聯合設備租賃 (URI) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals' third-quarter 2006 investor conference call. Please be advised that this call is being recorded and is copyrighted by United Rentals Inc. Any use, recording or transmission of any portion of this call without the express written consent of United Rentals is expressly prohibited.

Before we begin the Company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. United Rentals' businesses and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently actual results may differ materially from those projected by any such forward-looking statements. A summary of these uncertainties is included in the Safe Harbor statement contained in the Company's third-quarter 2006 earnings release.

For a fuller description of these and other possible uncertainties, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2005 as well as to its subsequent filings with the SEC. You can access the Company's earnings releases as well as its SEC filings on the Company's website at www.UnitedRentals.com using the link captioned Access Investor Relations.

Please note that United Rentals has no obligation and makes 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 references will be made to free cash flow and to EBITDA, each of which is a non-GAAP term. United Rentals' third-quarter 2006 earnings release explains these non-GAAP terms and includes a historical GAAP reconciliation for each.

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.

Thanks, operator. Good morning, everyone. Thank you for joining us today. I'm going to open the call by covering a few highlights of the quarter as well as our outlook for the full year. I'll also share some preliminary thoughts about 2007. Marty Welch will then review our financial performance and Michael Kneeland will follow Marty and talk about the current business environment that we're operating in. Michael will also cover the progress we're making on several key operational initiatives.

Now as you know, we have consistently talked about a number of important goals for the Company -- driving profitable revenue growth, increasing our operating margins, generating free cash flow in any environment, and improving our return on invested capital. With that said, we were pleased with the quarter's results. We established records for both revenue and earnings per share. Revenue of $1,070,000,000 was up 9.3%, this included the impact 5.1% increase in rental rates which actually was slightly higher than we expected.

Our diluted earnings per share for the quarter of $0.85 grew by 20% and that's after absorbing the impact of $0.03 related to our $63 million QUIPS security redemption and our $400 million term loan prepayment. Our strong earnings growth was driven by improved flow through on the gross margin line and a significant reduction in SG&A as a percent of revenue. Actions that we are taking should help us achieve continued improvement in our SG&A ratio as we move through the remainder of this year and into 2007.

Operating income of $216 million was 25% higher than the third quarter of 2005 and, importantly, our margins -- operating margins, exceeded 20%. EBITDA for the quarter rose 16% to $338 million from $291 million a year ago, reflecting the strength of our core business as well as profit improvement and traffic control. Compared with a year ago our return on invested capital improved by 2.3 points to 13%. We expect to see continued improvement in this metric in the fourth quarter and in 2007 and beyond.

Now turning to the outlook for the full year, we expect revenue this year to be between 3.9 and $4 billion. We believe we will finish the year with earnings per share between $2.12 and $2.22 and that's after observing the $0.03 I previously referred to as well as the $0.05 we absorbed during the second quarter of this year. This is consistent with our previous outlook and compares with the $1.80 we reported for 2005.

Our earnings per share range for the full year 2006 reflects our sensitivity to rental revenue levels which we will continue to closely monitor as we move into the last two months of this year. That said, it looks like our increase in rental revenue for October will equal what we achieved during the third quarter. Rental rates in the fourth quarter should be up between 3% and 4% bringing our total full year improvement to about 5%.

We'll also be closely watching same-store rental revenue growth which at 3.5% for the quarter came in a bit lower than we expected. We attribute this lower rate of growth partially to our drive to improve return on invested capital even at the expense of volume as well as the business conditions softening in some parts of the country -- Michael will talk about that in greater detail shortly.

Turning to free cash flow, we generated $135 million of free cash flow during the third quarter, bringing our year-to-date cash position -- or excuse me, our year-to-date position to a positive $19 million. Our expectations for free cash flow for the full year will be $175 million which is $30 million higher than our previous outlook. Just as a reminder, this outlook includes buying out a total of $58 million of operating leases for equipment this year which is affectively the equivalent of reducing debt by a corresponding amount.

Before turning this call over to Marty, and although we're in the middle of our planning process for the year in front of us, I would like to share some thoughts about 2007. In 2006 we should spend somewhere between $140 million and $150 million on growth capital. In 2007 we believe we'll see a slower pace of growth in private nonresidential construction. Accordingly we plan to spend somewhat less on growth capital next year. Our growth capital in 2007 should approximate $100 million to $125 million, a little over half of which would feed our 2006 and our 2007 cold starts.

We expect continued revenue growth in 2007 albeit at a lower-level; but like this year, our greater emphasis will be on improving our operating margins and a return on invested capital -- even at the expense of selectively foregoing opportunities for volume improvement. Driving the business in this manner should continue to improve free cash flow as well as strong year-over-year earnings per share growth.

As I said earlier, we are in the middle of our planning process for next year, so I won't go into greater detail now, but we will provide you with a more comprehensive review of our 2007 plan during our next conference call. And with that I'll turn the call over to 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 third quarter increased 9.3% to a record $1.07 billion. During the quarter we opened six new branches bringing us to 29 for the year-to-date. We remain on track to hit our target of 35 new branches for this year.

