聯合設備租賃 (URI) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Rentals second-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 second-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 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 caption 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 pro forma EPS, free cash flow, EBITDA and pro forma 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.

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 today's call by saying how pleased we were to announce the election of Jenne Britell as Chairman of our Board of Directors earlier this month. Jenne has been an invaluable member of our board since 2006. I can say with certainty that she shares our excitement about the future of United Rentals, and I look forward to working closely with her as we move forward.

We have a lot to discuss with you this morning, starting with our recent share repurchases and our second-quarter results. Marty will cover both of these topics in detail with you in the call. I also want to address our strategy and operating environment, specifically what the second quarter told us about our end markets and how they may perform in the balance of 2008. But first, let's start with the repurchases.

As you know, in June we repurchased all of our outstanding C and D preferred stock in preparation for launching a tender offer. We have now completed the tender and bought back 27 million shares of common stock at a price of $22 per share. These repurchases give us greater flexibility in many respects and are in the best interest of our Company and shareholders. The net result is that with the share repurchases complete we expect the Company's fully diluted share count to decrease by approximately 39% to 70 million shares in 2009.

Now let's turn to our operating results for the second quarter and we continue to focus on driving profitable growth in our core rental business, managing our fleet and controlling our cost. The construction environment, which was robust at the start of the year began to falter in the second quarter, impacting our topline numbers. Rental revenue was $620 million, down about 6% year-over-year due primarily to a 1.4% decline in rental rates and a 0.8 percentage point decline in time utilization.

Total revenue was $831 million, down 13.6% year over year. Our decision to deemphasize our contractor supplies business in favor of more profitable revenue brought our topline down by about $52 million in the quarter as we expected. Our pro forma EBITDA of $266 million for the quarter tracked about 10% less than last year. However, our pro forma EBITDA margin grew 1.3 percentage points to 32%. So even though our revenues were down, we operated our business more profitably.

Our stronger EBITDA margin is a sign that our strategy is working and the right dynamics are in place. Let me give you a few examples. On the sourcing side alone we saved an incremental $8 million in non-rental purchases through the first six months. We've targeted about $20 million in incremental savings this year which will give us about $40 million in savings toward our goal of $70 million by the end of 2009. We are operating at the business more efficiently with a workforce that is down by 1787 FTEs at the end of June 30. That is 15 percent lower than last year, and we managed the adjustment without impacting our customer service.

Our contractor supply business has been retooled to be a support function for our rental operations and is on track to become more profitable. Contractor supplies, generated 24% gross margin in the second quarter. Our fleet management initiatives are hitting their stride. Fleet transfers are a mechanism we use to enhance customer service and repurpose our capital. In the second quarter transfers were four times higher than 2007 on an OEC basis. While our OEC was up slightly, our fleet was basically flat on a unit basis as of June 30, and we expect to sell off more of our older assets between now and year end.

We've already adjusted our fleet plan to slow down our spending rental CapEx by $167 million versus last year, leading to a $269 million improvement in free cash year to date. We have allotted additional flexibility with CapEx, and we won't hesitate to exercise it if we need to. Our decision to slow CapEx spending was triggered in part by our operating environment. We believe that the back end of 2008 will be weaker than the first six months, particularly for non-residential construction. This is supported by several key industry forecasts as well as our own market intelligence. I would like to share some of that information with you.

We had some disappointments in the second quarter. A large number of our large projects were delayed in our aerial East region in our Canadian markets. Our performance in Aerial East, in particular fell short of its plan based on its timing. And we are seeing some large projects come back on stream there. In addition, a few regional economies have been affected by the housing slump, particularly in the Northwest, Southwest and Florida. And we had some weather delays in the Gulf where it impacted our quarter.

By contrast, aerial East and Midwest where bright spots for us with infrastructure projects, and our Rocky Mountain region, which stretches from the Arizona to Alberta, is continuing to turn in some strong numbers. We continue to deliver on our promise to weed out underperforming branches, closing another six locations in the second quarter which makes 29 so far this year.

In terms of our customer base, our national accounts program is on the front burner including the industrial account sector. Our size and scope gives us a competitive advantage with large accounts and we know from experience that these customers are capable of delivering long-term profitability. That gives you a look at the inside of United Rentals. Now I want to share what we are seeing on a macro level.

