聯合設備租賃 (URI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals first-quarter 2007 investor conference call. Please be advised that this call is being recorded and is copyrighted by United Rentals Inc.

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 first-quarter 2007 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, 2006, as well as subsequent filings with the SEC. You can access the Company's earnings, as well as its SEC filings, on the Company's website at www.UnitedRentals.com using the link captioned, Investor Information.

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' first-quarter 2007 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; Michael Kneeland, Chief Operating Officer; Marty Welch, Chief Financial Officer, and Chuck Wessendorf, Vice President Investor Relations and Corporate Communications.

I will now turn the call over to Mr. Hicks. Mr. Hicks, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us on this call this morning. I am going to open the call by covering the highlights of the quarter, and I will also talk about our outlook for 2007. Marty Welch will then review our first-quarter financial performance and provide some additional detail on how we see 2007. Mike Kneeland will follow Marty and share some thoughts about our current business environment and more about what we expect to see for the rest of this year.

Now, as I think all of you are aware, last month on, April 10 we announced that we would be exploring a broad range of strategic alternatives to maximize shareholder value, including a possible sale of the Company. We also said that we did not expect to disclose any further developments regarding the process unless and until the board has completed its evaluation or approved a specific transaction. When we begin the Q&A session in the call, I would ask you to understand that we will not be taking questions on this subject.

Now turning to the business, we performed well in the first quarter and consistent with our outlook for the full year. Revenue from continuing operations of $841 million was up 5.3%, which is very close to the growth we experienced in the fourth quarter of last year. Diluted earnings per share from continuing operations for the quarter of $0.30 grew by 30%. Our earnings per share were a record for the Company for a first quarter. A major contributor to our strong earnings growth was our ability to hold SG&A expense in check while growing our revenue. Our SG&A expense increased by only $2 million in the quarter and improved as a percentage of revenue by 7/10 of a percentage point.

Our reduction in interest expense, largely because of the $450 million debt reduction we accomplished last year, also contributed significantly to our results. Mike will talk about this later, but he will go into some actions we have been taking that should help us achieve continued improvement in our SG&A ratio, as well as other cost savings to improve the performance of the business during the balance of 2007.

We feel good about the current economic environment. During the first two months of the quarter, our time utilization was actually down slightly, but throughout March and April we started to see a year-over-year improvement, with April being up a couple of points, and that is on a larger fleet.

Turning to the full year, we are affirming our outlook for earnings per share in the range of $2.65 to $2.75, and that compares with $2.28 that we earned in 2006. That range is also predicated on revenue expectations this year of $3.85 billion.

We also plan to generate about $150 to $200 million in free cash flow while investing a total of $960 to $980 million in capital, including about $175 million of growth CapEx. Now we are taking our growth capital up by about $50 million compared with what we said on the last call to take advantage of the strong underlying demand evidenced by the improvement in time utilization that we are seeing on a larger fleet.

Finally, we have consistently talked about a number of important goals -- driving profitable revenue growth, increasing our operating margins, generating free cash flow in any environment and improving our return on invested capital. As we continue the process that we announced last month to explore a broad range of alternatives to maximize shareholder value, I believe the Company is well positioned to achieve continued improvement against each of these goals.

And with that, I will turn the call over to Marty Welch. Marty?

Thank you, Wayland, and good morning, everyone. Wayland has given you some of the highlights of the quarter and has covered our progress on several of our key initiatives. Now I will discuss our results for the quarter and review our outlook for the balance of the year.

As you know, we recently completed the sale of our Traffic Control business, and our first-quarter results reflect Traffic Control as a discontinued operation. Unless otherwise indicated, my remarks this morning relate to the performance of our continuing operations and exclude any impact associated with our Traffic Control business.

Let me start by discussing our results on three fronts, which we have been tracking as focus areas for our business.

First, growing overall revenues. Total revenue for the first quarter increased 5.3% to a record $841 million and in line with our forecast of $3.85 billion for the full-year.

Second, gross margins. I will talk more about this in a moment, but our gross margins of 30.8% during the quarter decreased 50 basis points from 2006, primarily reflecting reduced equipment rental and contractor supplies gross margins. Although gross margins declined, our operating margin of 11.8% was flat year-over-year due to improved SG&A leverage.

