聯合設備租賃 (URI) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the United Rentals' third-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 third quarter and first 9 months of 2005 have not yet been finalized. And consequently, the results and other data for these periods are preliminary and subject to change.

Unless otherwise specified, the information in this conference call, including forward-looking statements, is as of the date of our most recent quarterly public investor conference call and should not be construed as an update of such information. The Company's results for 2004 and the third quarter and first 9 months of 2005 have not been finalized. And consequently, the results and other data for these periods are preliminary and subject to change.

Certain statements contained in this presentation are forward-looking in nature. These statements can be identified by the use of forward-looking terminology, such as believes, expects, plans, intends, projects, forecasts, may, will, should, on track, or anticipates or the negative thereof or comparable terminology or by discussions of strategy or outlook.

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 statement. 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 and reduced demand and prices of 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 company that United Rentals acquires could have undiscovered liabilities and may be difficult to integrate; 5, rates may increase less than anticipated or 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 preliminary and subject to change; 7, the Company's results for the first 9 months of 2005 have not been finalized and consequently are preliminary and subject to change; 8, evaluation and testing of the Company's internal controls over financial reporting have not yet been completed and additional material weaknesses may be identified; 9, 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; 10, 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; 11, the Company may be unable to deliver financial statements or make SEC filings within the time period required by its lenders or the indentures governing various securities as amended; and 12, the estimated impact of expected restatements is preliminary and may change based upon additional analysis of the Company or its auditors.

Certain of these risks and uncertainties as well as others are discussed in greater detail in the Company's filings with the SEC. 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.

During the conference call, reference will 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 UnitedRentals.com.

Also, during the conference call, reference will be made to the 2005 outlook for EBITDA. Please note that EBITDA is a non-GAAP term, which represents net income plus interest expense, income taxes, depreciation and amortization. EBITDA should not be used as an alternative to net income or cash flow from operation.

Speaking today in Greenwich for United Rentals is Wayland Hicks, Chief Executive Officer; Marty Welch, Interim 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. Welcome to our third-quarter conference call. We very much appreciating you taking time out of your day to join us for this call. I'll begin by covering a few summary highlights for the quarter. Marty Welch, our new Interim CFO, will then take over and review our financial performance. And then, he'll pass the baton to Mike Kneeland, Executive Vice President of Operations, who will talk about some of the operational aspects of the business.

As you probably saw in our press release this morning, we continued our strong performance this quarter with third-quarter revenue growth of 16%. Our preliminary diluted earnings per share were $0.76. Rental rates were up 5% during the quarter on top of the 8.5% increase we achieved during the same period last year. Our rate improvement was slightly better than we expected and has continued during the third quarter -- has continued through the month of October at third-quarter levels. So it's holding up very well. I would also point out that this is the tenth consecutive quarter that we have increased rental rates.

In addition to rate improvement during the third quarter, we increased the size of our fleet by a further 90 million to 3.96 billion that is based on original equipment costs. At the same time, we've improved time utilization by 1.8 percentage points from the third quarter of last year. Dollar utilization in the third quarter established a record for the Company at 72.7%. Our previous high was 68.7% in the third quarter of the year 2000.

Our strong dollar utilization resulted from both the improvement in rates and the increase in time utilization. The results of our strategic focus on the contractor supply business continued in the third quarter with revenues up 46% to $89 million.

Since our last conference call, we opened our ninth regional distribution center, completing the coverage for our North American customer base. These distribution centers support our objective of providing the majority of our customers with next day delivery of supplies. They are a very important part of the infrastructure that will enable us to capture significant market opportunity and substantially increase the size of this business over the next several years.

Another important part of our growth strategy is opening new branches. Our objective this year and for that matter for each of the next several years is to open 30 to 35 new branches. We are on track to make this happen. We have opened 30 new branches so far this year and expect to open 5 more before year end, which of course would bring our total to 35 for the full year.

We continued to narrow the losses in the traffic control segment. Our third-quarter traffic control revenue was up 6% compared with the third quarter of 2004. But more importantly, our same-store growth increased 14%. Earlier this year, we said we would lose someplace between 30 and $40 million in this business. Compare that to 2004, where we lost $50 million.

Now on our last quarterly conference call, we indicated we expected to finish the year with a loss towards the low end of our range or about $30 million. We still expect to do that or perhaps even slightly better.

Given the strong results again this quarter as well as our outlook for the fourth quarter, we are raising the 2005 outlook for revenues to $3.5 billion from the 3.4 we previously had communicated. We're changing our diluted earnings forecast per share to a range of $1.68 to $1.75 compared with our outlook that we shared with you on the second-quarter call of $1.60 to $1.70.

