聯合設備租賃 (URI) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals' second-quarter 2006 investor conference call. Please be advised that the 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 our 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 terminologies such as believes, expects, plans, intends, projects, forecasts, may, will, should, on track, affirms, or anticipates, or the negative thereof or comparable terminology, or by discussions of strategy or outlook.

Our businesses and operations are subject to a variety of risks and uncertainties, many of which are beyond our control; 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, weaker or unfavorable economic and industry conditions can reduce demand and prices for our products and services. Two, nonresidential construction spending or governmental funding for highway infrastructure and other construction projects may not reach expected levels. Three, we may not have access to capital that our businesses or growth plans may require. Four, any companies we acquire that have undiscovered liabilities may stretch our management capabilities and may be difficult to integrate.

Five, rates we can charge may increase less than anticipated or costs we incur may increase more than anticipated. Six, we are highly leveraged, which requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions.

Seven, we have not yet successfully remediated a previously identified material weakness in our internal controls relating to our financial close process. Eight, we are subject to an ongoing inquiry by the SEC, and there can be no assurance that its outcome will not require additional changes in our accounting policies and practices, restatements of financial statements, revisions of results or guidance, or otherwise have adverse consequences for us.

And nine, we may incur additional significant expenses in connection with the SEC inquiry, our related internal reviews, the class action lawsuits and derivative actions that were filed in light of the SEC inquiry or other litigation, regulatory or investigatory matters related thereto or otherwise.

For a fuller description of these and other possible uncertainties, please refer to our annual report on Form 10-K for the year ended December 31, 2005, as well as our subsequent filings with the SEC. We make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.

During the conference call, reference will be made to free cash flow, which is a non-GAAP term. The second-quarter press release explains the non-GAAP term and includes GAAP reconciliation. You can access the press release as well as our SEC filings referenced above on the Company's website at unitedrentals.com.

Also during the conference call, reference will be made to our 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 indicators 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 conference over to Mr. Hicks. Mr. Hicks, you may begin.

Thank you, operator. Good morning, everyone. Thank you for joining us today. I'll open the call this morning by covering a few highlights of the quarter. Marty Welch will then review our financial performance and Michael Kneeland will follow Marty and talk about some of the operational aspects of our business.

As background to the call, let me start by saying we continue to see very strong growth in our primary end market, private nonresidential construction, which was up 17.8% during the second quarter of this year. The Company also continues to see strong demand for its services.

We're seeing exceptionally strong growth in the Gulf, the Northwest, including western Canada, and portions of the Southeast. Even the Midwest and the Northeast, which had been experiencing weaker performance, are showing signs of slight improvement. Michael Kneeland will add color to this in a few moments.

We were also pleased that these trends were evident in our second-quarter operating performance. Revenues were up 12%, with same-store rental revenue up 8.6%. Rental rates increased by 5.6% in the quarter and are actually up slightly higher than we expected. On the other hand performance, in our traffic control business was a little softer than we expected.

EBITDA for the quarter rose from $239 million to $274 million year-over-year, reflecting an increase of 15%, and indicating continued strength of our core business. Net income grew 12% in the quarter to $56 million or $0.51 per diluted share, including charges of $0.05 per share for two second-quarter items. Given our outlook for non-residential construction, we've continued to invest in our fleet and added $275 million to fleet during the quarter, concentrating on regions of the country and business segments that give us the opportunity for high revenue growth and a high return on our investment.

I should also note that we received about 70% of our planned rental CapEx for the year by June 30th. That's just in time for the height of the construction season. Fleet utilization this quarter was also very positive. Dollar utilization was up 1.3 percentage points year-over-year to 65.3%, which is a second-quarter record for the Company.

Time utilization for the quarter was up slightly as well. Our contractor supply sales were up 28% for the quarter to $109 million. We expect full-year contractor supply growth to be around 30%.

Now, before turning the call over to Marty, let me just briefly comment on our outlook for 2006. We expect revenues at $4 billion this year. We believe our rental rates will be up closer to 5% this year, which is somewhat higher than we previously had forecasted. We expect to see strong growth continue in both our General Rentals and our Trench Safety segments.

On the other hand, our Traffic Control Business, although improving, is projected to improve at a slower rate than we had originally anticipated. As a result of our strong performance, we are revising our full-year outlook to a range of $2.15 to $2.25 per share. Just as a reminder, that is up from $1.80 per share in 2005.