Third, improving return on invested capital. In 2005 we initiated reporting of ROIC as the best indicator of how efficiently and effectively we're employing capital and as a metric that is essential to increasing shareholder value long-term. This critical metric was 14.4% for the 12 months ended March 31, 2007, an improvement of 100 basis points from 2006 but down by 30 basis points since year-end.

Now let me turn to the quarterly P&L on a segment basis. In our largest segment, General Rentals, we continue to see strong overall performance. Revenues were up 6% to $792 million. This growth reflects improvements in our rental rates, which were up 1.6% in the quarter on a larger rental fleet and a 2.6% percentage point increase in same-store rental revenues as compared to .7% increase in the fourth quarter of 2006.

During the quarter our dollar utilization of 56% increased 10 basis points from 55.9% in the first quarter of 2006. Overall we were pleased with General Rentals revenue growth. In a moment Michael will give you some details on how we performed in various geographies.

In addition to seeing overall topline improvement, the profitability of General Rentals also improved. Operating income increased 10% to $89 million as compared to $81 million in the prior year period.

Turning to our Trench Safety, Pump and Power segment, revenue for the quarter of $49 million was flat year-over-year, reflecting softness in the housing market on the Trench side and no repeat benefit from Hurricane Katrina in the Pump and Power business.

Now returning to consolidated profitability, our equipment rental gross margins of 32.6% decreased 80 basis points versus the prior year, reflecting increased labor and benefit costs. These were partially offset by a 1.7% increase in rental rates and a 10 basis point increase in dollar equipment utilization.

Contractor supplies gross margins of 17% decreased 2.3 percentage points versus the prior year period. This performance was below expectations and reflects higher freight costs, as well as a change in product mix as we sold a larger portion of commodity products. We expect freight costs to return to normal levels as we go through the year.

During the quarter, on a dollar basis, SG&A expenses of $148 million were essentially flat compared with the 2006 quarter, but decreased by 70 basis points as a percent of revenue to 17.6%. We achieved this SG&A improvement as increased salaries and benefit costs were offset by the benefits realized from a number of initiatives, including SSI and our region realignment.

Further, we achieved a $7 million reduction in the level of professional fees for restatement matters.

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 additional improvement over the balance of the year.

Our continuing operations effective tax rate for the quarter was 36% as compared to 37.5% in the prior year. Our first-quarter rate reflects a tax provision benefit we received of $1.4 million or approximately $0.01 per share related to the release of a tax valuation allowance. Our continuing operations diluted EPS for the quarter was $0.30 on a share count of 110 million shares compared with $0.23 on a diluted share count of 108 million in 2006.

Looking at our consolidated cash flow for the quarter, our 2007 cash flow from continuing operations was $127 million compared with $221 million in the 2006 period. This year-over-year reduction was largely the result of working capital items as our Accounts Receivable provided only $3 million of cash in 2007 as compared with $71 million in 2006. Accounts Receivable provided less cash in 2007 because of higher year-over-year sales for the month of March and a slight increase in days sales outstanding from 54 days in 2006 to 56 days in 2007.

Turning to capital expenditures, we invested $265 million in our rental fleet compared with $250 million last year, an increase of $15 million. Our nonrental CapEx for the quarter was $31 million, a $21 million increase versus last year. Free cash flow usage for the quarter was $85 million as compared to free cash flow generation of $44 million last year. The reduction reflects several items I have already discussed, including lower cash generation from Account Receivable, increased CapEx and higher year-over-year cash tax payments. Our EBITDA margin of 25% was essentially flat as compared to 2006.

Let's now take a moment to review the balance sheet. Total assets were $5.4 billion, including the net book value of our rental equipment of $2.7 billion. Our total debt, including subordinated convertible debentures at March 31, 2007, was $2.7 billion, unchanged from December 31.

As of May 1, we had borrowing capacity under our revolver and Accounts Receivable securitization facility of approximately $754 million.

Before turning things over to Michael, let me discuss our expectations for 2007. As Wayland mentioned, we are reaffirming our previous guidance and expect diluted earnings per share in the range of $2.65 to $2.75. 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.

We also expect revenue of approximately $3.85 billion and EBITDA of approximately $1.2 billion. Our free cash flow outlook is $150 to $200 million after total capital expenditures of between $960 and $980 million. We have adjusted our ROIC outlook to 15.4% for the year, down from 15.7% as we expect to grow our asset base faster than previously anticipated. Given the higher timing utilization we have seen in March and April and opportunities we have seen in the marketplace, we believe this is the right decision for our business.