To take advantage of the very strong markets we're operating in, we are increasing our total capital expenditures this year from about 750 million to 800 to 850 million. We've previously talked about spending roughly 750 million on this fleet, and we're taking that up to take advantage of the great market that we are operating in. This combined with greater-than-planned revenue growth, which increases our receivables, has caused us to lower our forecast for free cash flow from what we had previously guided of 200 million to 100 million.

Now let me give you an update on the progress we're making on filing our financial statements. We have been working diligently in concluding the restatements for the self-insurance reserves and the income tax provision and are continuing to provide information to the Special Committee of the Board, reviewing matters related to the SEC inquiry. We have also begun the work to restate our results for most of the sale-leaseback transactions that occurred in the years 2000, 2001, and 2002. Just to refresh your memory, these transactions had an aggregate gross profit of $34.2 million. Based on a preliminary assessment by the Special Committee, the accounting for most of these transactions was incorrect and appears to have been improper. When we do receive the Special Committee's final conclusions on this subject, we will take appropriate action with respect to anyone responsible for improper conduct.

At this time, this is all we can say on this matter until we receive the final conclusions from the Special Committee.

Now before I close, in looking forward, we are in the second year of a recovery in private, non-residential construction, which as most of you know, that is our primary end market. At the end of August, this market was still 15% below the peak not adjusted for inflation, which occurred in the year 2000. Most of the forecasts I've seen are for a continuation of at least a moderate growth we have seen so far this year end of the year 2006 and for that matter end of the year 2007. This environment is very supportive of our strategy to expand our branch network as well as our rental fleet and focus on the opportunity in our contract-to-supply business.

Now with that as a summary of a few highlights, I'm going to pass the call over to Marty Welch. Marty?

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 key initiatives. Now I will provide some preliminary financial information for the quarter and review our outlook for the full year.

Our preliminary diluted earnings per share for the third quarter of $0.76 is based on a share count of 109.8 million shares. Total revenue for the third quarter of 984 million is an increase of 16% over 2004. This includes rental revenue of 742 million in the quarter, a 13% increase year over year. Sales of new equipment, contractor supplies and service revenues were up $44 million, a 32% increase in the quarter. This primarily reflects higher contractor supply sales, which were up 46% to $89 million, and sales of equipment, which were up 25% to $55 million.

Now taking a look at our segments, first, in the general rental segment, which represents 92% of our total revenue in the third quarter, we continue to see very strong overall performance. Total general rental segment revenue was $901 million, up 17%. This was primarily driven by a 14% increase in our rental revenues to $667 million. General rental segment same-store rental revenue was up 13%, and cold starts contributed an additional 2% of growth. Our growth was the result of improvements in our rental rates, which were up 5% in the quarter, as well as improved time utilization; all of which was accomplished on a larger fleet.

We've opened 30 new branches so far this year, and these branches contributed about $11 million to total revenues in the quarter. Rental equipment sales in the general rental segment were $61 million, up about 4 million over last year. Contractor supplies and equipment sales growth continued to be very strong in this segment. Contractor supplies were up 52%, and equipment sales were up 24%.

Now turning to our Traffic Control segment, in the quarter, we had total revenues of $83 million, which is a $5 million or 6% increase year over year. This growth was in spite of the fact that we had nine fewer branches and is largely the result of our capturing a greater share of the available business. We expect that the operating loss for the full year 2005 will be $30 million or slightly better. This compares favorably with a loss of about $50 million for 2004.

Now turning back to our consolidated results, as I mentioned earlier, we reported preliminary third-quarter results of $0.76, bringing our 9-month preliminary diluted earnings per share to $1.45. Our earnings for the quarter reflected the flow-through from our revenue growth, partially offset by continued higher-than-expected SG&A costs and higher interest expense due to increasing interest rates. Within SG&A beyond the normal inflationary increases, we had higher selling costs relating to growth in the business, consent fee expenses relating to our recent agreement with the bondholders, and professional fees including those related to the SEC inquiry.

The gross margin flow-through from the rental revenue increase in the quarter was in line with our targets; although, the flow-through to the bottom line was impacted by higher SG&A and interest costs.

Looking at our consolidated cash flows for the first 9 month, our cash flow from operations was 427 million for the first 9 months of 2005 compared with 531 million for the 2004 period. This change reflects cash utilization for working capital purposes in 2005 compared to cash generation from working capital in 2004. The higher-than-expected use of cash to support working capital in 2005 was principally due to growth in accounts receivable and inventory as well as the timing of cash disbursements to support our fleet expansion.

For the first 9 months, we invested $677 million in our rental fleet compared with 465 million last year, an increase of $212 million. Our non-rental CapEx for the first 9 months was 56 million, a $14 million increase versus last year. Due to the substantially higher investment in rental equipment to support our growth as well as the cash used for working capital requirements, we had negative free cash flow of $76 million compared with free cash flow generation of $216 million last year.

