聯合設備租賃 (URI) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the United Rentals Fourth Quarter and Full Year 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 fourth quarter and full-year 2005 have not been finalized and consequently, the results and data for these periods are preliminary and subject to change. Unless otherwise specified, the information in this presentation, 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 results for 2004 and 2005 full year and interim periods have not been finalized and consequently, the results and other data for these periods and the Company's outlook for 2006 are preliminary and subject to change.

Certain statements contained in this press release 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 statements.

Factors that could cause actual results to differ from those projected include but are not limited to the following: One, unfavorable economic and industry conditions can reduce demand and prices for the Company's products and services. Two, governmental funding for highway and other construction projects may not reach expected levels. Three, the company may not have access to capital that it may require. Four, many companies this United Rentals's acquires could have undiscovered liabilities and may be difficult to integrate. Five, rates may increase less than anticipated or costs may increase more than anticipated. Six, the audit of the Company's 2004 results audit has not been completed yet and, accordingly, previously-announced data for 2004 are preliminary and subject to change. Seven, the company's results for the interim periods and full-year 2005 have not been finalized and audit of the results for the full year 2005 have not been completed and, consequently, these results are preliminary and subject to change. Eight, the evaluation and testing of the Company's internal controls over financial reporting have not yet been completed and additional material weaknesses may be identified. Nine, the Company may incur additional significant expenses in connection with the SEC inquiry of the Company. The related internal review or the class-action lawsuits and derivative actions filed in light of the SEC inquiry. Ten, the SEC inquiry is ongoing and there can be no assurance the outcome of the SEC inquiry or internal review won't have additional changes in the company's policies and practices, restatements or financial statements, revisions of preliminary results or guidance and/or otherwise be adverse to the Company. Eleven, the company might be unable to deliver financial statements or make a SEC filings within the time period required by the lenders or the adventures governing the securities as amended. Twelve, the Company may not be able to file its 2004 10-K by March 31, 2006, the expiration date of an extension granted by the New York Stock Exchange. In which case, the exchange will initiate a suspension and de-listing procedures. Thirteen, the Company may not be able to file its 2005 10-K by the end of the 15-day extension period. And, fourteen, the estimated impact of expected statements is preliminary and may change based upon additional analyses by 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. Can you access this press release on the Company's website at www.unitedrentals.com.

Also during the conference call, reference will be made to the 2006 outlook for EBITDA. Please note that EBITDA is a non-GAAP term representing net income plus interest expense, income taxes, depreciation and amortization. EBITDA should not be considered as an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. Information reconciling forward-looking EBITDA expectations to a GAAP financial measure is unavailable to the Company without unreasonable effort.

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, 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. Good morning, everyone. Thank you for joining our conference call. We very much appreciate you being with us this morning.

I am going to begin by covering a few highlights of 2005 and then Marty Welch will review our financial performance. I should pause though, and say that Marty has just joined the Company as our CFO. As most of you know and was mentioned by the operator, he's previously been our Interim CFO so we welcome him to the Company and we're just absolutely delighted to have him aboard. Following Marty's review of the financial data, Mike Kneeland, the Executive Vice President of Operations will cover some of the operational aspects of the business. Let me turn now to the performance of the Company.

As noted in our press release, we're making progress towards finalizing our results for 2004 and 2005, and we're working diligently to file our financial statements later this month. Given, that the financial data that we'll cover this morning will be preliminary. With that said, 2005 was a very strong year for the Company. Revenues grew by 15%, up $469 million from 2004. We raised rental rates 6% in 2005, following a 7.5% increase in rates in 2004. We also grew our fleet and at the same time improved time utilization by 1.9 percentage points. Dollar utilization reached an all-time high of 64.9%. Just as a reminder, we achieved a previous high of 62.7% in the year 2000. Contractor supply revenue, a strategic initiative for the Company was up 44% to $324 million in 2005. Finally, we generated free cash flow of 133 million in 2005 after capital expenditures of $839 million, and we increased or diluted earnings per share to $1.81, up from the guidance we gave in the third quarter call that ranged from $1.68 to $1.75.

Let me turn to 2006. We expect total revenues of $4 billion. We also expect our rental rates to be up at least 4% and to see growth in more than 30% in our contractor supply business.

Our traffic control business lost $20 million in 2005. This reflected an improvement of more than $30 million over the previous year. We expect improvement in this business to continue and we believe that we should reach break-even in 2006.

We expect to generate $1.1 billion of EBITDA in 2006. After anticipating capital expenditures of approximately 900 million to 925 million, we should generate about $175 million of free cash flow this year. Finally, our diluted earnings per share should be in the range of $2.13 to $2.23. All in all, 2005 was a very good year for the Company and we believe we're positioned for an even stronger year in 2006.

With that, I will turn the call over to Marty Welch.

Thank you, Wayland and good morning, everyone. Wayland has given you some of the highlights and has covered our progress on several of our key initiatives. I will now provide some preliminary financial information for the quarter and the full-year and review our outlook for 2006.