While non-residential construction spending year over year was up for the quarter overall, indications are that construction starts have declined. The Dodge forecast estimates nonresidential starts at 57.1 billion in the second quarter, a decrease of nearly 14% from last year. Our own customers are telling us that while they currently have work on the books, the landscape is becoming more competitive as fewer projects are being put out for bid. We watch these leading indicators are very closely and very carefully. And the second quarter was a definite cautious sign for our industry.

As I mentioned earlier, we believe that we are seeing the start of what will be a slow but steady downturn through the balance of 2008. The turning point came earlier than anticipated, but the scenario is exactly what we've been preparing for since late last year. We expect 2009 to continue to be challenging, and we have a lot of levers that we can pull if the environment worsens. They include further reducing our CapEx, increasing our used equipment sales, aging our fleet by several months on average while staying within our optimum range of 35 to 45 months; and in addition we have the option of making further adjustments to our headcount branch network. The net result is that we are in a strong position to weather cycles in our end markets.

The updated guidance we released last night based on our share repurchases is for full-year pro forma earnings per share at a range of $3.15 to $3.25. This assumes a 1.5% decline in rental rates for the year and a slight decline in time utilization. Operationally this outlook ties to our previous guidance of $2.65 to $2.75 per share, so you can see that it is entirely consistent with our rationale for doing these share repurchases. As far as other elements of our guidance, it is important to remember the pro forma EBITDA range remains unchanged at $1.15 billion to $1.17 billion and our free cash flow is suspected to be strong at $350 million to $400 million. And we intend to use some of that cash to pay down debt.

The important thing is nothing about 2008 has taken us by surprise. We made dramatic news over the past year to prepare for exactly this kind of macro environment, and we continue to be vigilant and proactive. Instead of pulling in our horns our focus has been turned outward on driving EBITDA and incremental gains of EBITDA margin and free cash flow. Our business model is capable of delivering profitable growth even when revenues are down and our strategy is now well established with a relatively short, but solid track record with plenty of upside on tap.

As we move to what is historically our strongest quarter we intend to use as many operating levers at our disposal to continue to build sustaining value for our shareholders. Now before I turn the microphone over to Marty, I want to officially welcome Joe Dixon, who recently joined us as Vice President of sales, as part of our initiative to improve our sales force effectiveness. You may know Joe from Hertz and Home Depot, but most recently at JLG where he was in charge of global services. We are very pleased to have someone of Joe's caliber and industry experience to head our sales organization.

And with that, I'll ask Marty to go into more detail on our share repurchases and the second-quarter numbers, and then we will go into Q&A, and we will take questions.

Thank you, Michael, and good morning, everyone. Thanks for joining us today. Michael has discussed some of our highlights for the quarter, and now I would like to get into some of the details of the recently completed share repurchases and our second-quarter performance including the progress we are making on our cost saving initiatives. And then I will review the outlook for the year.

First, the share repurchases. As Michael mentioned, in the second quarter we repurchased all of our outstanding Series C and D preferred stock for $679 million. The removal of the preferred stock from our capital structure was a necessary step in proceeding with the tender offer and will give us greater flexibility going forward.

The preferred stock repurchase was funded with $254 million of cash, and the issuance of $425 million principal amount of new 14% HoldCo due 2014. It is important to point out that the reason we issued the HoldCo notes was not for liquidity reasons. Rather, we were careful to protect the restricted payments basket contained in the indentures for our existing notes, which have very attractive low coupon rates.

I should also point out that the most important feature of the new 14% HoldCo notes is that there is no call protection, which means we can prepay them at any time without penalty. In fact, as we pointed out in our earnings release last night, we've already given notice of our intent to repay $125 million of these notes at the end of the third quarter. After this payment the restricted payment basket will be approximately $200 million.

Our tender offer closed and funded last week. In the tender we repurchased 27.16 million shares of our common stock at a price of $22 per share, for a total cost of $598 million. The tender offer was funded primarily through borrowings under our new $1.25 billion ABL facility and our existing accounts receivable securitization facility. Now let me discuss what these transactions mean in terms of leverage and accretion.