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

Thanks, Marty. Good morning, everyone. Our first-quarter results reflect strong end market demand from private nonresidential construction, as well as progress on several key initiatives associated with our strategy to curb costs and accelerate earnings. I will talk more about these initiatives in a minute.

The positive operating environment of the last three years continued in the first quarter. Private nonresidential construction spending grew 15.6% compared with the first quarter last year. We expect that our primary end market will continue to improve this year and, in fact, through 2008, although we do agree with industry analysts who feel that the growth rate will moderate.

During the quarter the strongest demand for construction equipment came from the retail, manufacturing and health care sectors. These are the same sectors that drove demand last year, and they are a powerful revenue base for us, not only for new construction but also for equipment used for facility expansion, refurbishing and maintenance.

In our own operations, we saw year-over-year growth in most areas of the US and Canada with the exception of the Southwest and Southeast regions.

Turning now to performance by region, during the first quarter, our strongest regions were in the Gulf, the Northwest and aerial. Demand for equipment in the Gulf and Northwest regions continues to be very positive, particularly in the oil refinery, health care and manufacturing sectors.

In our two aerial regions, larger private nonresidential construction projects continue to fuel growth nationwide. These projects typically rent multiple machines for months or even years at a time. The Southwest and Southeast were sluggish in the first quarter. In California, which is part of our Southwest region, we have a high concentration of general rental branches that serve the residential construction market, which has been weak to moderate.

In the Southeast, Florida showed a slight decline after several years of explosive growth. We saw the start of this in late 2006. Construction related to hurricane damage has eased, and we've also seen a reduction in condo construction. However, there are still areas of sustained growth in commercial construction, particularly in South Florida.

Canada as a whole remained strong for the quarter, led by the construction activity in Alberta and British Columbia. The Midwest and Northeast regions, which lagged the rest of the market in 2006, have begun to show modest growth. Business conditions in both regions appear to be improving.

Our Trench Safety, Pump and Power business was flat in the first quarter, reflecting a quiet storm season and a slowdown in residential construction. This segment continues to be an excellent business for us with relatively stable demand, high margins and lower capital requirements.

Now I would like to turn to a discussion of our initiatives to grow the business, while improving our gross margins and our SG&A expense ratio. We continue to intensify the management of our larger rental fleet. Our fleet of $4 billion was approximately $100 million larger than a year ago, and at the end of March, the average age was 38 months, two months younger than a year ago.

About 30% of our planned rental CapEx for the year, or $265 million, was deployed in the first quarter. Most of this fleet was absorbed into our branches by the end of March when we began to see time utilization starting to trend upwards compared with last year.

When we improve our time utilization year-over-year on an expanded fleet as we're doing now, it indicates that there is a strong underlying demand for our equipment. Our branches are doing a good job of capitalizing on that demand, but we still see a lot of room for improvement, which is why we have been honing our focus on the way we deploy rental assets. More effective fleet management is critical to accelerating earnings and improving return on invested capital.

As Marty mentioned, our outlook metric for return on invested capital this year is 15.4%. Our branch teams understand the importance of achieving an optimum balance of rates and utilization to extract the highest possible returns on our fleet. We're not there yet, but we are making good progress.

Sales management is another key focus for us as we pursue not just more business but more profitable business. More than once this morning you have heard me refer to the strong underlying demand for rental equipment. United Rentals has a strong brand with widespread market recognition, not only with contractors but in niche markets and with consumers as well. Our brand is an asset that we can harness to increase our market position. As large as we are, we currently hold about 7 to 8% market share.

The realignment of our district and region platforms, which we discussed on the fourth-quarter call, is already contributing about $6 million in annual savings. In addition, our new field structure is able to operate more efficiently while providing better support for our field sales force.

Our district structure is now in a much better position to support future growth. We are currently evaluating additional ways to drive efficiency throughout our field platform so that more of each revenue dollar falls to the bottom line.

As Marty mentioned, we're also continuing to realize savings from our strategic sourcing initiative on non-equipment purchases. The Company currently spends about $1.1 billion on a litany of items such as IT communications, transportation, office supplies, parts and contractor supplies. Last year we realized $6 million in total cost savings from this program. In the first quarter alone, we saved about $3 million.