Our preliminary earnings per share for the fourth quarter is $0.48, and that's on a diluted share count of 110 million shares. Total revenue for the fourth quarter of $962 million is an increase of 17% over 2004. This included rental revenue of 703 million in the quarter, an 18% increase year-over-year. Sales of new equipment, contractor supplies, and service revenues were up $37 million or 25% in the quarter. This primarily reflects higher contractor supply sales, which were up 42% to $87 million and sales of new equipment, which were up 15% to $57 million.

The highlights for the full-year include total revenue for 2005 of $3.56 billion, an increase of 15% over 2004, rental revenue of $2.58 billion, a 13% increase year-over-year and contractor supply sales of $324 million increased 44% for the year. Our preliminary earnings per share for 2005 is $1.81, based again on a full-year diluted share count of 110 million shares.

Turning to our segments, first, the general rental segment which, represented 88% of our total revenues in the fourth quarter, we continue to see very strong overall performance. Total revenue is $843 million, up 17%. This was primarily driven by an 18% increase in our rental revenue to 601 million, offset slightly by less sales of used equipment. General rentals same-store rental revenue was up 10.3%. Our growth was a result of improvements in our rental rates, which were up 5.1% in the quarter, as well as improved time utilization, all of which was accomplished on a larger fleet. We have opened 27 new general rental branches this year and they contributed about $12 million to total revenue in the quarter. Rental equipment sales in the general revenue segment were 75 million, about four million less than last year.

Contractor supply sales growth continue to be very strong in the general rental segment. Contractor contractor supplies were up 46%, while new equipment sales up 11%.

You may have noticed in our press release that the Company expanded its reporting segments to break out our Trench Safety, Pump, and Power business. For those of you not familiar with this business, it includes the rental of steel trench shields and shoring, pumps and temporary power equipment, representing about 5% of total revenues. Total revenue for this segment in the fourth quarter was $50 million and increase of 43% over 2004. And for the full year, total revenue was $180 million, representing a year-over-year increase of 39%.

Looking at our traffic control segment, in the quarter we had total revenues of $69 million, which is four million higher than last year, or a 7% increase year-over-year. Our operating loss for 2005 in this segment was $20 million, significantly better than our previous expectation of a $30 million segment loss. This compares favorably with a revised loss of $58 million for the segment in 2004. We continue to benefit from cost control initiatives we have put in place and improved bidding on jobs. As a result, we're targeting to break even in this business for 2006.

Now I would like to take a minute to talk about return on invested capital. For the full year 2005, the Company is initiating report of ROIC. This ratio is a key indicator for us to measure the effectiveness of the Company's deployment of capital and increasing shareholder value. The Company's metric uses annual operating income divided by the sum of shareholders' equity, debt and deferred taxes, net of cash. We believe that this calculation appropriately measures the nature of our business and industry. The 2005 preliminary ROIC was 12%, an improvement of 2.4 percentage points over 2004. We will report ROIC on a quarterly basis going forward.

Turning back to our consolidated results, as I mentioned earlier, we reported preliminary fourth quarter results of $0.48 per share and full year preliminary diluted EPS of $1.81 per share. Our earnings for the quarter reflected strong flow-through from our revenue growth, partially offset by continued higher SG&A cost and higher interest expense due to increasing interest rates. Within SG&A, beyond the normal inflationary increases, we had higher selling and labor costs relating to growth in the business, increased insurance and benefit cost. and professional fees, including those relating to the SEC inquiry. SEC inquiry and statement related professional fees were $10 million in the fourth quarter, bringing the full-year costs to $25 million. We expect to continue to incur significant professional fees relating to the SEC inquiry and restatement related matters in 2006.

Looking at our consolidated cash flows for the year, cash flow from operations was $662 million for 2005, compared to 743 million in 2004. The change reflects cash utilized for working capital purposes in 2005 compared to cash generated from working capital in 2004. For 2005, we invested $757 million in our rental fleet compared with $592 million last year, an increase of $165 million. Our non-rental CapEx for the year was $82 million, compared to 58 million in 2004. Due to the substantially higher investment in rental equipment to support our growth, as well as the cash used for working capital, free cash flow is 133 million in 2005, compared to 392 million last year. Our cash balance at year-end stands at $316 million compared to 302 million from the year-ago period.

Let's take a moment to review the balance sheet. Our total assets at December 31, 2005 were $5.3 billion, including the net book value of our rental equipment of $2.3 billion, the total debt of 2.93 billion, down slightly from 2.94 billion last year and net of cash was 2.61 billion at December 31, 2005. Our net interest expense in the fourth quarter of 2005 was $51 million, ten million higher than the fourth quarter of 2004, reflecting higher interest rates.

Turning to our liquidity position, as of March 6, 2006, we had borrowing capacity under our revolver of $448 million. In addition to the revolver availability and our existing cash balances, our $200 million accounts receivable securitization facility is unused and fully available at our current ratings levels.

