聯合設備租賃 (URI) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the United Rentals third-quarter 2008 investor conference call. Please be advised that this call is being record 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 Rental's 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 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 31st, 2007, as well as to subsequent filings with the SEC.

You can access the Company's press releases as well as the SEC filings on the Company's website at www.united rentals.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 and expectations.

During the conference call, references will be made to proforma EPS, free cash flow, EBITDA and proforma 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 us today.

With me is Marty Welch, our Chief Financial Officer and other members of our Senior Management Team. In a minute, Marty will review our third-quarter results.

But first, I think it's important to tell you what we're seeing out there in the marketplace and what we expect our operating environment to be like as we move in through 2009.

I also want to discuss some of the many operational and financial actions we are taking to navigate through these waters, while position positioning the Company for continued growth in the future.

I'm going to give you more detail than we typically provide on these calls, because we know the environment is of paramount concern, and we want to address it as directly as possible.

I will also note that we want to provide as much visibility as we can today regarding our outlook for 2009. Further details and former guidance, we'll have to wait until we complete our planning process. As you all are aware, we are in the midst of an economy whose volatility has reached historic levels. Many of the contributing factors, such as the credit crisis have a direct impact on our end markets.

Unquestionably, as expected, at the start of the year, construction activity is slowing. I wouldn't describe it as universal. Let me explain what we're seeing out there right now. Business continues to clearly be challenging, particularly in Florida and California, where we have a big presence. These two states together account for more than 60% of the the decline in our US rental revenues for the quarter. By contrast, business remains steady in a number of markets, particularly the Rocky Mountains, Midwest and Texas, where we're supplying commitment to projects like the Dallas Cowboy Stadium in Texas and at Holcomb Concrete plant outside of St. Louis. And Canada continues to be strong.

Looking at the landscape overall, we're most optimistic about the big projects, where funding is already in place and where we have a presence on-site. In many cases, we've contracted for the lion's share of the rental needs on these job sites.

The outlook for the smaller jobs is weaker, both residential and nonresidential. A number of these projects are subject to discretionary spending, and we're seeing some delays due to the economy. Some of you may be aware of the latest architectural billing index that came out last week. It predicts the level of commercial building, six to 12 months into the future.

The ADI was 47.6 for August, and is down sharply to 41.4 for September. Now, anything below 50 indicates a decrease in billing, so that the trend is down.

Now, whether we see the same degree of weakness in our own markets remains to be seen, but we're well prepared for this, and I will discuss in detail.

Specifically, we are prepared for our primary market, nonresidential construction spending to 2008 and 2009 to decline through the rest of 2008 and 2009.

As we continue our budget process for 2009, we are planning on the basis of an overall GDP in construction environment that is substantially weaker than 2008. That's obviously not a great scenario, and I would prefer to have the events prove me wrong, but we have been and we are prepared for the challenge.

United Rentals is a very strong Company weathering a weak cycle, that requires difficult decisions, and we've repeatedly shown that we're willing to make those decisions and take decisive action.

It helps that we've been there before, and we know what to do. In fact, I personally steered rental companies through more of these cycles than I care to count. We expect to make steady progress each day, month and quarter until we lead the industry through a recovery.

The many actions we've taken this year and continue to take are designed to position our Company in recovery, both from the strategic and financial perspective. By that, I mean not just the upturn, but the long-term prospects for our industry, which are very good.

Now I want to revisit the strategy that defines our business and we can see the results of the action we have taken on every front, while remaining optimistic for the future.

I'll begin with our core operating strategy. First, focusing on our core competency of equipment rental. Second, our greater control of our cost structure, and third, a continuous improvement to fleet management.

Then I will discuss the financial implications of these strategies and out looks. In particular, cash flow generation, EBITDA margin improvement. That's what we would do at the start of the year and we're doing it.

First, there's the focus on our rental. Our seasonal revenues are down to date because of the cycle and revenues are up due to total revenues, exactly as planned. In the third quarter, rental revenues were 78% of total revenues, up five percentage points from last year. Our core business, the focus of driving our EBITDA margin higher up, 1.9 percentage points in the third quarter to 36.4%.

We're also making excellent headway in our contractor supplied margin. In the third quarter, we grew our contractor supply post margin by 5.3 percentage points, to more than 24%. By the end of the year, we will have closed all but two of our regional nine distribution centers. As we execute our strategy, our customers will remain our top priority, as they have in good times and bad.

We recently completed an intense program of customer research that will help guide and service efforts in the coming year.

In addition, over the next year, we expect to see an acceleration of the secular shift toward renting in a way from owning equipment, especially if credit remains to be an issue. Our customers in the past purchased a piece of equipment may be now more likely to rent.

This is particularly true in the current downturn, where customers are not only cash strapped, but find it difficult to finance purchases. Next is cost control. As I mentioned in January, we entered 2008 having made a number of moves in anticipation of the downturn. We made significant head count reductions, renegotiated our sourcing agreements and conducted a head to toe evaluation of our branch network. I want to emphasize that we're every bit as stringent now as we were at the start of the year.