This reflects our expectation of continued positive business trends for the remainder of this year for the General Rental and Trench Safety segments of our business, as well as somewhat reduced expectations for our Traffic Control Business. It also includes the two previously mentioned second-quarter items. Finally, we expect our EBITDA to grow from $956 million in 2005, to $1.1 billion in 2006, reflecting a growth rate of 15%.

Now with that, I'll turn the call over to Marty Welch to cover more in depth some of the financial details of the quarter. 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'll 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've highlighted as focus areas for our business. First, growing overall revenues. Total revenue for the second quarter increased 12% to a record $995 million. During the quarter, we opened 14 new branches, bringing us to 23 for the year. We remain on track to hit our target of 30 to 35 new branches this year.

Second, improving gross margins. Our overall profitability improved year-over-year as well, with gross margins in the second quarter reaching 34%, up 2.1 percentage points from 2005. Additionally, our operating margin climbed above 15%.

And third, improving ROIC. This critical metric was 12.5% for the 12 months ended June 30, 2006, an improvement of 170 basis points from 2005.

Now let me turn briefly to a P&L analysis on a segment basis. In our largest segment, General Rentals, we continue to see strong overall performance. Revenues were up 12% to $865 million. This growth reflects an 8.6% increase in same-store rental revenues and improvements in our rental rates, which were up 5.7% in the quarter.

In addition to seeing overall topline improvement, the profitability of this segment also improved. General Rentals operating income improved 15% to $142 million, as compared to $123 million in the prior year.

Turning to our Trench Safety, Pump & Power segment, revenue for the quarter was $55 million, an increase of $11 million or 25% year-over-year. This growth reflects a 14% increase in same-store rental revenues, as well as the continued success of our acquisition of Sandvik in December 2005. Sandvik contributed approximately $5 million in revenues during the quarter. Additionally, our operating income improved $2 million to $13 million for the second quarter.

Looking at our Traffic Control segment, in the quarter we had total revenues of $75 million, which is $2 million better than last year. And although revenues grew modestly, the traffic control operating loss was $5 million in the second quarter of 2006 compared to a loss of $2 million in the prior-year period, primarily reflecting an increase in the cost of materials and labor.

This performance obviously impacted the quarter and has caused us to lower our segment outlook. As you may recall, we were targeting a breakeven performance for traffic control for the year. Currently, we're expecting a low single digit loss for the year, reflecting the fact that the business is improving but at a slower rate than previously expected.

Returning now to consolidated profitability, we experienced strong gross margin flowthrough from the rental revenue increase in the quarter. Total gross margins improved 2.1 percentage points to 34%. The improved margin reflects improved equipment rental gross margins as rental rates increased. In addition, equipment rentals in the Trench Safety, Pump and Power Segment grew 31%.

These improvements were partially offset by reduced gross margins in our contractor supplies business relating to increased provisions for excess and slow-moving inventories, higher freight expenses and the cost of opening our new distribution centers.

SG&A was $164 million, an increase of $28 million from the second quarter of 2005. Beyond the normal inflationary increases, these expenses reflect benefits in insurance cost increases, higher selling costs relating to growth in the business, increased provision for bad debts, which is consistent with the increase in accounts receivable, higher advertising and promotional expenditures, and increased professional fees, including those relating to business improvement and cost containment initiatives.

These initiatives include strategic sourcing, which is designed to lower our procurement costs beginning in the second half of the year and give us further reductions in 2007 and 2008. Additionally, we're in the process of automating certain finance functions. This finance transformation initiative is designed to improve our controls and generate operational efficiencies.

Other professional fees incurred during the quarter related to regulatory issues and related matters, and were $6 million, consistent with the level of such costs in the second quarter of 2005 and significantly reduced from the $13 million we incurred in the first quarter of 2006.

Operating income increased 14% or $18 million reflecting a 20 basis point improvement in operating margin. Additionally, we reported net interest expense of $52 million compared with $43 million in the prior year. This $9 million increase reflects increased interest rates applicable to our floating-rate debt.

Our diluted earnings per share for the second quarter was $0.51 on a share count of 115 million shares compared with $0.48 in 2005 on a diluted share count of 110 million shares.

