聯合設備租賃 (URI) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals first-quarter 1006 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. Certain statements contained in this conference call are forward-looking in nature. These statements can be identified by the use of forward-looking terminology, such as believes, expects, plans, intends, projects, forecasts, may, will, should, on track, or anticipates, or the negative thereof, or comparable terminology or our 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 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, any companies that United Rentals 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 SEC inquiry is ongoing and there can be no assurance that the outcome of the SEC inquiry will not require additional changes in the Company's accounting policies and practices, restatements of financial statements, revisions of results or guidance, and/or otherwise be adverse to the company.

And seven, the Company may incur additional significant expenses in connection with the SEC inquiry of the Company, the related internal review, or class-action lawsuits and derivative actions that were filed in light of the SEC inquiry. 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 of any such statement is made.

During the conference call, reference will be made to free cash flow, which is a non-GAAP term. The first-quarter press release explains the non-GAAP term and includes a GAAP reconciliation. You can access this press release from the Company's website at unitedrentals.com.

Also during the conference call, reference will be made to the first-quarter 2006 actual and 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 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, Chief Financial Officer; Michael 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.

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

I am going to lead off by covering a few highlights of our first quarter. Marty Welch, our CFO, will then review our financial performance, and Mike Kneeland, Executive Vice President of Operations, will provide color on some of the operational aspects of our business.

To begin with, our first quarter reflected very strong performance, up from last year, and it carried forward into the quarter of this year, first quarter this year. Diluted earnings per share for the quarter was $0.19, up from $0.11 in the first quarter of last year and reflecting a 73% improvement.

We benefited from improved rental rates, higher time utilization on a larger fleet, and excellent contractor supplies growth. In fact, we set a first-quarter record for dollar utilization of 58.6%, up nearly 5 percentage points from last year's first quarter.

As noted in our press release, our total revenue grew by 15.6% in the quarter, including same-store rental revenue growth of 13.5%. All three of our business segments benefited from the strength we are seeing in our end markets. We raised rental rates by 6.5% in the first quarter, on top of the 9.7% increase we achieved in the first quarter of last year.

We increased the size of our rental fleet during the quarter by $284 million and at the same time, improved time utilization by 3.1 percentage points to 58.2%, also a record for a first quarter. Contractor supply revenue, a strategic initiative for the Company, was up 37.5%.

Revenue growth this quarter continued to outpace growth in our primary end market, which is private nonresidential construction. That market improved by 10.6% in the first quarter according to Department of Commerce data. Revenue growth this quarter benefited from new branch openings and acquisitions, as well as significant investments in our rental fleet, [rates] training, and investments we have made in our contractor supply infrastructure.

Our strategic objectives continue to be driving revenue growth, improving our margins, and increasing our return on invested capital. In the first quarter, we achieved revenue growth of 15.6%, as I mentioned earlier. Operating income was up 33%, reflecting an improvement in our operating margin of 1.4 percentage points. We also increased return on invested capital by 2.2 percentage points to 12.8% for the 12-month period ending March 31.

I believe it is also important to mention that we have resumed filing our financial statements on a timely basis. We filed our first-quarter 10-Q concurrent with the issuing of our press release yesterday.

Having said that, we do still have an SEC inquiry ongoing, and we continue to fully cooperate with the SEC.

Now before turning this call over to Marty, let me briefly comment on our outlook for 2006. We expect revenues to slightly exceed $4 billion this year. We also expect our rental rates to be up more than 4% and to see a growth of more than 30% in our contractor supplies business.

Our traffic control business, which lost $20 million in 2005, to reach breakeven in 2006. We expect to generate $1.1 billion of EBITDA in 2006, and after anticipated capital expenditures of about $900 million, we expect to generate approximately $175 million of free cash flow.

Finally, we raised our diluted earnings per share to be in the range of $2.17 to $2.27, from the previous range of $2.13 to $2.23. This, I might just remind you, is up from $1.80 last year. Our first quarter results, I believe, position us very well for another strong year in 2006. And with that, I'll turn the call over to Marty Welch. Marty?

Thank you, Wayland, and 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 discuss our results for the quarter and review our outlook for the full year.

In particular, I was very pleased with our progress on three fronts, which we have highlighted as focus areas for our business. First, growing overall revenues; second, improving gross margins; and third, improving return on invested capital. I will touch on each of these in more detail as I go.

