聯合設備租賃 (URI) 2004 Q4 法說會逐字稿

Please stand by for real-time transcript. Good morning, ladies and gentlemen, and welcome to the United Rentals Fourth Quarter and Full Year Investor's Conference Call. Please be advised today's call is being recorded. The statements in this conference call and the answers to your questions are intended to provide abbreviated and unofficial background -- unofficial background information to assist you in review of the company's press release and official S.E.C. 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 beliefs, aspects, projects, forecasts, may, will, should, on track, anticipates, and the negative thereof, or comparable terminology, or by discussions of strategy. The company's business and operations are subject to a variety of risks and uncertainties, and consequently, actual results may differ materially from those projected in forward-looking statements. Factors that can cause actual results to differ from those projected include, but are not limited to the following: Economic and industry conditions can reduce the 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, any companies that United Rentals acquires could have undiscovered liabilities, and may be difficult to a cost mace increase more than anticipated.

The audit of the company's 2004 results have not been completed, and additional adjustments may be identified. Consequently. the 2004 data, and outlook of the 2004 results are subject to change. The evolution -- excuse me, the evaluation and testing of the company's internal controls over financial reporting have not been completed, and additional material weaknesses may be identified.

The company may incur significant expenses in connection with the spec inquiry of the company and the class action lawsuits and derivative actions that were filed in light of the spec inquiry. There can be no assurance that the outcome of the spec inquiry or internal review will not require changes in the company's accounting policies and practices. Restatement of financial statements, revisions of preliminary results and guidance and/or otherwise may be adverse to the company. And anticipated consents or waivers from lenders may not be obtained, or security lenders may elect to declare in the event of default able under various indentures based on the delay in filing form 10-K.

Certain of these risks and uncertainties, as well as others are discussed in greater detail in the company's filings with the Securities and Exchange Commission. The company make no commitment to revise or update any forward-looking statements in order to reflect events, circumstances, after the date any such statement is made.

You should note that reference may be made to free cash flow, which is a non-GAAP term. Today's press release explains non-GAAP turn and includes a GAAP reconciliation. You can access the press release at the company's website at United Rentals.com.

Speaking today in Greenwich for United Rentals is Wayland Hicks, 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. Please go ahead, Mr. Hicks.

Thank you, Operator. Good morning, everyone, and welcome to our fourth quarter conference call. As we mentioned in our press releases this morning, we're delaying the filing of our 10-K to allow us additional time to review matters relating to the previously-announced S.E.C. fact-finding inquiry, as well as to complete the income tax restatement and other open items. Therefore, the financial information we'll share with you today will be both unaudited and at a fairly high level.

In the press release we issued this morning, we provided an update on the S.E.C. inquiry. We will not be providing additional information on this call. I know there's a lot of interest on this subject, but I would ask you to refrain from asking questions relating to the S.E.C. during the Q&A session of our call.

Now with that as a backdrop, let me turn and talk about the business. 2004 was the year of significant accomplishments for United Rentals. As we stated in the press release, we expected our 2004 results, when finalized, will meet or exceed the outlook we gave at the time of our third quarter earnings release.

During 2004, we grew total revenues by 8.4 percent to $3.1 billion, crossing the $3 billion mark for the first time if the company's history. Our revenue growth continues to outpace end market private non-residential construction, which was up 4 percent in 2004, according to the Department of Commerce. Our strong revenue growth was the result of our emphasis on three key priorities.

Our highest priority was to improve our return on capital, raising rental rates provides us the greatest opportunity to improve our return. During 2004, we focused the [INAUDIBLE] -- Operator?

We have our call -- our first question comes from the line of Gary McManus with J.P. Morgan, please go ahead.

We're not taking Q&A at this point, Operator. You need to put us back into the conference call. And there's something terribly disturbed with the microphone.

You are on-line, sir.

Okay. I'm going to pick up where I was, but there's a lot of distortion, operator.

Our second priority was to grow our contractor supply business. This market represents an enormous opportunity for the company. Selling contractor supplies is another way we can both serve our customers better, and expand our business at the same time. In 2004, we grew contractor supply revenues by 22 percent to $225 million, which was slightly higher than the 20 percent goal we had previously communicated.

Our third priority was to expand our rental fleet to take advantage of the recovering end market. To that end, we invested $125 million of growth capital during 2004.

Our 2004 generation of 385 million in free cash flow established a record for the company. We were able to achieve this even though our 2004 capital expenditures of 635 million were significantly higher than the 378 million we spent in 2003. We also finished the year with 302 million in cash, and that was after spending 102 million on acquisitions.

Now, turning to 2005, our plan is based on continuing recovery in the private non-residential construction, with anticipated growth somewhere in the neighborhood of 3 to 4 percent. We expect to build on the momentum we established in 2004, and believe our revenues will grow to 3.4 billion, fueled by several objectives we set for ourselves, as well as the anticipated growth in our end market.

