have to go in the market and find opportunities to do that.

You know, I suppose theoretically you can, you know, buy-back the stock, buy-back the quips, or just leave it sitting on the balance sheet. We do get credit for our cash in the covenant calculations, so to the extent we carry it on the balance sheet in our cash account it will help our credit statistics and could reduce our borrowing costs going forward.

Okay. And if I can continue cheating by gluing two questions together for Wayland, can you talk at all about potential impact of steel, probably more for 2005 for you guys? And also, you know, how is this highway bill? Is it helping or is it sort of a non-event, and maybe what’s the outlook for for next year?

Well, let me start with the highway bill first. And just say that it’s probably more of a hindrance than a help. People who are doing highway work, particularly large jobs, want certainty. And even though the 8-month extension gave us more certainty than we had before it still doesn’t give us a lot of certainty.

So, I’d like to see that highway bill pass. We’re advised that that’s not likely to occur before the May timeframe. John mentioned that this bill expires at the end of May. And that’s probably the likely timeframe for resolution. Frankly, whether it’s Republican or Democrat, election, White House winner, I think either one of them will take the amount being spent on highways up. We need to do that as a country, and both parties are talking about that.

Now, with regard to steel, I think you know that we have been very successful in warding off increases from our vendors on steel surcharges or other euphemisms that they have for that. We will not take any this year, and have not.

That being said, on a go-forward basis, we’ll work as hard as we can to minimize absorbing any increases on steel. We expect that our suppliers will drive productivity. They’re benefiting from greater volume. Their plants are more efficient because they have that greater volume, and they should be able to absorb a lot of that cost and still give us prices that are close to where we are to date, or slightly better.

So no guarantees that we can hold that off, but we’ll do everything in our power to resist it. And so far, as I said, we’ve been successful.

Okay. Thank you.

We’ll go next to Barry Bannister with Legg Mason..

Gentlemen, hi. How are you?

Good, Barry.

I have a question. Could you explain the impact on maintenance costs of the fleet age year-to-date and in the quarter, having been in first quarter, for example, $6m higher than expected maintenance, what would you say it is on a year-to-date basis?

Hey, Barry. It’s John. I don’t have my year-to-date numbers in front of me, so let me grab them. But in the quarter I can tell you that our repair and maintenance costs were up $2m, and $1.7m of that was in the general rental segment, so the bulk of it in the general rental segment.

And in terms of fleet, our general rental fleet was one month older in the third quarter of this year versus the third quarter last year. So that $2m increase, you know, it’s not significant, it’s really tempered itself as we’ve gone through the year and our fleet age has become more comparable on a year-over-year basis.

Okay. So it’s not increasing?

No, it actually isn’t.

And then, you know, when I look at the fact that you break-out traffic safety now from general rental, there is the complaint that it’s almost convenient to separate out the part that’s not working when prior to the year first quarter you did include a pricing assumption on the traffic safety bid work. And it was included in total same-store sales and pricing, and thus, unit sales could be calculated as same-store sales minus price.

So, it seems a valid criticism that you now break-out the part that you’re trying to get rid of in large measure, and when I include it back in I’m somewhere in the negative territory on unit sales although not as bad as last quarter. Would you concur that total unit sales including traffic safety backend is still negative but just not quite as negative as last quarter?

Definitely when you include the $30m decline that you saw in the traffic control segment, that I mean the math is right. You’re going to have an overall decline in your unit sales when you price it as tracking it at 8.5 percent on the general rental side. And I’m very confident that our pricing on the traffic control side is not seeing any increase. In fact, I’d argue it’s seeing a slight decrease. So, you’re accurate to reach the conclusion that unit sales are down on a consolidated basis.

And prior to breaking out traffic how did you calculate its pricing so that you did derive a correct number for total rental pricing, now that you assume it’s separate?

We looked at the traffic control segment pricing on a comparable basis to come up with an overall pricing calculation. Our view is that this presentation is more useful for people to see the two businesses separately because traffic control has some fundamentally different drivers in terms of the customers, in terms of what the economics of the business, the capital requirements, the overall metrics of what drives the business.

It, you know, I know the frustration today because we’re only three-quarters through so there’s not a full historical pattern. But, you know, I think once we get through the yearend and we have full audited numbers historically on a segment basis I think the frustration will quickly be over with, and everyone will be happy with the new presentation style.

