聯合設備租賃 (URI) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals' 2005 first 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. As indicated in today's press release, the Company's results for the first quarter of 2005 have not yet been finalized, and consequently results and other data for such period are preliminary and subject to change.

In addition, certain of the statements in this conference call 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 anticipate, or the negative thereof or comparable terminology or by discussions of strategy. The Company's business and operations are subject to a variety of risks and uncertainties, and consequently actual results may differ materially from those projected by any forward-looking statements.

Factors that could cause actual results to differ from those projected include, but are not limited to the following. (1) unfavorable economic and industry conditions can reduce demand and prices for the Company's products and services; (2) governmental funding for highway and other construction projects may not reach expected levels; (3) the Company may not have access to capital that it may require; (4) any companies that United Rentals acquires could have undiscovered liabilities and may be difficult to integrate; (5) costs may increase more than anticipated; (6) the audit of the Company's 2004 results has not yet been completed and accordingly, previously announced data for 2004 are subject to change; (7) the evaluation and testing of the Company's internal controls over financial reporting have not yet been completed and additional material weaknesses may be identified; (8) the Company may incur significant expenses in connection with the SEC inquiry of the Company and the class-action lawsuits and derivative actions that were filed in light of the SEC inquiry; (9) there can be no assurance that the outcome of the SEC inquiry or internal review will not require changes in the Company's accounting policies and practices, restatement of financial statements, provisions of preliminary results or guidance, and/or otherwise be adverse to the Company; and (10) security holders may elect to declare an event of default under various indentures based on the delay in filing of the Company's SEC reports.

Certain of these risks and uncertainties, as well as others, are discussed in greater detail on the Company's filings with the Securities and Exchange Commission. The Company makes no commitments to revise or update any forward-looking statements in order to reflect events or circumstances after the date of any such statement is made. You should note that references may be made to free cash flow which is a non-GAAP term. Today's press release explains the non-GAAP term and includes a GAAP reconciliation. You can access this press release on the Company's website at www.UnitedRentals.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. Mr. Hicks, you may begin.

Thanks, operator, and good morning everyone. Thank you for joining our conference call. This morning we reported, on a preliminary basis, first quarter diluted earnings per share of $0.15. We also said we would delay finalizing our results for the quarter and filing our 10-Q until we have reported final results for 2004. Now with this in mind, the financial information we will share with you this morning will be preliminary as I said, and like last quarter at a fairly high-level. Let me also briefly comment on the SEC inquiry which is still underway. As we have previously said, it appears to relate to a broad range of accounting practices and does not seem to be confined to a specific period of time. Our Board's Special Committee is currently reviewing matters relating to the inquiry. Their review is ongoing and the committee has not yet reported any conclusions.

Now as frustrating as I'm sure this is for all of you, we don't have any additional information to share with you at this time. Given that, I will ask you to refrain from asking questions regarding the SEC inquiry during the Q&A portion of this call. Now with that, I would like to move directly to the performance of our business in the first quarter where we saw some very positive results.

Our total revenue was up 13.5% reflecting strong growth of 14.7% in our general rental business and a decline of 3.2% in our traffic control segment. We were very pleased that we succeeded in raising rental rates in our general rental business by 9.7% which was a record year-over-year improvement. Although I should say the first quarter comparison will be the easiest one this year. Time utilization which reflects customer demand for our equipment inched up slightly during the quarter compared with the first quarter of last year. So in effect, we have been able to raise rental rates without impacting customer demand.

As for our traffic control segment, there is not a lot new to report regarding this part of our business, other than we are making progress in selling or closing the underperforming branches that we previously discussed, and we're stabilizing the performance of this business. The current transportation legislation in Washington when finalized, should benefit our traffic control segment but it's increasingly likely that this will have more of an impact on 2006 than it will have on this year.