Our most important objective will be to continue our emphasis on rental rates. We expect to benefit from the rates discipline that we put in place within the organization last year, and anticipate that our rates will be up at least 5 percent this year.

We also expect to continue to grow our contractor supply business in 2005. To support this growth, we began the implementation of the new distribution network designed to deliver most customer orders overnight throughout North America. We believe this improved level of service will help us achieve contractor supply revenue growth of 25 percent this year.

During 2005, we intend to grow our rental fleet by a further $200 to $250 million. This is in addition to the 425 to 450 million we expect to spend to maintain the fleet at its current size and age. This growth capital will allow us to increase the fleet in our existing branches, and provide fleet for the 30 to 35 branch locations we intend to open this year.

The overall growth in our revenue will be partially offset by a decline in our traffic control segment. This decline will result from our previously-announced plan to sell or close 1300 performing traffic control locations. We also expect to see this segment of our business benefit from the passage of a new Federal highway bill, although the major impact of this bill will not be felt in our traffic control business until 2006. All together, these actions should enable us to generate $200 million of free cash flow, after total capital expenditures of $675 million to 750 million, which represents significant increase from our 2004 levels, which we believe reflecting the strength of our basic business model.

The size and growth of the North American market represents tremendous opportunities from United Rentals. Our plans for growth combined with our inherent operating leverage should allow us to improve our profitability and improve our return on invested capital, and with that I'm going to turn the presentation over to John. John?

Thanks, Wayland. Good morning, everyone. I'm going to pick up where Wayland left off on the operational and financial results, and provide some more details on that, and the advantage, of course, of going second is Wayland gets to suffer any of the technical problems that we have with the call in his time period, and hopefully we have them ironed out here for those who were interrupted, we apologize, but, anyway, let's get into the results.

Do I want to highlight the tax restatement we mentioned that in the press release. This was a restatement that came out of our Sarbanes-Oxley evaluation and testing process. In that process, we identified some errors in our income tax reporting, and those errors caused us to report too high a tax provision, income tax provision, in the years '99 through 2003. So we're going to have to go back and restate our financial statements for that time period and reduce our income tax provision, which will, of course, increase our net income by a total of $25 million, is what we're expecting for that entire time period of '99 through 2003. So that work is ongoing, and we hope to complete that process fairly promptly.

Now, rather than me go through the pieces of why that restatement occurred, we do file an 8-K this morning that has a lot more details on the components of the errors that occurred in our income tax reporting, and I would just like you to read through that, if you would like to see more information. I would certainly be happy to follow up with any questions, but I think you'll see the 8-K spells it out pretty clearly. It's probably worth pointing out that this has nothing to do with our cash taxes, this will all be an adjustment to our deferred tax provision.

So moving on to the operations, let's just touch about half a dozen highlights here.

First of all, as Wayland mentioned, we expect to meet or exceed the adjusted EPS outlook we provided in our October 24 press release. Now, in case you don't have that press release handy, let me just recap what we said in that press release. We indicated our adjusted 2004 EPS outlook at the time was for $1.20 a share, but you have to keep in mind that that outlook did not reflect the impact of the new method for accounting for convertible debt. You'll see in our 10-Q that we filed with the third quarter that our $1.20 outlook would have been reduced by 5 cents, taking it down to $1.15, when you factored in that EITF announcement where there is a new accounting for convertible debt. So overall, our out look was for $1.15 for 2004, and we believe we will meet or exceed that level. Now, that's an adjusted EPS number, so as the operator mentioned, you should so the October press release to see the GAAP reconciliation.

Continuing with some more highlights. Our rental rates. Our rental rates were up 7.4 percent in the fourth quarter, and 7.5 percent for the full year. And that trend just keeps continuing to exceed our expectations. So far in the first quarter, our rental rates are up by more than 9 percent year-over-year, so we're continuing to pace well, although we obviously think that the increase year-over-year will go down, even though the sequential improvement will keep happening, because we have some more challenging comparisons in the back half of '05.

Our contractor supplies program continues to show strong growth. Overall, we increased our sales 22 percent for 2004, and if you stripped out the impact of our traffic control business, the general rental segment increased contractor supplies by 29.1 percent, so very strong growth.

Lastly on the highlights, our cash balance at the end of the year, December 31st, was $302 million, and that's up for from a level of $79.4 million a year ago. And clearly that increase was driven by the strong free cash flow of $385 million that we experienced during 2004.

So with those as the highlights, let's talk a little bit more about some of the details.

Total revenues for the fourth quarter were 836.4 million, and for the year, our total revenues were 3.110 billion. That included rental revenue of 610.1 million, and 2.3 billion of rental revenue for the full year. It's worth noting that both the total revenue and the rental revenue in 2004 reached record levels for United Rentals.

