聯合設備租賃 (URI) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals first-quarter 2008 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 many of the comments made on today's call and some of the responses to your questions will 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 2008 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, 2007, as well as to its subsequent filings with the SEC. You can access the Company's press 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.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, and Marty Welch, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Thank you operator. Good morning, everyone, and thank you for joining us today. With me is Marty Welch, our Chief Financial Officer, and other members of our senior management team.

I want to open this call by discussing why our first-quarter results provide an excellent perspective on the impact of our new strategic plan, both financially and operationally. Next, I want to review what we've been seeing and hearing out there in the marketplace. And then I want to discuss our outlook. So let's start with the first quarter.

Last year at this time, we were still operating under our old strategy which pursued several lines of business. This year, we are focused on driving profitable growth in our core rental business, managing our fleet and controlling our costs. We began to implement this strategy in mid-2007 and used it to deliver our current year-over-year improvements.

We increased our earnings 13.3% to a record $0.34 for the quarter. Our income increased 18.8%. We also improved our operating income margin to 13.2% of revenue, which is 1.4 percentage points higher than it was for the first three months of last year. And we generated $11 million of incremental EBITDA. That translates to a 3.6 percentage point improvement in EBITDA margin for the quarter.

We also became more responsive to market conditions in the first quarter. In the process, we generated $143 million of positive free cash flow. Marty will provide more insight into our CapEx landscape in a minute.

On the cost side of the business, we have constantly delivered on our promise to become more efficient. Last year, we reduced our headcount by 9.2%, which put us on track to achieve [55 and $60 million] of annual savings, with an additional potential savings as our field reacts to demand. Right now, our workforce level is running about 500 below year-end, so we have a lot of room to move and still achieve our savings.

We also acted on our plan to optimize our branch network and closed or consolidated 23 underperforming locations in the first quarter of this year, absorbing $2.6 million of pretax expense related to the closures. And we will continue to evaluate branch performance against expectations as the year progresses.

Strategic sourcing, which generated $22 million in savings in 2007, is on target to save an incremental $22 million this year. Our target is $70 million in savings by year end 2009 and we are well on our way.

In addition, we've identified another 120 cost-saving opportunities late last year and assigned them to project owners, who delivered $20 million in savings in 2007. And we've targeted an incremental $40 million of savings this year. These initiatives address a wide range of opportunities, including advertising efficiencies, in-sourcing and reduction of our T&E expense, to name a few.

As you can see from our results, our strategy is having the desired effect. Our SG&A expense was $16 million lower than last year, which improved our SG&A ratio by half a point, in line with our expectations. We also transferred three times the amount of fleet in the quarter versus a year ago. That is over $900 million of original equipment cost, redeployed in markets where it can work harder for us.

The increase in fleet transfer shows that our field operations have ear to the ground across our entire market. When construction slows in one area, we look for upswing somewhere else, and that is where the fleet goes.

From our current vantage point, this is shaping up to be a challenging year for our industry. The latest Department of Commerce data indicates that construction spending overall was basically flat in February. Although the March numbers aren't out yet, we believe that nonresidential construction spending, our primary end market, will show first-quarter declines in a number of sectors, and May in fact end up flat or down for the year.

The question is whether the current operating environment will define the rest of the year, and that remains to be seen. What I can tell you is that our company is prepared physically, mentally and strategically for any construction environment. We are being very aggressive and disciplined about taking cost of the business, and we have for months.

Also, we're making progressively better use of our capital and we're working hard to building loyalty with our customers. We've been getting a lot of positive feedback from our customers, which tells us we made the right move in bringing back our focus to our core business. In fact, the decline in total revenues for the quarter had nothing to do with equipment rentals; it was a result of our decision to take the emphasis off less profitable revenue streams, such as contractor supplies.

Our supplies business had a top-line decrease of $38 million for the quarter, which is about what we expected, and we had lower revenues on new and used equipment sales. But our rental revenues were actually up slightly.