Now let's take a look at our outlook for 2006. I would just like to point out our outlook doesn't reflect any additional impact that might result from the completion of the SEC inquiry or our internal review. We're targeting total revenues of $4 billion in 2006, including used equipment sales of approximately $300 million. We expect diluted earnings per share for 2006 would be in the range of $2.13 to $2.23. We expect EBITDA of $1.1 billion, replacement rental CapEx of $635 million and up to $200 million of growth capital, which includes about $70 million of capital allocated for an additional 30 to 35 new branches that we plan to open in 2006. We'll spend about $65 million or so on non-rental capital giving us a total capital spending outlook of about $900 million. And after all rental and non-rental CapEx, we would expect free cash flow of about 175 million for 2006.

That summarizes our outlook for 2006 and now I would like to turn it over to Mike Kneeland who will discuss some of the operational aspects of our business. Michael.

Thanks, Marty. Good morning, everyone.

As you pointed in the fourth quarter, we continue to see rate and time utilization improvements supported by the continued growth in private non-residential construction spending, our primary end market. The Department of Commerce reported a 5% increase in 2005, which is the second consecutive year of growth.

Now if you recall in 2004, spending was up 4.2% and even though we have seen two years of positive growth, it's still off by more than 13% from its peak in August of 2000. Inside these numbers, the areas that we have seen the strongest growth is in the commercial, retail and healthcare sectors. On a regional level in the U.S. and Canada, there has been year-over-year growth of all areas with the exception of the Midwest and Northeast regions. However, as we went through the fourth quarter, we will begin to see slight time utilization improvements in both of these markets.

Looking at our national account sales, we had sales of $653 million or 13% growth on a year-over-year basis. Given our broad footprint in North America and our unique ability to service large customers, we see our national accounts up clearly as a competitive advantage. Large companies, particularly in the industrial marketplace, are less prone to the swings that can occur in construction.

I would like to take a moment to talk about the newly-formed Trench, Pump and Power segment, which are specialty businesses for the Company. Key drivers for the business are safety and productivity in the workforce. Trench focuses on providing trench shields, shoring systems, slide rail systems, and steel crossing plates, as well as a broad range of confined space products and other trench safety equipment. Pump and Power focuses on providing temporary power generations, generators ranging from 20 kilowatts to 150 kilowatts, larger pumps ranging from four to 12 inches in diameter, and climate control equipment for commercial and industrial use. We have competitive strength in these businesses. They benefit from building and residential construction spending, in addition to private non-residential construction.

Now, as part of our growth strategy, we have made a substantial investment in these businesses over the past several years. In 2005, we added nine additional trench pump and power cold starts, and one acquisition. Our purchase of Sandvick Equipment located in Phoenix, added 8 locations to our trench operations. This brought our total count to 71 trench, pump and power locations in the Company.

Shifting to contractor supplies, we have have now completed the goal of establishing nine distribution centers in North America. That infrastructure started to return benefits in 2005 and the impacts should come -- be able to build on. We expanded our product offering to roughly 9,200 line-items and released a new catalog in January.

Now on balance I'm pleased with our Company's performance in 2005. As we move forward this year, we still see room for improvement in our operational efficiencies and to continue our intense focus on customer service.

With that as an overview, I will now pass the call over to the operator to open up for Q&A.

Operator, do you want to open up the call for questions now?

Yes, thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Lionel Jolivot from Goldman Sachs. Please go ahead.

Good morning. First on the Trench Safety Pump and Power segment, I mean -- so you decided to break it out and it seems that it will be reported in the future. I mean it's still a small portion of your sales. Why the focus on this segment is it just because it's growing much faster than the rest of the Company and then since the spotlight is on this segment, can you talk a little about the economics for the business, what kind of margins and what kind of return on capital do you get in this segment?

Hi, Lionel, it's Marty Welch. We are breaking it out because while it's, as you point out, only 5% of our sales, it's somewhat larger portion of our earnings, and in addition, we have a different organizational structure that has been in place for 2005 and we do manage it as an independent segment. And as you may may know under the accounting rules, those are the criteria that require breaking out under segment accounting.

And in terms of the margin and so forth, at this point unfortunately, we're still not able to comment fully, but I think as you might surmise from my earlier comment, this segment has somewhat higher margin than the Company overall.

And then when you talk about physically adding 30 to 35 branches in the company in '06 ,is it fair to assume seven to ten branches for Trench Safety, Pump and Power in '06?

I think that's a reasonable assumption, Lionel. We'll have 30 to 35 branches, last year nine of them were either trenched and our pump-and-power. I think if you figure a number right around that, maybe slightly lower, you will be pretty much on track.

Okay and then when I look at your industry, a few of your competitors are contemplating strategy changes and potential sales of their business, you have been relatively quiet in the acquisition front for the past two years, and this year. And as we get closer to March 31, and assuming that can you file all of your financial statements on time, what role do you expect to play in the consideration of the rental industry? Would you be active in -- and are you looking to expand a little bit your geographic product footprint at this point?