First turning to the P&L. Total revenue for the first quarter increased 15.6% to $846 million, driven by a 14% increase in same-store rental revenue. This marks our fourth consecutive quarter of double-digit same-store gains, an indication of the health of our business. In addition, we opened nine new branches in the quarter and we are on track to hit our target of 30 to 35 new branches for the year.

Within total revenues, equipment rental revenues increased 15% and contractor supply sales increased 37.5%.

Looking at it on a segment basis, we continue to see very strong overall performance in general rentals. Revenues were $750 million, up 15%. This growth reflects improvements in our rental rates, which were up 6.6% in the quarter, and a 13% increase in same-store rental revenues. In addition to seeing top-line improvement, the profitability of our largest segment also improved. General rentals' operating income improved 15% to $82 million as compared to $71 million in the prior year.

Turning to our trench safety, pump and power segment, revenues for the quarter were $49 million, an increase of $15 million, or 44% year-over-year. This growth reflects a 19% increase in same-store rental revenues, as well as the success of our acquisition of Sandvick in December 2005. Sandvick contributed approximately $6 million to revenues in this segment for the quarter. Additionally, our operating income improved $7 million to $13 million for the quarter.

Looking at our traffic control segment, we continue to make progress, as Wayland mentioned, in this area, focusing on cost control. In the quarter, we had total revenues of $47 million, which is $3 million higher than last year. Our operating loss for the quarter was $7 million, which is an improvement from the loss of $11 million in the first quarter of 2005. We believe this marks encouraging progress, particularly since we continue to target a breakeven performance for the full year 2006.

Now returning to consolidated profitability, we experienced strong gross margin flowthrough from rental revenue increases in the quarter. Total gross margins improved 2.9 percentage points to 30.4%. The margin performance reflects both improved equipment rental gross margins as rental rates increased, as well as equipment rental revenue growth in the trench safety, pump and power segment of 50%.

These improvements were partially offset by reduced gross margins in our contractor supplies business relating to the cost of opening our new distribution centers. We currently have nine distribution centers strategically located throughout the U.S. and Canada, which are designed to ensure one- to two-day customer delivery. With this network in place, we are positioned to expedite deliveries and reduce branch inventories.

SG&A was $153 million, an increase of $31 million from the first quarter of 2005. Within SG&A, beyond the normal inflationary increases, we had approximately $5 million of higher selling costs related to growth in the business, benefits and insurance cost increases of $4 million, and other professional fees of $3 million. Additionally, we incurred professional fees related to regulatory issues and related matters of $13 million, an increase of $10 million versus the prior year. SG&A is something our management team is focused on and we are committed to reducing SG&A as a percent of revenue.

Operating income increased 33%, or $22 million, reflecting a 140 basis point improvement in operating margin. We reported net interest expense of $54 million as compared to $47 million in the prior year. The $7 million increase reflects increased interest rates applicable to our floating-rate debt. Our diluted earnings per share for the quarter is $0.19 on a share count of 107.9 million shares, compared with $0.11 in 2005 on a diluted share count of 104.7 million.

Looking at our consolidated cash flows for the quarter, our cash flow from operations was $286 million, compared with $125 million in the 2005 period. This improvement was largely the result of working capital items. In the first quarter, we invested $243 million in our rental fleet, compared with $152 million last year, an increase of $91 million, and in line with our full-year CapEx plan. This significant investment in the first quarter positions us well for the seasonally strong second and third quarters.

Our nonrental CapEx for the first quarter was $21 million, an $8 million increase versus last year. Our free cash flow generation for the quarter was $47 million, an increase of $3 million versus last year, leaving us with a cash balance of $331 million at the end of the quarter as compared to $316 million at year-end. We are in the process of evaluating how to most effectively use this excess liquidity to reduce our balance sheet leverage.

Now let's take a look at the balance sheet. Total assets were $5.4 billion, including the net book value of our rental equipment of $2.4 billion. Total debt excluding the quips was $2.91 billion, essentially unchanged over the last eight quarters. As of May 7, we had borrowing capacity under our revolver of $421 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 turning to our expectations for 2006, as Wayland mentioned, we have raised our full-year diluted EPS target range from $2.13 to $2.23 to a new range of $2.17 to $2.27. This is based on an anticipated full-year diluted EPS share count of approximately 114 million shares. This range does not reflect any provision for any liabilities that may result from outcomes or developments related to regulatory issues and related matters.