Our second-quarter performance was adversely impacted by two non-cash charges recorded during the quarter. The combined impact of these items was to reduce second-quarter diluted earnings by $0.05 per share. First, we recorded a pretax charge of $5 million, or $0.03 per diluted share, to correct previously recorded nonrental depreciation expense for certain vehicles which are financed on capital leases.

Additionally during the quarter, we recorded a net charge of $3 million, or $0.02 per diluted share, primarily related to an identified tax contingency item. This contributed to a 42% effective tax rate in the quarter. We anticipate that our full-year tax rate will approximate 39.9%.

Looking at our consolidated cash flows for the second quarter, our cash flow from operations was $143 million compared to $193 million in 2005. The year-over-year reduction was largely the result of working capital items.

Turning to capital expenditures in the second quarter, we invested $369 million in our rental fleet compared with $332 million last year, an increase of $37 million. The significant investment in the second quarter positions us well for the seasonally strong third quarter. This second-quarter investment also reflects the decision we recently made to initiate a $42 million early buyout of equipment under operating leases.

Our nonrental CapEx for the second quarter was $26 million, a $7 million increase versus last year. Free cash flow for the quarter was -$163 million as compared to -$65 million last year, leaving us with a cash balance of $208 million at quarter end as compared with $316 million at year end.

Now let's take a moment to review the balance sheet. Total assets were $5.5 billion, including the net book value of our rental equipment of $2.6 billion. Total debt excluding the quips was $2.9 billion, essentially unchanged over the last eight quarters. As of August 7th, we had borrowing capacity under our revolver of $480 million, and in addition, we had existing cash balances and our $200 million accounts receivable securitization facility, which is unused and fully available at current ratings levels.

Finally let me come back to return on invested capital. Last year, we initiated reporting of ROIC as the best indicator of how efficiently and effectively we're employing capital and a metric that is central to increasing shareholder value long-term. As I noted, we used ROIC internally to measure our progress.

For the 12-month period ended June 30, 2006, ROIC was 12.5%, which represents a 170 basis point improvement versus the 12-month period ended June 30, 2005.

Before turning things over to Michael, let me discuss our expectations for 2006. Including the $0.05 per diluted share relating to the two items we previously discussed, we're revising our full-year diluted EPS targeted to $2.15 to $2.25 per share. As Whalen indicated, this range reflects an improved outlook for our core business, as well as somewhat reduced expectations for traffic control, and is based on an anticipated full-year diluted share count of approximately 114 million shares. This range does not reflect any provision relating to regulatory issues on related matters.

We expect that SG&A as a percent of revenue will decline in the second half of 2006 as compared to the first half. Within SG&A, legal and regulatory costs in the second half of 2006 should be significantly less than the $27 million we spent in the second half of 2005.

Our revenue, EBITDA and free cash flow guidance is as follows -- total revenues of $4 billion in 2006; EBITDA of about $1.1 billion; and approximately $145 million in free cash flow.

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

Thanks, Marty. Good morning, everyone. Our operations continued to perform well in the second quarter. As Whalen mentioned, rental rates improved year-over-year by 5.6% for the quarter, making this the 13th consecutive quarter of rate improvement. Looking at the first six months of the year, rates were up 6%.

We continue to invest in our rental fleet, and in the first half, we grew our fleet by $384 million to $4.2 billion. The average age was 38 months on June 30th, which is down two months from the first quarter. It's important to note that the two major components of our fleet, aerial and non-aerial, have very different ages. We have a high percentage of aerial equipment in our fleet, which has a longer useful life than non-aerial.

Our aerial fleet has an average age of 43 months and our non-aerial fleet averages 33 months. We manage our fleet age based on repair and maintenance history and customer satisfaction levels, and believe our present fleet age is exactly where we would like to be at this time of year.

Turning to the business conditions, at the national level, spending continues to be focused on commercial, office, retail, entertainment and manufacturing construction. As Whalen indicated, at the regional level, we saw growth in all areas and the second quarter. The strongest growth was in the Gulf, where we had 18% growth in revenues; the Northwest, including Canada, with 23%; and the aerial region with 16%.

Growth in these regions as primarily driven by increased activity in manufacturing, power plants, amusement and a variety of other projects. Just to give you a few examples, the following are several projects currently underway. In manufacturing, the Nucor Steel plant in Mississippi, and a $1.2 billion Honda new car plant in Indiana. For power plants, the Elm Grove power plant in Wisconsin, which will be the largest of its kind in the United States.