Second, improving gross margins. Overall profitability improved year-over-year as well with gross margins in the third quarter reaching 36.4%, up 1.2 percentage points from 2005. Additionally, our operating margin climbed above 20% reflecting higher rental rates as well as the improved performance of our traffic control segment. Third, improving return on invested capital. This critical metric was 13% for the 12 months ended September 30, 2006, an improvement of 230 basis points from 2005. I'll discuss ROIC in more detail in a moment.

Now let me turn to the P&L on a segment basis. In our largest segment, general rentals, we continue to see strong overall performance. Revenues were up 9% to $921 million. This growth reflects a 3.3% increase in same-store rental revenues and improvements in our rental rates which were up 5.3% in the quarter on a larger rental fleet. During the quarter our dollar utilization of 72.2% was essentially flat versus the prior year. Excluding our traffic control segment, our [dial] utilization was 65.9%, also consistent with the prior year.

Overall we were pleased with our total revenue growth. It's important to note, however, that the variance in sales gains across geographic areas ranged from double-digit increases to areas where our revenues were flat or even contracted. As Wayland mentioned, this was a function of the fact that in certain parts of the country we've been willing to forego volume in order to raise our rates and improve ROIC. In a moment Michael will give you some details on how we performed in various geographies.

In addition to seeing overall top line improvement, the profitability of general rentals also improved. Operating income increased 22% to $190 million as compared to $156 million in the prior year.

Turning to our trench, safety, pumps and power segment, revenues for the quarter were $62 million, an increase of $10 million or 19% year-over-year. This reflects the continued success of our acquisition of Sandvik, partially offset by reduced infrastructure related residential spending. Although our operating income remained flat during the quarter at $18 million, our operating margin declined from 35% to 29%. This decline reflects startup costs associated with seven new trench, pump and power branches.

Looking at our traffic control segment, in the quarter we had total revenues of $87 million, $4 million better than last year. While revenues grew modestly the traffic control operating profit was $8 million in the third quarter as compared to a loss of $1 million in the prior year period. This improvement reflects productivity improvements and the realization of our cost containment initiatives which are ongoing. As I mentioned last quarter, we are still expecting a segment loss of 4 to $6 million for the full year.

Returning to consolidated profitability, we experienced strong gross margin flowthrough from rental revenue increase in the quarter. Total gross margins improved 1.2 percentage points to 36.4%. The improved margin performance reflects improved equipment rental gross margins as rental rates increased. In general we were pleased with our gross margin performance. As you know from our previous calls, we're focused on improving our contractor supplies gross margin and we did achieve a sequential improvement of 280 basis points from the second quarter.

As Michael will discuss later, this improvement reflects improved inventory turns. Further, as this business continues to grow we expect to leverage these turns to further improve our return on capital.

SG&A of $164 million was essentially flat as compared to 2005, but as a percent of revenue decreased by 1.2 percentage points to 15.3%. In addition, our SG&A improved sequentially decreasing 1.1 percentage points from the second quarter. On a year-over-year basis SG&A performance improved as we were able to effectively offset modest selling cost increases with reduced professional fees and lower bad debt provisions. We achieved a $6 million reduction in the level of professional fees for regulatory issues and related matters.

Also, we reduced our days sales outstanding from 55 to 52.5 days through better credit management and improved collection efforts. As Michael will discuss shortly, we're moving forward on several initiatives which we believe will further reduce expenses and enable us to gain additional SG&A leverage. Our expectation is that we will see further year-over-year improvements in the fourth quarter.

Our third-quarter effective tax rate was 38.3% and is down from the second-quarter rate of 41.7% reflecting the impact of the second-quarter discrete charges we previously disclosed. We expect that o our 2006 full year effective tax rate will approximate 39.5%.

Operating income increased 25% or $43 million reflecting a 250 basis point improvement in both operating margin -- in operating margin following the improvements in both gross margin and SG&A. Additionally, we reported net interest expense of $58 million compared with $48 million in the prior year. The $10 million increase reflects $5 million of charges recorded in interest expense relating to the $400 million prepayment of our term loan as well as the $63 million QUIPS redemption. The balance of the increase relates to increased interest rates applicable to our floating-rate debt.

Our diluted earnings per share for the third quarter was $0.85 on a share count of 114 million shares compared with $0.71 in 2005 on a diluted share count of 110 million shares. Our third-quarter performance as noted reflects a net charge of $3.6 million after-tax or $0.03 for the third-quarter charges.

Looking at our consolidated cash flows for the third quarter, our cash flow from operations was $237 million compared with $96 million in 2005. The year-over-year improvement was largely the result of improved profitability and working capital items. We were able to effectively improve our cash generation by reducing our days sales outstanding and improving our inventory turns.