First with respect to leverage, since the Company's inception on a debt to EBITDA basis, United Rentals has operated at an average leverage ratio of 3.4 times. Following the completion of the tender, we are at 3.1 times, and we expect the ratio to be 2.9 times by year end, a level that is within our comfort zone. This means that the share repurchases have added less than one turn of leverage as compared to our pre-repurchase ratio of 2.3 times, and significantly below the historic high for the Company of five times.

From an accretion perspective, the repurchase of the common and preferred shares will reduce our 2009 fully diluted share count by about 39% to 70 million shares. And as Michael mentioned, and as our outlook for 2008 illustrates, these repurchases represent an opportunity for us to achieve significantly more accretion and to capture it more quickly than through any other means.

Before I turn to our second-quarter performance let me just touch on one more point. We have consistently talked about how this business can generate significant free cash flow in any environment. Our ability to secure financing under the ABL and the size we did, $1.25 billion at attractive prices, and in the middle of one of the most challenging credit markets seen in recent history is a testament to the resilience of our business model and to the credibility of the strategy we have put in place.

I would like to turn next to the second-quarter performance. First, let's talk about equipment rentals. Our rental revenue decreased 6%, reflecting a decline of 1.4% in rental rates and 0.8% in time utilization. The balance of the decline primarily relates to a shift in mix toward monthly contracts.

Second, our SG&A of $126 million was 15.2% of revenue for the quarter, an improvement of 10 basis points compared to 2007, reflecting lower rental revenue and the ongoing benefits of our cost saving initiatives. On an absolute dollar basis, SG&A decreased by $21 million.

Third, earnings per share. On a pro forma basis our EPS for the quarter was $0.62 on a share count of 97 million shares, compared with $0.60 on a share count of 115 million shares in 2007, and a GAAP loss per share of $2.33. Our pro forma EPS essentially adjusts our GAAP EPS to reflect our new capital structure and to exclude the impact of the $14 million provision relating to the SEC inquiry. As I discussed earlier, the share repurchase will reduce our 2009 share count by about 39%. For these reasons we believe pro forma EPS is a meaningful measure of our future profitability.

And finally, EBITDA, pro forma EBITDA margin, which excludes the impact of the SEC provision increased 130 basis points to 32% reflecting the success of our cost initiatives.

Turning to our contractor supplies business, our second-quarter contractor supplies margin of 23.7% improved 390 basis points versus the prior 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. In terms of our cost saving initiatives and in line with our goal of generating $500 million of incremental annual EBITDA within five years, we believe we can generate about $200 million of that improvement from the execution of our cost-saving plans.

During the second quarter, where we saw our pro forma EBITDA margin improve 130 basis points, we realized $34 million in cost savings. These savings came from a number of initiatives, including our strategic sourcing initiative and our headcount reductions. To put it in perspective, our workforce at June 30, 2008 is lower by about 1800 FTEs, which is the equivalent of 15% of our workforce as compared to last year at this time. And importantly, we believe these reductions were made without impacting customer service.

Now let's take a moment to review our expectations for 2008. Our pro forma EPS range is $3.15 to $3.25, reflecting the benefits of a lower share count. From an operational perspective, this outlook is in line with our previous guidance of $2.65 to $2.75 per share. Our revenue EBITDA and free cash flow guidance is as follows.

We expect total revenue of between $3.3 billion and $3.4 billion, including rental revenue of about $2.5 billion. Our pro forma EBITDA guidance of $1.15 billion to $1.17 billion is unchanged and represents a pro forma EBITDA margin of 34.1%.

We are forecasting a full year tax rate before discrete items of about 37.6%, and approximately $350 million to $400 million in free cash flow.

We were pleased with our DSO performance, which has improved from 53.9 days in the prior period to 53.1 days currently. Our free cash flow guidance, which reflects total CapEx of about $715 million has decreased by about $50 million, primarily because of additional interest expense following the share repurchases.

That summarizes our outlook and now we would like to turn it over to the operator to begin the Q&A session. Chris, if you can start the Q&A.

(OPERATOR INSTRUCTIONS) Manish Somaiya, Citigroup.