Shifting subjects, we are making significant investments in our overall business this year, including a number of regional distribution centers to support our contractor supply sales growth. We are opening a total of 30 to 35 new rental branches, and we're spending 650 to 725 million in capital for our rental fleet. With all of that, we feel comfortable with these investments, that the Company will generate strong free cash flow of $200 million or more this year.

I would like to elaborate a little on our contractor supplies. We developed this business to capture a modest slice of an enormous market and we're starting to see just how favorable that revenue potential can be. We have already opened three distribution centers in 2005 bringing our total to five, and we expect to open another four by the end of October. These new centers contributed to the 41% sales growth we achieved in contractor supplies during the first quarter, and they are an essential part of the infrastructure we are beginning to build to offer our North American customers next day delivery for their orders.

We have opened ten new rental branches so far this year, all in our general rental segment. One of these is on Liberty Street in lower Manhattan, directly across the street from where the former World Trade Center stood. We picked this location in anticipation of the construction that will shortly begin there. It is also a new model for us for branches that will be located in major cities or metropolitan areas where available space is typically constrained. So if you happen to be in the area, we would welcome a visit from anyone on the call to see this new location.

Typically a new branch turns profitable after nine to 18 months, so most of the call starts we are opening this year will be an ebb (ph) investment for us. However, they obviously expand our network and will help us grow revenue and profit in the future. It is our intention to open at least 30 to 35 branches each year for the next several years, as long as strength in our end market holds up.

On that note, I should highlight some positive Commerce Department data that affects our industry. Spending on private nonresidential construction, our primary end market grew 7% during the quarter compared with the same quarter last year. This is the fifth straight quarter of growth and it supports the strong revenue and profit we're projecting in our outlook for the full year. With that as a review of some of the highlights of the quarter, I will now turn the call over John.

Thanks Wayland. Good morning to everyone. Now that Wayland has given you some highlights for the quarter, let me give you some preliminary financial information and also go into some more detail for our outlook for the balance of 2005. With the 2005 outlook, I'm going to be talking as well about EBITDA results, so I need to point out that EBITDA is a non-GAAP term. And I am sure everyone is aware of this, but it represents net income plus interest, taxes, depreciation, amortization. And you're not supposed to use this as a substitute or an alternative for net income or cash flow from operations.

So anyway, with our results for the quarter, Wayland started off by mentioning we had earnings per share of $0.15 in the first quarter of 2005, and that is on a share count of 104.7 million shares. Our total revenue for the first quarter were $732 million, an increase of 13.5% year-over-year, and that includes our rental revenue at a level of $514 million, which is up a little shy of 10%, 9.9% year-over-year. Our dollar utilization in the quarter was 53.6%, as compared to 49.6% in the first quarter of the prior year. And that increase we saw in our dollar utilization was primarily driven by our higher rental rates.

It's probably worth noting that the first quarter dollar utilization is the highest first quarter utilization we have seen since back in 2000 before we saw the decline in construction spending. So obviously indicative of the recovery we're seeing in the business. Our rental rates, as Wayland pointed out, are up 9.7% in the quarter on a year-over-year basis, and that improving trend of rental rates year-over-year continues as we roll into the second quarter of 2005. So far in the second quarter, our rental rates are up about 5.5% on a year-over-year basis.

I think Wayland mentioned it in his opening comments, that as we move through the quarters we're going to have some more difficult comparisons in our rental rate increases year-over-year. If you go back to the second quarter of 2004, we had a sequential increase in the second quarter of 7% in our rental rates. Now we plan to have sequential increases as we go through the balance of 2005, but I am not sure they are going to be quite that dramatic.

Nonetheless, for the full year 2005, we still have an outlook that we will increase our rental rates year-over-year by more than 5%. Our time utilization was up slightly in the quarter. It was only up about half a percentage point, but it's worth mentioning it because last year as we were rolling out this push to raise rental rates, we actually saw time utilization drop a bit, by about 1% in 2004. So now as we have crossed into 2005 we have changed that trend, we have turned that around, and we're actually seeing time utilization improve while at the same time getting that significant rate improvement. And also worth pointing out, we also had a larger fleet year-over-year. We had about $100 million more fleet on rent in the first quarter of '05 versus '04. So all trends are pointing positive in that respect.