As for amusements, the $800 million addition to the Borgata Casino in Atlantic City, as well as the Dallas Cowboys football stadium. In Alberta, Canada, the tar sands project continues to increase in size.

Let me turn to our trench pump and power business, which focuses on serving the special needs of our inground construction, site preparation and the temporary power for our customers. This business performed extremely well and recorded a 25% increase in revenues in the second quarter, with a 23.6% operating margin. We're making significant investments in this business, including six of our 23 new branches we established in the first half of this year.

As we previously mentioned, our contractor supply sales grew 28% to $109 million in the second quarter. The contractor supply business represents an enormous growth opportunity for the Company and were making a significant investment to capitalize on this. Our strategy is to concentrate the bulk of our inventory in distribution centers rather than the branches, thus enabling us to significantly improve our customer service while improving our inventory turns.

To leverage our current infrastructure, we now have nine distribution centers in place, supplying one- to two-day delivery to virtually all of our customers in North America.

In the second quarter, our contractor supply gross margin was negatively impacted by costs associated with optimizing the inventory in our distribution network. We experienced added costs from inventory adjustments and freight as we made investments to support our contractor supply program.

As I mentioned, we currently have nine distribution centers in full operation in North America versus only five last year, and the cost of these has also impacted our margins. As we continue to drive sales, manage efficiencies and improve our inventory turns, we expect to see gross margins level off and then begin to gradually increase.

The last item I want to talk about is fuel. The price of fuel, as you are well aware of, has substantially increased year-over-year. We feel the impact on two fronts, the fuel costs associated with delivery and the fuel used by equipment (indiscernible).

Last year, we implemented new pricing guidelines and methods to mitigate the impact of these increases. We are closely monitoring fuel usage. We have been able to increase our delivery prices by 23% during the first half of this year.

Let me conclude by saying that we are pleased with the Company's performance in the second quarter, which followed an excellent start of the year. Our entire organization remains focused on our main initiatives of managing rental rates, improving return on capital and providing exceptional customer service. Based on every indication, we are optimistic that we are on track to achieve our objectives for 2006.

With that as an overview, I will now ask the operator to open the call for Q&A. Thank you.

(OPERATOR INSTRUCTIONS) Lionel Jolivot of Barclays.

Thank you. Good morning. Just on the time utilization, I mean, time utilization came in a little bit lower than I would have expected. Is it just the timing of your new equipment purchases, just because you were buying a lot of new equipment ahead of the summer season? Or are you seeing a slowdown in time utilization in some of your markets?

I wouldn't say it's a slowdown in time utilization in some of our markets. In fact, we are actually doing a little bit better in a couple of the weaker markets than we thought. We did front phase our equipment. But I think when you look at it, you're trying to call something very close when you put together a plan as much as nine full months in advance and you're ordering $850 million worth of equipment.

I think we are calling it pretty close to right, and in fact, that fact that we had rates up 5.6% and time utilization held flat was a good sign of strength for the business.

Okay. And on the cash flow side, adversely, you burned a fair amount of free cash flow this quarter; most of it was CapEx. But working capital was also a drive in cash. I'm just wondering -- it seems that your payables went down quite a lot this quarter when they were actually going up last year in the second quarter. Is there anything going on with working capital?

Lionel, there is nothing unusual on working capital. Specifically in payables -- and you saw the same effect in the first quarter -- we had more CapEx received in March and relatively lesser in June. And so in the March quarter end, there was more payables relative to CapEx versus a year ago. In the June quarter end, there is less payables relative to CapEx than a year ago. There's really nothing else going on in the payables area.

And for the full year, when I look at your free cash flow guidance, what are you assuming for working capital?

We are assuming a slight usage of working capital versus year end '05.

Okay. And just last thing for me, when I look at your trench safety and pump business, it seems that the organic growth came down a little bit this quarter -- I think it was around 14%, which is pretty good but a little bit slower than what we had seen historically. What is going on? Is it just a timing issue and do you expect this business to accelerate again in the second half of the year?

I think, Lionel, that you are really not seeing a slowdown in the growth as much as the business is growing. And as it grows, it's harder to continue to get the same kind of year-over-year growth comparisons that we had when it was a smaller business.

So we continue to be very positive about the trench safety business; we think it's a great market for us to be in. We continue to invest strongly in that. Of the 23 stores that we opened new this year so far, I think five or six of them have been in that business. So we are really positive on it.