In the fourth quarter, our total revenues were up 12.7 percent year-over-year, and that was generated by a combination of things. First of all, we saw a 9.4 percent increase in our rental revenues in the fourth quarter. We saw a higher sales of rental equipment. They were up $15.6 million in the fourth quarter.

And we also saw higher sales of new equipment, contractor supplies and other, which was up 21.2 percent in the quarter, generated by two primary drivers. First of all, we saw our new equipment sales were up 17 percent in the fourth quarter, and we also saw contractor supply sales in the fourth quarter were up 32.5 percent overall. That's combining both of our segments. So very strong growth as we exited '04 in that area of our business.

Breaking the fourth quarter into our two business segments. I'm sure you all recall, we have two business segments, one of which is general rentals, clearly our largest, 92 percent of our total revenue, and in this area we continue to see good business -- improving business conditions. Our total revenue in general rentals was up 15.7 percent in the fourth quarter, driven by a 13 percent increase in our rental revenues. That increase in rental revenues was the result of two primary factors, the 7.4 percent increase in our rental rates, and the increase we saw in our rental fleet through a combination of growth capital and acquisition throughout '04.

Rental equipment sales in general rental were 75.2 million in the fourth quarter, and that's an increase of 25 percent year-over-year. We're continuing to see strong used equipment markets pretty much throughout North America, and are benefiting from those -- from that high level of demand.

Moving from general rentals to traffic control. In the fourth quarter in the traffic control segment we saw total revenues of $64.7 million, which is a $10.2 million year-over-year decline. All of that decline was the result of a decline in our rental revenue in this segment. Our rental revenue was down $10.9 million, and that just continues to reflect the weakness we've been seeing in this area of our business throughout all of 2004.

Now, as Wayland pointed out, we are planning, we announced in the third quarter, we are planning to either sell or close 13 of our underperforming branches in this segment, and those branches had annual revenue of about $60 million. Originally, we planned to complete that by the end of the first quarter 2005, but it looks like the timing on that is going to stretch out, and we're not going to get that wrapped up until the end of the second quarter. But we are still proceeding with that program.

So that was the quarter results. Let's talk about the full year results.

For the full year, as I mentioned, total revenues were $3.110 billion, and that's up 8.4 percent year-over-year. Within that, we saw rental revenue was up 5.7 percent year-over-year, our dollar utilization in 2004 for the full year was 60.1 percent, and that compares to 57.1 percent in 2003. And that improvement in dollar utilization is all the result of improved rental rates. In fact, our time utilization was down very slightly, down by less than 1 percent, but overall rental rates drove the utilization improvement.

In total, our rental equipment sales for the full year were $235.2 million, and that's right in line with our expectations throughout 2004. Although it is up considerably from 2003, it's up $53.9 million, or 29.7 percent.

And lastly, our sales of new equipment, contractor supplies, and other for the entire company was up 12 percent year-over-year.

Again, breaking '04 into its two segments, in the general rental segment, we saw total revenue of $2.85 billion, up 12.4 percent year-over-year, and that includes rental revenue of 2.08 billion, which is up 10.5 percent from 2003. The rental revenue growth was primarily the result of same store rental revenue growth, which was up by a little more than the 10.5 percent. It was up by 10.9 percent. That rental revenue growth was primarily the result of the 7.5 percent improvement we saw in rental rates, but we also saw expansion of our fleet in our existing branches, which drove that increase in rental revenue.

Now, although acquisitions added about 7.5 million of revenue to 2004, the impact of consolidations and closures of branches we made around the country, which is a constant process we go through, the impact was to net out against that, so that overall, we didn't have an overall increase from that aspect of the business.

Rental equipment sales and general rental were up by $51.4 million, and that's up 28.4 percent year-over-year, and came in at $232.6 million. Clearly you can see that the general rental segment is the largest part of our rental equipment sales.

Sales of new equipment, contractor supplies and other were up 13.9 percent overall in the general rental segment, and that was driven by an increase in our contractor supplies, which were up 29.1 percent in general rentals.

Moving from general rentals to the traffic control segment. As we said throughout 2004, we've been seeing weakness in this segment of our business. Our total revenues were $254.9 million, and that's down 22.8 percent, or 75.3 million. Most of this, almost all of this, was the result of a decline in our rental revenues in this segment. Our rental revenues were down $72.5 million, or 22.4 percent.

When you look at the other lines of business, other revenue lines in the traffic control segment, they're showing some mixed results, but overall, they don't have much impact on the segment results since they're less than 10 percent of our traffic control segment revenue.

So moving back from the segments to our consolidated results, our interest expense, we've been talking about this all year, our interest expense in 2004 in the fourth quarter was $42.7 million. So that brings the total for the full year to $169.4 million. And that's down year-over-year considerably. That's down $54.5 million lower than 2003. That decrease has been tracking ahead of what we've expected throughout 2004, and that improvement that's better than expected has really been driven by the lower floating rates that we've been seeing on our debts and our interest rate swaps. We also got a little bit of benefit throughout the course of the third and fourth quarter from additional interest income that wasn't originally anticipated.