Our revenue, EBITDA, and free cash flow guidance is as follows. Total revenue of $4 billion, EBITDA of $1.1 billion and approximately $175 million of free cash flow.

Before turning things over to Mike, I would like to take a moment to discuss return on invested capital. Last year, we initiated reporting of ROIC for several reasons. First, this ratio is perhaps the best indicator of how efficiently and effectively we are employing capital, and is central to increasing shareholder value long-term.

Second, ROIC is a metric that we are using internally to measure our progress. And third, it is a metric with wide support among the investment community because it is both simple and informative.

For the 12-month period ended March 31, 2006, ROIC reached 12.8%, an improvement of 2.2 percentage points versus the prior period. Our expectation is for continued improvement over the rest of 2006.

That summarizes our outlook and now I would like to turn it over to Mike Kneeland, who will provide some color on some of the operational aspects of our business. Michael?

Thanks, Marty. Good morning, everyone. I would like to share the some highlights of our business conditions and their impact on operations. Private nonresidential construction spending in the United States, which is our primary end market, is reported by the Department of Commerce to be up 10.6% in the first quarter. With this double-digit growth, private nonresidential construction spending has now reported 10 consecutive quarters of recovery.

Given these favorable market conditions, we see continued opportunities to drive our top and bottom lines. We are capitalizing on the market by, among other things, expanding our fleet size and opening planned cold starts. In the first quarter, we increased our rate 6.5% and improved our time utilization more than 3 percentage points on a fleet that now stands at $4 billion of original equipment cost. In addition, we made one small strategic acquisition, Handy Rent-Alls, in the New York and the Connecticut areas.

Construction spending continues to improve nationally in categories such as lodging, health care, commercial and retail building and manufacturing.

Turning to the performance of our regions, the Southwest continues to be an area of growth for us. Arizona, Las Vegas, and Southern California in particular have a number of large commercial and retail projects under construction. However, unfavorable weather conditions impacted most of the Southwest region in the month of March and into April.

Our three best-performing regions are the Gulf, the Southeast, and the Northwest. The Gulf region continues to see improvement in the market, particularly in the oil refinery and manufacturing sector. We also have equipment out on a number of large projects in the Gulf, such as the Toyota plant in San Antonio and the Barnett Shale exploration project in North Texas.

Shifting to the Southeast, Florida continues to show growth, as it did throughout 2005. Some of this is driven by demand from reconstruction of the hurricane damage, but there is also solid growth in commercial construction.

Canada, which represents 9% of our revenues, remains an area of growth in 2006, particularly the northwest region, where we realized a 37% revenue increase on a year-over-year basis in the first quarter due to the participation in the giant tar sands project in Alberta. On the other hand, the Northeast and Midwest regions continue to only have modest growth; however, business conditions appear to be improving.

In the Midwest, several large projects are already underway, including the Indianapolis Colts Stadium and the MGM Casino in Detroit. In the Northeast, this region has been impacted by a slower beginning of the season. That said, commercial construction activity has picked up in the Philadelphia, New Jersey, and New York City markets.

We are also continuing to penetrate niche markets with good success. As Marty mentioned, our trench safety, pump and power business had a revenue increase of 44% in the first quarter.

Another growth investment we have been making for some time is our national accounts program. For the full year of 2005, we had sales of $653 million and 13% growth on a year-over-year basis. In the first quarter of 2006, we continue to make good progress, with 15.5% growth in the first quarter on national accounts revenue. We see this program as a strong competitive advantage for the Company.

Now I would like to take a moment to talk about the rising cost of fuel. The two main areas where fuel affects us are in delivery costs and fuel usage by our customers. Last year, we implemented pricing guidelines to monitor the average fuel costs within each state and province. Monthly reports were provided to our managers so they could adjust their charges accordingly. In the first quarter, we were successful in raising our delivery prices by 24%.

In summary, we are pleased with the Company's performance in the first quarter. We are effectively operating the business in a favorable business environment and executing our growth plan for improving our rental rates, adding fleet and locations, and focusing on customer needs. So that is the business overview. I will now ask the operator to open the call for Q&A. Thank you.

(OPERATOR INSTRUCTIONS) Lionel Jolivot, Barclays Capital.

Congratulations on the quarter. Just a quick question on the dollar utilization. I think the dollar utilization for the first quarter was 58.6%. And when you reported the monthly results, I think January was at 64%, February was at 58.4%. So it would imply that March was actually weaker than the prior two months and probably around 54%. Is it just a result of your acquisition of a lot of equipment late in the quarter or did you see any specific weakness in March?