A couple of questions. Michael, you talked about a mix of shift in the second quarter to more monthly rates, which resulted in lower rental revenue. Is that something we are likely to see in the second half, as well?

The lower rental revenue was caused by timing; we did shift away from our -- we are doing more monthly business. It is up 1.4 percentage points, almost 68% percent of our revenue is generated or transactions are monthly. We will continue to see the trend go towards monthly revenue transactions, but the real significant second quarter, there is two things. Let me give you two data points.

One was timing of our projects, as I stated and also continuous decline that we saw in our weaker markets, particularly in Florida and California. If you were to take those two states away, in fact our rental revenue would only have seen a decline of 2.7%.

I see. So basically what you are implying is that markets in Florida and California are actually getting worse. They have not stabilized.

Through the second quarter they got worse on a year-over-year basis, yes. However, we are starting to see at this point in time kind of level off. Too early to tell yet.

Fair enough. And then just secondly on EBITDA, I have been looking at the EBITDA distribution first half versus second half. Generally the second half has accounted for about 60% of full year EBITDA. Obviously with visibility what it is, and your guidance implies that you will do about 60% of your EBITDA in the second half, how are you getting comfortable with that?

The third quarter and into October is always the busiest part of the year for United rentals, so there is some seasonality to the business. We've got pretty good visibility to the third quarter at this point, and so I think we are comfortable in essentially reaffirming the guidance that we had put out previously.

And then just lastly an update on used equipment prices. Any changes since we last spoke on it?

We see actually improved margins in our retail sector where we are selling or where we have seen some declines as in the auction arena. And that is mostly around the earth moving equipment. But by and large when you take a look at the general survey put out by [Raush] I think last month it was only down about 0.6 of a point, and about 1.5% full year.

I appreciate it. Thank you so much.

Matt Vittorioso, Barclays.

Just wondering if you could comment on the fact that you kept the fleet size basically flat as far as the number of units despite the slowdown in utilization. Did the slowdown in utilization kind of catch you by surprise, and will you just compensate for that by, like you said, selling off more used equipment in the second half or -- just some more color on that would be helpful.

We targeted the level of CapEx at the beginning of 2007 -- at the end of 2007, going into 2008, and we anticipated a decline towards the back half of the year. As I said earlier, there was a timing issue. We review our needs very carefully and we believe the level of capital investment that we have right now is prudent, and obviously it is an operating lever that we can pull, but during the back half of the year we will continue to sell older fleet and more of it.

Okay, and then just onto the free cash flow and the possibility of debt repayments, is it safe to assume that for the time being any free cash flow will be used to help reduce the level of those 14% at the HoldCo? Would there be any op co debt repayment ahead of those 14s?

The 14% debt is a priority for us because of obviously of the cost. I think that if we have short-term free cash flow the ABL is 100% revolver and we can very easily pay down the ABL and reborrow as we need. The decision to repay the HoldCo notes is more significant decision because it is permanent and it also affects the restricted payment basket. So we will take that in a more measured way as we feel comfortable that we have the ability to do it.

By the way, we've mapped out over the next few years and we are very comfortable that we can fully pay off the HoldCo notes in the next four years or so. Without any additional refinancing just from operations.

Okay. Thank you very much.

Henry Kirn, UBS.

Quick question on the competitive response to the weaker markets. Have you seen anything different out of competitors? How has the landscape changed?

Well, the landscape obviously has become more competitive in specific markets. I mentioned two of those in Florida and California. I don't comment on what the competitors -- they will announce their own rates and what they are doing as far as their business model but what we are hearing from our sales reps and from our customers, they are being very responsive. Are there pockets where we see some competitive nature? Absolutely. But I think that overall the industry is acting prudent right now. They are taking down their fleets and doing the right things.

Okay, and on the shift in mix to the monthly contracts, how does that affect your ability to plan the fleet going forward?

Well, we plan our fleet -- we review our fleet quarterly and towards the fourth quarter we do a deep dive all the way down to branch level and build our way up. It is with input from all of our branches or branch managers, sales rep, customer input. But really the driver is our customers. What type of jobs are they seeing, what type of equipment will they require as we go forward? So it is very much a ground-up approach. So it is too early to tell, but we continually shift our fleet and I think that the biggest data point is our ability to shift fleet today between our branches and districts, which I'm happy to report is up four times over last year this time.