Lionel, it's a good question. Basically we have said it's before that we would continue to do acquisitions. I think previously we - mentioned that we would expect to layer in maybe up to $100 million worth of revenue a year by way of acquisitions. In the last two to three years, most of the acquisitions we have done have been relatively small, $15, $20 million-type of acquisitions, similar to the Sandvick acquisition we did in the fourth quarter 2005. We never ruled out the possibility of going for a larger acquisition. As you may know, there are a number of companies that are on the market today. To do that, as you pointed out, we would have to be past the 31 of March and have had successfully filed our 2004 -- 2005 10-K and we would have to step back to re-think the financial structuring to make something like that happen. I would say on a go-forward basis, acquisitions are something we would continue to be interested in.

Thank you very much.

Thank you. Our next question comes from David Bleustein from UBS, please go ahead.

Morning.

Morning, David. How are you?

Fine, thanks. How are you?

Fine.

Good. Pricing in 2006 how much of that 4% is simply carry-over from 2005?

About 2%.

Okay. The pricing on purchase -- on your rental equipment purchases in 2006 what, type of increase do you expect to be paying on rental equipment purchases? On average?

We're seeing increases in 2006 that run some place between 4 and 6%.

4 to 6%.

That's up from last year. Last year, I think, we saw a 3%, 2 to 3% increase in prices from our suppliers.

Okay and then, Marty, the SG&A expense in 2004, SEC of $2 million, what do you expect that to be in Q1 and Q2?

The Q1 is running at roughly the same rate as Q4. Beyond that, we really, at this point, don't have a forecast. We have to wait and see if we successfully file.

Hopefully zero, though, right?

Hopefully it's going to drop off. I don't think it's going go to zero. As was pointed out in the preamble to the conference call today, we still have class-action lawsuits and derivatives we'll have to wrestle with, but hopefully it will be a substantially lower number than the last couple of quarters.

Okay, the last one. Can you give us some hint as to what is in the restates in Q1, Q2, and Q3? I mean is the good news that that means you can basically quantify things and we're real close to filing but the bad news is I don't understand what exactly you restated?

The -- what went on in the quarters was just taking items that had been identified and appropriately spreading them through the quarters. Since we have not filed the Qs, all the quarters are considered open and as the teams go through and completely finalize each one of the items, that being deferred taxes, and the revenue recognition, and the other restatement items that we have identified, each one of those is being appropriately spread back to the quarters.

Okay, so there is nothing one-time in nature with respect to any of those accounting changes? This is all -- it's appropriate to the restated numbers as a base year.

Yeah, I would say yes to that. Uh-huh.

Okay, terrific. Thank you.

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

Good morning, everybody. Wayland, how would you characterize the risk of not filing your '04 10-K by the end of the month. Are you making enough progress that why you're highly confident of doing it? How would you characterize the risk?

That's a very good question and I would probably give you a dissatisfactory answer to it. It's almost impossible to characterize the risk. I think the important step that was made in January, I think January 26th when our special committee filed the report. That was a big, you know, step forward in this process. We are engaged in dialogue with the SEC. We're working hard as we mentioned in the press release to try to bring this to a conclusion to -- before the end of the 31, but I would hesitate to put any kind of probability on it. It's the highest priority we have and anyone in the Company that has anything to do with it is working as far as possible to make that happen.

Let me say it this way. First of all, is it entirely in your control or there are things outside you that can control that would delay the filing. And, secondly, you know, how would you -- are you more confident today than you were on January 26 or same level of confidence?

First of all, it's not entirely in our control. We're working closely with the SEC. The SEC has the right at any point in time to ask any find kind of question that they may still want to ask and we of course would need to respond to that. So, in terms of confidence compared to where we were, January 26, I'd say very similar. We saw that as a big step forward. Still have some work to do, hopefully and we believe that we're on track to make that happen.

Okay, second question is on your '06 guidance, you know, looking -- kind of doing assumptions, I assume there is no change in the tax rate between '05 and '06, and things on the lines, it seems to suggest an incremental margin of about 15% or so compared to a 30% incremental margin last year. I'm using rough numbers because I don't have the details. Seems like your forecast, looking at your revenues per share, suggesting much lower incremental margins in '06 and '05. Even though traffic control is going to make more headway, even though you're going to have slightly lower SEC-related expenses, and even business trends seem very solid. Can you comment on why you expect a lower incremental margins in '06 versus '05.

I don't think we made a comment specifically on the margins. We do think that '06 will continue the good sales trends that you have seen in '05 and we are continuing to make progression with the SEC. So, as the year unfolds it might be true that we are able to increase our guidance as the year goes by. At this point, we believe this is the appropriate level for us to talk about.

I guess my question is, there's nothing fundamentally different about what is going to happen the next 12 months in terms of your ability to show profits on a revenue growth than what we have seen in the past four quarters. Is that correct? Is there anything -- pricing is still good. There is nothing non-operational, like a different tax rate or anything like that that would account for it.

The tax rate is the same or essentially the same, we believe. I don't think there is anything fundamentally different. We did achieve close to 6% rate improvement in 2005 for outlook and it would have to be, um, about a 4% improvement of this year. So, other than that, nothing fundamental.

Okay, thank you.

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

It's Henry Kearns in for Joel today. Getting back to Gary's question, is there anything in the rental depreciation that would have it be at a higher run rate now than it was at the end of, you know, in '06 opposed to where it was in '05, given the timing when you purchased the equipment in the year?