No, I think if anything, Lionel, the major improvement that we're getting was driven by two things. One was time utilization continued to be a little stronger than we had expected and then our rates growth that we had during the first quarter, including the month of March, was strong.

So no sense of weakness in March at all?

We have some pockets of the country that are softer than others. We're getting only modest growth in the northeastern part of the United States, as Mike highlighted. And the Upper Midwest is still little soft by comparison, modest growth. But I wouldn't characterize any part of the country as being weak right now.

Okay. Then Marty, can you just elaborate a little bit more on your comment about the excess cash and the potential use of this excess cash to reduce the balance sheet leverage? Are you thinking about paying down some of the bank debt?

Yes, potentially, Lionel, we are. We intentionally carried extra cash during the period when we were not current with the SEC as protection, since we did not have normal access to the capital markets. We now do have normal access to the capital markets, and I would say that cash on the balance sheet of $100 million to $150 million is an adequate amount for us, certainly from day-to-day operations.

Last thing for me just we continue to hear a lot of speculation in the industry about the merger and acquisition activity. Can you just refresh us a little bit on your strategy? Are you still looking at roughly $100 million of acquisition a year, or would you consider some larger acquisitions at this point?

Lionel, we have said a number of different times -- or I have said a number of different times that we do intend to add revenue to the Company by way of acquisition. We've said in the past our intention is to be at about $100 million a year in revenue. Obviously, one year that may be $75 million, another year it maybe $150 million. It won't be perfectly even, but growth of that nature.

Having said that, I have also said in the past that we would not rule out larger acquisitions if every star lined up perfectly, including, and probably most importantly, the price being right. So I don't think there is any change in our approach. We have grown the Company certainly in the early days by way of acquisition. In the last few years, not as aggressively. My sense is on a going-forward basis, we will continue to grow by way of acquisitions and we will consider any quality acquisition that may come along.

Specifically, since RSC is for sale officially, is it something that you would consider at this point?

There is a number of different companies that are on the market today. I don't think it would be appropriate to comment on any one individually.

Thank you very much.

David Bleustein, UBS.

Can we start with the SG&A? Marty, you walked through a bunch of different components, including the regulatory one. How do you expect that $13 million to trend for the regulatory issues over the course of the year?

We do think that it will trend down. We had obviously the big push to get current in the first quarter and sort of a crescendo of spending with professionals during the quarter. But it is really hard to say how rapidly it will trend down. There are the shareholder lawsuits that now need to be dealt with. And so we will just have to see, but certainly we think that on a quarter-over-quarter basis, we would continue to see it decline.

Second question, shifting gears, expected cash flow in Q2 -- it is usually a cash use quarter. Is that what you expect again this year?

Yes.

You mentioned a share count in the guidance. What was that share count?

For the full year -- and again, this is an estimate because as you know how the calculation works, it depends on the market price of the stock and so forth. But we are estimating right now that the full-year, fully diluted share count will be in the range of 114 million shares.

Okay. What would be in the second quarter?

We think it's around the same thing, 114 million.

Okay. Terrific. Thanks a bunch.

Joel Tiss, Lehman Brothers.

This is actually Andy Kaplitz in for Joel. I noticed that you did not really mention if you have a new forecast for the end market for private nonres construction for 2006. So I was wondering if you could comment on that.

And then you have also mentioned, obviously, rental rates, at least 4%, I think, is still your guidance. And if you go back to O2, your rental rates have exceeded the end market each year, so I guess I am trying to figure out how conservative you are being.

There is nothing indirect about your observation, Andy. Let me talk about the end market. And there is conflicting data around. We originally gave guidance that said that we expect -- when we put our plan together, we expected growth in the end market private nonresidential construction to be in the 4 to 6% range.

A number of the outside sources that we track have private nonresidential construction growing at the 6% and some even as high as 8%, although I would note that the people that have it as high as 8% -- are projecting it for 8%, last year in May were projecting 8% for the full year. And as you know, private nonresidential construction ended at 5.2% full year. So forward projections by ourselves or, for that matter, by anybody in this type of market is very difficult to do.

The over 4% rate increase we still feel is the appropriate guidance. We will watch the market. We'll watch our performances we go through the remainder of the year. To the extent the market proves to be much stronger, as it was in the first quarter, we may have some more upside opportunity in that. But I think it is really way to early in the year to declare that now.