With the first quarter behind us, we're still seeing a great deal to be gained from our disciplined execution of our strategy. That credit goes to our employees. They have done a stellar job in managing change and they are enthusiastic about their role in steering United Rentals on our new and more profitable course.

At the same time, we need to be realistic about the external environment. The economic uncertainty that has constrained many industries is being felt in construction as well. That being said, we're entering the busiest two quarters of the season. Our customers are telling us that we have a lot of current projects on the books, although there's not a lot of visibility, as much as we would like, in the back half of the year.

If commercial construction continues to flatten and the industrial starts don't rise to fill the gap, we would expect to see the bulk of that impact later in the year and into 2009. We also expect that residential construction will remain weak for some time, as homebuilders continue to cut production and reduce their inventory.

Our branches are still reporting many pockets of opportunity, particularly in the Midwest region, (inaudible) east and west, Northeast Canada and the Rocky Mountain region, where we're continuing to get a bounce from the construction economy in Western Canada.

The Gulf region is anchored by Texas, where business remains strong, although the rest of the region is a little stagnant. And the Southeast and Southwest struggled in the first quarter, as they did for most of last year. So we're seeing some softness, but it's difficult to tell how much is attributable to an economic slowdown as opposed to other factors. And there is simply not a lot of good visibility into the tail end of the year.

Given the direction of all the information available to us --, the industry forecast, the drop in the architectural billings index, the government data and the input we're receiving from the field, we decided to lower our 2008 guidance to a range of $2.65 to $2.85, which represents our best estimate of annual performance at this time.

The rest of our outlook remains largely unchanged, as Marty will cover in a moment. As the year progresses, we will remain agile in ways we manage our fleet to respond to market conditions. For example, we intend to increase our used equipment sales to a new target of $265 million in revenue. That is $16 million more than we originally planned in 2008. It's a strategically sound way to respond to the market and it's just one of the several operating levers at our disposal.

Now I hope I've given you a sense of why our first-quarter results are such an important signpost for us. They point to the fact that our company is moving toward the goal that we announced several months ago -- that is to drive $500 million of incremental annual EBITDA within five years. Like any path, it can be affected by external factors, but our performance is also derived from preparation and strategic alternatives, our strategy, internal discipline, and these are things that we can and will do as we go forward.

Now, profitable growth in the first quarter is an important goal for us, and we are pleased with the results we reported last night. You can expect us to approach each quarter with the same drive and determination as the year progresses.

Before I turn the microphone over to Marty, as we said in our earnings release, we're continuing to explore alternatives for enhancing shareholder value, taking into account our operating environment, cash flow, capital structure and covenants. With that being said, it's not the focus of our call today.

Now I'm going to ask Marty to give you the details on our first-quarter performance. Then we'll go into Q&A and take your questions. Marty?

Thank you, Michael, and good morning, everyone. Michael has discussed some of our highlights for the quarter, and now I'd like to get into some of the details of our first-quarter performance and review our outlook for the year.

We were pleased with our first-quarter performance on several fronts which are focus areas for our business and critical to our goal of generating $500 million in incremental annual EBITDA within five years. First, equipment rentals. Our rental revenue increased 0.7% as improved time utilization essentially offset modest rate declines.

Second, our SG&A of $131 million was 17% of revenue for the quarter, an improvement of 50 basis points compared to 2007. Importantly, on an absolute dollar basis, SG&A expense decreased by $16 million, reflecting the ongoing benefits of our cost-saving initiatives.

Third, earnings per share. Our continuing operations' diluted EPS for the quarter was $0.34 on a share count of 111 million shares compared with $0.30 on a share count of 110 million in 2007. This represents an improvement of 13% versus the prior year.

And finally, EBITDA. EBITDA increased 5.2% to a first-quarter record of $224 million. Additionally, our EBITDA margin improved 360 basis points to 29%.

Looking at our other lines of business, our first-quarter Contractor Supplies margin of 21.4% improved 440 basis points versus the prior year and 60 basis points versus the fourth quarter of last year. These results are consistent with our strategy of repositioning the Supplies business and reducing the number of SKUs, especially in lower-margin commodity categories.