Makes sense. And if I can squeeze one more in here, quick modeling question on the share count for the third quarter and the fourth quarter; is it possible to give a little bit of guidance around what the third quarter share count might wind up being?

Sure. I am going to ask [Chris Brown], Vice President and assistant controller, to answer that.

Sure. In terms of Q3 we are forecasting a GAAP and a pro forma share count of 75 million shares. For Q4 we are forecasting a GAAP and a pro forma share count of 70 million shares. The GAAP and the pro forma share counts are the same as the preferred securities are excluded from the GAAP share count and no adjustments necessary. The 5 million difference between Q3 and Q4 essentially waits to the weighted average impact of the tender which closed in mid July.

Okay. Thanks a lot. I appreciate it.

(OPERATOR INSTRUCTIONS) Scott Schneeberger, Oppenheimer.

Focusing a little bit more on pricing, I think you guys answered this a different way, but can I ask it in the sense of how much of the percent drop year-over-year in pricing was competitive versus some of the other drivers?

Again, I can't report on what the competitors will report coming out, but there is two factors, one of which is we are going after monthly and longer-term, which comes down -- will affect our price. And then we have seen some competitive pressure and particularly the markets where we see the significant declines. But to answer your question directly, it is very hard because we don't have that type of information.

Fair enough. Now you had mentioned I think, and correct me if I'm wrong, 68% of revenue is now monthly transactions?

Yes.

Okay, and could you give us kind of how does that compare historically year-over-year and quarter-over-quarter?

Quarter-over-quarter from '07 it is up 1.4 percentage points.

Okay.

If you want more detail, Scott, we can do that off-line and give you more detail.

Sure. Fair enough. And just one more on the pricing or what occurred rental revenue in the quarter; the timing of projects, were these things that you feel you were going to get back in the third quarter, they were just pushed back to, or did they result in cancellation?

We have not seen any of our large projects of any magnitude be canceled. What we did see was in particular in the Canadian marketplace it was held up by the lack of engineering drawings; with regards to the Aerial East and our larger project here. It was related to steel and weather getting the jobs up and running.

Okay, so you do feel it is just a pushback?

Yes, that is part of the reason why we brought the fleet in to man those jobs.

Okay, thanks. Following up on an earlier question on used equipment sales. First quarter is a big auction quarter. Could you -- and you have given good color on what you are seeing in auction and retail. Could you give us an idea of kind of the mix of retail versus auction in the first quarter relative to the second quarter?

I don't think we've got quarterly numbers, but in general about 75% of our used sales are at retail. In other words, one by one and then another significant piece is trade back to the manufacturers, particularly in large aerial. So our auction has historically been less than 10% of our total used sales.

And I'm sorry, I'm going to go back to a pricing question. Just by versus dirt moving; any additional color you guys can give on that if it is all earthmoving or --?

With regards to auction prices?

Just pricing in general, what you are seeing out there. I am sorry I am jumping back, not in used equipment anymore, but now I am talking just in the rental space.

Well when we have demand our aerial regions, their rental rates have been holding firm. We don't give specific categories of equipment other than the fact that the, as we manage our rates with a lot of rigor and we have the reports and visibility. But so far to date obviously the areas we saw the biggest declines and it would also affect some of the aerial equipment with the markets, in particular.

Scott, our biggest weapon here is the ability to reposition this fleet as a national company. So in the weak markets such as California and Florida we have moved very large amounts for us of fleet out of those markets and repurposed it, as Michael says, to markets where we have better demand. That is a very big weapon in terms of responding to pricing pressure.

Okay, thanks. A couple quick ones. I'm sorry for being a hog here. The industrial, has that crept up as a percent of revenues? I think we were at 17% last quarter.

On a year-over-year basis it is up, but it hasn't moved significantly. It is a focus. It takes a longer turnaround time; the ones you have to negotiate, you have to get yourself in the game. We are being proactive in that arena. It is a large market. The market is -- we only have about 4% of the total industrial market. So we see that as a very unique opportunity for us to leverage our size.

