聯合設備租賃 (URI) 2005 Q2 法說會逐字稿

Good morning. Ladies and gentlemen. And welcome to United Rentals second quarter investor 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 second quarter and first half of 2005 have not yet been finalized and consequently the results and other data for such periods are preliminary and subject to change. In addition, certain of the statements in this conference call will be forward looking in nature. These statements can be identified by the use of forward-looking terminology such as "believes", "expects", "projects", "forecasts", "may", "will", "should", "on track", or "anticipates". Or the negative thereof or comparable terminology or by discussions of strategy.

The Company's business and operations are subject to a variety of risks and uncertainties and consequentially (ph) 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 (1) Unfavorable economic and industry conditions can reduce demand and prices for the Company's products and services. (2) Government funding for highway and other construction projects may not reach expected levels. (3) The Company may not have access to capital that it may have require (4) Any companies that United Rentals acquires could have undiscovered liabilities and maybe 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 maybe identified. (8) The Company may have 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, revisions 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 inventures (ph) based upon the delay in filing 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 commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.

You should note that reference may be made to 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; Mike Kneeland, Executive Vice President, Operations; Al Colangelo, Vice President Finance, and Chuck Wessendorf, Vice President Investor Relations and Corporate Communications.

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

Thank you and good morning, everyone. Welcome to our second quarter conference call. We really appreciate you joining us this morning.

We posted very strong results for the quarter with 15.5% revenue growth and $0.53 of preliminary diluted earnings per share. Our number one priority has been improving rental rates. Last year, during the second quarter, we raised rates by 7.9%. We further increased our rental rates year-over-year by 5.2% during this year's second quarter. This was very much in line with what we expected and the guidance we shared with you on our first quarter call. It is worth pointing out that this makes ninth consecutive quarter we've increased rates.

Now during the quarter, we not only raised rates, but we also increased the size of our fleet from 3.7 billion to 3.9 billion. And at at same time, we improved time utilization. Expanding fleet, increasing time utilization and raising rental rates all at same time is a very positive accomplishment.

Dollar utilization is running at levels that we haven't seen since the year 2001. We achieved 64.8% in the quarter compared to 60.1% in the second quarter of last year. This increase is primarily due to our rate improvement. Additionally, we sold $85 million of contractor supplies representing a 48% increase from last year's second quarter. We're continuing to invest in our infrastructure to support this business and to that end have opened up eight regional distribution centers since last fall. These centers, when fully functional, will give us the ability to provide most of our customers with next day delivery. They will also give us the ability to continue to expand our product offerings. Mike Kneeland will pick this up in a few minutes, and we'll talk about some other things we're doing to grow that business.

So far this year, we've opened up 18 new general rental locations which puts us well on track to open 30 to 35 new branches full-year. This is also consistent with what we've talked about on our first quarter conference call.

Now turning to our traffic control business. We achieved 10.2% revenue growth which was better than we expected. We did that by being somewhat more competitive on pricing and as a result winning more bids. We also sold or closed an additional four of our traffic control branches. This completes the plan we talked about on our first quarter call to eliminate nine of our underperforming traffic branches. Although our traffic segment is still unprofitable, we did narrow our losses and with the help of the soon to be signed highway bill, we expect to get this business to break even or even better in 2006.

Now regarding our outlook for 2005 we're on track to achieve $1.60 to $1.70 per diluted share that we've previously guided and we expect to generate at least $200 million of free cash flow after substantially increasing the investment we're making in our fleet. I would also like to saying we're working very hard to finalize our results. My highest personal priority is to work our way through this and to get our financial statements filed.

Before passing this presentation over to Chuck. Let me comment briefly on John Milne's status. In our July 14 press release, we indicated John had a 30-day cure period to respond to the board's notice of non-performance. This cure period will end on August 12, which is this coming Friday. Until then, there is nothing for me to add than what has already been said said in that press release. Other than to note that no cure has been effected to date.

Now with that, I'll turn the presentation over to Chuck Wessendorf who will share some additional information with you regarding our financial performance.

Chuck?

Thank you, Wayland. Good morning everyone.

Wayland has given you some of the highlights of the quarter. And has covered our progress on several of our on key initiatives. Now, I'll provide some preliminary financial information for the quarter, and review our outlook for the full year. And I have to point out since I'll also be providing a 2005 outlook for EBITDA, I need to point out that EBITDA is a non-GAAP term which represents net income plus interest expense, income taxes, depreciation and amortization, and of course, it should not be used as an alternative to net income or cash flow from operations.