Looking at our rental equipment sales in the quarter, we had total rental equipment sales of $65.5 million, and that is up 18.3% year-over-year. Now although that is a significant increase year-over-year in the quarter, I want to point out that for the full year we're still on track to do our normal replacement sales of about 225 to 250 million. So for the full year we expect to be pretty much flat even that we have had an accelerated pace in the first quarter.

Moving to our next revenue line which is our sales of equipment, contractor supplies and other revenues. In total, that was up 24.8% in the quarter, and most of that growth was generated by higher sales of equipment which were up 20.4% to a level of $56 million. And our higher contractor supplies, which as Wayland mentioned, was up 40.7% and came it at the level of $64 million for the quarter.

So with those consolidated results, let me talk about some selected data in each of our two business segments. I will start with the general rental segments, which is by far and away our largest segment, representing 94% of our total revenue in the first quarter results. We continue to see strong performance in our general rentals segment. Our total revenue was 688 million which is up 14.7% year-over-year. That growth included an 11.2% increase in our rental revenues to a level of $475.4 million. That rental revenue growth was almost all organic growth. Our same store rental revenue was up 11.1% in general rentals. And the organic growth we saw was driven by that rate improvement, 9.7% plus some additional time and fleet size increase.

Looking at our rental equipment sales in general rentals, by far and away that represents almost all of our rental equipment sales. And in the quarter we had $65 million of sales in the general rentals segment. Our equipment sales and contractor supplies growth in the general rentals segment was very strong. Equipment sales were up 21% reflecting the overall improvement that all of us have been seeing, both the manufacturers and the rental companies, in the sales of equipment. Also, our contractor supplies in general rentals was up 45.3%.

Now the third component of that revenue line is our service business and that also saw some improvement, although not nearly as dramatic as the other two components. But our service business was up about 8.1% year-over-year to a level of $32.4 million. And we have a number of initiatives underway that we think will continue to drive accelerated growth in that service line of business as we move into the next few years.

Moving from general rentals and shifting to traffic control, in that segment of our business we saw total revenues of $44 million which is down about 3.2% year-over-year. That decline was pretty much driven by the decline we saw in rental revenue in that segment which was off 3.5% year-over-year. During 2005, our view is that our same store revenue in the traffic control segment will be pretty much flat year-over-year, no significant increase or decline, although overall total revenue will be down because of the divestitures and branch closures that we're planning -- that we have completed and we're planning to complete over the next couple of months.

Overall, we're anticipating that total revenue in the traffic control segment will be down about $30 million in 2005 versus 2004. Now having introduced the subject of divestitures and closures, let me recap where we are at on the program that we announced last year in the third quarter. You may recall we were targeting 13 branches for sale or closure that had total revenue of 60 million. The intention was to either sell or close those branches to improve the traffic control segments performance because these branches were much weaker performing, unprofitable branches.

Now of the 13 identified, we have completed the sale of five and those five had total revenues last year of $14 million. Three of the five took place in the second quarter of 2005. So overall there was no real impact to the first quarter, either positive or negative, from the sale of those five branches. So that leaves us with eight remaining. Fortunately our operating folks have been able to turnaround four of those eight and we're seeing some positive results out of those four as we have rolled into the second quarter. So our plan is not to divest them; we'll hold onto those.

The remaining four we plan to sell over the next couple of months and they have revenues totaling about $18 million. So again, as you see those two pieces, the 14 million of revenue on the branches we have sold and the 18 we have remaining, that gives us an outlook to be down year-over-year about $30 million. Turning back to the consolidated results, let's pick up on cash flows and focus in on how those did for the quarter.