Although it is still very early in the process, our projected savings for the full year are in the range of $15 to $20 million. By the time the program hits its stride in 2009, we expect to realize $60 to $100 million in annual savings.

Now about three-quarters of these savings will improve our gross margins with the balance going toward reducing our SG&A expense ratio.

Now looking at contractor supplies, sales grew 13% to $94 million in the first quarter, although, as Marty mentioned, the gross margin was disappointing. We're taking a number of steps to improve this during the balance of the year, but despite the effort we are making, we don't believe that we can achieve the year-over-year improvement we had previously targeted. We recognize the need to improve the efficiency of the business and in particular make better use of our distribution centers.

In the first quarter, we brought down our inventory levels by 20% year-over-year and increased our inventory turns to 2.7 times from 1.8 times.

Now looking ahead for the balance of 2007, indications are that United Rentals and the customers we serve will be operating in a positive environment. We constantly take the temperature of the market conditions in our regions. We're very comfortable with what we see at this point. Based on the visibility that we have into 2008, we will continue to have a lot of large project commitments in-place.

As we entered May, time utilization was up more than 2 percentage points year-over-year, continuing a trend that started in March and April. Some of this improvement can be traced to our internal initiatives to optimize fleet, but also consistent with our feedback we have been getting from the field on market conditions. The nature of this business is that a successful company must constantly evolve along with opportunities. I'm confident that our strategy to capitalize on a range of business opportunities will improve our margins and accelerate our EBITDA growth.

On behalf of the entire United Rentals team, I would like to extend our thanks and appreciation to Wayland. Over the last nine plus years, he has brought enormous insight, experience, knowledge and leadership to our Company. I am grateful not only for his service, but for the fact that it has been a pleasure to work with him in building this Company. And it will be a privilege for me to lead it forward in June.

Now before I pass the call over to the operator for Q&A, I want to remind everyone the point that Wayland made earlier. Less than a month ago we announced that we were exploring a broad range of strategic alternatives to maximize shareholder value, including the possible sale of the Company. We also said at that time the Company does not expect to disclose further developments regarding the process unless and until the Board of Directors had completed its valuation or approved specific transactions. I would appreciate it if you would respect this so that we can make the best use of our Q&A time this morning.

With that, operator, would you open it up? Thank you.

(OPERATOR INSTRUCTIONS). Philip Volpicelli, Goldman Sachs.

First, I just want to wish Wayland the best in his future endeavors. When looking at the expectations or the guidance for 2007, the only thing that has changed is the CapEx has gone up pretty substantially, yet EBITDA and free cash flow stayed the same. Can you help me reconcile that? Has your EBITDA expectation gone up so it's 1.2 something as opposed to 1.2 flat previously?

Yes, I think it is a little bit of rounding going on there, and we're getting growth from time utilization and as compared to the prior year, less so from rate. And so I think those factors are at play there. But we do feel good about the direction of the business. Particularly in March and April we're seeing improvements in time.

I guess that is the second question. Most other participants have announced that they are going to cut CapEx in 2007 because we have seen very weak rental rates and the rate of increase there has been declining. Even one guy had negative rental rates in the fourth quarter. Has the entire industry seen a shift from March and April? Are you seeing that across the board, and do you think others will follow your suite and add more fleet, or are we at a point where too much fleet in the industry may push rental rates down further?

I think part of the answer to that is you have to look at each individual participant's CapEx over the last couple of years. We have been relatively steady and conservative in our CapEx. We've had a discipline of generating as Wayland said free cash flow in any environment, and so we are continuing to build our fleet and manage our fleet age in accordance with our long-term plan. I don't believe that you can necessarily compare our policy to others in that regard. We do feel good about the business, particularly since approximately the middle of March, and that is influencing our decision to layer in a little bit more CapEx.

Okay. And this is kind of touching close to what you don't want to talk about. But with what you're going on now, does that mean that you might pull back a little bit on making some tuck-in acquisitions, or are you still going to operate the business as if the strategic decisions were not going on?

We will probably hold back just a little bit on both cold starts and acquisitions as we work our way through the process. I don't think it would necessarily have a material effect on the full-year performance of the business.