No, Henry, we haven't changed our policies at all and we typically try to get in as much equipment as we can in the spring of the year. So that we can obviously earn revenue throughout the year. So, I don't believe there is anything changing in that department.

Okay, so, so do you have a guidance for rental depreciation, in '06?

We do not, separate from the EBITDA of 1.1 billion that we said.

Okay, that's fair. Question for you in terms of moving equipment around, was there any benefit in the fourth quarter to moving equipment from the the north down to the Gulf Coast region?

This is Mike Kneeland. On balance, we shift assets every year and we're running about the same level we had last year on a year-over-year basis around 11 to 12%.

Okay. Thanks a lot.

Thank you. Our next question comes from Manish Somaiya from Banc of America. Please go ahead.

Good morning, everyone. A couple of questions. One on dollar utilization. Obviously that has been pretty robust. Have we peaked, in that arena?

I don't think so. If you assume that we're going get rates up by a further 4% and we continue to experience slight increase in our time utilization, you would logically expect the dollar utilization would continue to climb.

But would you say that there is significant room or additional few percentage points?

I think it's probably, probably a few percentage points if you just go through the math of it and apply a 4% rate increase to 64.9 or 65. You're talking about picking up 4% times that would be 2.5% or a little less than that. And then add to that a further couple of points, maybe 2.5 points for improvement and time utilization which we experiencing through the first quarter of the year. You throw those two things together and can you say maybe four to five point improvement full-year.

Okay. And then just in terms of revenue growth, obviously you had pretty good revenue growth in '05. Is there a way to disect that growth as to, you know, is there a way to measure what percentage of that growth came from share gains versus just the improvement in the end markets?

I think you would have to look at it and say that our end markets grew about 5%. Our revenue growth, depending on how you want to look at it, was same-store growth, was roughly 13%. So we're currently growing faster than the market. Some of that may, some of that may be a conversion to rental from previously owning of equipment. That has been a secular trend that has been in process literally ever since I came to the industry many, many years ago, so part of it could be that and then I think part of it probably is picking up a little bit of share growth as well.

And then just lastly on CapEx, obviously you have a pretty big number for '06, in terms of investing that CapEx, could you kind of give us a sense as to where and what kind of equipment you are buying? You know, area versus earth moving versus forklifts.

This is Mike Kneeland. The way in which we go through and apply our CapEx, we go through a planning process every year with our branch managers, we roll that up, to districts and region level. When you look at it and you look at our history, there is no real strong deviation from the previous year. We're still buying, we have a large aerial fleet, so we will continue to buy aerial fleet, we will rough-terrain forklifts. The areas you will see a decline in is large earth-moving equipment, where we have low dollar utilization. Other than that, we will see another pick up in small high-dollar utilized assets such as the mini-excavators which, we had a pick up in this year.

Okay. Great. Thank you so much.

You're welcome.

Thank you. Our next question comes from Sarah Thompson from Lehman Brothers. Please go ahead.

Hi, a couple of questions. I'm sorry if I missed this but what was your time -- can you just give me your time utilization for '04-'05 and what you expect it to be for 2006.

Sarah, this is Mike Kneeland. In '04, it was 59, just around 60%. In '05, it was 61.9. And we would do slightly better next year probably a point and a half, maybe slightly better than that.

Okay. So I, I was just going back to the same thing. It's in terms of how much is contributing to the bottom line. It sounds like it's mostly in rate then because if you're getting the same kind of improvements in your time utilization, shouldn't be major shifts there.

If you look at our dollar utilization what, you want to do is take a look at it and say that, you know, you look at our rates, they contributed on a full-year, year-over-year basis. You take '04 at 59.8 utilization, you take the rates, you would multiply that out of the 6% that we received. That's 3.6 of our pick up came in rates. You also have to take a look at the time. We stage our equipment over the course of the 12 months. You look at how much of that of our assets have been put out on rent, and when you look at that, that had an impact of 1.1 percentage points and then the balance would be a combination of mix.

Right. Okay. Right. I was just going back to the earlier questions around the, trying to find out why the lower expectations around the contribution margin. I wanted to double check it. Doesn't look like it has anything to do with time utilization because your year-over-year increase is pretty similar, '05 to '06, from '04 to '05.

That's correct.

Okay. And then a question on acquisitions, I mean I guess we have been talking about them for a long time and I thought you guys were kind of the opinion that you kind of had the framework you that had and it made more sense to build out organically, except for the little tuck-in acquisitions. I am curious to know, I know you're not saying a big acquisition but what is it that has now changed? Is it the assets that are potentially on the market that would make you look at a bigger acquisition or your change in outlook for the market or for some reason you think it's a different growth strategy. Can you give us a little more insight about that.