Understand. Just shifting gears for a second to contractor supplies, obviously very strong growth. The margins are lower, and I understand that is from the distribution centers. How does that trend throughout the year and maybe over the next couple of years? Can you get some of that gross margin back? Is it just sort of the short-term that we should be looking at this trend or should we be forecasting lower margins going forward?

Andy, this is Michael Kneeland. I'll answer that question. If you recall, you made a valid point that we made an investment in this business, If you go back in 2005 in the first quarter, we had four distribution facilities open. We now have all nine of them open. They're fully stocked with inventory; 99% of our catalog is well stocked in inventory at all of our DCs.

As we grow this business and we pull out some efficiencies as we go forward, we would expect through the balance of this year a slight improvement in our margins. On a longer-term basis, we would expect somewhere between 20 to the 24% range, somewhere in that range longer-term.

Okay, thanks. Just one more quick question on traffic control. It looks like a pretty good quarter seasonally. Are you getting more pricing power in that business now? And I understand you didn't change your outlook for the future, but can you just give us a little more color on what's going on for you guys in that business?

I would say no major shift in pricing power. We are, as you know, doing better in the first quarter than we did last year. Last year, we lost $11 million, this year $7 million. I think that is more attributable, as Marty pointed out, to tighter cost control.

And I would add one other thing. I think we're doing a better job estimating and not only estimating our costs as well, and then managing to that estimate. I think as we go beyond the back half this year and into 2007, you're going to see more demand generated by the new T-21 Bill, and that may at that point in time give us some upside opportunity on pricing improvement, but as I said, we're not seeing that yet.

Okay, thank you very much.

Gary McManus, JPMorgan.

What was the factors behind raising your guidance by $0.04, the range? First, I would kind of comment -- it's a pretty precise range or -- you know, suggests a high degree of precision. But what were the factors on raising the guidance?

I should say any time you have a range, it doesn't reflect too high a degree of precision. A real high degree of precision would be a single point number. But to comment on your question, I think, Gary, we're looking at slightly stronger revenue growth.

You did not see that because when we gave the outlook for the full year, we rounded the $4 billion -- where actually we were rounding up the $4 billion, we are now rounding down the $4 billion. And the swing in there is worth $65 million, $70 million of additional revenue over what we expected when we gave our earlier guidance.

So it's really you raised slightly. It's hardly noticeable you raised the revenue guidance?

Yes, and you would not notice it because we rounded the $4 billion number. Then by the way, the increase in revenue is really driven by a couple of things. Our rates are running just a little higher than we thought. Our time utilization is running just a little stronger. And we also have fleet out a little earlier than we had originally -- we anticipated, but we weren't that sure that we would get it out, given some of the backlogs that your seeing with some of our manufacturers.

And the second question I have, you say breakeven for traffic control in 2006. That is for the full year or does that mean you're going to make $7 million for the remaining three quarters?

We expect to break even full year. The next couple of quarters is stronger and then, as you know, the fourth quarter in that business, along with the first quarter, is not as strong.

Okay. And just getting back on the rental rate, you did not change your guidance for rental rate growth at least 4%, even though the first quarter came in at 6.5%. If I use 4%, it kind of suggests rental rate growth maybe 3% or so for the rest of the year, which would be a fairly big downturn or dropoff from what you have seen here in the past few quarters.

Is this just conservatism? Is there something out there that would lead you to believe that you're going to see a slowdown in rental rate growth?

Basically, if you look at it -- you have to remember, the 6.5% that we saw in the first quarter is the easiest comparable period that we have as we go through the rest of the year. So you have to go back and look at rate improvements through the four quarters last year. And I won't track you through that.

But basically, I would say going forward that we are comfortable with the guidance that we have given. There was a subtle but slightly different aspect of what we previously talked about. We have previously said at least 4%. We're now saying over 4%. But I don't think I would look at numbers significantly greater than 4%. Maybe low single digit -- 4.2, 4.3, something like that.

One thing I would comment on is as you go around our regions in the South, the Southeast, the Gulf in particular, we're seeing very strong rate improvements. That is because the market is very strong there. And we have a number of districts, even regions, that are getting high single-digit or even low double-digit improvements.

On the other hand, we have parts of the country, including the Northeast that Mike talked about, the Upper Midwest that Mike also commented on, where we're not seeing a lot of rate improvement because activity isn't growing in that area.