Christina Woo, Morgan Stanley.

You have made some improvements in SG&A spending. Longer-term once you reach peak efficiency, what do you see as your SG&A target as a percent of revenue?

We have said that we would like to get our SG&A down to the range of 13, 13.5, 14% as we go through the next three to four years. I think that is a good goal, and I suspect we will be updating that goal every year as we look forward. It is a never-ending opportunity to try to chase costs down, and we are working hard to do that.

Why do you expect that your SG&A spending as a percent of revenue is so much higher versus the competition, which is more in the high single digit range?

You know, it is one of the values of having public comps today. We're looking at both companies and trying to understand better what they are doing that is different than what we are doing, and that should give us an opportunity to help us drive our costs down. I'm not prepared to speak to individual line items of comparison, but I will tell you we are learning things that will help us do this more effectively.

Okay. Great. You had also mentioned in the call that you had 15.6% growth in nonresidential construction spending during the quarter. Yet your revenue growth was only 5.3%. I'm wondering if you would have expected stronger growth in your core business given what was spending in the non-res segment.

I think there's a couple of things behind that. First of all, the 15.6% is non-inflation adjusted. So you're probably better off to look at construction put in place, which is a much lower number. That historically has run around 5, 6%. So that is part of it.

Part of it too, though, is what Marty said earlier. We have worked hard to try to balance the amount of investment in the business by way of growth capital, which drives revenue, along with improving our operating margins, our return on invested capital and by the way generating free cash flow. We just think that is an important thing for the business to do. And that will keep you from getting some of the growth opportunity that is out there.

Okay. One final question. We're midway through an expansionary period, and there has been growing investor attention in the equipment rental space. I recognize you won't talk about any specifics regarding your process of exploring strategic alternatives, and I'm not asking about that. But what I'm curious about is why the board has decided to explore strategic actions now?

I think the board has been frustrated as I have and members of management for sometime about the overall valuation of the Company. We have talked about it from time to time over the past few years and just decided that this is a good time for us to look at a number of strategic alternatives that could optimize shareholder value.

Scott Schneeberger, CIBC World Markets.

Could you guys speak a little bit to same-store sales? That was up sequentially. Maybe give us a month-to-month update? You talked about how you are seeing some strength in April and May. Are you seeing that in that metric as well?

Our year-over-year rental revenue of 3.1% came primarily from the rates. As Marty mentioned earlier, the first quarter we saw time utilization was relatively flat, down slightly by 0.4 percentage points -- 0.4 of 1 percentage point down. We are trailing up about a little over 2 points. We saw that through the month of April and into May. We don't give year-over-year guidance on same-store growth by month.

Okay. Shifting gears a little bit, contractor supply sales, you had mentioned a little weakness in the quarter. The freight costs you think that will work itself out over the year. But you mentioned product mix was part of some of the disappointment. Is that going to improve over the year? Is there something that you are working on there, just a little more color?

We were not disappointed with the contractor supplies performance in the first quarter. It is still a very large market. When you talk about product mix, product mix is really driven by our customer, and we have two areas, and I will break that down for you. You have got the commodities, which is the steel and rebar and things of that nature. Again, it is driven by our customer demand.

So what we have in place-- to improve margins--we are putting in place pricing guidelines by category of equipment -- not equipment, but category of product for our field. In addition to that, we are modifying and adjusting our commission structure based on gross margins, which should improve it.

Thank you. And a quick question on updates with business for the government. I know that is an area that you have made nice progress. Any updates there?

It is a good question. We have a GSA contract, and we kicked that off several years ago. Our growth for the government last year was up 219% on a year-over-year basis. We continue to see growth in that market as we educate the government, and we still see that as a very unique opportunity for United Rentals.

A final one if I could sneak it in. Could you help us thinking about NOLs and cash taxes going forward, just for modeling purposes and how we should think about that?

We expect cash taxes in 2007 of $126 million, and we have largely burned through the NOLs. And so, as you know when you put in new capital, it layers in incremental new timing differences. So to some degree it is difficult to model that out forward because it does depend on how much new CapEx we spend in each of the forward years. But for purposes of modeling 2007, you can use $126 million for cash taxes.

Joel Tiss, Lehman Brothers.