Moving to our cash flows. For the fourth and for the full year, we've clearly outperformed our expectations. During the fourth quarter, cash flow from operations, plus the proceeds from our used equipment sales, totaled $272.3 million. And when you look at the full year 2004, we had cash flow from operations of $761 million, and we had $235.2 million of proceeds from used equipment sales, so that brings that total to just under $1 billion for the year. That $1 billion for 2004 is up $472.6 million over 2003, so a very significant improvement.

During the fourth quarter, our CapEx program, we bought $112 million of rental equipment in the fourth quarter, and that brings our total purchases of rental equipment for the year to $577.2 million. The components of that are 452 million of replacement CapEx, and 125 million in growth CapEx.

In addition to our rental CapEx, we always have non-rental CapEx. For 2004, that was $57.4 million, and as we mentioned in the third quarter call, that came in higher than we expected because we purchased nine real estate facilities for $21 million that wasn't in our original plans.

Now, offsetting that 57.4 million of growth spendings, we generated $23.5 million from the sale and lease back of 10 of our branch facilities. So on a net basis, our non-rental CapEx was $33.9 million, which is more in line with our plans, and what you typically see from us year to year.

So taking that all into account, we had free cash flow for 2004 of $358.1 million, and that level $385 million is well above our target of $250 million. Now, I should point out, though, that almost all of that increase year-over-year, the $385 versus 250 was generated by higher than expected sources from our working capital. But even factoring that out, we still would have met our 250 million free cash flow goal.

How did we use the cash flow? Well, we did do two acquisitions throughout the year. We completed two acquisitions in Canada. But most of the capital went to increase the cash on our balance sheet. We increased our cash by $153 million during the fourth quarter, which meant for the full year, we are up 223 million to a balance of 302 million. The two small acquisitions in Canada took up 102 million of purchase price, which -- and then the full year revenue from those acquisitions will be about 75 million. Obviously, we've got very little of the impact of the second deal, since it was done in the fourth quarter.

Looking at our balance sheet, total assets ended the year at $4.940 billion. The original cost of our rental fleet at year end was 3.7 billion, that's up from 3.5 billion a year ago. As I mentioned, 125 million of that increase was growth capital, and the balance came in through the acquisition program.

Our average fleet age ended the year at 40 months, and that's the same level that we saw a year ago, and it's pretty much a steady target that we have, around 40 months.

We had total debt at year end of 2.940 billion, and when you net out our cash balance, our net debt was 2.640 billion, which is down about $95 million year-over-year.

We finished the year with $213 million of rental fleet under long-term leases, and the expense for our long-term leases was $59 million for the full year, and $16.1 million for the fourth quarter. And we don't plan to see that level of rental fleet under long-term leases change significantly as we go through 2005. It will hover around that $200 million number.

As of last week, March 11th, we had $179 million borrowed under our revolver, and we also had $52 million in LC's issued under that $650 million revolver. We had the full 150 million of Letters of Credit drawn under our institutional LC facility, and in addition to our revolver, we had nothing drawn on our AR facility, our $250 million AR facility.

Now, as we mentioned in the press release, our bank covenants and our AR facility covenants require us to deliver audited financials to the banks not later than March 31st. Now, we've begun the process to seek consent to extend that deadline, and we will move we can wrap up that process by the time this time frame lapses at March 31st. Now, obviously we will update you on the progress of that as it goes forward.

Lastly, I just want to close by recapping the 2005 outlook. Wayland mentioned some of these components of our 2005 outlook, but it's worthwhile, I think, to just kind of list through them.

First of all, we've targeted total revenues to grow by 8.5 percent in 2005. And that's all going to be generated by general rentals, since we expect traffic control is expected to go down in total revenues in 2005. Overall, in our general rental segment, we see total revenues up approximately 10 percent, and that's comprised of a 10 percent improvement in the rental revenue in general rentals, mainly driven by the more than 5 percent improvement we expect to see in rental rates. The balance of that 10 percent improvement in general rental revenue will be caused by same-store volume growth, adding more fleet to our existing branches, which should come in around 3 to 5 percent, and the balance of the growth will be a small impact from our cold starts and the rollover impact of the fourth quarter acquisitions. In total the cold starts and the 2004 acquisitions will total about 1 to 2 percent growth.

None of our 2005 outlook builds in any additional acquisitions for 2005.

Our cold start program in 2005 consists of 30 to 35 new branches. That's up considerably from the levels we've seen over the last two years. In 2003 and 2004, we added only 7 branches in each of those two years. And all of our cold starts will be in general rentals, and they include 5 new trench locations, and four new pump and power specialty locations.

Our cold starts will use up about $70 million of the growth capital number I gave you earlier, and will generate about 25 to 35 million of total revenue with very little impact on profitability. Typically these stores take at least 12 months to turn profitable.