Our used equipment sales were down about 20% year-over-year, consistent with our lifecycle management strategy, as we focus on selling older assets. And although our gross margins declined by 350 basis points during the quarter, they increased 610 basis points sequentially.

Looking at our cash flow and interest expense for the quarter, our first-quarter cash flow from operations was $226 million compared with $127 million in 2007. We invested $136 million in our rental fleet compared with $265 million last year. Although our CapEx outlook for the year is unchanged at $715 million, we did significantly reduce spending in the first quarter as compared to last year, as we focused on better utilizing our existing fleet and managing our spend, recognizing market conditions.

Over the balance of the year, we will add fleet to regions with the strongest demand and we will continue to monitor developments and adjust our CapEx as conditions dictate.

Free cash flow for the quarter improved significantly to a first-quarter record of $143 million as compared to free cash flow usage of $83 million in 2007. The significant year-over-year improvement reflects reduced CapEx and improved working capital performance.

Our net interest expense decreased by $6 million, reflecting lower interest expense as a result of less variable rate debt and higher interest income.

Now let's take a moment to review our expectations for 2008. Our EPS range is $2.65 to $2.85 per share, down $0.15 from our original guidance. As Michael mentioned, based on feedback from our customers and in recognition of recent industry forecasts, we are revising our full-year forecast. Our revenue, EBITDA and free cash flow guidance is as follows.

We expect total revenue of between $3.4 billion and $3.5 billion. Additionally, rental revenue will be essentially flat at $2.6 billion. Our rental revenue guidance has been reduced by $100 million, driven by a change in our time utilization expectations. Previously, we had forecasted time utilization to be up about 200 basis points versus 2007. We now expect it to be up a modest 40 basis points.

And as we discussed in our last call, we continue to expect rate to be down about 1% this year. Our EBITDA guidance of $1.15 billion to $1.19 billion is down $20 million from our previous guidance and represents an EBITDA margin of about 33.9%.

We are forecasting a full-year tax rate of about 37.5% and approximately $400 million to $450 million of free cash flow. Our cash flow expectations have been increased by $75 million, based on the bonus depreciation provisions contained in the recently passed Federal Stimulus package.

That summarizes our outlook, which doesn't include any impact from regulatory matters. And now, I'd like to turn it over to the operator to begin the Q&A. Chris, could you open the Q&A session, please?

Yes, sir. (OPERATOR INSTRUCTIONS) Manish Somaiya with Citigroup.

Good morning. A couple of questions. Michael, you mentioned in your opening remarks that -- and this is your quote -- that you don't have good visibility into the tail end in the year. Could you just give us an idea of how much visibility do you have in your business going forward?

Yes, that is a great question. As we go through the balance of the year, we take a look at a lot of different indexes, one of which I mentioned was the ABI index, which tells you that it had two consecutive months below 50%. In fact, it would drop down to 39.7%, which is a low, a record low. And the lead time to that is really somewhere between six months to a year. So that really comes down to the visibility point that I'm talking about.

When we talks to our customers, again, they have a lot of business on the books, and they have a lot of things to start. But it is really going out beyond that six- to 12-month range. Looking at what we see today, there's not a lot of visibility until we get a little closer.

Okay. So basically -- just backtracking a bit. I guess in your seasonally strong second quarter, you have had a month to look at the trends. Have you guys seen a pickup in April vis-a-vis March?

Right now what we are seeing is we're actually seeing our time utilization equal to the time utilization last year; it's flat on a year-over-year basis. We are still seeing the same seasonal pickup; we're just not getting any traction above and beyond that point.

Okay. And then just lastly, on the competitive landscape, I think one of your competitors had mentioned that you were being a bit disruptive in certain markets, and in Las Vegas in particular. And I was hoping that perhaps you could comment on what you are seeing out there in the marketplace and your own behavior in the marketplace.

Sure. We reported our rates were down 0.6% for the quarter. We are still holding firm that we're managing our rates to a 1% drop full year. And we truly manage our rates at a branch, district and region level. Pockets where we see softness, we adjust. Pockets where we have growth, we've seen increases.