Turning to capital expenditures in the third quarter, we invested $158 million in our rental fleet compared with $197 million last year, a decrease of $39 million. Our nonrental CapEx for the third quarter was $34 million, a $10 million increase from last year. Free cash flow for the quarter was $135 million as compared to negative $62 million last year. The year-over-year improvement in quarterly free cash flow reflects the improved profitability of our business as well as our decision to bring fleet in during 2006 earlier in the year than we did in 2005.

In addition to achieving strong free cash flow during the quarter, our EBITDA margins also improved. Our EBITDA margin of 31.6% for the third quarter represents a 1.9 percentage point improvement versus 2005.

Now let's take a moment to review the balance sheet. Total assets were $5.5 billion including net book value of our rental equipment of $2.7 billion. Net debt, which represents debt plus our subordinated convertible debentures and less cash, was $2.82 billion at September 30, 2006. This represents a decrease of $190 million since September 30, 2005. As of October 30th we had borrowing capacity under our revolver and our accounts receivable securitization facility of approximately $580 million.

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 as 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 September 30, 2006 ROIC was 13% which represents a 230 basis point improvement versus the 12-month period ended September 30, 2005.

Before turning things over to Michael, let me discuss expectations for the remainder of the year. As Wayland mentioned, including the $0.03 per diluted share impact related to the refinancing charges we previously discussed, our EPS range is $2.12 to $2.22 per share. This is based on an anticipated full year diluted share count of approximately 114 million shares. This range does not reflect any provision related to regulatory issues and related matters.

Our revenue, EBITDA and free cash flow guidance is as follows -- total revenue of 3.9 to $4 billion in 2006; EBITDA of $1.1 billion; and approximately $175 million of free cash flow. We're pleased to have raised our free cash flow guidance by approximately $30 million at the same time we've increased our anticipated CapEx by approximately $25 million to $955 million. That summarizes our outlook and 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. I'll begin this morning by sharing highlights of our current operating environment and by bringing you up to date on the progress of several key operational initiatives. As previously mentioned, our same-store rental revenue was up 3.5%, but inside this average we experienced wide variability.

Looking across our business, the Southwest continues to be an area of growth for us. In Arizona and Nevada we achieved over 30% revenue growth during the quarter. Other strong areas for us were the Gulf, Northwest and Southeast. The Gulf continues to see strong growth particularly in the oil refinery and manufacturing sectors. In addition, demand from reconstruction of hurricane damage continues to be positive.

Our revenue in Louisiana was up 28% even though pump and power locations had lower revenue because of this year's relatively mild storm activity. In the Northwest we grew revenue in Utah by 50%, driven by an increase in commercial and retail projects. Canada, which represents 9% of our revenues, continues to be an area of growth for us. We increased revenues by 35% in the third quarter in Western Canada. We benefited from the participation in energy-related projects in Alberta and in construction in the 2010 Olympics in British Columbia.

On the other hand, our operations in the Northeast, mid-Atlantic and Midwest had only modest growth and in some cases even a slight decline in revenue. California, which represents about 17% of our revenue, was flat in the third quarter and has been affected by the sharp decline in residential construction. Residential construction has a less noticeable effect than other parts of our business.

As Wayland mentioned, rental rates improved year-over-year by 5.1% in the quarter, making this the 14th consecutive quarter of rate improvement. We manage rates in the context of return on capital, utilization and growth. For example, in areas of the country where our return on capital is low we're emphasizing rate improvement at the expense of volume. In markets where we already have high returns we're focused on growing our market share.

We ended the quarter with $4.1 billion of fleet which is almost flat from the second quarter. Our average age was 38 months, in line with expectations. We continue to focus on managing our fleet to improve return on invested capital by reducing underperforming assets, sharing of equipment between branches and increasing used sales where appropriate. 12.5% of our rental revenue in the quarter was generated through equipment sharing. We see opportunities to leverage our network even further in this regard.

Now I'd like to shift gears and cover some actions we're taking to improve our operational efficiencies. During September we made changes to our regions and district structure, streamlining a number of support functions which will reduce our field SG&A cost. We also expanded our regional platform which paves the way for further cost reductions. This new alignment will better serve the needs of our employees and of course our customers by providing them with a flexible platform which will allow us to operate the business more smoothly and at a lower cost.

Finally, we consolidated our accounting platform to one central location in Tampa which helps us to tighten our financial controls as well as reduce our SG&A cost. On another subject, our strategic sourcing initiative launched earlier this year has a potential to be a homerun for us. We've identified an untapped opportunity to leverage our scale and to achieve operational efficiencies on our $1.2 billion non equipment related annual spending.

We've already implemented Phase I -- the first phase of this initiative and believe that we will save between 15 and $20 million in expense on negotiated supply contracts in 2007. When fully implemented in 2009 we expect savings to be somewhere between 60 and $100 million.