I don't think really, Sarah, our position has changed very much. We said for the last number of years or last several years that we hope to grow the business by way of acquisition, by maybe $100 million a year, and we would concentrate primarily on smaller acquisitions to fill in market areas that we do not have current strength in and look for quality companies and there is no shortage of good quality companies out there. In that regard, I don't think there is any change at all. In terms of larger acquisitions, we're certainly are not saying that we intend to make a larger acquisition, having said that, I would always expect when there is key property available, or on the market, that we should take a look at it. If the price is right, it seems to make sense and it winds up well with us and we can organize ourselves financially to take advantage of that, then I certainly wouldn't rule that out. I don't think that is at all inconsistent with the position that we have taken over the last several years.

Okay, no, that that last statement clarifies it. Thank you very much.

Thank you, Sarah.

Thank you. Our next question comes from John McGinty from Credit Suisse First Boston. Please go ahead.

Good morning.

Morning, John.

A question back to make sure I got this right. You said your rates obviously were up 6% in '05 and you were assuming only 4% in '06 even with the two -- and getting back to David's original question, 2% of that is carry-over or did I miss it, did I confuse two things?

No, you get that essentially right, in fact if you back up to 2005 and you look at the 6% that we achieved in 2005 I would say close to half of that was a carry-over from the proceeding year. As we go -- .

And what was the -- But it was '04, the increase I think you said 5.5 %?

The increase in '04 was 7.5.

Sorry, 7.5. I went the wrong way. But here's my question. If we come back to a couple of comments you made, one, you know, two years in a row of non-residential construction being up, but we're still 13% below the peak and yet you're seeing the two areas of the country where things were sloppy, you're seeing some increases in time utilization. We're coming back to the equipment that you're purchasing. The rates that you're paying for what you're purchasing stuff. The list prices are up four to six versus what was up two to three. In a stronger -- what seems to be a stronger market. In a market where people that look at the equipment side of the business are used to or expecting to pay higher rates or anything, why wouldn't you be more aggressive? In other words, the 4% seems illogical in relation to the type of market that you're talking about.

It's an interesting observation. I would say that if you go back a couple of years ago when we started the rates initiative inside of the Company, we actually were raising rates at a time when the market was not growing at all. In fact, we have consistently been almost --

I, I agree with you 100%. But hasn't the marketplace changed? Aren't rates becoming more than norm, particularly when you get the stuff on the whole Gulf Coast, where there is just no equipment out there and you spread that around. The supply demands the dynamics of the industry, it just seems to me if that final demand is stronger, just -- are you purposely holding back rates, are you not being as aggressive?

No, not at all. In fact, in fact we spend a tremendous amount of time internally. We said raising rental rates is our number one objective as a Company. And we worked that very, we worked that very, very hard. My sense, my sense is the 4% that we put in is a good planning number. I did underscore that we would get at least 4% rate improvement. We may do better than that. We'll work hard to try to make that a larger number. But that's not that far out of line with the expected growth that we see in private non-residential construction. Our -- .

Yeah, but your rates were up almost 50%. In other words, non-residential construction in '04 and '05. The rates were up substantially more than the rate of non-residential construction, right?

In '05, not much different. Private non-residential construction was up 5%, we were up --

Six.

A shade under 6%, so it was at a point.

Okay, but I mean one could at least believe that there could be some conservatism in your forecast at least of rates.

I have been told a couple of times from my wife, I have a tendency to be slightly conservative.

Fair enough. Thank you very much.

Thank you. Your next question comes from [Tom Maher] from Lord Abbett, go ahead.

Hi, guys, the last question got some of my questions. I guess you put up a good fourth quarter and the outlook, I think what people are trying to reconcile is if you look from a growth point of view rates and margins, seems less enthusiastic than, you know, a continuation of what went on in Q4, and you know, is it a question of just, you know, downright conservatism? Is it a question of wanting to get financials in before you take a more holistic look in '06, or start with the baseline. I think that's what most of the questions on the call have been circling around. I don't know if you have anything in that regard but I think it will be helpful.

I don't know If I can add color to what has already been said. We work hard as we go through the year putting a plan together. We plan a lot of different factors in that. We take into consideration economic outlooks from a number of sources. We look to for information regarding private non-residential construction growth which, is our principle end-market. As you look at that, we have been guided by others that that's expected to be in the range of 4 to 6% so we planned our capital around that. We've gone through a kind of thorough examination of rates across the various different markets that we're in, look for opportunities to raise that, and when you put it all together, we have a plan that we feel comfortable with that ties to the guidance that I gave earlier on the call, $2.13 to $2.23. As we go through the year to the extent that the year unfolds in a more positive way than that, we will not hesitate to come back and raise or lower should it go the other way. But hopefully raise rather than lower. I would not connect any of that to the SEC inquiry. We're working hard on that front but that doesn't tie to the kind of guidance we give in the street other than, of course, costs associated with the SEC that's embodied in our SG&A costs.

Fair enough. One follow up on rates. Is there any way -- so if we look at an aggregate 4% increase, is there any way to sort of split that out either by equipment time equipment type, by geographic region? There must be a variation in that, just to give us a sense. Because talking to other rental companies in different segments of, you know, you guys are bigger and broader. In some parts of the market, you're seeing better than that on the rate side. Maybe it would be helpful if can you give us a sense geographically or by equipment type, what type of rate incomes you're expecting in '06.