Our cash flows from the quarter remained strong. We had cash flows from operations plus the proceeds of used rental equipment sales totaling $215 million. With that cash flow we bought $152 million of rental equipment during the quarter, almost all of which was replacement. We spent about 145 of the 152 on replacement CapEx, so just a small piece for growth. We had $18 million of nonrental CapEx in the first quarter. So that our total CapEx was $170 million, which is pretty much flat with last year first quarter. We were at 171 in the first quarter of last year.

When you take that all into account and add back the proceeds from our rental equipment sales, our free cash flow for the quarter was $45 million. That free cash flow, as you will see in the press release and the schedule attached to it, was down $42 million on a year-over-year basis. But I need to point out that doesn't reflect any weakness in our operations. Our operations are continuing to improve year-over-year. What that reflects is less cash flow we generated from our working capital. We generated about $34 million of cash flow from working capital in the first quarter of '05, but that was down significantly year-over-year.

You may recall that in the fourth quarter of '03, we paid down a lot of our accounts payable, reduced it quite significantly. So as we rolled into the first quarter of '04, we got the benefit of that in our free cash flow and saw that as well for the full year '04. So we didn't repeat that, but that is not impacting our operations. Our operations are still generating significant free cash flow, and in fact, if you look at our cash balances on March 31st, we were up $40 million to a level of $342 million of cash on the balance sheet at the end of the quarter.

So let's move back to the balance sheet. Our balance sheet we had $4.96 billion of total assets at March 31st and that included our rental fleet with an OEC, original equipment cost, of $3.7 billion. You may recall that is pretty much where we ended December 31, 2004. We really haven't changed too much since year-end. Our average fleet age at March 31st was 40 months. Again, pretty much the same level as where we ended 2004. That is also right at the steady-state target we're shooting for for the balance of 2004, although with the incremental growth CapEx we plan to bring in we might notch it down a little bit.

Our total debt as of March 31st was 2.92 billion, and net of cash, we had net debt of 2.58 billion on March 31st which was down $62 million from year-end 2004. Interest expense in 2005 first quarter was $46.2 million which is $3.4 million lower than what we saw in the first quarter of 2004. Now we are still benefiting in the first quarter of '05 in our year-over-year comparisons from the refinancing we completed in the first and second quarter of 2004. You may recall we pretty much redid our entire debt side of our balance sheet in the first and second quarter last year.

As we move into the second quarter of '05, we are going to start to see negative comparisons. We are going to start to see higher interest expense on a year-over-year basis because of the increases we have seen in LIBOR rates over the course of the last 12 months. We're planning on interest expense being up in each of the remaining three-quarters of 2005, by about 7 to $10 million. That is what we have factored into our outlook. Now we will get a slight offset to that because with our improved operating performance we're moving down our borrowing grid on our bank debt. We're going to lower our bank rate by about 25 basis points because of improving credit statistics. But obviously the couple million dollars we will save out of that in '05 won't offset the higher LIBOR rates we expect to see.

The remainder of our rental fleet that is on long-term lease, we have just under $200 million on long-term lease, 198, which is pretty much flat with where we have been in 2004. The cost of those leases in the first quarter was $16 million for lease expense, and we're not planning to change that $200 million level as we go through 2005; it will stay pretty much constant. As of May 2nd, earlier this week, we had $132 million borrowed under our revolver and we have $57 million of LCs drawn under our $650 million revolver. So still a lot of availability -- available for us under that revolving facility. We had the full $150 million drawn under our letter of credit facility and then we continue to have nothing drawn on our $250 million AR facility.

So moving to the 2005 outlook. Let me just finish the prepared remarks before we go into Q&A to give some additional color to the 2005 outlook. This outlook reflects the strong construction markets that we're seeing now in the first quarter of 2005. Starting with the bottom-line, we expect our diluted earnings per share will be between $1.60 and $1.70 for the full year 2005, and obviously that doesn't reflect any impact that may result from the outcome of the SEC inquiry that is ongoing.