Okay, I will get back in the queue. Thank you very much.

Alex Blanton.

Good morning. I may have missed it, but did you mention total rental CapEx for the year that is planned?

We basically have given guidance that we would spend about $850 million on CapEx for the year -- that is on the rental fleet. We will spend another $60 million to $70 million on the nonrental fleet.

Okay.

-- nonrental items.

So there hasn't been any change? Because if I take 70% of the $612 million you did for the first half, that is 874. But what you've done is just rounded it, right? 850 is what -- that's 72%.

The one thing you have to add back in is the lease buyouts that we put into the full year.

Add back in -- what do you mean?

We came out with 850 for CapEx, and then there was an additional $42 million for a lease buyout.

That is on top of the 850?

Actually about 30 million of it will be top of it. 10 million we would have bought down or paid down during the fourth quarter of this year.

30 million on top. And that is included -- that 30 million -- in the 369?

Yes.

For the second quarter?

Yes.

So these are not new purchases; these are purchases of things you've been leasing?

44 million of that were purchases of operating equipment we had on operating leases. By the way, that is in effect the equivalent of paying down debt.

Right. I'm looking at it from the standpoint of how much you are ordering new from suppliers.

Okay.

Now, you mentioned something called lower procurement costs with strategic sourcing in the second half. What is that? Could you just give us a little more detail on that?

Alex, this is Michael. Strategic sourcing is focusing on our non-fleet items. If you go back in history, the Company was very efficient of capturing all of our buying power around fleet. However, we have about a $1.2 billion spend in other related items, items such as batteries, parts, pens, paper, all the above indirect spending.

And that would -- we're focused on that. We believe there's an opportunity for us to increase our buying power. And strategic sourcing is going to be focusing on that $1.2 billion spend.

Okay, so this is more or less maintenance items you're buying. This isn't equipment.

This is not equipment. This would be -- it would include maintenance items. It would also include items in SG&A as well.

SG&A. Okay, supplies. All right. Finally, you said that your average age was 38 months, that aerials average 43 months and non-aerials averaged 33 months. Well, the 38 is just midway in between those two. So arithmetically, wouldn't it have to be that the aerials are one half of your fleet for that to come out that way? Is that correct -- in terms of units?

In terms of OEC, it's roughly about 55%.

55% --

Is aerial.

Of units or dollars?

Dollars. As far as units, you'll have more units in the smaller items as opposed to the larger volume or larger dollar items. I'll give you an example. A 60-foot boom is going to run you anywhere between $70,000 to $80,000. I would have a lot more items in the small tool category --.

Right. So there is less than 55% in terms of units?

That is correct.

Okay. Thank you.

James Moore of Goldman Sachs.

Good afternoon, gentlemen. It's James Moore from Goldman Sachs in London. Just a wider question -- three questions if I could. Firstly, a wider question on the rental markets in the U.S. Atlas Copco, the number two player behind you, is clearly in the latter stages of selling its rental operation to RSC. And the press reported that you were involved in the bidding in late June. Could you give your shareholders a feel as to your interest in the assets and particularly whether you have yet ruled it out as an acquisition?

Let me comment on that. That same question came up on our first-quarter conference call. We have obviously been aware that Atlas Copco and others in our industry have been for sale. We said on the first-quarter conference call -- in fact, I've pretty consistently said -- that our intent is to grow to the business by way of acquisition to the tune of about $100 million a year. And we are doing that, for the most part, by small- to medium-sized acquisitions, acquisitions that would run $10 million, $15 million, $20 million in size, $25 million in size.

That is our game plan. I did say on the first-quarter call that I would not rule out looking at some of the larger properties who come on the market, but the stars would really have to line up to make those attractive for us to do.

So at this point I wouldn't comment any further on that. But we will continue to grow the business, as I said, by way of acquisitions, most likely smaller acquisitions.

Okay, that is quite clear. And I will split my second question out then and go straight to my third. I think Atlas saw 23% same-store sales growth in the second quarter, and I think you said you saw 8.6. Wondered if you could explain perhaps what is behind the market share losses that you appear to be seeing now? And I wondered if it related to having a three-year-old fleet versus them having an average two-year-old fleet, or is it something different?