As far as the competitive landscape, it's mixed. We've got a lot of different players out there. There is no one company, there is a lot of small companies, there are local companies, there are some regionals. But by and large, there is no pattern of rate reduction across the board is what we are seeing today.

Okay, thank you.

Thank you.

Scott Schneeberger with Oppenheimer.

Good morning. First, if we could talk a little bit about industrial, what you guys are doing there, what you'd like to get that up to as a percent mix of the business, what verticals are strong, how the pricing environment is, just a very broad-based --.

Sure. Let me start out with the industrial sector. The industrial sector is an area that is an opportunity for us, given our broad footprint. We were able to increase our penetration, albeit lower than what our competitors have, we did increase it 2 percentage points on a year-over-year basis. Roughly, it's right now about 17% of our revenue. And we still see that as an opportunity.

But there is a longer lead time to that type of work. And what I mean by that is that typical work is when it is released is usually for a year or two; it has some sort of time element to it. So it's just a matter of us getting into that process and bidding that. So, we see that as being -- it's competitive, yes. But it is also very profitable and doesn't have the cyclicality you would have in the construction environment.

When you speak of competitive, could you just go a little deeper on the rate environment there, what you are seeing and how competitive is that? Obviously, an area where a lot of you and a lot of your peers are moving right now.

When I say competitive, it's really -- it's a monthly basis. So, you're looking at something that is out there for longer-term. You are bidding something that is going to be out there for either multiple months or sometimes years. So you have to put that into the equation.

I don't think that it's as competitive as some of the other markets, because once you are in there, you are in there. It's not like you bump people off or anything like that. It is primarily -- it's based on your services that you have to offer to that company. So, it's nowhere near as competitive that you would see in any other market; it just doesn't have the cycles to it.

Thanks. And just following up on that. What particular verticals are strongest geographies within industrial, specifically?

Well, obviously the Gulf area. You've got the petrochemical industry; anything related to the energy portion is very strong. There are food processing plants that are very strong, steel plants. And there is also automotive. Even though automotive is down, there is still maintenance that has to be ongoing inside those plants.

Thanks. Just a little broader-based question. Obviously, a lot of fleet movement out of you in the first quarter. Could you speak to that strategy? I imagine with higher fuel prices there is certainly a cost benefit you have to consider when making that move. I was just more curious on how those decisions are made. Is it an absolute -- we have to get it to this new region because it's going to be healthier than this old region, and we have to do it regardless of cost? Just kind of the thought process there.

Sure. We have fleet management at the region level, and a district manager. Both of them make the business decisions, along with the branch manager. Now, the request comes in. Let me kind of give you some color to the $900 million of equipment that we moved.

About $750 million of that was between branches, was inside of the districts. So you are moving from branch to branch with inside the four walls of the district. And then across districts is just about $156 million. So as you get toward the regions, it's not so much transferring the equipment. It's more we will sell equipment in, say, the Southeast and we will buy something else in the Rocky Mountain. So all of that is taken into consideration. You take a look at the length of term, the rate you have, to determine whether you want to move it for any length of distance.

Just finally, the used equipment market, as you mentioned, a little bit lower margin year-over-year, but up sequentially. And you had mentioned in fourth quarter that you got rid of a lot of distressed assets. How do you see that going forward? Are we going to see pricing pressure now with a slowing of the macro environment? Just your thoughts there.

Well, first, most of our sales is accomplished through our sales force. So it's more in a retail environment. And the returns that we're seeing there are part of what we've seen over the last couple of quarters. The areas where we see some pricing pressure is -- we consciously made an effort to reduce our heavy equipment. We did that in the first quarter, and as a result, it impacted our gross margins. But as far as the market is concerned from the auction, the auction still has a lot of activity from foreign investment.

Okay. Thanks very much.

Philip Gresh with JPMorgan.

Hey, guys, how are you doing? One thing I didn't see in the release was the same-store sales for the quarter. Could you give that to us?