As Wayland said, our preliminary diluted EPS for the second quarter is $0.53, and that is on a share count of 110.1 million shares. Total revenue for the second quarter was $896 million, an increase of 15.5% over 2004. And this included rental revenue of $635 million in the quarter, which is an 11.5% increase in our rental revenues year-over-year. We had higher sales of rental equipment in the quarter, which were $75 million, up $19 million over last year. We are still targeting full-year sales of rental equipment of about $250 million.

On the next line, higher sales of equipment, contractor supplies, and other revenues, were up 23.7% in the quarter. And this was generated by higher contractor supply sales, which were up 47.6% to $85 million, as well as sales of equipment which were up 8.7% to $67 million.

Let me now provide some selected data on our two business segments, general rentals and traffic control. First, in general rentals, our largest segment, representing 92% of our total revenues in the second quarter we continued our very strong performance. Total revenue was $823 million, up 16%. This was primarily driven by an 11.5% increase in our rental revenues to a level of $570 million. And almost all of our growth in general rentals was organic. With same-store rental revenue up 11.3%. This increase was the result of improvements in our rental rates, which as Wayland said were up 5.2% in the quarter, as well as improved time utilization on a larger fleet.

We have now opened 18 new branches so far this year in this segment and these contributed about $6 million of total revenues in the second quarter. Rental equipment sales in the general rental segment were $74 million. And contractor supplies and equipment sales growth was very strong in this segment, contractor supplies in general rentals were up 53.2%. And equipment sales was up 8.7%.

And we also saw good growth in our service business, where revenues were $35 million, up 10.3% year-over-year.

Now I did would like to move on and look at our traffic control segment. In the quarter we had total revenues of $73 million. Which is a $7 million increase or up 10.2% year-over-year. This was the result of an 11.3% increase in rental revenues in this segment. The improved revenue performance in traffic control this quarter is largely the result of our capturing a greater share of the available business, not a fundamental improvement in the end market.

However, the new Federal highway bill that has been on extension at the old levels since the fall of 2003, has finally been approved by the House and the Senate at $286.5 billion. And we expect that this new legislation will not impact 2005 but will favorably impact 2006 and beyond. Our revenue forecast for traffic control has been for a decline of about $30 million from 2004, reflecting the impact of the closures and sales of the underperforming branches as we've said on previous calls. However, based on current performance, we might do a little better in revenue.

We now expect that the operating loss in 2005 for traffic control for the full year will be about $30 million compared with a loss of about $50 million in 2004. The projected $30 million loss for 2005 is at the low end of the range that we had previously guided. Let me now return to our consolidated results.

As we said, we reported preliminary second quarter results of $0.53 and that brings our first half preliminary results to $0.68. Our earnings reflected the flow through from our revenue growth, partially offset by increased interest expense and continued higher than expected SG&A costs. Within SG&A, beyond the normal inflation increases, and the higher selling costs relating to the growth in the business, professional fees represented the largest single component of year-over-year growth. A portion of which is attributable to the SOX compliance and SEC inquiry issues.

The gross margin flow through from the rental revenue increase in the quarter was in line with our targets. Although as I said, the impact on operating income was watered down somewhat by the higher SG&A costs.

Looking at our cash flows for this first six months, our operations continue to generate strong cash flow. Our cash flow from operations was $356 million --excuse me-- for the first half and when you add in the $140 million of proceeds from rental equipment sales, 0ur cash generation totaled $496 million. And that compares with $470 million in the first half of 2004. Including $359 million of cash flow from operations and $111 million of proceeds from rental equipment sales.

For the first six months, we invested $482 million in our rental fleet, compared with $322 million last year. Our non-rental CapEx for the first half was $38 million, flat versus last year. And as a result of this substantially higher investment in rental equipment this year, for the first half, we had negative free cash flow of $21 million, compared with free cash flow generation of $110 million last year.

As is typical, the second quarter is our heaviest CapEx quarter. During the second quarter we bought $331 million of rental equipment, which is an increase of $162 million year-over-year, or almost double what we invested in the second quarter of last year. And what this means is that the projected significant increase this year, compared with 2004, in our rental fleet investment for both the existing branches as well as the new branches, we just did that increase in the second quarter. Just when we need the equipment for our seasonally strong third quarter and the very strong month of October.