Lastly, I'd like to cover contractor supplies. During our second-quarter conference call I stated that we would continue to focus on driving sales, manage operational efficiencies and improve inventory returns. Today I can tell you that we have seen gains in all three areas. We achieved 23% contractor supply growth in the third quarter. We also had sequential improvement of 2.8 percentage points in our contractor supplies gross margins and increased our turns 2.6 from 2.1 year-over-year. We will continue to focus on further improving our margins and expanding this exciting opportunity.

In conclusion, we are pleased with our performance in the third quarter. Our branches clearly understand the Company's focus on initiatives such as improving return on capital, managing rates and focusing on customer needs. Their efforts are largely responsible for the positive third-quarter results you've seen here today. And with that as a business overview I will now pass it back over to the operator to open up for Q&A. Thank you.

(OPERATOR INSTRUCTIONS). Philip Volpicelli, Goldman Sachs.

Thank you very much. Just want a little more detail on the fleet and the directions that you give us in terms of CapEx. Could you give us a couple more decimal points on the actual original equipment cost of the fleet past the 4.1?

This is Michael, Phillip. It's 4.136.

Great, that's very helpful. And then as you look into 2007 and you're going to reduce certain -- the amount of spending, are there certain types of equipment that you will spend less on and others that you'll spend more on? Or could you give us a sense of how that's going to break out?

Products that are related to residential and/or earth moving equipment have historically -- over the past year have been defleeting. Currently we're down $30 million year-over-year on our earth moving equipment and we'll continue on that pace. Areas that we will expend on obviously will be the trench, pump and power as well as in some aerial lifts. And other related products are related to small tools.

That's great, thank you. And then in terms of the fourth-quarter performance here, can you give us a sense of how things are going? We're a little ways through it; it seems like utilization was a touch lower and rates at 5% was good. Just wondering how those two are interplaying as you go through the fourth quarter here?

It's obviously too difficult to call the fourth quarter yet, but the month of October looks like our overall revenue would be up around 10%; rental revenue up just about the same as it was at the end of the third quarter.

Okay, great. Thanks, guys. I'll get back in queue.

David Bluestein, UBS.

Wayland, as you try to balance your capital spending against your expectation of 2007 rental rates, I guess the question is you're expecting to spend another 100 to $125 million in growth CapEx, what is your thought in terms of the 2007 rental rate that you can capture at that level of cap spending?

It's again a little difficult and a little premature to try to answer that. I think we'll know better when we go through our planning cycle. But we will continue to improve our rental rate as we move into 2007 probably at a slightly lower rate than we're improving this year.

Okay. Next, what are you seeing in the used equipment marketplace?

So far it's holding up reasonably well, although you're seeing some signs of some equipment receiving a little softer prices. But as you noted, our gross margins for equipment sold during the third quarter and remain pretty strong. I would expect that that would drift down a little bit as we go through the next several months.

Which were the weakest machine types?

David, this is Michael. One of the areas that we're seeing some declines in pricing with regards to used sale prices is related to earth moving equipment and that would be the large excavators and some of the backhoes.

But none in the small stuff?

Some of the small compaction equipment is still holding up its value. We're not seeing any declines in that market area. It's too early to tell if we're going to see any further declines as we go through the winter. There's a seasonal portion to that; however, what we're experiencing today is really in the heavier, larger earth moving equipment and also related around the backhoes.

And then switching gears, and I'm not sure if it's too early or -- if you don't want to touch this I understand. But what are you seeing in terms of price expectations from manufacturers in terms of your '07 CapEx? In other words, what kind of price increase or decline are you expecting to pay on your CapEx purchases?

I would see a blended mix, coming in somewhere in the small single digits. Obviously there's going to be a change due to the engines with the Tier I engines and what impact that will have. There's also some components increases. But overall we will be very aggressive in negotiating with our vendors as we go through the plan year and we would expect small single-digit increases.

Okay. And then the last question. The negotiated supply agreement, who do you expect will be taking lower prices? What categories of equipment do you expect to be able to take all that cost out of?

This is Marty. I think those comments were really related to our strategic sourcing initiative, not so much to equipment.

Right.

And that is a wide variety of things that we buy is a total spend of $1.2 billion in the non-CapEx category. So we are systematically going through in waves and sourcing in a programmatic way all of those categories.

Is a IT, is it pencils?

It really is everything. One of the early waves was package delivery, just to name something. And so --

Tires, batteries, computers, telephones -- just really -- uniforms that our mechanics wear. Just a real potpourri of items that are necessary to run the business.

And the vast majority of that will go through cost of sales and SG&A -- [this area a big slug] through SG&A?

I think you'll see more of it fall in the gross margin line, but it will have a positive effect on SG&A as well.

All right, terrific. Thanks a bunch.

Lionel Jolivot, Barclays Capital.

First of all, I think you reaffirmed your guidance for this year for (indiscernible) $1.1 billion. I'm just wondering, can you give one more decimal because on an LTM basis you're already at $1.1 billion. Are we talking 1.1 or $1.14 at this point?

1.10.