Our 2005 outlook for the traffic control segment, although we are seeing positive signs on the horizon, that not going to impact us for 2005. The highway bill just got passed by the House at $238.9 billion, and in the next few weeks, the Senate is supposed to begin the work on their bill. But even if we resolve that by May, that will only benefit us in 2006 and going forward. So in 2005, you can look for traffic control revenue to be down somewhere between $40 million to $50 million, depending on the timing of the closures and the divestitures that we're planning to complete by the end of the second quarter.

Lastly, going back to the entire company's performance, the consolidated performance, total rental equipment sales will be pretty much flat with 2005 -- sorry, with 2004. We expect them to come in at 225 to 250 million in 2005. And that will lead to a replacement CapEx program of about 425 to 450 million of replacement CapEx. We'll spend 200 to 250 in growth CapEx on our rental fleet, and we'll see our new equipment sales contractor supplies and other revenue will be up about 10 percent in total, primarily driven by the 25 percent improvement we expect in contractor supply sales. We'll expect that to top 250 million of revenue in 2005.

So when you factor all of that in, in 2005, we're looking for a cash from operations of about 725 to 750 million, and that's with no significant improve independent our working capital, unlike we saw this year in 2004. And after all of our CapEx and expansion spending, which is going to be up $125 million year-over-year, we're anticipating free cash flow in 2005 will exceed $200 million.

So with all of that, I think we're now ready for Q&A. And I would just like to remind everyone to please refrain from asking questions on the S.E.C. inquiry, because we're just not prepared to offer any more information than what we have in the press release. And I also do want to remind you that until our audit is complete and we complete the work on our '04 results, we're really not going to be able to give too many details on the fourth quarter and full year, but we certainly welcome your questions, and I would like the operator to give instructions on how you can ask questions.

Very good. Ladies and Gentlemen, we will again the Q&A session now. If you have a question, please press star followed by 1. We ask that you please limit yourself to one question and a related follow-up. You are certainly welcome to queue back up by pressing star followed by 1. And our first question comes from the line of David Bleustein, UBS. Please go ahead.

Good morning.

Good morning, David.

A couple of quick questions. You mentioned where you were in your discussions with the bondholders and the banks, but will your creditors receive anything in exchange for ratifying the amendments to your covenants and indentures?

Hi, David, it's John. We've been advised by the banks, and we're going out with a proposal that this would be an administrative amendment, and that we would not be looking to pay anything to get it.

What book tax rate should we be assuming for 2005 and beyond?

For the -- basically the same rate that we've been using historically. I think historically, it's been about 38.25 percent, is the right rate to use.

And I think you've given us all of these data points, but you blew them by me pretty quick. The capital spending in 2005, how much is brick and mortar?

We didn't give a specific number, but you can expect us to run somewhere between 40 to 50 million in PP&E spending on our rental equipment.

And then in order to keep the fleet at its current size and age, in theory that number should be creeping up, as, you know, as the fleet gets bigger. What is that? Did you say that number is 425 to 450? And what was it last year?

The number that we expect for replacement CapEx in '05 is 425 to 450. That will probably knock it down a little bit, when you combine that with the growth capital, but generally, I think last year we were giving on outlook of 400 to 425 for replacement CapEx, so it has creeped up a little bit, David.

Okay. Terrific, thanks.

And our next question comes from the line of Gary McManus with J.P. Morgan. Please go ahead.

Good morning. Is the delay in filing the 10-K, is that due to the Sarbanes-Oxley related, or is it the S.E.C. inquiry, or both. In other words, once you complete work on the Sarbanes-Oxley, will you be able to file your 10-K?

Well, you've got to look at all of these things in total. I mean, it's too theoretical to try and break down all of the pieces, and we're going to have to take it one step at a time. All of the things we've listed, the S.E.C., the tax restatement, and the remaining Sarbanes-Oxley, the 404 testing and evaluation, all of them are holding us up at this point in time, Gary, and there's no one thing that we can break apart.

Is so if the S.E.C. inquiry continues to be ongoing, you can't file your 10-K?

We don't know that. It's a step by step process we have to evaluate it each time we move forward and make some progress on these different fronts. We don't know that.

Okay. I think you're asking your lenders to grant waivers through the end of June, or June 29th. Is that -- I mean, what's the significance of that date? Is that just like a typical three-month extension that's customary, or do you expect to get your 10-K filed by then?

Of course we don't want to give anyone any specific guidance when we plan to file anything. That's a pretty standard request. A lot of companies are in this situation right now, where they're looking for that amendment, and that's a pretty standard request for the 90-day extension.

Okay. Thanks.

And our next question comes from the line of Barry Bannister, Legg Mason. Please go ahead.

You seem to be managing through this cycle fairly well, and I wanted to ask you, it looks like -- free cash is interesting, but I always look at operating cash flow, and it was pretty good, it was 761 million, but could you give me a little color as to what part of that was working capital?