Even with this substantially higher year-over-year investment in rental equipment, we're still on track to achieve free cash flow for the full year of at least $200 million. Our cash balance stands at $254 million as of June 30, which is a decrease of $48 million from year-end 2004. Let's now take a moment to review the balance sheet.

Our total assets at June 30 were $5.15 billion including the net book value of our rental equipment of $2.3 billion. We had total debt of $2.95 billion and net of cash balances net debt was $2.7 billion. Our interest expense in the second quarter of 2005 was $48 million, $10 million higher than the second quarter of 2004, resulting from the higher interest rate environment. On average, our floating rate debt cost us 160 basis points more in the second quarter this year than last year.

And as we mentioned on the first quarter call as we move into the second half of 2005, you will continue to see interest expense higher year-over-year each quarter. This will run 7 to $10 million higher per quarter depending upon LIBOR rate levels. At June 30 we had $181 million of rental fleet under long-term leases. And the related expense on our long-term leases was $15 million in the second quarter. And as we said in the first quarter, this will stay pretty steady since we don't see the amount of fleet under long-term lease changing significantly in 2005.

Now I would like to cover our strong liquidity position. As of August 5 we had only $131 million borrowed and $63 million in letters of credit outstanding under our $650 million revolver. Leaving $456 million of undrawn capacity. In addition to the revolver availability we have nothing drawn under our new $200 million accounts receivable securitization facility.

Okay, I would now like to recap our outlook for 2005, which remains pretty much unchanged from what we said on the first quarter call. I would also just like to point out that our outlook doesn't reflect any charges that might occur or any possible impact that might result from the outcome of the SEC inquiry. We're targeting total revenues to be $3.4 billion in 2005. And and as Wayland said, we expect diluted EPS for 2005 will be in range of $1.60 to $1.70. We would expect EBITDA of 925 to $950 million. And we're also projecting cash flow from operations of about 725 to $750 million.

On replacement rental CapEx we're outlooking at approximately 450 to $475 million. On top of that, approximately 200 to $250 million of gross capital. And that includes about $70 million of capital for our 30 to 35 new branches. With about $50 million or so in non-rental capital spending that gives a total capital spending outlook in the 700 to $775 million range. And after all rental and non-rental capital we would expect our free cash flow of at least $200 million for the full year. That now summarizes our outlook for 2005.

And next, I would like to turn it over to on Mike Kneeland, who will provide some color on some of the operational aspects of our business.

Mike?

Thanks, Chuck. Good morning, everyone.

I would like to share with you some highlights on our operations and business environment. As you know, non-residential construction is our primary end market. The Department of Commerce has reported to be up 5.1% year-over-year in the quarter and 5.9% in the first half of 2005. Construction spending continues to improve in categories such as lodging, commercial, retail, and in manufacturing.

Now looking more closely at our business conditions in the United States, the southwest continues to be an area of growth. Arizona, Las Vegas, and southern California have a number of large commercial and retail projects. Northern California, particularly the Bay area remains flat. The Gulf region which was flat in 2004 has seen industrial activity pick up, particularly in Houston. The southeast continues to show growth as it did throughout 2004. Florida remains strong and demand from reconstruction due to hurricane damage has also had a positive effect on on our business.

Mid-Atlantic showed continued growth in commercial and office activity. Mainly due to government expansion. The midwest lags in overall recovery and remains flat for the year. Several industrial projects are slated to get underway and hopefully will stimulate increased demands. The northeast has been weaker this year due to delayed construction starts. But commercial construction activity has picked up in the Philadelphia, New York, New York City market so the year should still be relatively strong. Canada, which represents 8.7% of our revenue, also remains an area of growth with the exception of Quebec which was flat in the second quarter.

So overall, non-residential construction spending has reported seven consecutive quarters of growth on a year-over-year basis. This is still 17.5% off from the peak in 2000, but our sense is the recovery will continue through 2006 and very likely into 2007 and beyond. As Chuck mentioned, we've grown our fleet by about 200 million during the first six months to 3.9 billion. And spent a little over 300 million of replacement CapEx. The age of our fleet was down slightly to 39 months.

Now shifting from the rental side to our contractor supply business where we saw 48% growth in the quarter. Let me talk further about some of the things we're doing to achieve and maintain this growth. As was mentioned, we currently have eight distribution centers open in North America, putting us on track to have all nine open by October. This will allow us to achieve overnight delivery to almost all of our customers and substantially expand our product offering.