And by the way, we’re not planning to get rid of the traffic control segment. I mean that’s not our plan. Our plan is to take steps to get rid of some of the more losing branches, but we don’t have a plan today to get rid of that. Our plan is to turn the business around and take advantage of what we think will be a much better environment when the new T21 bill is passed.

But what percentage of the annual revenues are you divesting?

We’re selling $60m on 240, so roughly 20 percent.

25 percent.

Okay. Thanks a lot.

We’ll go next to Alex Blanton with [Ingalls and Snyder].

Hello. I have a question on your rental equipment spending. The numbers you gave earlier for the year I assume that’s just pure equipment, right? These are numbers you’ve given before?

Yes. The rental equipment on the year-to-date one?

$425 to $450, and $150 on growth CapEx?

Yes. That’s rental equipment.

Okay. And what was the – I missed the figure for the year-to-date.

$466m on rental equipment.

$466?

$466 on rental equipment through the first nine months of the year.

And the third quarter was $143.4?

That’s correct.

Okay. So that you would have to spend $110m to $135m in the fourth quarter then to get to your target for the year?

On the low side we’d have to spend $60.

Great. The target is $575 on the low side, and you’ve done $466 so far?

$425 plus $100 would be…

No, no, didn’t you say $425 to $450 maintenance CapEx, and $150 on growth, that’s $575 to $600?

Okay. I thought you were talking about the original range. That’d be $575.

To $600 is your target for the year?

So, we have to spend another $110m at the low end to hit that target.

Yes. And $135 at the high end.

That’d be correct.

Yes. Last year you spent $15m in the fourth quarter because normally you don’t spend in the fourth quarter, very much. So, it was talked earlier that if you, and I assume that the third quarter spend would have been higher had you been able to get equipment on time, is that correct?

That has been part of the problem that we had, and it’s also one of the reasons why we will spend more, Alex, during the fourth quarter of this year than we spent during the fourth quarter of last year.

That’s exactly what I want to establish, because some people were saying that if you didn’t spend it by the end of the third quarter you wouldn’t spend it in the fourth quarter, you would postpone it until next year.

We have a lot of equipment that we expected actually to get in September that will be coming in as we move through the month of October.

Okay.

But decided not to shut that down. Now…

That’s what I wanted to establish. Okay.

Back up to the $575, we actually would have liked to have spent more on the fleet than that. We suffered, as you know or as you mentioned, not being able to have as much equipment available as we wanted to.

Yeah.

And we may end up falling a little short of the $575 number, again, because we’re just trying to claw equipment away from some of our, you know, out of some of the manufacturers. And some of them are seriously backed up.

Yeah. And a corollary question is does it make any difference to you on delivery time? I mean are you willing to shift business from one manufacturer to another because they can deliver earlier? Or give them other things because they can deliver earlier, such as a little better pricing and so on?

We’re working very closely with all of our suppliers. We have a lot of respect for them. We don’t try to jerk our suppliers around. If it’s somebody who is seriously backed up they normally let us know that, and we lose a little equipment around in that regard but not a significant amount. We probably focus more on the price that we’re buying the equipment for than the absolute immediacy of the delivery.

Now, that being said, we’re also working with our suppliers to try to give them pretty strong indications of what we expect to buy by quarter, down to category and class of equipment. And we think that that will take some of the pressure off of the backlog that we’ve experienced as we move into 2005, some of the pressure off of the backlog that we’ve experienced this year.

Okay. Any preliminary indication of how much you might spend in 2005 on equipment?

A lot on what the world looks like in 2005, but if you were to say it’s more or less the same as it is this year we would spend probably someplace in the neighborhood of what we’re spending this year and a little bit more.

Okay.

I’m just about to invoke the one question per…

Okay. I know. It’s all about CapEx.

Thank you very much.

Thank you.

Our next question comes from Sarah Thompson with Lehman Brothers.

Hi. I’m trying to think of a way to ask this without it sounding negative, so bear with me for a second. I think your price increases have been fantastic, but what I’m having trouble with is the fact that your prices have been better than you expected and yet you’re not changing your bottom line, and I think you went through some of that when you talked about Sarbanes-Oxley costs being more and, you know, the traffic safety being worse, and the insurance and benefit costs being higher. But I guess my question is, you know, trying to determine the real earnings power of this business, are you guys feel like you’re keeping pace with inflation in terms of your ability to raise the top line prices?