Okay. And second thing, you talked a little bit about your different markets and volumes that are kind of flat to slightly down in California, in the Midwest, in the Northeast. What's happening in terms of pricing there? Are you still able -- I know that you mentioned in your comments that you were trying to stay focused on pricing even if it comes at the expense of volume, but how is pricing doing in these states?

It varies across -- this is Mike, by the way. It varies across the country and also in Canada as well. Really when we're seeing high demand we're able to continue to push forward price increases. Areas where we have a high return we have -- to some degree need to go after and push volume because our returns are so high. In other markets where we don't get an ample return on our investment we've actually either downsized our fleet and/or closed locations and moved the fleet to other parts of the country.

So I think that we have a program that is very robust, we go through continuous training at all of our branches, all the way down to the coordinators as well as the salesforce. Everyone is in tune with driving return on invested capital.

Okay. And then how should I read the decline in professional fees this quarter? Does it mean that -- I know the SEC inquiry is officially still ongoing, but does it mean that you're not really spending any time and money on it anymore?

No, we continue to spend money on the SEC inquiry, but at a reduced low. I think Marty mentioned in his opening comments that our year-over-year decline was like $6 million from third quarter of last year.

Lionel, that decline will continue in the fourth quarter, because as you remember, we had significant spending in the fourth quarter of '05.

Just backing up to your EBITDA question, I gave you a fairly flippant response, but 1.1 is meant to be a single point. We are not -- that is what our expectations are. We don't expect -- it is not like a range. We're going to go from 956 million last year to 1.1 billion this year.

That is perfect. Just last thing, you generated a lot of free cash flow this quarter and you paid down a fair amount of debt. It seems that you will continue to generate free cash flow in Q4 and probably next year. I'm just wondering what are the priorities at this point in terms of free cash flow. (indiscernible) seems that -- you have been very, very quiet on the acquisition front for a year. Should we expect you to start spending (indiscernible) again on these acquisitions?

I would say we have given guidance in the past that we would like to acquire about $100 million worth of revenue by way of acquisitions each year. We have been a little slower than that this year. I think we'll probably end the year maybe 40 -- maybe 50, $60 million worth of revenue acquired.

We are ramping up, so as we go into 2007, I would expect to see that $100 million revenue achieved or maybe slightly more than that. Acquisitions have a tendency to happen when the stars line up, and the don't always occur exactly when you want them to. But I think if you look to the next few years, thinking in terms of $100 million in acquisition revenue year would be about right.

Okay, great. Thank you very much.

Joel Tiss, Lehman Brothers.

Can you guys give us just a little more of a hint about your CapEx outlook for 2007? If we guess that it would be in the run rate of what you're doing on the gross CapEx, is that reasonable or is it going to be more like flat? Can you just help us there a little bit, please.

We spent $855 million on the fleet this year and that included someplace -- or that will include someplace between 140 and $150 million of growth capital. If you drop the growth capital to say 100 to $125 million you would take that off of the $855 million number and see slightly lower growth -- slightly lower total capital next year.

Just to add to that, the lease buyouts are included in maintenance capital so you have to adjust that number. We are not planning on aging our fleet, so maintenance capital should be consistent with keeping our fleet age at a constant level.

Okay. And also historically the CapEx had been front-end load, do you expect that to happen again?

This is Michael, Joel. No, we will not be doing that as we did last year. I think it really was because -- if you go back last year the demand that the manufacturers received, their lead-times were out. The lead-times that we're seeing today are almost immediate. There are a few categories of equipment that relates to the Tier I engines and some componentry. But by and large that's about an eight-week window so we're not going to do any large purchases in advance.

Okay. And lastly, are there any categories of equipment that you think the prices might actually go down a little bit and then I'm done? Thank you.

Joel, it's still too early to tell. We're still going through our plan process. Once we get all of our data collected we will, as I said earlier, aggressively go after. Again, it's too early to tell.

Thank you.

Phil Gresh, JPMorgan.

Just another question on the pricing. I realize this might be a difficult one, but can you talk about how you view your pricing relative to your competitors? Are you seeing competitors follow your lead, both larger and smaller competitors? And how much would any kind of competitor reaction impact your thoughts on pricing for '07 given the volume declines we saw here in the third quarter?

My sense is that a number of our competitors are following what we're doing on pricing. We picked that up on public call reports even where they're subsidiaries of other companies. But my sense is that the leading competitors are more or less raising rates in a comparable manner. That obviously will vary from location to location across their business.

I think in terms of volume -- or losing volume, where we are is because we have return on our fleet that is not acceptable. We're not getting a return on invested capital that's commensurate with what our expectations are. And we are willing to walk away from some volume at the expense of raising our rates and we'll continue to do that as we move through 2007.

Okay. A couple of other questions. Professional fees again, it was actually flat sequentially. I guess I expected to see a bit more of a decline versus the second quarter. Do you expect it to kind of be at these levels again in the fourth quarter? Or with the SEC cost going slightly lower should we expect some kind of decline there?