Actually, it's not as much different as it seems. You have to look at the concentration of their business in the marketplace versus where we are. If you go through the southern part of the United States including the Gulf, and look at our rental revenue growth, you see rental growth. And I would include in that Mississippi, Alabama, Louisiana and parts of Florida, Georgia. You see very strong rental revenue growth on the part of Rental Service Corporation. But if you looked at our growth, which we don't break out by state that way, you would see almost parallel growth.

On the other hand, if you get into the upper Midwest, the Northeast, where we have much greater presence than they have, we are getting much more modest growth in the tune of 4% to 5%. And I think it's that difference much more so than us gaining or losing market share against them.

And by the way, we've looked at the age of the fleet for a very long period of time. We do not believe that the customer is sensitive to the age of the equipment as long as the equipment that you are providing the customer with is reliable, dependable equipment -- it works when they want it, when they need it, and you have it available for them.

That is great. And just finally, could I ask perhaps why you think we're seeing so many rental assets up for sale, with Maxim having been put out there, with Hertz now coming back out of private equity, it appears that that facility's for sale. You seem to be saying that you are experiencing growth, not decelerating, and you're not worried about the shape of the cycle. Why do you think these assets are coming up for sale at the moment?

That is a really good question. You probably should direct that more to the guys that are putting their business up for sale. I think there is a lot of interest in this market and a lot of interest in this space. I believe that people who follow this space think that the market will continue to be strong, not only in 2006, but 2007, 2008 and beyond, and investing in the rental equipment business is the sensible investment to make.

Brilliant. Thank you very much, gentlemen.

Karru Martinson of CIBC.

Good morning. In terms of your goal of adding $100 million in annual revenues, are you seeing opportunities in that $10 million to $25 million size? Or have multiples kind of moved against you on that side?

No, we're seeing opportunities anywhere from the $5 million to $25 million, $30 million size. And there is some difference in multiples, as you would expect. But not moving away from us.

Okay, so you still feel comfortable in achieving that $100 million target?

I've always kind of said that one year we may do a little more, next year we may do a little less. When you're working acquisitions, it is a very time-consuming process. We start working with an acquisition maybe as much as two years before we end up acquiring the company.

Often you'll find that the owner is, when you first approach him, is not really ready to sell. And then events change in his or her life and eventually they get to the point where they make come back with much more interest. But that often is a gestation period that consumes at least a couple of years.

In terms of the CapEx increased her, the 900 to the 930, is that pulling forward CapEx, you feel, from 2007, or is that just condition of the market that you see right now?

I would say that it's probably not pulling forward. We think actually private nonresidential construction is growing at a rate faster than we thought it would grow so far this year. We expect that will moderate as we go through the back half of the year, and then carry into 2007 with fairly solid growth, maybe in the 6%, 7% range and even on to 2008.

To the extent that we see that, then we will continue to invest in our fleet. In that sense, no it is not pulling it forward.

In terms of freight expenses, how much higher were they during the quarter and what opportunities do you have, if any, to offset those with not only the price increases, but perhaps some fuel surcharges?

I want to say our freight expenses -- and somebody can correct me if they are wrong -- was up $1.3 million over the prior period. We're moving, as Mike pointed out, we're doing some rebalancing of our inventory. I think the increases you see that are affecting our margins will abate as we go through the back half of the year.

Okay, thank you very much.

(indiscernible) of Goldman Sachs.

Thank you very much. With regard to the trench safety business, what steps do you need to take to improve it or what needs to happen in the marketplace for that to improve faster than you anticipate or you are expecting?

We are driving it to improve as fast as we know how to do today. If they were other steps that I could add to that, we probably would. I think we're a little disappointed that we are not going to -- or we don't expect now to get it quite to breakeven.

But I think the team is doing a really good job. You'll remember this business three years ago lost $55 million. Last year we lost $20 million, so we had substantial year-over-year pickup. This year, we're looking at maybe losing $4 million to $6 million. So you will see yet again a substantial pickup year-over-year.

We will continue to drive this business forward and make it better. One thing we have not gotten the benefit from yet is SAFETEA-LU, which is the replacement, for those of you who don't follow it closely, of T21. We expect that to kick in more in the states that we are strong in as we move into 2007. That should benefit the business too.

We think we have our cost base right. We are experiencing some cost increases in material, particularly related to petroleum. But I think our cost base, setting that aside, is right and what we need to do is pour more revenue through the funnel.