We continue to develop our catalog and have more than doubled our product line from 2,900 SKUs to 7,000 SKUs and plan to expand that to 10,000 by year-end. We're developing call centers for our customer service and we have been training our sales force on product knowledge. All in an effort to further improve our results. This puts us on track to achieve more than $300 million of contractor supply revenue in 2005.

Let me wrap this up by talking about customer satisfaction. We recently conducted a company-wide survey and received very high marks. Customers consistently rank us eight or better on a scale of ten, with ten being the highest level. But we still see ways that we can improve. We've made tremendous investments in training our employees, and so far this year, we've conducted over 160,000 hours of training across the Company which is up 47% over 2004. We have also made improvements to our national account program. By consolidating our inside sales support effort into our national account customer service center we're improving the service we provide our -- these customers. We believe revenue from this customer base will exceed $640 million in 2005, up 15% over the previous year.

Now with that as an overview I'll now pass this back over to Wayland for a few comments before beginning the Q&A. Thank you.

Thanks, Mike. And before we move to questions let me make just a couple of further comments. We provided an update on the SEC inquiry in our press release. I would ask you to not ask a lot of questions about the inquiry since we will not be adding anything to what was said in that release. Also, since we haven't finalized our results we have to discuss financial performance at a very high level and given that, we won't be able to go into a lot of detail on our financial results.

With that, Operator, I would like to ask you to open the phones up for questions.

Thank you, sir. We will now big the question and answer session. [OPERATOR INSTRUCTIONS]

Our first question comes from David Bleustein from UBS. Please go ahead.

Good morning.

I know you mentioned you're not going provide too much detail, but Chuck, you started down the path. Can you walk us through the components of your SG&A, basically what was that professional fee piece in the quarter related to Sarbanes-Oxley and the SEC review?

David, let me pick that up if I can.

And let me just broaden the subject and talk about a number of factors that affects our overall increase in SG&A. I would begin by saying you have the standard inflationary expense pressure that you would expect to see on the G&A salaries. You combine that with a couple of areas, one sales compensation and also profit sharing for our plan -- for -- our profiteering plan for our field organization are both up largely relating to the better performance of the business. That's combined with the professional fees that you mentioned. A significant portion of which are associated with Sarbanes-Oxley also some additional audit expenses that we're wrestling with and then finally some costs associated with the SEC inquiry. I'm not going to go into specific numbers, but I think that gives you some flavor for it.

Okay, and then the other question. And I know this is a toughie. But assuming we get to August 12 and we haven't heard anything from you. Should we assume that the 10-K will get further delayed?

No, I would not tie those two dates together. I think -- or those two things together rather. I think we're working as hard as we can, as I mentioned on my opening comments, to file our financial reports. The August 12 date that you referenced should not impact that.

Terrific, thank you.

Thank you, our next question comes from Lionel Jolivot from Goldman Sachs. Please go ahead.

Good morning.

First a question on the traffic control business. You mentioned -- first of all the growth was much better than what I expected this quarter but you mentioned that it came partly at the expense of pricing. So, what did you see in terms of rates? How much were rental rates down during the quarter in this business?

Thanks, Lionel, as you know we measure the traffic control business differently than we do the general rental business where you can very precisely measure rates. In the traffic control business we're bidding jobs. Large part -- most of our revenue comes from jobs that are bid. Because of that, and simply because no jobs are -- or no two jobs are alike. It's very difficult to -- very difficult to give meaningful rates comparison or price comparison.

What I would say we lowered our gross margins in order to be more aggressive to go after that business. That's given us a pickup in revenue. Unfortunately it still hasn't brought us to the point where we've reached a level of profitability.

Okay. And you gave us your expectations for this business for '05. What kind of revenues are you looking for in '06 for traffic control?

That's a good question. We basically, have guided in the past that our results would have negative 30 to $40 million impact in '05. I think because of the revenue growth that you're seeing, we're probably coming in at low end of that range or slightly better. My sense is that as we move into 2006 we should get our revenue up from maybe 230, 235 this year to some place in the neighborhood of 275 to $300 million next year.

Okay. And then looking at the contractor supply business. I mean you will soon have nine centers open for this business and I think you expect $300 million of revenues this year. What do you want to do with this business? Where would you like to go in the next two to three years with this business?

Okay. Lionel, I'm going to invoke the one question per speaker rule but I'll answer that question before we move on.