Our cash balance stands at 151 million at September 30, 2005, which is essentially flat from the year-ago period. Our cash balance during the quarter was negatively impacted by a $33 million payment that was required in connection with our consent solicitation.

Also as we noted in our press release, we are maintaining a cash balance of $75 million in an investment account for a Traffic Control subsidiary to conduct business with the State of Florida.

Now let's take a moment to review the balance sheet. Our total assets at September 30, 2005 were $5.3 billion, including the net book value of our rental equipment of $2.4 billion. We had total debt of $2.94 billion, and our net interest expense in the third quarter of 2005 was $50 million, $11 million higher than the third quarter of 2004, reflecting higher interest rates.

Turning to our liquidity position, as of today, we have borrowing capacity under our revolver of $449 million. And in addition to the revolver availability and existing cash balances, our $200 million accounts receivable securitization facility is unused and fully available at our current ratings' levels.

Now let's discuss our outlook for 2005. I would also just like to point out that our outlook does not reflect any possible impact that might result from the outcome of the SEC inquiry. We are targeting total revenues of $3.5 billion in 2005, including used equipment sales in the range of 260 to $285 million. We expect diluted earnings per share for 2005 will be in the range of $1.68 to $1.75. And we would expect EBITDA of 935 to $950 million.

With respect to CapEx, replacement rental CapEx of approximately 475 million to 500 million, between 250 million and 275 million of growth capital, which includes about 70 million of capital allocated for our 35 new branches, we will spend about 75 million or so in non-rental capital, which gives us a total capital spending outlook in the 800 million to $850 million range. And after all rental and non-rental capital, we would expect free cash flow of about $100 million for the year.

That summarizes our outlook for 2005. Now, I'd like to turn it over to Mike Kneeland, who will provide some color on the operational aspect of the business.

Thanks, Marty. Good morning, everyone. As Wayland mentioned, we continue to see rates around 5% in October. Our rate improvement this year has been supported by the continued growth in private, non-residential construction spending, which the Department of Commerce reported this morning to be up 5.1% for the first 9 months of the year.

Nationally, we are seeing increased construction activity in the commercial, office, retail and the manufacturing sectors. On a regional level, in the U.S. and Canada, construction continues to show growth in most areas with the exception of the Midwest and Northeast regions, which remain flat on a year-over-year basis.

Let me take a moment to talk about the hurricane effect on our operations in the Gulf and Southeast regions. From a Company standpoint, this had a modest impact on the business overall. Katrina affected 11 of our branches, with 4 of those sustaining slight-to-moderate damage. Within 30 days, we deployed $21 million of equipment to supplement our Gulf area fleet and aid in the clean-up efforts. This equipment was primarily put to work in New Orleans and Mississippi. Once the initial cleanup was completed -- is completed and the rebuilding begins, we expect to see significant growth in the region for the next several years.

And in the case of New Orleans, it is likely to be a much longer timeframe. Our contractor supplies distribution centers also played an important role in the recovery efforts by supporting our branches to meet the increased demand.

And in Florida, 17 of our branches are currently assisting Florida Power and Light as they worked to restore power more than a week after Wilma hit.

More importantly, the scope of these disasters demonstrated United Rentals' ability to respond even to the most extreme situations to meet the requirements of our customers. In each case, our emergency response team and our branches have been able to respond fully to our customer needs.

Now I'd like to take a moment and talk about the rising costs associated with fuel. Last year, we implemented pricing guidelines and best practices designed to offset fuel increases. In the third quarter, these best practices resulted in incremental revenues of $8.6 million this year versus last. These additional revenues more than offset the added fuel expense of 3.6 million.

Let me conclude by saying that our entire organization remains focused on managing the business, raising rental rates, expanding and utilizing our fleet, while providing our customers with exceptional customer service and the range of solutions to meet their needs.

Now with that, I'd like to pass the call back over to the operator to open up the lines for Q&A. Thank you.

(OPERATOR INSTRUCTIONS). Lionel Jolivot, Goldman Sachs.

First question regarding the guidance for the full year, you raised slightly the lower end of your EBITDA guidance; you're now looking at 935 to $950 million. I was just wondering, you are taking a 33 to $35 million charge for the consent payment to bondholders. Is it included in the (indiscernible) EBITDA? Because the vest charge is included in SG&A if I am right.

The $33 million under the accounting rules actually gets capitalized and amortized over the remaining life of the bond issue. So only the professional fees relating to consent, which is about $3 million were expensed. The rest of it was capitalized.

So $3 million in the third quarter and probably the same in the fourth quarter. Is it fair to assume this?

No, it is a one-time event.

The second thing is, I'm trying to -- could you give us the EBITDA for the third quarter?

We actually aren't allowed to talk too much about that because of the investigation. But I think you can kind of infer what it is by taking a look at the 6 months and the 9 months.