And one final on a margin front. Within contractor supply, do you have a target margin you are shooting for that you would share? It looks like you are making nice progress there. Just kind of any parameters you are thinking about there?

I think longer-term we are looking at getting upwards of the 30% margin. That is the area that we are focusing on. Obviously the 24% is a step in the right direction and we will continue to focus on that as we go forward.

Thanks very much, guys.

Joel Tiss, Buckingham.

I wonder just a little bit more on what some of the things Scott was asking about. Are you changing your CapEx plans more toward monthly to match your contracts or are you going to keep it on a quarterly basis?

Right now our total outlook has not changed. We have 715 in total capital. Let me give you some breakdown, break that down for you in a little more detail. About $85 million is non-rental, which is associated with real estate. We have about $32 million of leases that we are buying out, so effectively we are paying down debt. And then we've got about $20 million of refurb, refurfishing equipment, and that leaves about $580 million. And what I did say as we go back to the back half of the year we will increase our used sales. So at the end of the year we will be below our fleet levels on a year-over-year basis.

And then can you talk at all like just color wise about the mix of your CapEx? Are you shifting a little bit away from aerial work platforms or are you continuing to keep most of the downward pressure on the earthmoving side?

We haven't said we are shifting away from aerial. In fact, our aerial purchases -- and I announced this on our last quarter -- we are going to have increases and in fact we have increased our aerial fleet. And in particular one of the areas is the large booms for the power plants, which has that demand. Most of our demand -- most of our purchases really come from customer demands.

Okay. And then just two other ones. Marty, can you talk a little bit about -- I saw there was a big increase in the Accounts Payable in the quarter or year to date. Can you just talk about maybe what is behind that or how sustainable is that direction? That is what I am trying to get at.

Yes there is nothing unusual there. It must have just been the quirk of when the check runs went out or something. We are moving as everyone is trying to move our AP more toward 60-day terms as a general standard. So we make progress on that as time goes on but there is nothing unusual there.

Okay, and then last I wonder, Mike, if you can just talk about your comment about the gradual decline in nonres spending, what gives you confidence there? Can you give us some of the puts and takes? We obviously know California, Florida stink. What are some of the highlights on what is still growing, and are they breaking ground on enough new things that that gradual decline would continue, say, into 2010 as well?

Obviously some of the sectors you are relating to as the industrial sector. Industrial will continue to be a focus and growth opportunity. All the refineries are working at full capacity to produce gasoline. Oil is another industry. The power plants getting their EPA compliance by 2010. The health area is another area that we are going to see continuous strength as we see an aging population.

And then infrastructure, there is a need for infrastructure and a compelling need for infrastructure. However, it will be tempered by the fact of the municipal governments being able to fund it. But infrastructure will be at some point a growth opportunity. And it is a very large portion of non-building construction, as well.

But it is still kind of flattish to down right now, though, right?

That's correct.

Thank you so much.

Philip Volpicelli, Goldman Sachs.

With regard to the daily, weekly, and monthly and I guess there might be another category, can you give us the rest of the breakout? You said monthly was 68%. Can you give us the other pieces?

Yes, our daily business is 13. It is down a point. Our weekly is flat. It is at 19. And then you've got 68% at the monthly, which is up.

You don't have like an other category for longer than that?

No, we don't.

And it is logical to think that your daily is probably your most profitable and as you move further along it gets less profitable?

No, that is not the case at all. Obviously when you have daily business there is a lot more touches to it. You have to bring the equipment in. You have to service it. You have to check it over and it goes back out. The longer-term and the monthly contracts is a profitable growth opportunity for us (multiple speakers) we are focused on.

So rates might go down, but because there is less touches it actually might be more profitable for you as a business?

Absolutely.

Got you. And with regard to your outlook I just wanted to make sure I am thinking about this the right way. I think you mentioned that your guidance includes a 1.5% decrease in rates. And in the second quarter here we saw 1.4% decrease. Yet I think we all agree the market is starting to soften. So how confident are you in that 1.5% rate decline in your guidance? Is it something you are going to have to reassess as you go forward?

No, we built in what we believe the market will be. Obviously year to date we are down 0.6% and in the back half of the year we will be down about two points.