I think that we’re outpacing it a little bit, Sarah. If you break the pieces apart and focus on the general rental side, because again, you know, that’s where we should be seeing our biggest improvement. There’s about, you know, $35m in the quarter of rate improvement when you, you know, identify the impact of that 8.5 percent rate improvement in the quarter. And most of that should flow to the bottom line. There’ll be some commission costs that inevitably will pick away a little bit at it. But then on top of that you have unit growth that’s in excess of $20m.

When you move to the cost side we thought we probably see about a 3 percent inflationary cost pressure which would put you around $11m, $12m of unit, of rental costs, and we’re clearly outpacing that. We’re coming in around $13m, $14m of call it unplanned cost increase. So the $20m, the over $20m of unit growth is being eaten away by higher cost level.

If you looked at the two areas that I mentioned they contributed to in excess of $10m of incremental cost, so the flow through if we were able to not continue to sustain year-over-year increases in our Sarbanes-Oxley type compliance programs and our healthcare and insurance costs running at 15 percent, if we were able to not sustain that your flow through would jump from about a 40 percent flow through on unit growth to closer to a 70 percent flow through on unit growth. And I, you know, I think the reasonable range is somewhere in between those two.

Okay. That’s really helpful. And then, just one other quick follow-up question to that, when you look at where your physical utilization rates are right now, are you pretty much tapped out?

We’re running higher, obviously, and I’d say for our aerial business we probably are pretty much tapped out. That’s running north of 80 percent. For the general rental business by region we have some opportunity to move it up a little bit.

Okay. Terrific. That’s all I had. Thank you.

Thank you.

Our next question comes from [Lionel Golivo] [ph] with Goldman Sachs.

Good morning. I just wanted to go back to the capital structure for a moment. Your best position went up during the quarter by $53m, and I know you indicated that it was partly due to the impact of the foreign exchange rate with the Canadian dollar. But if I’m right, the foreign exchange rate impact on the revolver which went up only from 92 to 97, so why is it that hurt so much during the quarter.

Most of the move there is the mark-to-market on your swaps. You saw the swaps affect on your debt, on June 30 it was $65.5m credit, and then on September 30 it was a $20m credit against your debt balance. So there’s a large swing in your mark-to-market. The actual debt levels, as you pointed out, the actual debt levels, the movement there was all in the revolver where you’re right, it was about a 5.4m or 5.5m swing in your revolver balance.

Okay. And just a related question, you generated $89m of free cash flow during the quarter, but your net debt went down only $24m, so where did the remaining $65m of cash go? Did you buyback any of your off balance sheet commitments, or am I missing what cash was used during the quarter?

I – just one second, I want to check. Because I think probably the difference you’re seeing there also is the swap impact, because that’s not a cash use but because the swap credit, the swap benefit went down by $45m through the course of the quarter you, it looks like it’s a cash use, but it’s not, it’s a mark-to-market on your debt level. So it sounds like our debt goes up by $45m because of the swap mark-to-market.

Okay. No, that’s fair. Thank you very much.

We’ll go next to [Mike Tender] [ph] with Citigroup.

Yes. I was wondering if – you said the [split age] [ph] was 39 months at the end of September. What do you expect to see that at yearned?

It’ll hover pretty much around where it is, 39, maybe 40 months. A lot of that will depend on how much capital we bring in as we go through the fourth quarter.

Okay. And the other question was on the, you talked about lead-times on equipment. You know, what are you seeing on some of your major categories, if you could just give us a little more color on that in terms of, you know, aerials, and you know, a couple other categories?

Mike, this is Mike Kneeland. What we’re seeing is in specific categories of aerial equipment, such as the 19-foot scissors, and the 60-foot broom, and also, the rough terrain forklift have the longest lead-times of approximately 15 weeks. And then, on some of your larger earthmoving equipment. The remainder of the equipment is typically shorter timeframes and, as Wayland mentioned earlier, we’re capable of working with our suppliers to get our needs met.

Great. Thank you.

You’re welcome.

Our next question comes from [Joseph VonMeister] [ph] with Jefferies and Company.

Hi, guys. I had a few housekeeping questions, if you don’t mind. How many stores were you operating in your same-store sales calculation?

It’s going to be about 730. I’ll have…

It’s still 730?

Yeah, it hasn’t really moved.

And what was the inventory on the balance sheet at the end of the period, in the press release, say sort of lumped the crude expenses and other?

Yes, the inventory is 123,242,000.