Okay. And with SAFETEA-LU, it's about a 30% to 40% increase in federal money. Is that all going to flow to you? I mean, if that increase goes through, wouldn't this business likely become very positive in 2007?

You really have to look at it state by state and see where the expenses -- or see where the government is spending and states are matching funding. I would be reluctant to draw a conclusion that you'd see dollar-for-dollar change in that regard.

Great. With regard to the acquisition that my colleague in London asked about before, what is the maximum leverage that you guys would be willing to operate under if you were to make a large acquisition of the size of RSC?

I think this is a hypothetical question stacked on top of a hypothetical question, so I'm going to decline responding to that.

Okay. I guess just in your general operations, you're about three times levered now. Are you comfortable with that?

We are very comfortable with the leverage. If you go back in time, we entered 2005 with ratios that were about 3.7 times. We came out of 2005 with ratios that were about three times. We expect that we will come out of this year with ratios that are in the 2.8 times range, and we should continue to drive that down.

And that is the target, to continue to drive that done?

Yes, this is Marty. I think that we would be -- the 2.5 range is a range where I think that the Company could think about achieving investment-grade -- low investment-grade ratings over time. And there wouldn't be any particular advantage to drive the leverage down lower than that. I think we'd be very comfortable operating through any cycle that you could assume at that level.

My last question with regard to the SEC. They continue to -- or that continues to be ongoing. Is there any way that you can get them to conclude the investigation? Or what are the next steps needed to conclude that portion of the investigation?

The SEC has its own program, which we don't have complete visibility to. And we continue to cooperate with them to the fullest extent that we can.

So there is no time horizon or deadline?

No.

Thank you.

David Bleustein with UBS.

Good morning. A couple of questions. First, would you describe the CapEx in the second quarter as an acceleration or is that what you were planning on spending in the June quarter all along, x that lease buyout?

I would say x the fleet buyout, it was very much on track with what we had intended to spend.

Okay. Second question, you mentioned higher marketing expenses. Were those necessary due to demand trends, was that new store openings, contractor supplies? What is the reason for the increased marketing expenditures?

It was a little bit of all of the above.

Are you seeing market softness anywhere that forced the incremental marketing expenditures?

No, I would not say that at all. We are moving into new businesses, such as contractor supplies, so we will logically support that with a little bit more marketing effort. People who have not bought from us, bought contractor supplies, have a tendency to think of us as being in the rental business. So you'll get a little bit of effort in that way to try to broaden people's way of looking at us as a company.

I think we're also building market positions. In Canada, for example, we sponsored some [NFL] hockey in Canada to strengthen our brand position in that market. But I don't think anything --certainly not defensive or certainly not because of an apparent slowdown in a specific market.

Okay, great. And the final one has to do with the dollar utilization. With pricing up 5.6% and time utilization up a tick, I think Marty mentioned that mix had a negative impact in the quarter. Should we expect a similar negative impact over the next couple of quarters, as you are renting more booms and forklifts?

I would guess that you would see something that would be close to that. There is really a lot of moving parts here, and try to give you precise estimates on what time utilization will be 90 days out is tough to do. But the general direction should be similar, David.

Got you. Thanks a bunch.

Robbie (indiscernible) with AIG.

The first general comment, there were issues with your webcast, it kept getting interrupted by the operator. So I missed parts of the call, so maybe if there is a way to -- when you post the replay, we can get the full content of your remarks.

Thank you for telling us that. We will check into it right after the call.

Yes. And I guess the second question is sort of a general question on your capital expenditures. What would you have to see before you decide to cut back in the CapEx? I guess given that you sort of missed your earnings expectations for the quarter, I guess it's a little surprising that you have increased your CapEx and reduced your free cash flow expectations. Thank you.

Let me take just slight exception to the last comment; then I will come back and comment on capital. We didn't miss our earnings expectations. The Street was a little bit out in front of us. We had given clear guidance on our first-quarter conference call that we would have a range of $2.17 to $2.27. The consensus on the Street for the full year against that guidance that we gave them was $2.36, which is obviously a lot higher.

We had not given any guidance at all for the second quarter, so the Street had basically locked in on $0.63. That is unfortunate, but it doesn't change the way we think or intend to operate or manage the business. We are in a strong market, we are making capital investments to support a strong market. We expect that market will continue to be strong through the remainder of this year. And as I said earlier, we expect that it will be strong throughout 2007 and 2008 as well. And not to capitalize on that I think would be a mistake.