Okay. That's interesting. And I think in the past we've talked about a point of rate equals about $25 million EBITDA. Does that still hold or is that changing with you guys doing all the cost savings?

No, that's great. That's a good number.

Okay. With regard to the closures, were they in Florida and California and are there other closures that might occur before the end of the year?

Yes, some of the closures were there, and we don't talk about potential or where potential closures would be obviously because of our employee base. But we continually look at all of our branches on a monthly basis, and make the appropriate changes where necessary. That is why, in fact, we closed six more in the last quarter. And if we continue to see opportunities to or repurpose our fleet and other areas and take down our underperformance we will do that.

With regard to the restricted payments basket, I think, Chris you and I had talked about a number around 165 pro forma, the two transactions, the C&D and the stock. And I think, Marty, you said it would be $200 million pro forma taking out $125 million of the 14th. And I only see about $37 million of net income in the second. I know there is going to be some in the third, so can you guys walk me through how we get from where we were pro forma the transaction to [$200] million dollars at the end of the third quarter?

Yes, I mean a big factor of course is we only paid $22 a share for the common and not $25. That is probably the biggest difference. I think rather than take up time on the call if you want to give Chris a call he can walk you through the math on that.

That sounds great. Thank you. And then finally, obviously the market is going to get tougher. There might be some acquisition opportunities out there. One, are you guys interested in looking at acquisitions? Two, what size would that be up to? And three, do you have kind of a leverage target that you don't want to go above?

Obviously we are very opportunistic and we are going to take a look at the market, obviously as we go through a decline we are going to be making sure that if we can grow through profitable growth we will take a look at any one of the acquisitions and size is something that we don't necessarily pinpoint on. We take a look at does it accent our current model? I will we grow our market share through profitable growth in that format? Obviously when we take a look at where our stock is right now and where it is trading at the multiple of EBITDA we would not want to go above that as a guideline, and again, opportunistic.

We will look at it. We don't really comment, talk about them because that is just the nature of the business. But we are very opportunistic and I would also point out that this is an area that is a core competency for this company because of our background, not only doing acquisitions but integrating them very well.

Thank you very much, guys. Good luck.

Yvonne Varano, Jefferies.

Most of my questions have been answered. Just a housekeeping. You ran through the share count for 3 and 4Q. Could you do something similar for the interest expense and maybe what the run rate you are anticipating coming out of the year was going to be?

Yes, what we can do, we can follow up with you off-line in terms of modeling the interest expense.

Okay, thanks.

Sundar Varadarajan, Deutsche Bank.

A couple housekeeping questions. On the debt side as you repay this $125 million call you expect to use the revolver or do you expect to pay that down with free cash flow? And could you give us what the pro forma debt number is going to be following the $125 million call that you are doing on the 14% notes?

Sure. The Company is at its maximum use of working capital in the third quarter, so we will use the revolver for this specific transaction. However, we do generate significant amounts of free cash flow in the fourth quarter, so we have a longer-term outlook here that says that we are not just substituting one form of debt for another. But in fact, we are going to pay down.

And on that working capital front somebody asked the question on Accounts Payable and you are up about 110 or $112 million on the Accounts Payable front in the first half of the year. You look at the back half and given that your CapEx number in the back half is going to be somewhat lower on a year-over-year basis as well as on a first-half to second-half basis, do you expect that Accounts Payable number to kind of go down a little bit more than what you've seen in the past? How do you see that number Accounts Payable kind of playing out in the back half of the year?

I don't expect anything unusual on Accounts Payable. To be honest, we haven't even focused on that. We do have an initiative to as we do strategic sourcing and as we work with our vendors to generally move our vendors to 60 days. We have made some progress on that. There was really nothing unusual going on in Accounts Payable this quarter and I would not think it would act differently at the end of this year than it has at the end of other years.

Thank you. And finally, going back to this back half EBITDA number, at the midpoint of your guidance it seems like your EBITDA will have to grow about 35% in the second half compared to the first half. Last year it was only up about 26% in the back half. You expect pricing to be down 2% in the back half of the year compared to the first half? Are you saying your monthly proportion of monthly sales is higher? What gives you the better visibility to expect this second-half to perform as well as it has on a seasonal basis and in fact better when conditions are actually getting a little softer?