Yeah, I don't want to give a specific number, Barry, because as we complete the audit, the number could move just a little bit, the working capital number, but here is the best way to look at it. The 385 that we achieved in free cash flow, we said that that was above the 250 that was our original outlook. That difference, 250 to 358, was comprised almost entirely of the improvement we saw in the working capital.

Any particular part of working capital better than you thought it would be?

Well, if you go back to our calls, you may recall that in the fourth quarter of '03, we had a significant draw-down to take advantage of some discounts our vendors were giving us on the AP level, so think you'll see our AP got drawn down pretty heavily, and we were a cash user in fourth quarter of '03. That's one of the number one drivers.

And on this non-rental CapEx, in the past, it has been historically as much as a 5th of your total CapEx, about that range. Besides just the 50-odd million you said, do you think you're going to have some old trucks or anything you need to spend more on in '05, so we should bump that number up for the year?

No, you should still operate with the $40 million to $50 million number. You know, without the acquisition program, when you look back to the history in those years where we had big PP&E spending, we're buying a lot of companies, and as you might imagine, up grading facilities, upgrading delivery vehicles, that's what was driving that program. We're at a steady state now, Barry, where that $40 to $50 million number is a good number.

Okay, thanks.

And our next question comes from the line of Sarah Thompson with Lehman Brothers. Please go ahead.

Hi, good morning. Clarification. You said that your EPS guidance was the same as you -- or I guess equaled or exceeded what you had given on your third quarter call. Is that true for EBITDA as well, so we're still looking at something 800, 825 or higher?

We haven't given any guidance on the EBITDA, we have just focused on the EPS and the free cash flow, and operating cash flow, so unfortunately we are not able to provided any more details than that.

Okay. That's what I was afraid you were going to say. I don't know if you can answer this or not, but the tax situation relates only to 2003 and before, right? There shouldn't be anything impacting 2004?

That's correct. It impacts -- '99 -- it impacts -- our I first cut at it, it impacts '99, 2000, 2001, 2002, and 2003, but that's it, it doesn't go beyond 2003.

Okay. So am I missing something in that you're not saying anything about EBITDA, but you are saying it about EPS?

No, we just -- until we finish the audit and finish all of the testing work that's required, we're just not comfortable for providing additional details. You know, we're going to work hard to get everything wrapped up, but until then, we're not comfortable providing a lot more details on the P&L.

Okay. Fair enough. And then on your -- I know you mentioned time utilization went down a little bit this year. In terms of your growth CapEx plans for 2005, I guess what's your goal for, I guess, you know, we could figure it out either way, but either time utilization, or dollar utilization? I'm just trying to figure out, are you kind of spending the minimum CapEx you can spend to meet the market growth, or are you giving yourselves some room in case non-residential construction spending is better than you're anticipating?

We're really not -- we're planning on, as I said in my opening comments, about 3 percent to 4 percent growth in the private non-residential construction market. Now, to the extent we saw for instance in January 10 percent growth, that's one month, and, as you know, when you look at that data, it's often restated and one month clearly doesn't make a trend, so if, as we went through the year, private non-residential growth accelerated, and looked like it was going to run a lot higher, then we could come back and revisit the decision on how much capital we would put in.

That being said, we are seeing some amount of lead time issues. We've actually been pre-ordering equipment to avoid some of the problems that the industry experienced last year, but we might bump up against some lead time issues if for instance we run through the first quarter, didn't see much of a change, and then saw the world take off and be more positive as we run through the second quarter and the third quarter.

I think the best way to look at to that, Sara, if you pull out the the 70 million of our growth capital that we're putting into our cold starts, that growth capital number would be 130 to the -- you know, on the low side, to 180 on the high side. So not very much of an increase from the levels that we saw at 125 in '04. So to Wayland's point, we haven't factored in much of an improvement beyond the '04 level.

And given the availability of equipment, historically, you guys seem to buy that early. Is that the same case this year, or are you going to have problems?

We actually pre-ordered equipment because we did experience some problems last year, so in the November time frame, we started working with our suppliers, and actually did pre-order, so we would expect probably more capital to be spent, slightly more to be spent in the first quarter of this year than we spent the first quarter of '04.

Great. That's all I had. Thank you.

Thank you. We do have a follow-up from the line of David Bleustein. Please go ahead.

With 300 million in cash on the balance sheet, and another 200 million planned after the growth capital and the cold starts, what are your priorities for the additional cash?

We're really wrestling with that now David. If fact, we've been talking about it as we came through the end of the year. We do not intend to buy shares down. We have some limit on how much debt repayment we can make, and, as you know, the debt that we have is very attractively financed, so we're not real thrilled with the idea of paying debt down right now, so we're kind of wrestling with that, looking at different options that we have. John, can you add anything to that?