I wonder, can you talk about peak EBITDA margins as you implement all the different things that you are working on? Maybe four or five years down the road, can you give us sort of a measure -- maybe not the ending point -- but where could we be a couple of years down the road?

I would just say we will not give you line item detail on that, but we would expect to see continuous improvement, and we think we have substantial room for improvement in our EBITDA margins.

Okay. One sort of -- maybe a weird question. Is there any strategic advantage that you guys are feeling in the marketplace from some of your competitors having so much debt and maybe changing a little bit of their mindset toward paying down debt versus running their business or maybe not having as much availability for new CapEx and new equipment and all that? Can you just talk about that for a second?

I think most of the two competitors that you are referencing are going to manage their business I think pretty much the same way they have been managing it all along. They may have slightly greater focus on debt reduction, but it is difficult for me to comment any further than that. That is probably a better question for you to ask them than to ask us.

I will get the same answer. And then Mike, I wonder if you can just give us a sense maybe directionally what sort of evolution we could see and management style as you become the CEO and think about this business going forward? I know you are going to be polite and say Wayland did everything great, but give us a little bit.

I have worked closely with Wayland over the nine plus years, over the last three years very closely at a senior level. Our mission has been and will continue to focus on the customer. We have the resources and are putting an effort going forward to focus on our customers, thinking what the customer is -- you know, how we can get more of a share of his wallet. We are going to challenge our people. We substantially over the last nine years have improved the quality of our workforce. And then we want to drive value, drive value to our shareholders. We want to continue to make sure that we provide an ample opportunity to improve returns.

As far as the priorities, they have been consistent with our priorities, and that is to continue to focus on return on invested capital. We want to optimize our mix between rate and fleet, and then we need to drive efficiencies inside the business to reduce our expenses and improve our profitability. So it is going to be very much the same, and we are going to put our focus on the customer and our fleet optimization and return on invested capital.

John Hecht, JMP Securities.

With the incremental CapEx you discussed this morning, can you highlight what types of equipment you're focusing on with the incremental purchasing? And offsetting that, is there any type of equipment you are maybe more actively selling in the secondary markets at this point?

Just to give you an update, we have been spending more capital on aerial lifts. We have increased our aerial lifts up slightly on a year-over-year basis. We have been seeing a decline in our backhoes and large excavators, and conversely we have been putting capital into industrial forklifts and in mini excavators.

Okay. And then any changes relative to past comments about your expectations for nonresidential construction growth I guess within that on a regional basis? Beyond that, have you guys been reallocating your equipment portfolio from one region to another given some of those changes?

No. As I said earlier, private non-res is a 15.6 percentage increase. I gave you some color as far as the regional landscape. Obviously things change and things shift. We have been able to shift assets around. We will continue to do that. That is part of our optimization of our fleet between rate and time. We will continue to move fleet and make it very fluid between the regions, and we still see continuous growth in Northwest, Canada. We're seeing pockets of growth in the Gulf area, as well as the Northwest. And aerial has a lot of larger projects that are coming on board, and we will see that through the balance of the year and into 2008.

Okay. And the last question is, your leverage ratios have come down. Your credit metrics, interest coverage type ratios have improved year-over-year. And now you are discussing maybe holding back a little bit on the acquisition bolt-ons. Should we continue then to just expect you guys to improve the balance sheet, or is there any other mechanism we should expect you to use that excess capital or cash at this point?

I think the answer to that question will depend on the outcome of the evaluation of the strategic alternatives.

Seth Weber, Bank of America Securities.

Do you have an opinion as to why the business, why the utilization was lower in the first quarter of the year? Is there anything you can point to? Was it whether or just something, people holding back from an economic perspective? And has there been anything that you have noticed that has changed to kind of cause that to get better here recently? That is my first question.

I don't think we have hard data that would be able to respond to that in a way that would satisfy your curiosity. Our sense is that the year did get off to a slower start. Both Mike, myself and Marty have been in the field recently, and you have kind of got the feeling from talking to our people that the contractor's business was slow in picking up but has come back relatively strong in the last couple of months. Not hard data to help you with that.

Okay. Have you noticed on the used pricing, the used equipment, has the used equipment pricing also gotten better as the trends have gotten stronger?

We have seen pricing improve in some of the categories of equipment. Aerial equipment right now is very scarce, particularly in larger booms. We are seeing some softness in the areas that we're selling some of our larger items. But on balance I would say blended it was up -- what we're seeing in the marketplace on used sales is roughly flat to up slightly.