Now with that EPS level of $1.60 to $1.70, we are anticipating that EBITDA will come out just shy of $1 billion, 925 to $950 million for the full year of 2005. That is based on a targeted total revenue growth of 9% year-over-year. And as I mentioned, that is all going to be coming from general rentals since traffic control will be down $30 million approximately. The rental revenue growth within that 9% will be 8%, year-by-year. Our rental equipment sales will be flat to slightly up in 2005. We're targeting a range of 225 to 250 million for the full year.

Finally, in our third line of revenue, our sales of equipment, contractor supplies and other revenue, we are planning on that to be up 20% in total year-over-year. The main driver of that will be the contractor supply growth which is planned to be up by more than 30% year-on-year and should achieve a targeted revenue level of $300 million for the full year. So that leads to a cash from operations in aggregate for 2005, of 725 to 750 million. And we will use that cash to fund replacement CapEx of about 450 to 475 million. Then we are adding about 200 to 250 million of growth CapEx to our rental fleet. And by the way, that includes whatever we will need for those 30 to 35 cold starts, as well.

So when you net out the used rental equipment sales, after all of our CapEx and our cold start program, we expect free cash flow for 2005 will exceed $200 million. So with that recap, I think it is time to move for Q&A. And before we do, let me just remind you of what Wayland mentioned at the beginning, that we would like to ask you to please refrain from questions regarding the SEC inquiry, since we're not prepared to offer any more information than what is in the press release at this point in time.

Also as Wayland mentioned, since we haven't completed our 2004 audit, we are not going to be able to five a lot details on the financial results for the quarter or the prior year. But we would obviously welcome your questions, and why don't I ask the operator to let everyone know how to answer questions.

(OPERATOR INSTRUCTIONS) Joel Tiss from Lehman Brothers.

Two questions. One, maybe I am getting into sensitive ground here so you can cut me off it is not good, but is it fair to assume that the SEC inquiry, they understand sort of the disruption that they are causing to the valuation and all of that and that they have some, whatever, a plan to get to the point as soon as they can? The second question, can you just give us a little help on -- it feels like we're missing something in the second half of the year because price increases are going to be up 5%. You were expecting commercial construction spending or nonresidential, to be a sort of 3 or 4. It is running higher than that. There is a chance that it gets better as the year goes. Is sort of the conservative guidance, is there anything in the second half or is it just from you guys being conservative? Thank you.

Joel, thanks for the question. Obviously, I'm going to skip over that first one. That is probably not one I should comment on. Let me get into the outlook for the full year. We have got some costs that probably are putting a little bit of a drag on getting the full benefit of the improvement in the construction environment. For example, we still expect that traffic control will lose 30 to $40 million for the full year, so that is holding us back. The cold starts will have a slight negative impact, but I think the right thing to do in terms of building the business for the long-term. But we will probably -- we saw about $800,000 of operating costs -- or sorry -- operating losses coming out of those in the first quarter. And we will probably continue to see a little higher pace than that as we go through those cold starts for the balance of the year.

On balance, I don't know that I would characterize it as conservative. I think we have factored in a reasonable outlook with the conditions that we see on the landscape. But there are some things that are holding back, getting the full benefit in '05, that we will start to see the benefit of in '06 and '07.

Okay, thank you.

David Bleustein from UBS.

Just following up on that last one. Can you walk us through the operating leverage metrics in the first quarter, and what you expect for the year? I am just struggling with why that big pricing didn't drop through to the bottom-line, especially in this first quarter?

It is going to be a little challenging for me to do that without plunging into a lot of the details on the quarter. I will tell you that we did see a significant improvement to the bottom-line, as you can tell by the earnings outlook -- not the earnings outlook -- the preliminary earnings result at $0.15, most of which, in fact almost all of which, was driven by the rate improvement. Our traffic control business continues to be weak.