Yes, it should decline a little bit in the fourth quarter.

Okay. And on contractor supplies, what's the time frame for getting margins back to the mid 20% type of range? Do you think that can be achieved in the next couple quarters or is that a longer-term goal?

I think you'll see a gradual improvement as you go through the year. We finished a little over 21% this year. I think if you would kick that up a point or maybe a point and a half for full year next year that would be a reasonable ballpark to operate within. And then that kind of growth in the following year or two.

Okay, that's helpful. And then last one is used equipment sales for the fourth quarter. You had previously said for the full year 300 million which would imply a decent follow-up in the fourth quarter. So have you bumped up your expectations for full year used equipment sales at this point then?

Yes, we have. Our used to sales should come in somewhere between about 320 -- 330 this year up from 300 last year.

Okay, that's it. Thanks.

Eric Autio, Buckhead Capital.

Good morning and thanks for the detail on the outlook for the cost savings and procurement initiatives. Could you give us a little bit more information around how much costs these are incurring to implement? Is it a net neutral now and where will that be going forward?

This is Michael. The costs right now we're incurring through this year as we go for, it should be net neutral -- actually a little positive this year, but really our pickup will be into 2007 and beyond.

Is it systems expenses? Are you going through Rental Man? How is that working?

Right now a lot of the cost savings is just negotiating, it's collecting all of the data and going through, as Marty mentioned earlier, on just deliveries. We can centralize all of our deliveries and track that today. We are going to improve our Rental Man to accommodate all of the features so that we can capture the cost savings. But that's something that is ongoing with the organization and it will be more than amply offset by the savings that we get.

Great. And then your view on traffic control seems to be gaining some traction. Would you explore monetizing it? And if so, where would the proceeds best be served?

I think the answer to that is we, just as a policy, do not comment on either divestitures or acquisitions prior to an event taking place.

Okay. And then just real quick on the SEC investigation, any new or recent requests for information from them?

I would say -- repeat what we said in our press release, nothing new to report.

Okay, thanks very much.

Karru Martinson, CIBC World Markets.

Good morning. Following up on the earlier acquisition question, are we seeing a change in acquisition pricing or are the multiples remaining relatively constant there?

I would say the multiples are relatively constant.

Okay. And in terms of equipment revenue sharing that you generated at 12.5% this past quarter, do you have a target that you're looking at in terms of growing that portion of the business?

Basically that's going to vary from season to season. Of the 12.5 I think we peaked at 13.2 -- I think that was the highest that we ever achieved as a company. And it will kind of go back and forth within that range. A lot of that depends on demand for equipment in a given area. So we don't specifically target trying to get up to a level, but I think you could think of it being pretty constant at the level that we're currently operating in -- maybe a little upside opportunity in it.

And in terms of [safety LU] and the potential for California infrastructure bonding initiatives on the ballot and so forth, what are you seeing in the market for California? You mentioned that it was flat as a residential; non-residential I would assume would be growing rather nicely to help offset that.

The safety LU -- which T21 was a lot easier to (multiple speakers) remember. But safety LU will have a benefit I think for us in 2007, but not so much in California only because our California operations for traffic control is a di minimus part of our total traffic control business. We expect we'll see a stronger benefit in states like Illinois, states like Texas where we have a very strong position and they will get more of a safety LU benefit next year.

And just lastly, in terms of your outlook on nonresidential construction, McGraw-Hill was talking about a 6% increase in 2007. Is that footing with kind of how you see the markets evolving next year?

I think mid single digit growth is about right. We obviously listen to what Bob Murray at McGraw-Hill says. We follow what Reed says. We also use Maximus as an adviser and I think they're all hovering around pretty much the same level, 6 to 7% kind of growth in private nonresidential construction and then maybe a little softer in 2008.

Thank you very much.

Matthew Shefler, ISF.

Could you comment on store openings, this year and next, what you're thinking? And also given the performance you've seen in the field, can you provide any update or comment on how much of the business you think today is related to residential construction? Thank you.

Let me stay with the cold starts, I'm not sure how to tie it into the last part of what you said. But cold starts are very much on track. We opened 37 cold starts in 2005. Those are doing very well. Our operating margins are now in about the 15% range than the ones opened in 2005. If you go back to the ones we opened in 2004, the operating margins actually slightly exceed 20%. Obviously Marty commented that we're going to open up 35 this year; we've actually opened up 29 through the end of the third quarter. So we'll hit the high end of the range that we guided at 30 to 35 and they're pretty much on plan.

We don't plan, by the way, for a store to -- we essentially plan for them to break even during the year that we start them up, so we're getting no margin improvement. By the way, that also affects our return on invested capital because we'll put this year close to $70 million (technical difficulty) not to benefit the business today, but because it will have a material benefit on the business as we move through the next two to three years. And that's something we're constantly doing.