And just the only number we are missing is the tax rate. What was it in the third quarter?

It's around 39%.

And last thing, the average age of your fleet is still around 39 months? Yet, you've increased your CapEx ratably dramatically in the past couple of months. And if we continue to increase in the fourth quarter, what is the target? When you look at your fleet, where do you want to go in terms of average age?

We've said before that we will operate within a window of 35 months up to 45 months, depending where we are on the cycle. Your observations are correct; we are running about 39 months now and we would expect that to be close to that level at the end of the year. So a lot of it depends on what the economic environment looks like. As we go forward, I would expect that you would see maybe a little downward movement on the fleet age, probably not a lot as we continue into 2006, 2007. If the economy reverses itself, then you might see a little upward movement and the fleet getting a bit older.

David Bleustein, UBS.

Wayland, can you elaborate on why you need $75 million in an investment account with Florida?

Basically, we have a situation where we have actually had I think the technical term for it would be net negative equity. Marty, can you just jump in on this?

You might remember, David, that a year ago, we wrote off all of the goodwill associated with the Highway Tech business. And those journal entries are required to be pushed down to the operating subsidiaries. And when that happened, this subsidiary had a substantial retaining deficit. And so we made a capital contribution to the subsidiary to give it a positive net worth, which was necessary to qualify for bidding on business with the State of Florida.

It is completely a voluntary deposit. We could take it out at anytime. In other words, we are not contractually obligated to keep it there. The only impact of that would be that we would not be able to bid on new business with the State of Florida should we decide to withdraw it.

Just to further comment, that's our highway -- our Traffic Control business that Marty is talking about.

Yes, the Traffic Control business only.

Let me switch gears and ask one question about the accounting. Were all of the sale-leaseback transactions with the same counterparty?

I don't think it's appropriate, David, for us to go into the individual transactions or even talk about them in aggregate form. I'd appreciate it if you would let us off with that.

And then last one, can you give us some sense for your thoughts in 2000 -- given that you expect non-residential construction good in '06, and then you even commented on '07. Should we expect capital spending in '06 to be well above maintenance levels? And if so, give us some sense for how much above.

We will reserve guidance until we talk to you on the fourth-quarter call, but I'll give you a flavor for it. We are right in the middle of our planning process now and we work at very hard and we do that bottoms-up to get a sense by branch, district and region.

My feeling is though if the environment continues to hold as it is right now, which is as I said what the economists are telling us is likely to occur, then you would see another year where we would put in the same kind of growth capital that we are talking about now and maintenance capital probably in the 500 to $525 million range.

Manish Somaiya, Banc of America Securities.

A couple of questions. One, just to go back to David's question on CapEx for '06 as it relates to free cash for '06, how should we be directionally thinking about it -- up, down, or flat versus '05?

It's good question, and I'm going to take you back to something that we have said before. We basically said that we could fund the business -- rental revenue growth up to about 10% -- high-single digits or very low double-digit growth and still generate free cash flow. That is exactly what we expect to do this year. We are growing our rental revenues -- same-store rental revenue by 13%. And we expect, as we said earlier, to generate about $100 million worth of free cash flow. To the extent that we get that same kind of growth next year and we put the same kind of levels of capital in, then I would also expect to see free cash flow in that $100 million range.

If the same-store growth took off and went up to high teens and we've seen that before particularly in the late '90s, we would probably end up putting more growth capital in. Or to take advantage of the growth in the market, we'd put more growth capital in and you might not see as much free cash flow generated.

The other question pertains to non-res construction and just the general industry fundamentals. I think you pointed out before that it looks like '06 is going to be a pretty good year. Can you elaborate or at least give us your perspective on when you think the next industry peak might be?

The next turndown in the economy?

Or just the peak in non-res construction.

My sense is -- and again, we rely very heavily on looking at Dodge data, talking to our customers, getting economic forecasts -- that you are going to see growth continue in private, non-residential construction through 2007. I have not seen forecasts for 2008, probably a little early for those to be available. But moderate-to-slightly-above-moderate growth at least through 2006 and into 2007.

And then just lastly, I think your free cash flow guidance is 100 million for '05. Year to date, that number is negative 76 million. What accounts for the pick-up in the fourth? Is it just working capital?

What you typically see is -- as we move through the end of the third quarter, we then begin to cut back fairly significantly on the amount of capital we spend on our fleet. We will continue to spend but at a much lower level than we did during the first 9 months. At the same time, the third quarter is our highest-receivable month. So as we move through the fourth quarter, we benefit from the collection of the receivables. So when you put those two things together, you end up seeing a lot of cash generated in the fourth quarter, and we have historically done that.

(OPERATOR INSTRUCTIONS). Andy Kaplowitz, Lehman Brothers.