How much more did traffic control loose this year versus last?

Actually, David, I was having trouble with my mike. Actually traffic control performed slightly better in the first quarter of 2005 than it did in the first quarter of 2004.

So there should have been no offset then to the improvement in general rentals on an incremental margin basis. So maybe, John, let me come back and just ask this question. What was the incremental margin, the incremental contribution margin, in this first quarter at general rentals?

Again, I don't want to necessarily start talking about operating income and operating margins. Let me try and characterize it for you. If you take normal inflationary cost pressure that we typically see year-over-year, our costs, inflationary costs run 3 to 5%, a little bit higher than that in the first quarter but not significantly -- I mean within that range but not significantly higher. Probably the biggest thing that is continuing to eat away at the flowthrough, the incremental margin, would be the SG&A costs. We continue to carry a lot of SG&A costs with all of the audit work, the 404 work, the inquiry. This adds up to some significant dollars that are probably impacting that flowthrough. Above and beyond, that we are seeing the typical sort of 65% flowthrough that you would expect to see in the overall revenue growth on a year-over-year basis.

You don't, by any chance, want to take a crack at how much that audit work, 404 and SEC is relative to normal?

I would prefer not to. I don't actually have a number in front of me, but it is definitely in the millions.

All right. Lastly, can you help me reconcile the dollar utilization numbers? If you were at 49.6 last year in the quarter, your time utilization was up slightly and your pricing was up close to 10%, why is your dollar utilization not up at least 10%?

Looking at the dollar utilization we were running in the quarter, we had an improvement of 4%. If you walk through it, you take the 49.6, multiply that by 9.7%. So that would take you to about 54.4. And then add onto that about a half of a point of improvement from your time utilization. Then the negative draft you are going to have against that is two things. Number one, traffic control revenue was down year-over-year. Number two, you have a slight mix impact because the portion of our fleet that was forklifts and aerial work platforms was slightly higher this year than last year. So there is a little downdraft on that because that utilization tends to run about 10 to 15 points lower than the average.

I will get back into queue. Thanks guys.

Lionel Jolivot from Goldman Sachs.

Good morning. First of all, regarding the EBITDA, you gave a guidance of 925 to 950 million of EBITDA for the full year. Maybe I missed it, but could you give us the EBITDA for this quarter, for the first quarter?

You just cut out at the end. You wanted guidance for which?

Could you give us the EBITDA for the first quarter of '05?

We didn't release EBITDA for first quarter of '05. Until we finished the 2004 audit we don't want to -- we don't think it is appropriate to share anymore level of detail on the results for the first quarter 2005 or 2004. So I am sorry but we didn't release that information.

Okay. Turning to the free cash flow, working capital was a source of cash during the first quarter. It was roughly $34 million. What will it be for the full year? Built in your 200 million free cash flow guidance, how much comes from working capital for the full year?

The amount we got in the first quarter will represent pretty much the whole amount we will get for the full year, because we've got a lot of programs that will absorb a lot of working capital like our inventory program with the contractor supplies. So my outlook for the full year of over 200 million of free cash flow, only contemplates about 30 to 40 million in total of cash flow from working capital.

Okay. Last question, on the traffic control business. So you were able to turnaround four of the stores that were supposed to be divested or closed. What are you seeing with the remaining stores? Are you seeing a slight improvement, particularly in terms of utilization and pricing? What is going on with the remaining stores at this point?

We are really not seeing a pickup yet. As I mentioned the performance was slightly better during the first quarter, but no major change in the overall operations for the remaining stores.

And the slight improvement is primarily in terms of utilization. You have not seen anything in terms of pricing?

We have definitely not seen any pickup on pricing yet. I think there is still a lot of uncertainty around traffic control including the pending of legislation in Washington I talked about earlier. I don't think we will see a huge pickup until that is behind us, which says probably you are into 2006 before we will see a significant benefit from that.