We're looking at how you grow this business not just in the year that you're in, but how you position the Company for growth many years out. The same is true with contractor supplies. We've made a rather significant investment in that business, again not so much for the benefit (technical difficulty) for the business today, although that is improving, as Marty commented on. But for the large opportunity that we see over a much longer period of time.

And next year, any thoughts there? And the other question was really a separate question which was -- as you've looked at the recent performance of your businesses, do you have any different take on how much of your total business is residential construction?

I'll answer that one first and then come back to the second part of the question. Residential construction represents someplace between 5 and 10% of our total volume. It is, as Mike said, stronger in California. We believe in California that might be a little closer to 20% of the total volume that we have. That's unusual and I think it has to do with the nature of the stores that we have in California. Almost all of our stores there are open seven days a week which is a little different than we operate the rest of the business at.

Now cold starts next year, it's premature to comment on that. We're going through our planning process -- we're right in the middle of it in fact. We'll give you a very much clearer picture on that when we get together on the next conference call.

Thank you.

Yvonne Varano, Jeffries.

I was just wondering if you could comment on your nonrental depreciation and amortization expectations for '06 and why the drop in the 3Q?

We reclassified our delivery fleet up into rental and so we correspondingly reclassified the depreciation from nonrental into rental. Our thinking is that the delivery fleet is revenue generating and it's more appropriately classified in gross margin. So you'll notice that the -- about $100 million of assets moved up from VP&E into rental fleet and correspondingly the depreciation moved up. There is no change in the totals, we didn't sell anything, nothing in the business changed.

Okay. So for the year it should continue to trend at that 10 million type of range?

Yes.

And then just on your capital expenditures when you talk about the 100 to $125 million, is that all fleet or is some of that part of the cold starts?

The cold starts are included in the growth capital number. So it takes about $2 million to open a cold start. And so as Whelan said, in the 100 to $125 million there is the second year capital for the stores we're opening this year which is typically another $1 million at least that goes in on top of the first two, and then there would be incremental capital for cold starts we're opening in 2007.

As I look at that 100 to $125 million, how much of it is actually fleet?

That is all fleet. We don't classify any non fleet as growth.

Okay. Great, thanks very much.

Scott Quigley phonetic, Wells Fargo.

Could you guys provide us with some guidance with respect to your plans to pay down debt? In particular the term loan which you paid down $400 million of in the last quarter?

Right. As we've generated more cash in the business we've been looking for opportunities to delever. Our capital structure is somewhat complex in that we have an existing swap portfolio and we have a lot of costs hung up on the balance sheet with respect to certain debt issues. So the two initiatives that we've taken so far being the QUIPS partial redemption and the $400 million on the term loan were effective ways to use the cash we have available right now.

We are looking and will continue to look for additional opportunities to delever. I might also note that the Company has not entered into any new operating leases for equipment in several years. So as Wayland mentioned, our liability for operating leases continues to drop. As the old ones run off, we buy out the equipment. And on a current basis, we are paying cash for all of our equipment.

Over the last several years, we have reduced the amount of operating leases we have by close to $0.5 billion.

Okay, thank you.

Alex Blanton, Ingalls & Snyder.

Good morning. Just a couple of housekeeping things. The 158 in rental CapEx, does that have any buyouts in it for the quarter?

Yes, the rental CapEx in the quarter -- do we know the buyout number -- the year to date is going to be $58 million for the total year.

I think we did 32 million in the quarter.

I'm not clear on what you just said because several people were talking. What is your year-to-date forecast now for CapEx? 855 you said? Hello?

Yes, it is $855 million.

How much of that is buyout?

Of that, $58 million would be buyout.

Okay. What is the year-to-date figure for the buyouts?

Year-to-date figure for the buyout is about $46 million.

And how much of that was in the quarter -- in the third quarter?

A very small amount in the third quarter.

Okay. So most of the $158 then is new equipment purchases.

Oh, yes.

Okay. So you've reduced your forecast for CapEx without the buyout down to 797, I guess it is? It was 810, so it has gone down a little bit.

A little bit, that is right.

And you have -- okay, so I can calculate from that what you are expecting for the fourth quarter; it's the difference. You mentioned that -- I missed this part -- the heavier earthmoving and backhoes were doing what? I think you were talking with --.

Alex, this is Michael Kneeland. Two things I mentioned on backhoes and heavy earthmoving, one of which is we are seeing new sales prices decline in that segment of the market; that is one. The other item is that we are defleeting, and we have defleeted about $30 million in the earthmoving category year-to-date.

So used prices are declining, and you are reducing this as a portion of your fleet.

That's correct.

Now, you mentioned heavy earthmoving. That really doesn't sound like housing related stuff. Is it?

Well, part of it is. If you think about it, you have to go out and you have to excavate the land in order to build homes on, and have to go and develop all of this land.

So the defleeting that you're doing is related to the housing, even though that is a small portion of your total.

In part. The other part of it is we're not getting return on our invested capital.

Okay, but we are not talking about highway construction and things like that here.

No.

No, okay. We are talking about building construction, earthmoving connection with building construction.