Then I would go to the West Coast and say a little bit the same thing. We are already at very high rate levels. We do track our rates relative to where our competition is. We think the returns we are getting in that part of the market are sufficient, and we would not want to move ourselves further away from our competition.

Okay, just one last question. In the general rentals, you have a couple different ways you break out the revenues. But in the general rentals segment, you had no margin improvement despite 15% revenue growth. Can you comment on that? Was that just the professional fees and --?

I think largely it was SG&A cost that was increased, as Marty talked about.

All the professional fees are in that general rentals area?

Given that it is such a large part of our total business, you would expect a proportional part of it would fall into that area.

Okay, great. Thank you.

Alex Blanton, Ingalls & Snyder.

I wanted to talk a bit about rental CapEx plans for the year, because you did not mention that in your opening remarks. Specifically, what is the plan for the year just for the rental CapEx, as compared with 243 for the quarter? And given that plan, what will the fleet size be and the age of the fleet at the year and?

Also, can you break the rental CapEx down into the portion that is just for maintenance to keep the fleet size and age the same and the part that is for growth?

Let me take a crack at that. We're looking at someplace between 800 and 850 in total expenditures on the fleet. And given the strength of the market, I think you could safely say that we will probably go to the high end of that. So say $850 million for expenditures on the rental fleet. In spite of that, about $200 million of it would be growth capital. The remainder of course would be replacement or maintenance cap.

Okay. What would the size and age of the fleet be?

The size of the fleet will be slightly over 4 billion -- close to 4.2 billion. And the age of the fleet will be someplace between 38 and 40 months.

Okay. And earlier -- I think it was last fall -- I'm not sure which quarter it was -- you had a much lower maintenance figure. You said it would be 450, I think, or 425 to 450. Then last quarter you went to this higher figure. You gave a total figure of 800 to 850, I think a quarter ago, of which 200 would be growth. So that hasn't changed.

But what did change was the 600 to 650 for maintenance is up a couple hundred million from numbers that you had used six months before. And I did not understand that because that really should not change.

I would have to go back and look at the numbers. I frankly cannot recall. I don't remember a number being at $450 million for a very, very long period of time. But you realize that we have grown the size of our fleet quite considerably as we've gone through the last couple years. Last year, I think we added 200 million to the fleet. This year we're adding another 200 million to the fleet. So some of the change that you're talking about would be just the natural phenomenon of growth.

But adding 200 million to the fleet would not cause the maintenance CapEx figure go up by $200 million. That's my point. There has been some change in the assumption somewhere, but I will have to pursue it off-line.

That's fine. Why don't you give us a call and we will talk about.

Any idea how this will break down by quarter --?

It will be very front phased. We would expect to have at least 70% of the fleet in by the end of June.

70% of the spending --?

Yes.

-- by the end of June? Okay, thank you.

[Chris McRae], Merrill Lynch.

I wonder if you have stated any targets for return on invested capital.

We have not put any specific guidance out, other than to say that we are continuing to drive for improvement each quarter as we go forward.

I assume you have done some benchmarking on that. Can you highlight any key comps and where you feel you stand relative to those?

Benchmarking in this industry is very, very difficult because you have a limited number of stand-alone companies -- in fact, ourselves and one other. And the one other has a different enough business mix that it's hard to compare. A lot of our competitors, as you know, are subsidiaries of parent companies, and because of that, it is difficult to get data available that you can do meaningful comparisons to.

I think, though, in terms of where we should go, we should be looking at a return on invested capital that's in the mid-teens, maybe slightly higher than that, 16, 17%. It will take us a few years to get there, but we're making steady improvement and heading in that direction.

Do you think the mix of the fleet that you are investing in will naturally trend that up or is it, would you say, 90 plus percent reliant on the rental rate environment right now?

If you look forward to the next few years, it is probably less reliant on rental rate improvement, more reliant on other improvements we will make in the business.

In particular, the efforts that we need to make to bring our SG&A in line will be a big driver as well.

So in effect, you have reasonable confidence that it will trend up regard -- well, I shouldn't say regardless, because if rates trend down aggressively, that would hurt you. But in a stable environment, you have confidence of that increasing.

Yes, and you put the right words around it. A stable environment or a reasonably consistent environment. Assuming we have moderate growth in private nonresidential construction over the next two to three years, we should be moving in that direction.