We're getting really good growth out of that business, we previously guided the street that our contractor supply business could grow by 30%. You saw the numbers in the quarter. They were obviously better than that. We believe that we will break through more than $300 million of revenue up from 225 last year. Over a five-year period of time, I think we can take this business some place in the neighborhood of 6 to $700 million, maybe a little more.

Thank you.

Thank you.

Thank you. Our next question comes from Gary McManus from J.P. Morgan. Please go ahead.

Good morning everybody.

Hey, Wayland I'm just looking at your full-year revenue and earnings per share guidance, and it seems to imply in revenues, only 5% growth in the second half after being up about, I think, 15% in the first half. And similarly I know we don't really have exact earnings per share numbers yet, but it also implies a slow down in the year-to-year growth. Can you talk about that?

Do you see rental rates slowing? It was up 9% in the first quarter, I believe, and went to 5% in the second and do -- or do you expect same-store growth to slow? Just talk through what's behind these assumptions.

There's a couple of the things and I'll start off by saying we're probably being being a little conservative on the revenue forecast. I suspect by the end of the year we'll see that coming in a little bit higher than what we're currently talking about, the guidance that we gave earlier which was $3.4 billion. Now, with regard to rates in particular. We did say on the first quarter call that we expected, as we went through the year, that our rate achievement would be lower simply because the comps get more difficult as we go through the back half of the year.

Same is true with the contractor supply business as we move into the third and fourth quarter you start so see tougher comps than what we're seeing in the first and second quarter of this year. So, I think you are observation is right. The 5% revenue growth may sound a little bit on the conservative side. We'll watch that very closely as we go through the third quarter. If it looks like we have an opportunity to give clearer direction on that, we'll do that.

Okay. So you're not really seeing any real slow down in your businesses that would be suggested in that -- in other words, as you look at monthly results you weren't seeing any slow down either in volume or rates?

We're seeing during the month of July, rates were running about 5%. Which is down just a little bit. I think we said 5.2% for the quarter. So down a little bit. If you look at the period so far in August, and I would caution you to say that this is really very early days in August. But we're running just a fraction below that, about 4.8% rate. Overall I would say the volume is still strong.

We've increased the size of our fleet considerably as Chuck mentioned in his part of this report. And we're not seeing -- we're seeing that go into the market and be absorbed with time utilization continuing to run slightly higher.

And just real one quick clarification with your comments on John Milne. I'm implying that he has not changed his willingness to cooperate with the board since that announcement on July 14. Is that right?

John has effectively not cured the cause that gave board the reason to give notification. That's correct.

Okay. Great, thank you.

Thank you, our next question comes from Joel Tiss from Lehman Brothers. Please go ahead.

Good morning. Guys it's Henry Kern (ph) in for Joel.

Good morning.

Question for you on the tax rate. Can you give a little color around where the tax rate was for the quarter and your assumptions for the year?

Sure. Hi, this is Al Colangelo.

The tax rate is running pretty much our normalized rate which is about 39% and we expect that for the full year as well.

Okay. One follow-up question.

On the share count it was a little bit higher than we had been expecting, was there something that changed during the quarter?

Yes, Henry. This is Chuck.

In the second quarter, because we had higher income, we had to count QUIPs, the convertible preferred securities, in the share count for an additional approximately 5 million shares. And we hadn't counted these in the first quarter because in the first quarter the income was lower and to count them would have been anti-dilutive. And in the third quarter we would expect, again, that we'll have to count them.

Okay. Thanks a lot guys.

You're welcome.

Thank you. Our next question comes from Scott Scher from Clovis Capital. Please go ahead.

Hi guys. Wayland you talked a little about the professional fees, but you really -- and I guess without an SG&A number, which maybe you said, but maybe I didn't hear, I was just sort of struggling to exactly figure out the number.

I mean, is it more or less than $10 million in the quarter? Or more or less than $5 million that ran through for the quarter for SEC, additional audits, all of the stuff that most people would consider to be nonrecurring? Is it somewhere between 5 and 10?

I would say it's someplace between 5 and 10. Probably a little closer to the bottom end of that range.

For the quarter that's running through?

Right.

Okay. And then one other question.

It looked like when you gave updates on two things. You gave updates on self-insurance reserve you gave updates on income tax statements. It looked like in your self-insurance reserve, it looked like the language changed a little bit and you put a statement in there in the last part of the self-insurance reserve that says that the Company has concluded that the reserve level at year-end 2004 is appropriate. That looks like a new statement that was not in the prior quarter. Is that correct?