Yes, there are some fundamental differences. If you look at our footprint, we cover the market more comprehensively than most our competitors, in fact, all of our competitors. We have a lot of our business in the northern part of the United States, particularly in the Midwest and the New England states. And I would say that we have not, in the last year, nor do we expect this year to have the stage opportunity for rate improvement in that area that we're seeing in some of the more robust markets, including the south, south-central and the southwestern part of the United States where we have enjoyed much larger rate incomes and I think if you compare that to a competition that do business in that area, you will see something similar as well.

With regard to the second part of your question, regarding the equipment, I would also say that our mix of equipment is substantially different than the average mix for the rest of the equipment rental environment. In fact, our companies. We have a tendency to have much larger percentage of our fleet in the aerial part of the business. If you look at that part of the business, a lot of our aerial work is on large jobs which are more sensitive to rate pressure. So, if you roll those two things together, you would see some differences from what you would expect to see from us as well as from the other people competing against.

That is helpful. I guess in the early times of improvement in the Midwest or Northeast following through, that would be encouraging. Thanks.

Thank you.

Thank you. Our next question comes from David Heller from Delaware Street Capital. Please go ahead.

Hey, guys, what is the three- to five-year plan here and what this business looks like in terms of revenues. Can you break that down what you think organic growth would be, what are new opportunities in terms of end-markets and it sounds like you already discussed the acquisition side.

I said in previous calls, David, that our intent was to double the size of the company in a five-year period of time beginning when private non-residential construction turned around. If you look at private non-residential construction, it started moving positive in the back half of 2004, flat roughly so during the first half. We said we think growth objectives beginning in 2005 to double the size of the company between then and 2009. To do that, you need a compounded growth rate of about 15%. Last year we achieved slightly over that. This year, our guidance is slightly under that. That said, we will watch that very closely as we go through, as we go through the year. I, I believe that the market is there for us to grow at a very significant rate. Certainly double-digit this year. I believe in 2007, we should have an opportunity to do the same thing. Most of the economic guidance that we get from sources that we use would suggest the 2006 and 2007 should look like 2005 did. 2008, probably, you know, up for, you know, more questions but it will be an election year. As I look back over the -- my time in business, I would say most election years, you know, the economy normally takes a year or two after the election, not a year or two before. So I would be inclined to think 2008 would be a fairly strong year as well. The fourth and fifth year of that or the third and fourth year of that timeframe is harder to talk about.

Have there been any new end-markets you guys are talking about focusing on?

Not really new end-markets. We have had some new products we brought into the business. We're concentrating, as Mike and Marty talked about earlier, going more aggressive after the trench safety business. We like that business a lot. I think you will continue to see us invest in that business, but we have been in the business for a while. I wouldn't categorize it as a new end-market.

And FEMA -- is FEMA a big opportunity when we look at the '06 guidance?

FEMA, I think, as well as a number of other governmental institutions, are a big opportunity for the Company. We do work closely with FEMA. Obviously to a large extent that depends on what the hurricane season looks like what, kind of natural disasters we have, but we, certainly in this past year, we worked closely with FEMA and expect to continue to do that again. There are a lost other large customers out there, including the national park services, that we see as an attractive market. Just a ton of markets related to the government that are appealing to us.

Okay, thank you.

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

Good morning. On the CapEx, rental CapEx of 835 I think is what the press release said, you indicated 635 for maintenance, that's about 210 for growth. Is that correct?

We basically said that we would put some place between 625 and 650 in the maintenance capital.

Oh, you didn't say that. You gave the number 635. 625 to 650. Okay.

Yes. If I said 635, my apologies. The range should be 625 to 650.

Okay, now that's up from a range you gave last year of 475 to 500. And that was out of a total of 725 to 775 and you came in in the middle of that, so the question really is why such a big increase? Are you expecting to reduce the average age of the fleet or is that part of it? What do you expect the average age to be at the end of this year?

Yeah, we expect our average age to basically stay constant in the 39 to 40 months.

Okay what, about the size of the fleet?

The size of the fleet will continue to grow.

You have a target?

By the extent of the growth capital, and you know, you might understand that in the age, there is a variation. We are relative to our competitors, heavier in aerial fleet. And aerial fleet, we believe, works well, somewhat older. Does not have to be rotated out so fast. If you take the aerial out of our fleet, the reminder of our fleet is around 35 months.

35 months without aerials.

Right.

Okay.

And --

That's because they're in the air, right?

The --

They don't get the wear.

I'm not an engineer, but in general, we have a point of view which I think is well-developed by our mechanics and our maintenance folks that say where is the point on the curve. The life curve of the asset where the maintenance cost so to spikes up and we try to keep as a particular category of equipment in that range to appropriately manage our maintenance costs. So in the case of aerial that tends to be somewhat older.

The question really is why is there a forecast 30% increase in the maintenance CapEx when you're not expecting the age of the fleet to get any younger?