You talked about hurricanes a little bit and the positive effect potentially in '06. Is there any way to quantify in terms of sales just a ballpark of how much it could be incremental to sort of a decent economy in '06? Is there any way to think about that?

Mike mentioned that we've moved $21 million of additional equipment into the Gulf. We will probably put a little bit more than that in as we go forward. We will obviously add some additional equipment to Florida as a result of the hurricanes there as well. So if you said above the 2005 rate, we may have as much as say 30 or $35 million of additional equipment. And we are tracking at a say a full year dollar utilization level of around 63, 64%. You're probably talking about $20 million plus or minus a little bit of additional revenue.

We are also doing some cold starts in that area, which won't give us major profit improvements obviously during 2005, but we'll see some additional revenue growth coming from that as well.

And then that 20 million is sort of a yearly impact in '05? And maybe that could grow a little bit in '06 as reconstruction begins?

Actually, I was giving you a full-year level, and that would be '06. It might be a little bit higher than that. A lot of it depends on just how quickly the reconstruction begins to take place.

Just looking at your revenue guidance for the year now, 3.5 billion, I guess it means a pretty big drop-off in 4Q in terms of revenue growth. Is that just sort of being conservative again? What do you expect your rental rates to be in 4Q, and how can we look at the number?

I think you will see a couple of things to help you understand that a little bit better. Rental rates, we have said will drop off as we go through the back of the year. They haven't dropped off quite as much as we thought they would. We're continuing to run at the 5% level through October. We do expect that to drift down a little bit by the end of the year.

The second thing though is the used equipment sales. Last year, we did about $75 million of used equipment sales in the fourth quarter. We would expect that to drop down to maybe 50, 55, 60 million in the fourth quarter this year. And then finally, I suppose you could conclude that we might be being a little bit conservative.

And just one more question. In Traffic Control, you mentioned in the past that you've had lower prices, so you have been getting a higher revenue. Is that sort of still how it's going? It's a market share gain? And have you been able to raise your prices at all in that business?

I would say we're still doing what we said we would do earlier this year, and we are getting the additional revenues you pointed out. But we are getting that at slightly lower prices than we had previously.

And then, any sort of thoughts on '06? I know you mentioned before you want to make it a little better than breakeven. Is that still the case?

Our goal is to get it to breakeven or better in 2006. That's correct.

Mike Kender, Citigroup.

I was wondering, you gave a total debt number. I was wondering if you could give a breakout with revolver term loan -- and obviously we know what the bonds are -- but just break out that cap table.

Sure, Mike, this is Al Colangelo. The Board's (ph) out at 930. We had about 137 million on our revolver, 739 million on our term loan, about 1 billion outstanding with our high-yield 6.5% notes. And our senior sub notes combined were about just over $1 billion -- 1.43 billion. Topping that off, we had some other debt, which would bring the total to 2.935 billion.

Scott Scher, Clovis.

A quick question, Wayland. On the $100 million or so of incremental capital that you're spending this year above what was said for earlier guidance on the growth side, what does that sort of tend to generate? If we use a 70% utilization and incremental EBITDAs of 35 to 40%, what does that sort of get me next year and the year after by spending that money instead of giving it back to me in free cash flow?

You've got to back up. The 72% number that you talked about may be a little high because that's our peak period if you will third quarter still. I would use a number of closer to 65. Then if you talk about say it's 100 million -- it could be 50 million because we gave you a range -- but say use your $100 million number. If you're getting dollar utilization full year at 65, you would then expect to get about 65 million.

If you are running EBITDA at our historical levels and I'll let you plug the number in because you're familiar with that and I am not going to talk about the number, you can work the rest of the math pretty easily.

I think EBITDA has been running about 32, 33%. But I think you've talked about incrementals in the 40% range obviously because it's a fixed-cost business.

You get a better flow-through for incremental revenue that you are putting in.

Yes, so if you spend $100 million and you get 65 million of revenue at 40% -- it's a 40 incremental; that's about 25, 26 million of EBITDA, which is about a 25, 26% cash on cash return. So obviously, I guess you could've given us the free cash flow this year.

But you are choosing, based on your perception of the near-term growth, to put that into growth and hopefully get us 25% cash on cash return on the incremental $100 million. Is that the right way to think about it?

You've done the math very well. I think you summarized it very well. I think we would be remiss not to take advantage of investing in this market. We are a -- and I know you noted that or Paul has noted that -- if you think about it, we're putting the additional capital in. This is -- we did the same thing through the second quarter as well. But we're putting the additional capital in, we're raising our rental rates and we are increasing our time utilization all at the same time. If we were not to take advantage of putting the additional capital in, I think we would be missing an opportunity.

Sarah Thompson, Lehman Brothers.

A couple questions. Can you just give us -- I'm sorry if I missed it -- what your timing utilization rate was in the quarter?