Yes, I think Mike's answer is important to note, the major reason that we are defleeting -- and we are not defleeting in a significant way. But the major reason is you don't get the kind of returns on that capital that we get on other pieces of equipment that we can invest in. I think the residential has some impact on that, but it would be the lesser of the two.

But residential really hasn't had a lot of impact if you look at your real growth. If you look at the 9.3% revenue increase and rates on that are up 5.3%, that is 3.8% real growth despite housing being down.

Yes. As we've said, housing is probably maybe 5% to 10% of our total revenue stream, and even if it is down, it doesn't go away. So we are continuing to --.

But whatever it is, you are reducing your purchases of equipment related to that.

We are. We are reducing -- I think it is better to say we are reducing equipment where time utilization is not high and we are not getting good return on it, some part of which is driven by the decline in the housing market, but I think it is a less significant part.

So that sort of leads into my next question which is on the lead-times. You mentioned that lead-times have come in a lot, but what about aerials, what are those lead-times on aerials? Because that is an area you are going to actually be increasing your investment, right?

Yes, we are in some areas; in some categories of the aerial equipment lineup, yes. Now, inside of that, the larger units where you have the tier-one engines, there are some delays. But I also mentioned that the delays are really eight to ten weeks out in duration, which is substantially less than what we were seeing in the beginning of this year where it is it was out three and four months at a minimum.

Okay. So if you wanted something in the second quarter of 2007, a large boom, would you be ordering it today or would you wait?

I would be waiting.

You would be waiting until February, March, or something like that?

Every month we monitor lead-times. Our fleet department communicates to our field. And to the extent that we have a demand and we start to see demand increase and our return on invested capital is increasing in these categories, we will continue to order equipment. At that time frame if, in fact, the lead-times is only eight weeks, we will order in January for sometime in March, and so forth and so on.

Yes, okay.

We are going to invoke the two or three questions.

That is it; I am finished.

Operator, we have time for one further question.

Philip Volpicelli, Goldman Sachs.

I just wanted to touch back on the residential/non-residential thing. In terms of projects that may be classified as non-residential, for instance, strip malls and Home Depots and things of those like, do you have a sense of how much of the business is related to that kind of non-residential business that might come after residential developments are built? And then what the delay or the lag is, in terms of those being put into place?

We don't track by projects. We classify by SIC code. However, when you look at an SIC code, a plumber, we don't go through them and determine exactly if this plumber is working on a hotel versus a casino versus anything else, or educational. What we do is go through and find out through the SIC code, we track it back, and we also have an open relationship with our customers. We also track the job locations, where these jobs are, the type of job, actually locations. But we don't track the exact job itself, what type it is.

I think it is safe to say, though, we have not seen yet a significant slowdown or a slowdown in the areas that you were talking about; the things that you typically find in a strip mall or a shopping center. That may well be in front of us, but we are not seeing that yet today.

And then there are a number of areas that are going like gangbusters. Hotel growth is really just very, very strong, educational institutions. So it's just a number of areas where we continue to experience quite solid or strong growth.

Can I just slip one last one in? In terms of your California business, you mentioned that it has a larger proportion to residential. Can you modify those locations to react to the slowdown in residential and more non-residential work there?

Sure. We are constantly with all of our branches kind of toing and froing. We move a lot of equipment around. We share equipment between branches that Mike talked about. We will move anywhere from 200, $250 million a year from one region to another region, pulling equipment out of branches and/or selling equipment off as Mike has talked about.

So to the extent that we are seeing a little bit of a slowdown there -- and by the way, it is slowing down, but the revenue in California is, as Mike said, flat. So it's not like it is dropping off the edge of the earth. We will cut back on capital we have in those branches and redirect that capital elsewhere.

Great. Thanks, guys.

Thank you very much. Operator, I'm going to close off the call now with just a few summary statements. First of all, we were very pleased with the quarter. Our earnings per share growth of 20% was something we felt very good about. Also the 16% increase that we saw in EBITDA, and importantly crossing over 30%, 31% EBITDA margins for the business.

We also felt good about seeing the 2.3% improvement in ROIC. That's something we have been working on now for a considerable period of time. We want to continue to drive that up, and we will talk about that more on future conference calls, but it is clearly going in the right direction.

SG&A as a percent of revenue declined, as Marty pointed out, by 1.2% down to 15.3% for the quarter. That is also something we have talked about on previous calls and are continuing to work on, and expect to see further improvements as we go through the balance of this year and into 2007.

Our revenue growth up by 9.3%, we think was solid performance for the Company and we were encouraged by that. Then finally, a 25% improvement in operating income was something that we felt really very good about.

So with that, operator, I'm going to close the call off. I would like to thank everybody that joined us today, and particularly those of you who had questions for us. Thank you very much and have a great day.

Once again, ladies and gentlemen, we do thank you for your participation on today's conference. The conference has concluded. You may all disconnect, and enjoy your day.