Okay. Thanks. Last question. Just in previous quarters you have given us the split, the age split between aerials and the general rental category. Can you give us that again?

Yes. Non-aerial is 32 months. Aerial is at 45 months.

(OPERATOR INSTRUCTIONS). Philip Volpicelli.

Just going back to the cost savings that you had outlined, I believe you mentioned the goal was 60 to $100 million by 2009. For some reason I had $150 million by 2009 in my head. Has that changed or has the outlook there changed?

No, this is Marty. We have always said $60 to $100 million. That is from strategic sourcing. That is the number we use there.

Okay. And then have you also given any guidance on savings from integrating the acquisition, the 250 acquisitions you guys have done into kind of more of a national platform? Have you ever given any guidance on what that kind of savings could be?

No, I think we're constantly looking at all of the categories of spend and looking at all of our business processes, trying to get better. But in terms of specific guidance, we have been speaking specifically only about the strategic sourcing initiatives.

And then just last question in terms of the guidance again for '07, so it sounds like utilization will be the biggest driver there, just up modestly. You're still expecting rates to be, I think you said in the past, low single digits, around 2%; is that accurate?

We basically had said earlier that it would be about 1%.

1%?

Right. And that we had hoped to shift more emphasis to driving volume. We've had 16 consecutive quarters now with rates up, and we are operating in most markets with historically high levels of rates. So one of the core messages from our own field organization was that if we have an opportunity to drive volume at higher rates, we ought to take advantage of doing that, and that is exactly what we are after.

Mike Marburg, Ramsey Asset Management.

Two quick questions, one around just a line in a filing that says part of your strategy is to go through acquisitions that strengthen or complement the existing assets. Is that in reference to just the bolt-on acquisitions that you have historically been doing, or is that part of this examining your strategic alternatives and may be related to a much larger acquisition?

That was in reference to bolt-on type of acquisitions that we have historically been doing.

Okay. And then in doing some channel checks, one of the things I have come across is people noting that there is increased competition from former entrepreneurs who were bought out in the late '90s or early 2000's but are now past their noncompete periods and have built up pretty good regional firms in Chicago and places like that. Have you guys started to see increased competition from those types of players, names that you would recognize?

I would not say that that is -- that we have seen much of a change at all in that regard. We have had a few former owners come back into the business. But the market has changed so radically from when we began to consolidate the industry in the late '90s that we really did not expect to see large numbers of former owners coming back into the business. As I said, we see some periodically that do, and that is fine. It is a big market, and we welcome competition in that market.

(OPERATOR INSTRUCTIONS).

Operator, I think this is probably a good time for me to wrap the call up, and I will do that. I would just like to make a few closing remarks.

As you know, I have announced my plan to retire at the annual meeting in June of this year. I would just say my involvement with United Rentals over nearly a decade now has been a really remarkable experience. I have served six years as Chief Operating Officer and almost three and a half years as Chief Executive. My time with this Company has clearly been one of the most rewarding business experiences that I have had. I have watched us grow from a fledgling startup company with pro forma revenue of $12 million in 1997 to the position of undisputed market leadership in 2007. During this period of time we have built an organization that consists of really great people, and that is at all levels of the business. We have people that have a passion for providing service to our customers.

I am also very pleased to past the baton onto Mike Kneeland. Mike has been instrumental in helping us shape our business strategy and in driving operational results. I have enormous respect for him, and I am confident that he will do a great job leading the Company in the future.

Now, although we have come a long way in the past several years, I believe we still have a very long way to go. I think the Company under Mike's leadership will continue to excel. Mike will focus, as you've heard him talk on this call and other calls, on gross margin improvement, SG&A improvement, and that will help us drive better and better results as we go forward.

Finally, I would like to take this opportunity just to tell you I really appreciate the interest and support that all of you have given the Company and myself personally over the last several years. I'm retiring from the business, but I do intend to remain on the board of United Rentals and serve as its Vice Chairman. So I won't be totally away from the Company or the rental equipment industry.

And with that, thank you very much for joining our conference call today, and I hope all of you have a really terrific day.

Ladies and gentlemen, this does conclude the conference for today. We do thank you for your participation. You may all disconnect at this time. Good day.