We did not give that number, but it was roughly 65%.

And can you just tell me, how does that compare -- you said your best dollar utilization rate was in 2000. How would that compare with time utilization rates then?

Time utilization would have been lower. So I think you could say in the third quarter for instance of 2004, time utilization was running about 62%. So we are running just a little bit north of 65%, closer to 66% -- still up 2 to 3 points.

Where do you think your max time utilization is given your daily versus weekly versus monthly customers and your fleet mix?

We are very close to maxing out on time utilization. We can have some additional opportunity in dollar utilization. But I think we are close to running the fleet at peak when you start getting into the high mid to high 60s.

Just from a bigger picture question -- curious about that comment around better dollar utilization. Obviously, pricing has been much better than I think you thought, than we thought. And just trying to understand what is kind of allowing you to price better I guess this time in the FIFO versus kind of where you were in the late '90s, 2000 time period.

Well I think there's a number of factors that contributed to that. One of which is, we are in a much more buoyant market today; although, the late '90s, the buoyancy in the market would have been similar.

Two, I think the industry is much more disciplined today than it was if you go back to the late '90s. In the '98, '99 timeframe, a lot of capital came into the industry in a very short period of time. People bought a lot of fleet; put it out. And when it wasn't moving, they would have a tendency to use the rates as a lever to drive additional volume. That ended up kind of backfiring for a number of companies in the industry as we went through an economic turndown. I think the industry is far more disciplined today than it was before.

The third factor that contributes to our success is -- we made a significant investment in time and effort as we went through the back half of 2003. To understand better how to drive rate improvement, we brought MacKenzie in, the consulting firm, to work with us. We put a team of people together. We analyzed all of our transactions and began to see the patterns that allowed us by doing business in a slightly different way to begin to improve rates. We continue to do that today. We focus on it religiously. We monitor every branch, region, district very carefully and work at trying to get our rates up.

I think we are a different company today than we were in the 1997 -- '98 timeframe. The industry is different as well.

And then just last question -- a little bit difficult to look at from our industry numbers, but do you guys feel like you are gaining market share in this upswing? Are you kind of keeping pace with the market? Give us any color there.

I would say we are holding our share or slightly improving it. Basically, as you pointed out, when you are in a growth market, it is always difficult to separate out what is additional revenue coming by growth of the industry and additional revenues taking share away.

Joseph von Meister, Jefferies.

A quick question on your cash flow items. What was the cash flow from used equipment sales in the quarter?

Are you talking about proceeds from used equipment sales?

Yes.

It was 228 million for the quarter.

I know that you give the 9 months in your press release --

That is 9 months.

Is that 9 months?

Yes, the 228 is 9 months.

It's about 62 million for the quarter.

Can you provide the -- normally in the cash flow statements, you have profit on used equipment sales; it appears in the operating cash flow section of your cash flow statement.

We have not been giving out -- because we haven't filed a K, we have not been giving out gross margins.

And do you guys have any idea when you are going to be filing your updated financials? Is there any time certain or time estimate?

We are working at it as hard as we possibly can. It is my personal number one priority is to get our K filed. But I would not commit to any specific timeframe.

John Robbins, Morgan Stanley.

A couple of quick questions. The first, have you noted any sort of strategic initiatives by any of your competitors that you found to be successful? Or have you seen anything being executed by your competitors that have sort of made you a little nervous or forced you to modify your strategy whatsoever?

I haven't seen anything that makes me nervous. I would say -- and I commented on this just a couple of minutes ago -- I believe that there's a concerted effort across the industry to get rates up. By the way, that was needed. If you look at the industry's return on capital, we really did need to get our rates up to improve that return.

So I think it not just ourselves driving that activity. But I think as you go around other leading companies in the industry, you're seeing them concentrate on that as well.

Do you think any of your competitors are earning their cost of capital at this point?

I would not comment on how other companies are relevant to it. Some of it is very difficult to see because a number of our competitors are subsidiaries of larger companies (multiple speakers). You don't have good access to that kind of detail.

With respect to your CapEx, you did a nice job of segmenting your CapEx. With respect to opening new branches, any investments that are necessary for those in distribution centers? Does that fit into the growth CapEx bucket, or is that in the non-rental CapEx bucket?

This is Mike Kneeland. Insofar as the improvements to the facilities, that would be in non-rental as well as the distribution facilities. And then inside of the rental fleet, that would be considered on obviously on our fleet purchase.

So that would be in the growth CapEx?

That's correct.

With respect to real estate, you're not opening a tremendous number of new branches, distribution centers. Have you found sort of real estate to be relatively tight? Is there ample capacity in the areas that you've expanded into?