The biggest factor there of course is our continuing focus on cost reductions. We are down absolutely $21 million less spending SG&A in the first half, and we expect that to continue. And the pricing and utilization outlook that we talk about includes the sort of shift to monthlies, if you will. These are not additive factors. We are just trying to give you a little color about why this is occurring. As the fleet shifts more a little bit more toward aerial and away from dirt the aerial business tends to be more monthlies. That is really what is driving back. But it doesn't necessarily mean we are deteriorating incrementally; in other words you are getting pricing, annualization, and shift to monthly. We are just trying to give you a little bit more color.

And finally, the expense side seems to be the opportunity here and you had SG&A of about $126 million this quarter. How should we think about that on an absolute dollar basis for the back half of the year?

Specifically for SG&A?

Yes.

We don't give line item by quarter kind of forecasting, but we are going to continue to make continued progress in these areas we are working on very hard. It is one of our primary areas of focus.

Thank you.

Chris Doherty, Oppenheimer.

Michael, you mentioned a Dodge number starts down 14%. Was that both nonres and residential or just nonres?

I believe it is the nonres number that they brought forward in June.

And do they have an estimate for '08 and 09?

They have some estimates that are out there. I think when you take a look at the consensus it is coming down -- '08 it is going to come down 1 point, 2 points on a year-over-year basis. The next year, 6.7.

Could you just talk about sort of the mix of your fleet and how you would expect that to lag that? If we've seen starts increase up until now, are we talking six months, a year lag between when you might see your aerial being used or earthmoving? Is there some sort of effect there?

Obviously when you start to see starts the first thing that goes in is earthmoving equipment, and our earthmoving fleet has not -- although it is down it hasn't had dramatic shift. The area that we have fleeted up in 2008 is in the aerial sector, and aerial has a lot of end markets that it can serve. Not only construction but maintenance and also the industrial sector which I mentioned is an opportunity for us.

Lastly, a housekeeping number. Dollar utilization for the quarter?

For the quarter it was --.

It was 56.8% for the quarter.

And what was the average fleet to the millions in the quarter?

The OEC at the end of the quarter was 4 3 2 5.

Thanks, Chris.

Seth Weber, Banc of America.

On the used equipment can you give us an idea who is buying this stuff? Is this still largely international customers that are stepping in and buying a lot of the used equipment? And then I have a quick follow-up question.

Obviously from the auction they are seeing more and more offshore international players coming in and buy our equipment. The vast majority of our fleet is still being sold on retail here in North America. Keep in mind that only about 35% of everything that is manufactured goes to the rental industry. There is still a very viable market out there for selling fleet.

Okay, thanks. And then conceptually, Mike, you've been in this business a while. Can you compare how this downturn feels to the previous ones, and how the operating environment compares and what you are seeing from a rationality among your competitors?

Thank you, Seth. You are now -- I am now going to give up my age here. I've been in the industry for 30 years and you are right, I have seen different markets. I think that I take a look at 90-91, the last downturn. And I also take a -- I put a lot of comparison to that to where we are today. Having said that the differences between our most recent downturn of 2000-2002 is really we are a different industry and we are more professional. And I've talked about this one-on-ones with the investment community, and I do believe that. I do believe that we are a different industry today.

I know this company is a different company today than they were back in 2000-2001. We are focused on rates. We are focused on driving profitable growth. And we are doing the right things going into a downturn. We are selling off the fleet, and producing cash flow. And at the same time frame improving our EBITDA. So I think overall we are doing all the right things here. And I do think that the industry overall is being prudent on focusing this downturn differently than the last.

Okay. Thanks very much.

Thank you, Mr. Weber. Mr. Kneeland, I turn the conference back over to you, sir.

Thanks, operator. Before we sign off, I want to thank all of you for joining the call today. This is an opportunity for us to express how strongly we feel about the future of United Rentals and our Company's ability to create value. Our results show that we are doing all the right things and that we will continue to be vigilant as we move through the busiest period of our year in the third quarter. And with that, that concludes our remarks for today.

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