And you are generating a lot of free cash flow here. I guess one of the ways you could re-deploy that is in making acquisitions. You know, order of magnitude, what kind of multiples do you have to pay for rental equipment businesses in this market?

Right now it’s basically a market where you look at the fair value of the fleet you’re buying. The acquisitions we’ve done recently which, you know, frankly there’s only been two this year, so it’s not a broad population. But the acquisitions we’ve done recently you can see, for example, the price that we paid for the last deal was $35m which was essentially one times revenue.

What was that, Atlantic?

Yeah, that was Atlantic. You know, you’re not seeing multiples of earnings so much as you’re seeing liquidation or fair value of assets, and the deal we did in Northern Alberta has a multiple revenue, it will probably look like a premium deal but there was a large amount of excess fleet that we then re-deployed in our company. So it’s not really a good benchmark to use these days.

So it’s time to re-deploy some of this cash into buying out, you know, these smaller operations and consolidating them under the URI umbrella? I mean am I gleaning that that is, you know, is a strategy that you guys are going to pursue?

On a limited and strategic basis. I mean there’s no, if our branch is on, you know, the northeast corner of the street and, you know, someone is on the northwest corner we’re not going to just buy that branch and close it down.

But in both the circumstances we’ve done this year we had no presence whatsoever in Prince Edward Island, Nova Scotia, New Brunswick, and this individual was the top player – I believe he was the largest in that three-province area, so that was a nice staff that we could move in, take a position.

And the same with Northern Alberta, we really were the third, fourth, or in some cases, fifth player, and this allowed us to leapfrog in the rankings and really service our customer base there much more effectively. So it’s going to be strategic, it’s not across-the-board, we’re running around trying to find every little small guy to buy.

And after this, after you bought out your operating leases last year what is the first cost of equipment that remains off balance sheet? Is it like, I’m thinking maybe 200, or I’m sorry, first cost, 430m?

No. It wouldn’t be that high. It’d probably be closer to 300m.

300m? Okay, thanks a lot.

We’re going to take one more question, Operator, please.

Thank you. And our last question comes from [Jeremy Lindell] [ph] with Neuberger Berman.

Can you tell us where it’s changed since the last business cycle, or what are some of the lessons learned from the last business cycle, and the changes implemented by the Company to prevent, you know, another acquisition spree, and I guess, negative free cash flows to the downturn? Thanks.

Well, let’s just take that piece-by-piece. First of all, we feel very good about the acquisitions that we acquired as we went through the first several years of the Company. We have some of the, we acquired some of the premiere rental houses in North America. And we have been very successful in integrating those into the business and operating them. So I don’t see anything looking back that we would do a whole lot different.

Now, in terms of changes going forward, there are some. It’s a different industry today. It’s far more consolidated, and you have some larger players that are in the industry today that were not there when United Rentals first came about. I also think that you’ll see us being slightly differently, we don’t need to acquire as many companies. As John said earlier, we’ll be very selective about picking up companies, but we will continue to do that where it makes sense as we have done this year. The reason we don’t do it as aggressively as we have in the past is because we have a very solid footprint across North America. And we don’t have the need.

What I think you will see us do is open up more cold storage. This year we’ve done eight or nine. As we look to 2005 I would hope that we would be able to do as many as 30 or 35, there’s still hundreds of cities in North America that would benefit from having either additional rental stores or, in fact, the first rental store.

So, I think you’ll see the shift away from acquisitions not because we’re not pleased with what we had, but because growing the business organically and growing it through cold starts probably makes more sense. But we will selectively, as I said, look for opportunities to acquire companies that give us presence, particularly in markets like the one that we just announced that we did not have strong presence in.

Operator, I’m going to close this call off now. We very much appreciate the questions that we’ve had throughout the morning.

I’ll just summarize briefly our feelings about the quarter. We’re very pleased with the general rental business where we saw great same-store growth, and we continued to benefit from pricing. That is something that is very healthy for the company. Our traffic control business is disappointing. We will work and continue to work to improve the performance of that business. John mentioned earlier that we’ve identified a number of stores to either sell off or close. We expect to substantially improve the performance of that business as we move out of this year and into next year.

Overall, we felt like we had a very solid quarter and accomplished a lot. And with that, I’ll close off. And look forward to talking to all of you on the next quarterly conference call. Thank you very much, and have a terrific day.

This does conclude today’s teleconference. Thank you for your participation. You may now disconnect.

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