You really have to look at that market by market. I would say for the most part, we don't have difficulty finding real estate availability. On the other hand, if you go into New York City which is a big market for us, we have opened two branches this year. And the nature of those branches, they're slightly different than they would be if they were in a different part of the country -- much smaller square foot. We don't have the same kind of yard there that we would have even in neighboring cities like Stanford, Connecticut.

So you do have some variability. Obviously, the more condensed or dense the area is, the tougher it is to get space available.

With respect to the new space, what are the average lease terms or duration of that space?

We typically will negotiate a contract that will have a 5-year lease with options to renew for at least 5 years and more often than not, 2 to 3 different renewal periods up to a total of 20 years.

One final question, scrap pricing has been as it always is very volatile this year and had nice bid through the third quarter. Has that had a material impact on your capital budget? Has that contributed to the expansion of your CapEx budget for the balance of the year?

I would not say that that is the major factor to it.

Christina Boni, Credit Suisse First Boston.

First question is just with respect to acquisitions; I know you are very focused on cold starts. But can you give us any thoughts in terms of the acquisition environment out there and your thought process of continuing to look at any acquisitions?

Yes, we will continue to look at acquisitions. Basically, I said before -- publicly said before -- that we would expect to add roughly $100 million a year by way of revenue -- by way of acquisitions. You may find 1 year -- this year, we have not added a whole lot, I think maybe 8 or $10 million worth of revenue by way of acquisitions. So maybe the following year, you do a little bit more than that. But if you thought in terms of an average of 100 million revenue year-end growth, that would be a good number to work with.

Now in terms of availability, there is no shortage of availability at all. This is still a very highly fragmented industry with a lot of small, independent players out there. I think we can continue to grow that way, selectively fill in our footprint in areas that we want to take advantage of.

We did a couple of acquisitions last year in Canada that fell in that category. One in the Alberta area; the other one in the Maritime Province. It allowed us to enter a market much quicker and more affordably than we would if we tried to tackle doing a cold start and also take advantage of a market, particularly in Alberta that was growing very rapidly.

I think that is what you will see us do. It's not likely that we would go out after a major acquisition. I'll never say no on that. We would look at different opportunities as they present themselves. But our tendency I think will be to do smaller ones, and as I said, with roughly $100 million of added revenue a year that way.

Then just with respect to your guidance, you took the revenue guidance up $100 million and EBITDA guidance really has not moved. Is there anything in the cost structure that has basically changed to get some additional flow-through on that? Or are you just being conservative?

I think Marty had talked about our SG&A costs, and we've had increases in our SG&A costs that are higher than certainly we would like attributable to a number of things. Some of which are once offs; others will be with us for at least some time to come. We're actually getting very good flow-through on our gross margin line. Even though we cannot talk about it, we're happy with that. That is on track pretty much consistent with what we planned.

So let's watch the fourth quarter. I would rather give you a number that we feel confident that we can make than give you a number that is ambitious and then fall short by a little bit.

Austin Zalkin, ING.

Just following on Christina's question, could you talk a little more depth about maybe the types of acquisition multiples you're seeing for the size acquisitions you are looking at? And how that has maybe changed over the year?

We have not looked at that many. I would say that the acquisition multiples have been running in the five to six times EBITDA range, and that is reasonably consistent. Maybe a little higher today than it would have been in the earlier years of the Company.

David Raso, Citigroup.

Really just a housekeeping question here. I'm trying to figure out what drove the upside in the quarter with a little bit more detail. The comments you had about SG&A, at least I would think suggests that SG&A was up as a percent of revenues this quarter versus a year ago? Is that a correct assumption?

Yes, it is. And embedded in there is a significant cost regarding the special investigation. In the quarter, there was about $9 million of costs relating to the special investigation. And year to date, there is about $15 million relating to that. So that's one of the factors that is in there.

And that said, with the interest expense number, I believe you said it was around 50 million?

Correct.

That implies the operating profit -- I'm sorry, the gross profit was a very large incremental boost given the revenue growth. Can you help flesh out for us a little bit, was there particularly large gains on used equipment sales? Or if that's not the case, it implies maybe the equipment rental margin was north of 50% for the quarter?

David, as much as I would like to, we just can't talk to you about our gross margins. We are going to religiously follow that position.

Ed Shen (ph), Ivory Capital.

Just had a quick question on the fleet age, wanted to just ask you about the range that you're talking about being 35 to 45 months over the cycle. And I just noticed that Atlas Copco just reported their numbers. And their fleet age actually came down I think pretty significantly year over year. It was 41 months I think last year and came down to I believe 32 months in the most current quarter.

But I was wondering why you guys are viewing the fleet age sort of question differently than some of your competitors are? It seems like some of the other people out there are being more aggressive in getting the fleet age down.