Thank you very much.

(OPERATOR INSTRUCTIONS) David Bluestein, UBS.

Marty, really just a follow-up. Can you just bridge us from the first quarter's 107.9 to the 114 in Q2 for share count?

Sure. The biggest difference is the quips are antidilutive in the first quarter and they go into the calculation beginning in the second quarter, and that adds 5 million shares all by itself.

What was the interest on the quips in Q1?

The quips are -- let's see -- in Q1 it is about to 2.1, 2.2 million.

Got you. The last question is you mentioned weather-related softness, Mike, in the Southwest. What do you think that took out of dollar utilization in the quarter? Is it material or is it tiny?

David, this is Michael. The California or Southwest region in 2005 represents about 18% of our revenue. And we have 103 branches that are located there. It also would extend up towards Oregon so there would be added branches in there. They had record levels of rain. It did have an impact in time utilization. And as Wayland mentioned earlier, that is an area that our rates are some of the highest for the Company in relative terms to our competitors. So it had an impact, but I would say that as things turn around, it will come right back because the demand is there.

How much was time utilization down in the region?

For the region, for the South -- it actually was tracking -- both January and February, it was tracking up in the low single digits. In March, it started to taper off, I would say towards the second week and into April. But I would say it had probably an impact of about a point to the region.

All right. Okay, terrific. Thanks a bunch.

Alex Blanton.

Again, this is on the equipment spending plans. Last year, you had significant delays in deliveries of certain items of equipment, and that caused the spending to shift to the second half of the year as you waited for delivery. You seem to be indicating, though, that these equipment delays have diminished. Is that the case?

No. This is Michael. If you go back in time, one of the things that we realized, we anticipated demand the marketplace. We did a pre-order of about $400 million in advance and we --

When was that? You pre-ordered when?

We pre-ordered towards the end of the third quarter. We went ahead and locked in with our vendors. As you know, we aggressively negotiate on an annual basis. At that point in time, we did a pre-order of about $400 million and we staggered out our time slots in the first half of the year with anticipation of meeting the market demand.

Okay. So that is pushing more spending into the first half, because you ordered earlier and you got production slots lined up?

That is correct.

So there is really not much improvement, then, in the delivery times being offered, or is there?

It varies a lot of by type of equipment that you're talking about. We have some pieces of equipment today, if you wanted to order it, that may be as much as six months out. We have others that you could get within a one-month period or even less.

What is the best and what is the worst?

This is Michael. If you were to take some categories of equipment, taking a look at the aerial equipment, specifically, the up-and-over style machines, they are out significant -- six months or longer, as well as some of the rough terrain forklifts. On the flip side, we can call up one of our vendors today and receive a backhoe rather quickly.

Backhoes are short-term, all right. One final thing. What is the most rapidly growing category of equipment you're buying, that is increasing more than the others?

We really have not shifted from the past. If you look at our fleet, we have invested in all varieties of our classes. There has been no significant changes on a year-over-year basis, with the exception of adding in new products -- mini excavators we're increasing. Areas that we are decreasing is in the large, large excavators, as well as the articulated trucks.

Okay. Any rubber track vehicles?

Rubber track is a product that we are investing in. It is a new product. Our customers are seeking demand of that product and we anticipated that last year. And a lot of our rubber track units are coming in this year.

So demand for that is rising as opposed to wheel vehicles?

That is correct.

All right. Thank you.

[Wayne Steferak] of KBC Financial Products.

Could you comment on your financial policy, say any specific leverage targets you have, and if necessary how aggressive you'd get with leverage to consummate a large acquisition?

Well, with respect to the first part -- this is Marty -- I think that we should be trending our leverage down towards 2.5 times EBITDA. We are currently at around 3, and I think longer-term we believe that the Company could eventually get itself into investment grade. Although that is probably a few years off, we definitely think in those terms. I think at the 2.5 times leverage, it is a possibility over time.

In terms of what might happen in an acquisition, I think in a very large acquisition it is conceivable that we might use equity either -- to raise part of the funds. I don't see us as being advantaged to dramatically ratchet up the leverage in our balance sheet at this stage in our corporate development.

That's great. Thanks.

A follow-up from Gary McManus.

Just one real quick one. Just getting back to SG&A, do you expect SG&A as a percent of sales to go down? In other words, you're kind of suggesting 12% revenue growth this year. Will SG&A growth be less than that?