Sure. I mean, clearly, we've set a goal, David, of improving our credit statistics, and reducing the amount of leverage we have over the next couple of years, so that we exit 2006 with a much higher level of credit ratings. We've mentioned in the past that we thought we would be putting a couple of hundred million dollars of our free cash flow over the next couple of years to paying down debt.

We haven't fundamentally changed from that view, but as the business improves, and profitability increases, it may be that our profitability gets us there to the credit level that we're getting quicker than we expected. So we're going to have to keep navigating through this. I would expect near-term that some portion, again between that 100 to 200 million, we would like to try and to take some debt down off the balance sheet.

Terrific. Thanks.

Thank you. And our next question comes from the line of Joel Tiss with Lehman Brothers. Please go ahead.

Hi, guys, how're you doing?

Good, Joel, how are you?

I'm all right. Can you give us on sense strategically why you're thinking about closing the branches just in front of the highway bill coming and that segment seeming like it's going to turn around?

Yeah, Joel, it's John. What we did is we went through a strategic plan with the traffic control group, the district managers and the VP that heads up that group, and we really said where are we going to get the most bang for our buck when this bill recovers, when revenue picks up, and let's get out of those markets where we're not the major player, where we're not in the number one position, where we've got weakness. We're isolated, we may have one branch, or maybe the number third or fourth or fifth player, where there local market dynamics aren't right. So it's really a process of culling out branches that are not performing today, and are not really our power alley for growth in the future. So we don't think we're compromising our growth in the traffic control side, we think we're enhances it be getting rid of these branches.

And then in that same vein, can you give us a sense -- you know, you're opening, to me, a surprising number of cold starts. Are any of those branches in roughly the same places where you closed old branches a couple of years back?

No, I wouldn't say that, David. They're basically -- or, sorry, Joel, they're basically scattered pretty much across the United States. We are opening some branches, by the way, that are in business areas that we would like to grow, at an even more faster rate. For instance, we'll open three our four of those branches as pump and power stores, four or five of them will be trend safety. Those are two really nice markets for us where we're building a good position, and that's probably the most significant variation from cold starts we've opened in the past.

Okay. Just two last quick cleanups. On the same-store sales of your contractor supply, can you give us the same store versus, you know, versus opening new? And also, can you give us a sense while you're so conservative on commercial construction growth? It seem like it should be picking up a little more in '05 versus '04? Thank you.

The contractor supply same store growth we haven't looked at it frankly, but if you look at it, almost all of the growth would have been same store. As John mentioned, we only did seven cold starts last year, and I would think a relatively small part of the total would have come from that.

With regard to your second question, in terms of are we being conservative, you realize, of course, when we put the plan together for the business, we start that in the September-October time frame, and work that bottom's up with our organization. When we were traveling through that period of team, we were looking at a fairly high degree of uncertainty where non-residential construction is headed. As we went through the fourth quarter, it turned out that we were doing about 5.2 percent. That's not wildly off from the rate that we planned the business -- I mentioned before 3 to 4 percent growth.

So maybe we're being a little bit conservative. But when you're wrestling with the vagaries or the uncertainties of what kind of construction lies in front of you, up to 15, 20 months in advance, it's hard to be too -- too clever with that. So I think we've got it right again, as it takes off and really proves to be much stronger than that, we will do our best to react to that.

The key thing there is to drive for that increase in rental rates. We still have an opportunity to get more on the rental rate front, and, you know, that's our -- that's the step one focus, is getting that rental rate improvement.

Okay. Thank you very much.

And our next question comes from the line of Lionel Golivo with Goldman Sachs. Please go ahead.

Good morning.

Good morning, Lionel.

How are you? Quick question. First of all, on the sale lease back transaction, I am seeing that you had 23 million of proceeds in the fourth quarter. I was just wondering, you still have an option with CLRS Acquisitions, and I think you can require them, basically to ensure an additional sale lease back transaction for up to $51 million. Is that transaction included if your free cash flow guidance, your 250 million of free cash flow guidance for '05, or could it be an upside to this number?

You broke up, but did you ask about the sale lease back transaction? Is that what you're asking about?

Yes, I was asking about -- basically, I was -- I would like to know if you expect to use any sale lease back transactions in 2005?

I mean, the sale lease back that we did in 2004 was a one off opportunity to take some property that we planned to be in for a long time. They are strategically very attractive properties, and rather than fund the development of those properties over the next 10 years, we were able to find a REIT, a financial operator, independent REIT, who is in the business of real estate and developing it. So that was an attractive process to sell to them.

I don't see selling additional real estate off of our balance sheet as a primary focus, but that same partner has made a commitment to us that as we grow, when we open new branches, they will open those -- they will fine that real estate, buy that real estate, and lease it to us to help us fund our growth. So the primary purpose for that partnership was to fund the future growth, as opposed to getting cash for the balance sheet. And by the way, the full impact of that sale lease back for 2005 and going forward is going to be less than a million dollars of additional costs going through our P&L, so it's a pretty minor impact up on our P&L going forward.