Okay. Fair enough. Thank you.

Operator, we have time for about one more question.

Our final question for the day comes from Mr. Daniel Cunliffe with Bear Stearns.

Can hear me?

Yes.

Just a quick question on the underlying volumes here. You talk about nonresidential construction accelerating and going towards 6 to 7 for the next year. I'm just wondering whether I'm looking at this right. But if I look at your quarterly revenue progression, same-store growth of 8.6, take off the pricing of 5.6, you have a same-store volume of 3%, which compares to same-store volumes the last quarter of 7%.

I'm just trying to square that with accelerating end markets, if you could kind of correct me if I'm kind of looking at this wrong; or if that is right, what is the mismatch between the accelerating market and the volumes not accelerating? Thanks.

Okay, let me just make a couple of points on that -- it's a very good question. First quarter, we did 13.5% same-store growth. If you go back and you look at the first quarter of the year, we basically saw a very mild winter. It started in the fourth quarter -- in fact, for those of you who follow this stock closely, you'll remember that our fourth quarter last year was very strong because of the mild winter weather that we experienced.

That mild winter carried forward into the first quarter, and that was different than the first quarter of 2005. First quarter of 2005 was a more typical winter. So the comp in the first quarter was much easier than the comp that we're experiencing as we go through the second quarter. And I think, for that matter, the rest of the year.

Now the essence of your question, though, wasn't the first quarter versus the second quarter. The essence of the question, I think, was why isn't your growth tracking closer to that of private nonresidential construction, which was up, as we said earlier, at a much higher clip.

I think you have to step back and look at it the way we look at it as a company. We put our plans together based on an anticipation of what market is likely to look like and what private nonresidential construction growth will be. We are trying to optimize the return on capital and improve that return on capital. When we put the plant together, we spend a lot of time moving equipment from one branch to another branch, taking equipment out of underperforming areas, transporting it to areas that are doing strong.

So we are not trying to tie to a precise number that you see in hindsight after the federal government releases data on what actually transpired. We are trying to build the business to take advantage of what market growth we anticipate, not what in retrospect actually occurs.

I feel that we are doing that reasonably well. We're balancing -- getting rates up and trying to drive an improvement on our return on capital by raising rates. And we will miss maybe a little bits of market opportunity to optimize rate performance. We also have areas of the country where our rates are very strong, and rather than try to raise rates, we will try to actually get more business. If the return on capital in select markets is very high, then we'll make that trade-off as well.

So I think you are -- again, as I said earlier -- you are looking at a thousand moving parts or probably a lot more than that in this business, and we are trying to manage our way through a period of time where the market is growing and we're taking advantage of that growth. But we will never get that -- I don't think -- we will never call it so perfectly that we'll exactly tie to our private nonresidential growth that you see.

By the way, a government doesn't call it that closely either. Typically, at the end of a quarter, you'll see a number and then a month later or two months later there will be an adjustment to that number, and you'll be looking at something else.

Very helpful. Thank you.

With that, operator, as I said, I'm going to wind the call down. As was noted on the conference call, we continue to invest to grow our fleet. We do that, as I mentioned, because we think the market is not only strong this year, but will continue to be strong as we move into 2007 and beyond.

And although we're growing our fleet, we expect to continue to generate free cash flow. We've given guidance before of $175 million. When we bought down the operating leases, as I mentioned, that is the equivalent of paying down debt. So the $30 million more that we are spending on operating leases this year will come off of that free cash flow. So our guidance now will be $145 million of free cash flow after making a very substantial investment in our fleet.

We're pleased with our rate improvement continues to grow; we are up 5.6% in the quarter. And as I mentioned in my opening comments, we are now expecting that our full-year growth will be closer to the 5% than we previously had thought it would be.

Overall, we see enormous strength in our core business, general rentals, as well as our [trench safety business] (corrected by Company following the call). We are a little disappointed with the performance of our highway technology business, but it does continue to improve. And I think we feel good about the position we have in the market. We feel like we're well positioned to take advantage of the growth that's occurring in the market, and we will continue to manage this business to do that as we go through not only the balance of this year, but the years to come.

With that, everyone, thank you for joining our conference call today. Have a terrific day and we'll look forward to speaking to you on our next conference call.

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