Yes, they were flat for the year -- for the quarter.

Flat, okay. And on the guidance, there's a couple things I'm trying to square. You have -- for rental revenue specifically, you talked about rates down 1%, but flat overall revenues. So that would imply volumes flat up 1 percent-ish. But at the same time, I look at it and I see you closed 3% of your store base basically in the first quarter. And if I look at the rest of the year, it looks like the comps get tougher, and you talk about reduced visibility. So I'm just trying to make all that kind of square.

Well, you're right. We anticipated a 2 point increase in our time utilization in our original guidance, and we revised that down to -- just to your point -- about 0.5 point of improvement over 2007. So, now the yield is just a 0.7 improvement in time utilization from the first quarter.

We revitalized our target based on the fleet sharing. And when we talk about reduction of our branches, keep in mind that we are not taking all the equipment out; we're repurposing that equipment. So, of that fleet that we took out of those closures, we've repurposed them. 60% or 70% of the fleet that was there, we moved.

Okay. And just do you see -- with the tougher comps as we progress through the year, do you see a pickup in the volumes despite those tougher comps or because of that repurposing of the equipment? Was there something in the first quarter because you moved that equipment that hindered volumes? I'm just trying to get an understanding.

No. One other point I want to make -- and I didn't probably point out is -- our average fleet size is bigger this year than it was last year. So, there is also that portion that gets baked into the revenue stream. But specifically to answer your question, no, we haven't seen anything else other than what we've laid out here.

Okay. And then just I guess the last question would be can you talk a little bit more about pricing by the product -- aerials versus earthmoving in the quarter and kind of trends you're seeing heading into the second quarter? Thanks.

Well, we don't give specifics based on the product mix. What we did say is that our aerial, we refocused on the high time utilization of improving our time; we have done that. And keep in mind that the first quarter is also our most challenging quarter.

But we don't give specifics based on products. And we don't give it based on our regions. You can assume that areas where we had softness, we had to adjust the rates, and areas where we had growth, we improved our rates.

Would you be able to tell us if aerials are up right now (multiple speakers) quarter?

Aerials are up slightly, yes.

Okay, thanks.

Emily Shanks with Lehman Brothers.

Good morning. I just wanted to ask a follow-up question around the used equipment sales; I want to be clear. Were the margins down simply because of mix shift and sales of heavier equipment or are you seeing overall pricing pressure in the secondary market?

No, it was the first. It was the mix and the heavy equipment. And we did that -- there was a big auction that happens every year down in Florida. I mentioned it in our fourth-quarter call, that we saw margins actually much higher than we anticipated. So we did much better than we thought. So that was a conscious effort on our part. So, yes, it was mix.

Okay, great. Thank you. And then just if I could, just a couple more. In terms of pricing, how much discretion does the branch manager have or is pricing -- where in that sort of tier of management is that determined?

The pricing is really at the focus of the district manager and the regional platform. And it's market specific. They have a certain threshold within each individual branch, and it requires the approval of the district manager to exceed that.

Okay. Okay. And if I could, just one last question. This past fall, I think, there was some commentary out of URI that you had quite a nice pipeline of aerial or big guns projects. I'm just curious -- it's very prevalent in the news around the cancellation of the big construction site that was proposed in downtown Seattle, etc. Are you seeing any change to the absolute dollar amounts associated with that pipeline?

No, we are seeing -- I mean, when you say absolute, we are still seeing large projects come on board. And the other area that is very strong is the energy related to power plants, and the EPA requirement to put scrubbers on every one of these facilities. So that demand is still there. Obviously, we still have a lot of entertainment ongoing, and that bodes well for the aerial portion of the business.

Great, thank you.

[Chris Daugherty] with Oppenheimer.

Hi, Michael and Marty. Marty, can you just tell us -- I know you guys tend to just give one decimal place in terms of your fleet -- but could you go up to three and tell whether your fleet was actually down on a sequential basis?

Hi, Chris, this is [Chris Brown] speaking. How are you? The OEC of the fleet at the end of Q1 was [4186]. And in the fourth quarter of last year, it was [4207]. So sequentially, it is down a bit.