Most of the improvement in the first quarter, if I can just interject, they took out costs from this segment of the business as we went through all of 2004, laying off people, taking out additional costs, closing excess facilities. So most of the improvement you are seeing in the year-over-year comparisons, which again is a very modest improvement, was because of the reduction (ph) in the cost base.

Okay. Last thing. The debt level at the end of the quarter, I don't think you gave it?

The amount of debt at the end of the quarter, total debt was 2.921 billion and that excludes the QUIPs, subordinated convertibles preferred. So 2.921 billion and then the QUIPs are 221.6 million.

Okay. In terms of the potential use you see for the free cash flow, it is still the same? You might consider paying down some debt during the year?

We have significant cash on the balance sheet and we are planning to, as I mentioned, generate additional free cash flow as we go through the year. One of our objectives has always been, and we continue to be, focused on improving our credit statistics. Now as our EBITDA continues to increase, there is less pressure on us to pay down absolute debt levels because we will get a significant improvement in our credit simply by the improved profitability of the business. We did pay off a little bit of debt during the quarter and we will look at that opportunity as we go through the year.

But we will look at all the other opportunities for building the business, whether it's small acquisitions, additional growth capital if the market supports it, if we continue to see strong construction numbers. The full list of potential uses is definitely out there.

One of the reasons we are hesitant to pay down debt right now, even though we have cash on the balance sheet is, you will remember in the first and early part of the second quarter last year, we refinanced our debt structure at historically low levels. That positions us very well, particularly as interest rates are beginning to rise. So we are reluctant to go in and pay down debt and then maybe at some other point in time need to increase it higher levels. I think John's opinion of looking at a number of different areas of how we can use that cash other than just debt is what we will continue to focus on.

Okay, thank you very much.

David Bleustein from UBS.

John, I just wanted to come back to that 3 to 5% inflation rate. If by the fourth quarter in order to keep rental rates up 5%, let's just say it's a 10, a 5 and then a 3 and a 2, that would seem to indicate that your pricing won't keep pace with even the low end of your inflation. Is that 3 to 5 just a function of what we have seen from energy prices and the like? Or is that what you have seen over the last decade?

I haven't been around running a rental business for the last decade, so I won't comment quite that far back. The 3 to 5 is what we have been seeing, and when you strip out some of the extraordinary costs that hit us over the last two years, the 3 to 5 is what we were seeing between a combination of wage pressure, benefit costs, expectations, repair and maintenance costs, is no longer pressuring us. So it would be only the normal inflationary costs you would see in your parts and your wages. Five may be the high end of it, David, that factors in some growth in the business. But 3 is probably a normal base level that you expect all things being equal.

Okay. Wayland, I know we have discussed this one before, but returning cash to shareholders, at what point in time in terms of -- after you have set-aside 650 million of which -- the big CapEx number, at what point in time does your balance sheet become strong enough that you consider either a dividend or a share repurchase or some form of return of capital to shareholders.

John should have probably added that as one of the things we would look at, I think, and we will do that. I don't see us doing that in the near-term. I think there is still an attractive market. We are still -- our total market share is less than 10% of the market. The market is growing. We would like to expand with the market. I think will have an opportunity to invest some of that money back into the business in a way that would give our shareholders a longer-term, greater benefit, than just simply giving them a cash dividend at this point.

Alright guys. Thanks again.

Mike Kender from Citigroup.

On your CapEx for the year, can you give us a feel for how that's going to come in? Is it going to be frontloaded, backloaded? How do you expect it to play out over the course of the year?

This is Mike Kneeland. Our CapEx, we will have a big portion of our CapEx come into the second quarter. It will then taper off into the third and drop even further in the fourth quarter. So we are flat year-over-year in the first quarter. It will go up substantially in the second quarter, and then it will taper down.