That depends on certain key factors, including the professional fees, Gary, and we have some initiatives in place that are really at the beginning stages. All I can tell you for sure is that we're working very, very hard on this and the whole management team is focused on it.

You're not going to be any more precise than that? I mean, SG&A went up 25% in the first quarter. I assume that is not a sustainable growth. It has been up between 20 or 30% for the last four quarters. I know there has been all those professional fees that are in those numbers. It suggests the underlying SG&A growth is a lot lower than that, and you're going to get -- the comparisons are going to get a lot easier, I assume, as we go through the rest of the year.

That's right. All of that is true, and we are -- we understand fully that our performance in this area is not good, but to make a more specific forecast, I think you would have to make some assumptions about some of the individual line items in there that are just difficult. We're working very hard in certain areas, including taking a look at strategic sourcing, for example, and just trying to get our arms around things that we no longer-term can take structural costs out of the business.

You said you're not happy with the performance even when you strip out the professional and regulatory related fees, or are you including that when you look at the performance?

Even when you strip them out, I would personally say that we're not happy with the performance. You know, if you strip them out of both sides, you're up about 2/10. With the kind of sales growth we have, there's just no excuse for not having SG&A decline as a percent of sales in this environment.

Okay, great. Thanks.

[Ed Shin], Ivory.

I just wanted to ask you about just utilization rates in terms of, I think the rate that you typically quote is a dollar utilization level, and where you think that that maxes out at in kind of in a good environment?

It doesn't certainly max out until you stop getting time utilization growth as well as rate improvement. I'm not going to put a number on that because it is really hard to project exactly how far we will be able to push both of those. I think we will go out of this year with 68, 69% dollar utilization. I believe that we will cross the 70% mark next year, probably not quite as much growth in '07 as we will see in '06 and certainly what we saw in '05.

Great. Then you mentioned time utilization. Is that a metric that you've been giving out over the past few periods?

We have not routinely given the time utilization out. We have talked more in terms of improvement on time utilization. By the way, time utilization will depend a tremendous amount on the mix of your fleet. So if you had data, you would have to have comparative mix data for it to mean a whole lot to you. For that reason, we have a tendency to talk in terms of it's either up or it's down without giving you precise data.

Right, but if we look at the dollar utilization figures that you have been giving to us and we take out the [retrograde] increases, is that a good way of getting a sense of the trend in the time utilization?

That would give you a good sense on the upper trend in time, yes.

How much more do you think you have to go in terms of time utilization?

Less than we do on dollar utilization, because if you look at the fleet, you have large parts of the fleet today and as we go through the year that are operating particularly like Aerial that will typically operate with very high time utilization levels, and we're close to maxing out on all we can do there.

I would say we expect to get a little improvement this year, maybe 1 point, 1.5 points in time utilization, but not huge improvements.

Okay. The time utilization, just so I'm clear on how you guys are calculating that, that's just the number of days it's out on rent versus the number of days total?

That is correct.

Can you give us just a broad sense of where that metric is?

It would typically run for the whole fleet on a full-year basis someplace in the low 60%, 62%, 63%.

Okay, so you feel like you're having a little bit of improvement, a couple points on that metric, and then the rest on improvement will come from increased rates.

That is correct.

Operator, I'm going to close the call off. I'll do that just by summarizing a few of the highlights of the quarter at the risk of being repetitive, but we saw revenue growth up 15.6%. We really felt very good about that. As I noted, it was greater improvement than the improvement in our end markets.

Rental rate improvement of 6.5%. It's one of the more powerful things that we can do in terms of improving the gross margins in the business. Contractors supply revenue up 37.5%. This is a growth initiative that we have identified for the Company, and we continue to make investments in that, including SG&A investments to drive our performance there.

We had record dollar utilization for the first quarter. That is something, hopefully, that we will be able to repeat again as we go through the remaining quarters of the year. Our return on invested capital was up 2.2 percentage points to 12.8%. That is, as Marty and I talked about, not where we wanted to be, but it's certainly followed movement in the right direction.

So all in all, we were very pleased with the quarter. We believe very much that we are well-positioned to take advantage of the favorable market conditions that we are operating in and expect to see the remainder of the year be strong for the Company.

With that, ladies and gentlemen, thank you very much for joining our call. We'll look forward to catching up with you again on the second-quarter conference call. Have a very good day.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may all disconnect, and have a wonderful day.