And then what about dollar utilization? What was the dollar utilization for the quarter?

Dollar utilization for the quarter was at --

52.9%

How does that compare to last year?

It's down about three points.

Down three. All right. And Marty, in the past you've talked about the RP basket being about $1 billion. Is that based on the bond levels? And if so, is the bank agreement a little bit more restrictive than that?

Yes, that is exactly correct. The basket now is somewhat over $1 billion, slightly over $1 billion. The basket that is in our bank revolver is about half that size.

All right. And then lastly, the improvement, I guess, in margins, the expected margins from the new guidance and also the free cash flow, does that have anything to do with faster realization of some of the savings or an increase in the savings? And then also if you can just sort of tell why you expect free cash flow to go up.

Sure, free cash flow is of course cash from operations minus CapEx. So to the extent we are spending less CapEx than a year ago, that is a factor. We definitely are benefiting from the less cash taxes in the new Tax Act that just passed. So, I think that is the nature of this business, is that when you rein in the fleet, free cash flow goes up.

With regards to the cost savings, yes, they are absolutely having an impact on our profitability. And we have spoken about that and we're focused on that, and will continue to focus on our cost savings as we go forward to improve our EBITDA.

All right. Thank you, gentlemen.

[Matt Vitorioso] with Berkeley Capital.

It was wondering if you could comment on the age of the fleet. I think it ticked up a bit to 39 months. How do you see that playing out over the balance of the year, given the reduction in fleet CapEx? And then balanced with the fact that I think you said you expect to sell a little bit more of the older equipment, how do you see that playing out?

Obviously, we expect to be in a range of between 39 and 40 months, and we are well within that range. As we go through the balance of the year, our objective is to really sell the oldest fleet, and we will continue to do that. We have been very fortunate that most of the fleet that we sell through our fleet management process is in excess of 70 months, and we will continue along that process.

Okay. And then I was just hoping to get a little more visibility. You have reduced your guidance for CapEx year-over-year to $715 million. Is there any way you can give us a little more visibility on how that plays out? Like, do you expect second quarter to dip into sort of a free cash flow negative quarter versus -- this year was a nice increase in free cash flow year-over-year. How do you see that playing out over the next couple of quarters?

Well, we don't forecast our cash flow. But what I will say is that typically as you buy more equipment, you would have a tendency to have -- reduce your cash flow in usually the first and second quarter going into the third. And really pick up a lot of positive cash flow in the fourth quarter. And that is how that plays out.

Right, right. Okay. And then lastly, just sort of more philosophically. As you guys continue to contemplate certain actions you might take for shareholders, etc., how do the interests of bondholders play into that decision, just given where we are in the business cycle and the state of the markets today?

Well, you point out that there's a lot of flexibility for the Company on our balance sheet. And there's a lot of complexities associated with all different options. Having said all of that, I don't think it's appropriate for us to comment or speculate on what we may or may not do.

Okay, thank you very much.

Philip Volpicelli with Goldman Sachs.

Thank you. Good morning. With regard to the cash that is on the balance sheet, the 515, and the potential shareholder-friendly actions, do you have a sense of when that might occur? Is there a timeframe that we should think of? Is it a 2008 event? Is it a 2009 event?

I think the Board continues to evaluate options. As Michael mentioned, it's a complex area. I think as we've disclosed in the past, the holders of C&D Preferred have consent rights for any kind of a transaction that would be of any size. And so that is an additional factor on top of the baskets. So, it's really very difficult to say what timing might be for any kind of a major use of the cash.

Marty, can you comment if you've had discussions with the C&D Preferred shareholders?

No, it's not appropriate for us to comment on any kind of conversations that might have gone on.

Understood. With regard to the consolidation of sites, is it a hard rule that you guys are using to figure out which sites should be consolidated? And are there more consolidations to be contemplated?