Right, the answer is that as I explained earlier, we sort of back into the growth number. We take the original equipment cost of the assets we sell and we say that that is the amount of capital. We sort of subtract is that from total capital and the difference becomes growth capital. We did sell more used as the year went on than we originally planned on. I think we ended up at 307 million proceeds from sale of used. That equated to the $600-plus million of OEC, if you will, and so we define that as maintenance capital. As long as it replaces the OEC that we sold and the difference between that and total capital is our growth capital.

What was the maintenance capital in for '05?

Alexander, I think that is what is behind your questions. We actually spend more in maintenance capital last year than we previously anticipated for the reasons that Marty just talked about. We ended up spending 575, $580 million.

Okay.

With the payment of maintenance capital.

All right, got you. All right.

If you put those two things together, it ties closely.

Right, the CapEx is a holistic buy and the exact subdivision of it, when they buy an asset, they don't have a label on it saying this is maintenance and this is growth. Rather, it's a holistic buy for the fleet and the amount that ultimate gets called maintenance is a function of how much we sell of the used.

A couple more questions what, do you expect in the first quarter, the last quarter my figures show about 80 million. Is that correct? That's unusually high for a fourth quarter, but that's because things were delayed in delivery, right?

I think that's a reasonable assumption.

And what about the first quarter this year?

First quarter will be low. We really start bringing equipment in in the March timeframe and then ramp up aggressively in the second quarter. I don't have a number off the top of my head to tell you for the first quarter, but relatively speaking, it will be lower.

Okay, one more thing. Are you planning on bringing any rubber track vehicles to the fleet?

Sure.

This is the new trend some in small equipment.

A number of our [INAUDIBLE] are coming in with the tracks on them, rubber tracks on them. The same thing with mini excavators. We actually have some of our aerial equipment that has rubber tracks as well.

We're also bringing in wheel loaders to that mix and the rubber track products is gaining some steam in the marketplace. It doesn't, you know, damage a lot of the ground that they are utilized in.

Okay. Thank you.

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

Okay, thank you. Our last question comes from John Beal from Standard Pacific. Please go ahead.

Hey, guys. Just back on the maintenance CapEx definition you gave, so if you didn't sell equipment in a given year, by that definition you wouldn't have any maintenance CapEx for that year? Is that what you're say something.

That's correct.

Okay, so what is the, you know what, is the recurring amount of CapEx you that would have to spend in order not to age the fleet?

If you took the size of the fleet as it is today and you hold it at that level, you would be talking probably some knows in the neighborhood of 620, 625 million.

620 to 625. So if you spent that every year, then you would be kind of flat lining.

Holding the age consistent and holding the size consistent.

Okay. Great. And then on, on the financials, people kind of talk about this a little bit. If you don't file by the end of the month, your debt waivers expire and you'll be delisted. Is that a mandatory delisting or can that be extended as well?

I think the best way to answer that is you can probably talk to the New York Stock Exchange into extending it for a very brief period of time if you're within a week or so of filing. They would initiate the delisting procedures, they have a calendar that they have to manage to where they have committees that meet, so I don't think day one after the end of the month would necessarily result in the delisting. They would aggressively move to that. My sense is that if we were really very close to getting it filed and not successful in getting it filed by the 31st, that they would listen to that. There is no guarantees of that.

Okay, and the fact, and if you were delisted, does that change things for the convert holders or does make it difficult for them to to waive or is it just the same negotiation that you have had before?

I think it would be kind of up for grabs. We will work through that should it unfortunately happen. I have to get to that end.

Okay. And, obviously, nobody hopes that happens either. What is the timetable, so is it on, if you hopefully, obviously, you get the waivers as the end of the month. If not, is it then a 30-day notice before acceleration or immediate acceleration and what kind of financial backup to you do you have, you know, that we hope that event doesn't happen.

It's basically not an automatic thing. It's a by-product of what is called agitation. If a number of the bond holders feel like the Company has put them in a position putting them in the right to move forward, they can do that. But it doesn't, there is no automatic clock that ticks. The New York Stock Exchange, on the other hand, is automatic.

I'm going -- going to close this thing off now. By the way, it's been a very interesting conference call. We appreciate your attention.

Let me just close briefly by recapping some of the positive things that occurred in 2005. We came through the year in a very strong way. Our revenue growth was up 15%. Our rental rates that we talked a lot about in this conference call were up 6% and we improved our time utilization and increased our fleet at the same time. All of those are positive attributes that they have to have happen.

As I look at other aspects of the business, our growth in contracts for supplies made us feel that the investments we're making in that part of the business is very warranted. We grew 44% last year and expect to grow the business by another 30 million this year. We will be rapidly approaching the half a billion dollar mark in that business and that, too, I think, bodes well for the future.

As you look to 2006, we have done a lot of things to optimize the fleet to drive better utilization of the assets we have. We'll continue to keep the pressure on rates and hopefully we won't disappoint people in the call and do better than the 4% that we have guided. But I think as a Company, we're well-positioned to take advantage of the growth that is occurring in the marketplace and the continuing trend of movement from ownership of equipment to rental equipment.

With that, I think -- thank everyone for joining the conference call today. We look forward to catching up with you on the first quarter conference call as we go through the earlier part of the year. Thank you very much and have a great day.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating, you may all disconnect.