That's a very interesting observation. A couple of things, let me back up to the 35 to 45 months and tell you how we got there. We looked at the fleet; we analyzed our maintenance costs; and we also analyzed frequency of failure, which is the most important thing from a customer's perspective. What we saw was that there was linear growth as you went out through time from 35 to 45 months but barely noticeable -- very, very insignificant growth in terms of either increased frequency of failure or cost of maintenance to us.

When you got to 45 months, you started to see a knee over the curve, where that popped up a little bit. So we said, that's the window that we feel comfortable in operating inside of.

Now the second thing you have to look at is the mix of the fleet. And I can't tell you exactly how rental service -- what the mix of their fleet is. But I will tell you that I believe we are substantially heavier in aerial equipment than they or for that matter anybody else in the industry or any of the large public companies in the industry.

So when I look at that -- and we split the fleet apart -- we would have 33 months of fleet age for our general rental fleet and about 44 month age for our aerial fleet. When you look at our maintenance costs, both of them run just about the same on a percent of revenue basis.

So I think we have it right. I think we want to continue to monitor that and watch that, but I don't feel like we have anything wrong with the age and the size of our fleet.

I just have a question on working capital as well. You mentioned that there is a tough comparison year over year. Could you give us just a size of what the magnitude of that swing is both on a year-to-date basis or for the full year to the extent that you can talk about that?

Well, in the year to date, the 9 months, we've got an increase in receivables of about 60 million and an inventory of about 40 million. And also while payables did grow and provide a source of working capital in '05 over '04, there was a much larger increase in payables '04 over '03. So the comparison year over year is a little bit nonlinear with respect to payables.

Maybe I will just follow up with Chuck off-line on that issue.

David Bleustein, UBS.

Forgive me if I missed this, but was there a discrete charge related to the repurchase of John Milne's stock in the quarter?

No, there wasn't any charge associated with the Milne termination.

We bought some stock back, but it was an insignificant number. And actually we had some gains from the transaction without going into any kind of depth. So it was, as Al said, very insignificant.

Adam Scotch (ph), Jana (ph).

Yes, two questions -- first just a follow-up on the working capital question. I am just trying to understand conceptually, I know you're kind of limited in terms of actually talking about specific numbers. But assuming that you said the AR in the inventory went up to kind of accommodate the upswing in business, presumably higher incremental margin sort of revenues. Why would cash flow from operations on a net basis suffer to that extent? I would think that the incremental profitability would at least offset and probably more so, assuming that your DSOs were kind of remaining at a sort of normal level and that the incremental profitability of the revenue that you are spitting out is at that level.

And then second question I had was, you gave some color on fuel. And so, if I heard you correctly, if I subtract the 3.6 million of actual incremental costs from the surcharge-related revenue and tax affected about maybe $0.04 of benefit in the quarter from that?

With respect to the working capital, I think the working capital components in general are going up in relationship to sales. We do have a little bit more build in inventory as we continue to grow the contractor supply business. What I was trying to explain earlier was that in '04, there was an unusual amount of working capital provided by Accounts Payable, which did not repeat itself in '05. Accounts Payable did provide some working capital but not to the same extent as it did in '04. I will let Mike comment on the fuel question.

Regards to fuel question, the 8.6 million that was increased on our delivery prices, 16%, which resulted in 5.0 million of that 8.6. And we charge more often. We are up 14% year over year; and that is worth 3.5 million. Insofar as our earnings, we're not going to go into that.

Just a follow-up on the working capital, I definitely to -- you're saying about the payables. I was more interested in the effect of higher accounts receivable inventories versus the incremental profit that you -- I am assuming -- booked from a better level of business. I was thinking unless maybe the DSOs have changed or maybe there's a nuance I am not quite understanding there.

The DSOs have not changed. I mean without getting too specific, there's nothing unusual moving around there. The inventory year over year is a result of opening up the nine DCs (ph) and continuing to grow the contractor supply business.

Operator, we're going to close the call down. Let me just begin by thanking everybody for joining us on the call. We really felt good about the quarter. We had outstanding revenue growth. We're operating the business in a way that we also feel good about in terms of being able to get our time utilization up, our dollar utilization up concurrent with increasing the size of the fleet that we have. And that's really very positive for the equipment rental companies that are able to do that.

The market itself is buoyant. We are going to continue to take advantage of the growth opportunity that we have in that market. As I said earlier in the call, we will spend a little bit more money on capital today to do that. But I think the returns that we get on that, particularly when you think of incremental capital going into the market, you do get a very high flow-through. So we wish to take advantage of that.

We will continue to wrestle with our SG&A expenses. Hopefully, that will peak, and we will get those under control sometime in the not-too-distant future. But again, when we summarized the whole quarter -- rental rates were up very strong, utilization is good, and capital is being accepted by the market. So we feel good about where we are. Thank you very much. And we will look forward to catching up with you on the next quarterly conference call.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.