Sure. We constantly have a list of what we call underperforming branches that we look at, and we challenge ourselves can we serve that market with fewer pieces of real estate. We don't look at it as necessarily exiting a market as much as we do using the resources that we have in a better way. So as Michael mentioned, when we close a branch, the bulk of the fleet in that branch typically gets reallocated to surrounding branches and we try to serve the market in that way.

Are you willing to comment on the percent of your fleet that is not rent-ready at the moment?

Basically, it's about flat from what it was at the end of the fourth quarter, which is about -- just shy above 10% -- 10.3%.

Great, okay. And then I'm going to ask the question -- forgive me -- that everyone else has been dancing around. Would you approve offering fleet for free to customers to win share or did you approve to offer fleet for free to win share?

I'm not aware of where we -- one, it's not appropriate for me to comment. But I know where this question is coming from, and we are not in the business of giving out free fleet.

Understood. Great, thank you very much. Good luck.

Sundar Varadarajan with Deutsche Bank.

Hi. Just going back to the CapEx guidance, you've taken a somewhat more conservative view of your end markets, and given the lack of visibility, taking a cautious view here. But you've left your CapEx guidance virtually unchanged. Could you give us some color on what percentage of your CapEx spend this year is actually maintenance versus growth, and how much more flexibility do you have in terms of reducing your CapEx spend even further?

Well, right now, as it stands, we have about $583 million, $585 million that's replacement CapEx, based on the sales that we have. We had about $15 million of growth, and that really is a function of just the inflationary cost of the replacement. And then we've got some lease buyouts and we've got non-rental CapEx, which makes up the balance. And non-rental is some of our vehicles, as well as some of our real estate improvements.

So, with regards to flexibility, that is one of the levers that we can pull. But right now, given the market conditions as we see it, we are going to maintain our capital outlay.

So by spending about $580 million of CapEx on replacement type CapEx, you expect to keep your fleet age at this 38, 39 month level. Is that fair?

Yes, yes. Between 580 and 600, just around it. But, yes.

Okay, thank you.

Emily Shanks.

Thank you for taking the follow-up. I think you've commented on the restricted payments and the bank and bond indentures. But just be clear, there is a restricted payment provision in the C&D Preferreds that is about $100 million, is that correct?

Yes, it's a consent right, and it is roughly 7.5% of our market cap, which is a number that is slightly larger than $100 million right now.

Okay. And then could you just give us an update, is the [CEO] search still in play right now?

This is Mike. Yes, it is. The Board is very active and doing their due process going through that. I'm still a candidate, but they're working through that.

Okay. And then if I could, just one last one. As we look at what the absolute number of contractors supply sales were, is that a pretty good run rate to be assuming for this year?

We -- hang on one second. Go ahead, Chris.

Yes, this is Chris Brown, speaking. For full-year 2008, we're expecting contractor supply sales of about $230 million, which is up slightly from our original guidance.

Okay, great. Thank you.

Philip Volpicelli with Goldman Sachs.

This was with regard to equipment costs, new equipment costs, clearly the market is weakening in North America. You guys are one of the largest purchasers, but we've got steel prices. Can you give us a sense -- are you getting better deals on equipment right now or are steel prices eating into any benefit you might have?

This is Mike. Obviously, in some of the products we buy, we are getting favorable. Overall, we're going to see anywhere between 0 to 2%, in that range. And no, to answer your questions specifically, we have not seen anything related to steel prices in regards to our prices coming to us.

So 0 to 2% better than last year or 0 to 2% worse than -- price increase?

I would say it's about a price increase. Just because some of it, we are changing some of the products, one. Two, some of the options which bring in. And so it's about a 1% to 2% price increase -- inflationary factor you would see.

Got it. Thank you very much.

Thank you.

Thank you.

That was the last question. And I'm going to close this off. First, I want to thank everybody for taking the time out for our first-quarter earnings call. We are clearly making progress. We've only just begun. We believe that with the effort, our EBITDA can be the best in class. We will focus on our core business of rental. We are doing a better job at fleet management, sales force effectiveness and controlling cost. These are all within our control, and we are committed to focusing on improvement. With that, I would like to think everybody and look forward to the next call.

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