Okay great, thank you,

Dan Rutaleg (ph) from Bradford & Marzec.

Could you first help me out with the shares outstanding, did you say 104.7 million shares outstanding?

That is correct.

And that is changed from 78 -- the last shares I have are as of September. Can you help me with what the difference is?

You would have seen in our last year reports a much lower number because we reported a loss. We report on the primary share count versus the diluted. The primary share count today is about 77 million shares. Obviously, when we make money, we have to report on the diluted basis, which is 105 million. Now that 105 -- 104.7, that has gone up and it has gone up because of the change in treatment for the convertible debt. You may recall that last year, they introduced new rules on how you account for a contingent conversion. That added 5.6 million shares to our share count that previously were not counted because it was a contingent convertible debt. There hasn't been any shares issued, any meaningful number of shares issued. It's only the change in the accounting principles that's increased that slightly.

I understand and I have an additional question about your -- the seasonality of the business and how that affects gross margin. Do you in the first quarter of the year generate the lower margin, lower gross margin, than in other periods because of some seasonality? When I lay out your historical numbers, I get something on the order of 25 or 26% gross margin in the first quarter of the year, and then the remaining quarters are anywhere between 28 and 32.

You will typically find the first quarter, particularly because of the traffic control business, the first quarter we always have our lowest gross margin level. It will depend a little bit on your level of used equipment sales because that will help in some cases raise the overall margin level, but you would typically run in the mid to high 20s in the first quarter. Than the second, third and fourth quarter, normally they are fairly close to each other. They would be running in the low 30s, but they would typically be about the same level with a little bit of a higher level in the third quarter normally, but not always the case, again depending on the timing of sales.

Does that seasonality extend down into the SG&A line item as well? It looks like it does.

Yes, it does because the biggest portion of our SG&A is S, which is commission costs on our sales reps. So you would normally see that same sort of seasonal trend pattern with SG&A.

All right, thanks very much.

(OPERATOR INSTRUCTIONS) Clark Orsky from KDP Investment Advisors.

I just had one thing. Have you guys gone back to the bank to extend out the date for the audited finances that have to be delivered, or do you think you will have to at this point?

We have extended the 10-K and the 10-Q when we went to the banks a few weeks ago after the earnings release for the second quarter. We went and got an extension so that we don't -- they agreed that we don't have to file our 10-K until June 29th. We don't have to file our 10-Q until August 12th is it, Al? August 12th. The banks have already agreed to that extension at this point in time.

Right, but there has been no change in those dates at this point?

No additional update from that, no.

Okay, thanks,

We have time for one more question.

Tom Maher (ph) from Lord Abbett.

Just on the expected EPS, is that on a fully diluted basis for the year?

Absolutely, absolutely. That is on the roughly 105 million share count.

So you're looking at -- that earnings growth is on a significantly increased share count?

Yes, be essentially on a share count that is up by about 5 million.

Great, thank you.

Operator, with that, I'm going to call close the call down. Let me just make a few closing comments. First, thanks again to everybody for joining our conference. We always look forward to having a chance to talk to you. We were pleased with the results of the quarter, particularly with the continued success we are having with our rental rates initiative. Getting rates up by 9.7% was a major accomplishment for us. The operating environment that we are in appears to be getting stronger. I am a little hesitant to say that one quarter makes a trend, but as I said, we have looked over the past five quarters and we've been inching up each quarter for five quarters. And hopefully, that will continue as we go through the balance of the year. Obviously, that positions us well as the private nonresidential construction picks up.

We are investing in the business significantly as I said earlier, opening cold starts not only this year, but we expect to continue to do that to broaden the network of branches we have. And finally, I would just close off by saying we expect to have a very good year with substantial revenue growth, profit growth, and in particular generate on top of the investments we are making at least $200 million of free cash flow. With that, thank you very much and we'll look forward to speaking with you when we have our next quarterly conference call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.