No, that's incorrect. That statement so my knowledge was in the prior quarter.

Okay.

I thought that that looked like a new statement. But then you also said on the tax that you continue to believe that the restatement for tax will not impact 2004 and you also continue to believe that the taxes in prior years is likely to decrease the aggregate income tax expense that's the same as what you said previously, right?

That's absolutely consistent with what we said previously.

Okay, thank you.

Thanks, Scott.

Our next question comes from Dave Garg (ph) from Lehman Brothers. Please go ahead.

Hi. It's actually Sarah Thompson. I'm sorry if I missed this but with time utilization rates as strong as they are and you guys being able to hold pricing as well as you have, are you thinking about more growth CapEx? I know you haven't said anything for this year so far, but I guess the question would be more for next year?

Sarah we'll obviously continue to watch that as we go through the back half this year. We start our planning process in September. We work that bottoms up with our branches. So we'll give guidance either very late in the year, more likely on the first quarter conference call for what full-year next year will look like.

That said we'll go to the high end or likely to go to the high end of our range this year. We've previously said we'd spend someplace 200 and $250 million on growth capital. I would expect us to come in close to the top end of that range. And to the extent that the market holds up in a manner similar to what we've experienced this year, I would expect we'd do something very similar to that next year as well.

Okay.

And do you have any comments in terms of -- I think, some of your suppliers are suggesting that prices are going to increase next year on that equipment? Is that something you're looking to absorb in your pricing strategy? Or can you talk at all about that?

Sarah, this is Mike.

What I would say is, when you go back and look at the peak rental rate levels we saw about five years ago we're close near that peak. Our time utilization has also increased on a year-over-year basis. Oh, on the equipment? The equipment we can absorb into the organization. We still have time utilization increasing. As we go through our planning process in the fourth quarter, we will continue to look at what fleet we want to bring in and how we absorb it throughout the organization.

Sarah I think equipment prices are likely to be up. We've done a lot to offset that in the past, in fact, last year we actually -- in 2004 saw a reduction in prices of equipment. This year we've said before that we expect prices to be up probably close to 3%, maybe just a fraction over that.

on a go-forward basis because of steel prices, my guess is we'll continue to receive a lot of pressure from some of our suppliers to let them get their rates up. We work that very hard though, and we'll try to do everything that we can to hold their rate increases -- or their price increases as low as possible.

Great, that's all I have, thank you.

Thank you. Our next question comes from Mike Kender from Citigroup. Please go ahead.

Yes, I was wondering if -- you gave EPS and cash flow for the quarter, do you have an EBITDA number for the second quarter?

We're -- we do but we're not talking about that. That falls in an area that we don't feel comfortable in reporting.

Okay.

Also in terms of acquisitions. You're operating -- you're opening a -- 30 stores this year. What about acquisitions in terms of adding to the network? Given that you're generating a lot of free cash flow.

We basically will continue to look selectively for acquisitions that will strengthen the foundation or the base that we have. Obviously we don't have any to announce or we would have announced those already. We'll continue to go for acquisitions. They'll probably be in the smaller nature. Similar to the ones that we did last year. The SkyReach acquisition that we did in western Canada or the Atlantic Rental acquisition we did in eastern Canada.

Both of those were kind of like in the -- one of them was like in the 60, $65 million worth of revenue. The one, SkyReach was, the other one was more closer to $30 million worth of revenue. I would expect, as you watch us on a go-forward basis, you would see us grow by acquisitions maybe by as much in terms of revenue 120 to $125 million a year. We probably will have some years we'll be a little bit north of that and some years we'll be a little south of that.

Okay. Thank you.

Thank you. Our next question comes from Alex Blanton from Ingalls, Snyder. Please go ahead.

Hi. Good morning. My questions are on the capital spending. The first quarter you broke it down into replacement and growth but you haven't done that yet for the $331 million in the second quarter. Have you got a breakdown like that?

Well, if you looked at the size of the fleet during the second quarter, we were up about 180, $190 million. So, I would say if you took the $331 million that we spent during the quarter and subtracted that number from it, you would be looking at what was maintenance CapEx.

Okay.

And last year you had an unusual amount of spending in the fourth quarter. I think it was $112 million. And that was up from $15 million the year before because there were a lot of products that couldn't be delivered. You would have taken delivery in the third quarter but there were delays, so you had to take them in the fourth.