Okay. But you don't expect any proceeds, all of you're guidance, your free cash flow guidance for '05 does not include any proceeds from a sale lease back transaction?

No, there's nothing on the cash flow guidance that we gave for '05, no proceeds anticipated in that cash flow guidance.

Okay And then, you know, in terms of CapEx, I was just wondering what you were seeing in terms of price of new equipment. I know that some of your suppliers are implements some steel surcharges. I think you were able to avoid some of these surcharges in '04. Will that still be the case in '05, or will you have to pay a little more for the same equipment.

This is Mike. In 2004, versus 2003, we had a modest decrease on pricing. Going into 2005 through our planning process with our vendors, we're seeing a slight increase in the single digits.

Okay. Great. Thank you.

You're welcome.

And our next question comes from the line of Scot Shear with Clovis Capital. Please go ahead.

Two questions. John, you said that the tax issue had nothing to do with 2004, or at least that's your perception right now. So I'm curious, in this release, why did you not give an EPS number, and why did you not go through and give all of the final numbers?

And then related question is, if I look that's rental revenues, they were almost identical to the third quarter, so if I'm trying to back into what I think the earnings will be in this fourth quarter versus some other period be are there any material differences traditionally in the fourth quarter versus the third with regard to expenses, such that if I wanted to think what I think the earnings might be, I might just use the third quarter as a proxy, given that your rental revenues are identical to the revenue -- to the 771 as they were there in the third quarter of '04?

Well, on the second point, you know, obviously I'm not going to -- I'm not going to get into the details of, you know, speculating on what the earnings should be or shouldn't be for the fourth quarter. I don't think that's really where we want to go.

In terms of the question of why we're not giving full information, it's really, you know, a number of components. As we mentioned in the press release, it's looking at matters that the S.E.C. -- to do with the S.E.C. inquiry, completing our fall forecasting, evaluation of our fall forecasting, and you're right, the income tax restatement as we see it today doesn't impact '04, but we haven't had the auditor sign off on that, so obviously we've got to work through that, as well.

Mr. Shear, does that answer your question?

Yes, thank you.

Okay. Moving along. Our next question comes from the line of Matt Shefler with ISF. Please go ahead.

Two questions, please. Can you just review the growth capital that you had in 2002-2003, and also, can you -- can you just share the net new branches in 2004 versus 2005, and how you're going to effectively manage that growth?

Sure. Let me try and pull that apart. Our growth capital in 2003 was zero. In fact, we underspent our traditional -- or our targeted CapEx level. We spent $336 million in 2003. So no growth capital in '03.

In '02, I think we had a little bit of growth capital. Let me just check fleet size. My recollection is it was less than 100 million. Yeah, 2002, our fleet size went up by 60 million, so less than 100 million of growth capital in 2002.

The net new stores in 2004 we had 7 new stores, and in 2003, we had 7 new stores. Going forward, in 2005, obviously 30 to 35 is a significant increase.

Now, we have historically, if you roll back into the '99, 2000, 2001 time frame, we had historically opened about 15 to 25 stores each year, and now having said that, we have made some steps to make the 30 to 35 a more smoother progress. We've brought one of our regional VP's in to head up our cold start program. He is a very experienced veteran in the industry, he has been in the industry 15 to 20 years, and he is making sure we're hitting on all cylinders on that cold start program.

Can you comment on your success relative to your plan in 2003 and 2004, the financial success of opening your new branches?

Sure. Pretty much unanimously we achieved the goals of getting them to turn positive in roughly 12 months. I mean, generally speaking, our branches, once we open them, we can turn them positive and they start contributing to operating income within 12 months. And we've seen that over the last 7 years.

And the last question, if I may. What's the incremental new spending that you would have to do for each store?

Well, we're planning on 70 million for all of the stores for 2005. Now, obviously, those stores, when we roll into 2006 and 2007, they're going to have a lot more same-store growth than you would see out of the rest of the business, because they are hitting -- it really takes about three years to mature that store. So if you're spending $3 million, $4 million in the first year, you would keep up that pace for about two or three years before you would start settling out to more of an average fleet size.

Thank you very much.

Due to time restraints. That was our last question. Speakers, please go ahead with any closing remarks.

Okay. Thank you very much, operator.

Let me just close the call off be say we go felt very good about the fourth quarter. In fact, we felt very good about the full year. When I look back on the year, our revenue growth, our rates improvement and strong free cash flow were probably the three highlights. We've talked a lot on the call about non-residential construction, which appears to be on an upward trend. If that is a the case and that trend continues, that will clearly benefit the business. So on balance we feel good about the approximation of the business, we feel good about where we are as we move through the first quarter, and think that we're on our way to repeat the performance that we had last year, and have another very good year.

And with that, I would think everybody for joining our call today, and I'll look forward to talking to all of you on our second quarter conference call. Thank you have have a good day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference Service. You may now disconnect.