Now, if you get to the top end of the range for capital spending for the year, you'll do $243 million in the second half. This year, how would you expect that to break down between the third and the fourth quarter? Go ahead.

I understand your question very well. Sorry, I didn't mean to cut you off.

The -- I would say that the lion's share of that would be spent in the third quarter. Obviously, we're working with our vendors to try to bring equipment in as early as possible. We've done a really good job of that thus far. Noting that we spent $480 million -- $482 million in the first six months of the year. But if I tried to break those apart, I would probably say about $75 million in the fourth quarter ,the remainder in the third quarter. That may move just a little bit depending on the availability of equipment.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Scott Scher from Clovis Capital. Please go ahead.

Just one question on the new branches that you opened and on contractor supply. I believe neither of those is contributing much in the way of earnings in '05, is that correct?

Well, the new branches actually are negative earnings in 2005. Or at least year-to-date they are, but given that we're -- we've opened 18, we expect to open someplace between 30 and 35 full year. I would say that you're -- you should look at that as certainly not contributing to earnings.

Contractor supplies we're making some substantial investments in that business. That said, we've typically gotten gross margins in the mid-20s. That's pretty much holding up. So you can -- I'm not going to go through the details, but you can figure out roughly with where we stand with that.

In terms of the drag from the new branches, the 30 to 35, did you -- I can't recall if you quantified before what you thought that would cost you in '05?

Scott, it is Chuck.

The 18 new branches that we've opened so far in the first half have had revenues of $7 million-plus and a loss of around $400 million.

400,000.

$400,000. Excuse me. And so we have another number of branches to open to get to the 30 to 35 but it will be later this year.

Thank you.

Thank you. Our next question comes from John Beale (ph) from Standard Pacific Capital. Please go ahead.

You said before the year bonds can be accelerated. Have you had any discussions with holders in that regard any buybacks or exchanges or anything like that?

Let me just start off by saying if you look at our bonds, basically, if we have a number of bond holders or a number of different issues out there ,should more than 25% choose to elect to give us notice of default, they, of course, could do that, and that's basically because we have not filed our 10-K.

I would just say that we have discussions every day with both bond holders and shareholders. To date we have not received any notifications of fault and I don't think it's appropriate to talk about conversations that we have with bond holders or shareholders, positive or negative.

Okay, great.

And then I guess if that happened or if some were to be accelerated I guess you'd have your line of credit. Any other sort of backup mechanisms to help you?

I think if you look at how other companies have dealt with that, basically you would go to the bond holders and troy to seek a consent. I don't think based on what I've observed other companies, particularly companies that have strong cash flow, strong credit statistics would have a lot of difficulty doing that. I think the same thing would apply to us.

Okay. Thanks a lot.

Thank you. Our next question comes from Joel Tiss of Lehman Brothers. Please go ahead.

This is actually Andy Kaplowitz.

I just have a follow-up question for you guys. You talk about traffic control guiding to the high end of the range essentially, that you've given previously. And so I'm just wondering, if you look at sort of the second half of the year and you look at your EPS guidance and you haven't changed it. Are you just building in more cushion given a sort of better off traffic control? Is there some offset there?

I'm sorry you broke up on your question -- the back half of your question. I lost you when you said we were coming in at the lower end of the range.

Yes, so. I was just saying that you are -- your guidance is for better off traffic control. And then for the end of the year -- essentially for the year you haven't changed your EPS guidance-- your overall EPS guidance. So I'm just wondering is there an offset to the better traffic control that we should be aware of? Or are you just being more conservative?

Well, I think it goes back to what we were talking about before. We are getting a little bit of revenue growth -- the revenue growth we're getting in the traffic control business, by the way, comes at using more competitive prices so you don't get as much flow through from that as you would otherwise expect.

But I just think in essence, we gave a range, the range was $1.60 to $1.70. When we put that range in place it basically gave us some room on the upside, some room on the downside and we still feel that we're comfortably within the range.

Okay, thank you.

Thank you. And our next question comes from David Raso from Citigroup. Please go ahead.

Good morning.

Hi David. How are you?

Good.

Just trying to -- with the modeling on the equipment rental margins, just trying to make sure I'm not getting off base. Obviously, we're working with a lot of estimates here the last few quarters. The equipment rental margin on a year-over-year basis, how is that trending right now? Again that's the number you (ph) to give ex depreciation.

Without giving you specific numbers because we're not -- we're just not going to go into the specific numbers. I would say it's up slightly.

Up slightly. On the comment earlier about rental rates are near where they were in the last peak, the impression I get in the field, they're still not where they were.

So, let's hope my field work is right because if rates are at the last peak and the rate growth is already slowing, I'm trying to understand where the Company thinks their equipment and rental margins can go relative to where it used to be in the mid to high 50s. Because obviously your costs are up on buying equipment and that's not likely to change imminently.

Is there some guidance you can give us on where the equipment and rental margins can go, especially if that comment is right that rates are near last peak and that rate growth is already slowing?

You've got a couple of things there. And again, I'm not going to go into specific details or numbers for the reasons I mentioned earlier in the call we're getting rates up. We are getting rates up, we basically said that we expected that we would continue to get rates up even beyond 2005 at a lower rate. Hopefully, somewhere near to the CPI index. At same time we're also getting time utilization up a little bit as well. And the combination of those two things are driving our dollar utilization up.

Thank you very much.

Thank you, David.

Thank you. Our next question comes from Doug Christopher from Crowell, Weedon. Please go ahead.

Hi. Thank you very much.

I was just wondering if you could cover -- and you haven't done it yet -- but maybe talk about how the highway construction bill, the spending bill, their potential impact on you, when you might expect some possible benefits from that given your positioning.

Thank you.

Typically when you look at the work we bid. We have about a lag time of about 90 to 120 days from the time we secure a bid and when we begin work. Obviously, on smaller jobs it will on at the shorter end of that or maybe even a little less than 90 days. And then on some of the bigger jobs, major road construction that goes over a two or two and a half year period of time the lag time might be even longer than the 120 days.

But if you think about it now we're at the middle of August. If you apply that 90 to 120 day lag between securing a bid and actually beginning the work, you're really talking about no impact in 2005, and then beginning to see some impact as we move into 2006. And I think that's how I'd characterize it. I believe as we go through 2006 again, assuming the economy holds up, which we believe it will, we'll see progressively better business environment in that area than we've seen obviously as we've gone through 2004 and 2005.

Thank you.

Thank you. Our next question comes from Brad Artemis from Greenlight Capital. Please go ahead.

Hi. Actually it's David Einhorn.

I was hoping you could elaborate. I know you've said you don't want to a lot, but in terms of the SEC investigation which has been going on for a very long time now and you've disclosed a number of things that have come up.

Have you disclosed all of the major things relating to that inquiry from what you can see or are there possible additional major things that are completely unknown to the market at this point?

We basically have disclosed things that we thought were appropriate to disclose. If anything was there that we felt needed to be disclosed, we would do that, but at this time, I think I'd go back and just say that the inquiry is conduct -- you know is looking at a broad range of accounting issues over a non-specified period of time. To try to give you much more insight on that is -- would be wrong.

Okay. Thanks.

Thank you. Operator, we have time for about one more question.

Thank you, sir. We have a question from Eric Ribner from NorthStar Capital. Please go ahead.

Hi, guys. In light of the fact that you saw rental rates increase 5.2%. Some of your competitors saw rates that were 9% and better. Why is there a discrepancy?

A couple of things. One is you have to look at rental rates over a much longer period of time than one quarter. We've been working at getting rental rates up now for a long time. Over two years. In fact, the 5.2 rate increase we saw this quarter was the ninth consecutive rate increase that we have.

I'm not sure that anybody else in the industry has achieved that. So I would be careful just looking at one single quarter for comparative purposes.

Okay.

Okay. Operator with that I'm going close this call off with just a few very brief comments.

First of all I would like to thank everybody for joining the conference call, we always look forward to having a chance to talk with you. We're very pleased with the quarter.

Three things that you've heard us talk about a number of times today is raising rental rates, increasing the size of our fleet, and improving time utilization concurrently is really very, very positive for the Company. Our principal end market private, non-residential construction as Mike mentioned earlier, remains strong. I have no reason to believe that that won't continue throughout the balance of this year and into 2006 and as Mike said possibly beyond that as well.

In closing, I believe the balance of the year should be strong for us. We may have been a little bit conservative on the revenue, we'll watch that as we go through the remainder of the year. But we are firmly committed to making the $1.60 to $1.70 a share that we've guided and to generating at least $200 million of free cash flow. With that have a very good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may disconnect and thank you for participating.