In the first nine months of the year we closed 31 branches. In the fourth quarter, we will close our consolidate at least 30 more branches and absorb both the cost savings and the impact on revenue. The cost of the closings is reflected in our revised 2008 guidance. 61 branches is a significant reduction. It represents nearly 10% of our entire network. About 20% of these closed branches will be sold off and about 80% will be repurchased, which will help keep our CapEx down in 2009.

I want to emphasize that even with these plant closings, our footprint is still significantly larger than any of our competitors. We are continuing to address SG&A costs. SG&A expense decreased $17 million in the third quarter. We're also running the business more efficiently overall, with more success of leveraging our size. For example, we'll be able to cut administrative costs in many markets where branch density supports a more centralized support. And the actions we have taken so far this year translate into a head-count reduction of approximately 12% through the third quarter.

Our entire organization is focused on proactively taking costs out of the business to align our expenses with revenue. We will continue to cut operating costs in ways to protect our customer service standards and without putting any of our long-term growth initiatives at risk.

Fleet management is the third arm if our strategy. We get high marks on this one. In the third quarter, we moved a record amount of equipment among branches, where we can expect to get higher returns. $1.5 billion of our fleet, based on OEC was physically transferred from weaker locations to those where we see demand, most typically in the same district. It's a very effective device that no other rental employee can employ on the scale as United Rentals.

Fleet transfers is one of the key reasons why our time utilization stayed constant at 68% in the third quarter. Rental rates is a more complex issue, and I want to keep the rates in perspective. Our last call, we told you that we expected to see rate decline of 1.5 percentage points for the full year.

In the third quarter, our rates slipped 3.4%, but sequentially we were down less than 1%. The current environment points to our rates being down about 2.5% for the year overall. Our rate changes isn't happening in a vacuum. Rates is one of the means we use to balance utilization, profitability and market share.

Given the current environment, we will do our best to manage rates in a way that is consistent with our goals for long-term EBITDA growth and shareholders value.

Now, given a chance to sustain utilization and track new business, we made a decision to delay some of our used sales until later in the year.

We expect to see our year end -- our OEC at about $4 billion with an average age of 39 to 40 months. Right now, we're down about 6% of our fleet on a unit basis count, and more to come.

In 2009, we'll significantly reduce our rental capital spending and continue to defleet. I can tell you that we can expect our net rental CapEx, which we defined as purchases of rental equipment, less the proceeds of the sale of rental equipment to be about $100 million in 2009.

That's a dramatic drop from this year, when net rental CapEx will come in at about $350 million, and even more of a drop in 2007 when net rental CapEx was $551 million.

Our 2009 plan will have an effect of aging our fleet, while still keeping within our targeted range. From our customers' perspective, United Rentals will continue to address the number one need. We offer the best availability on the largest rental fleet in North America, and that won't change in 2009.

When we talk about fleet size and branch footprint and flexibility, we're talking about tangible, competitive advantages derived from size. These competitive strengths of size and scale are meaningful components of long-term value creation. For example, we're in a strong position to gain industrial market share because of our footprint.

Industrial rentals are a multi-billion dollar market that is less cyclical than construction with far less rental penetration. Year to date through September, our industrial customers have accounted for 16.2% of our rental revenues this year, up from 14.3% last year. And this market continues to be a strategic focus for us.

As one example, we recently acquired an industrial rental company in Corpus Christi to expand our presence presence in the sector. We also use our size to expand our national count in government sales businesses. Our Company's ability to serve large accounts is a major competitive advantage, and we haven't taken full advantage of that yet. But that's on the front burner now.

In this context, we expect to continue to deliver strong cash flow to provide ample financial flexibility. Our experience in 2008 clearly demonstrates the cash-flow generation potential of this business and the flexibility we have. And finally, we expect to pursue EBITDA in 2009 with the same single minded of focus that we're showing in 2008.

Our branch compensation plans now use EBITDA as a target metric with a focus on profitable growth, and we will continue to do so.

As I mentioned earlier, further details of our coming year will have to wait until we complete our planning and give you our 2009 guidance.

That's a quick look under the hood of the strategy that's being applied at every level of our organization. We're making all the right moves, not just for the near term, but for the ongoing financial performance. We have stress-tested our financial model well beyond the expectations of this cycle, and we feel very confident with the results.

The key point I want you to leave with is this. We are in choppy waters, but we are navigating the waters with a powerful strategy with palpable growth and rock-solid liquidity. These strengths are serving us well in 2008. Just as they will in 2009 and for the foreseeable future.

With that, I ask Marty to go into more detail on our balance sheet for third quarter numbers, and then we'll go into Q&A, and we'll take your questions. Marty?

Thank you, Michael. And let me add my welcome to everyone joining us on the call this morning.

Michael has discussed some of our highlights for the quarter, and the actions we're taking to execute our strategy. I plan on reviewing our third-quarter performance in greater detail, including the progress we're making on cost-saving initiatives, as well as our outlook for the year. Before I review the quarter, though, I'd like to spend a few minutes on our capital structure and liquidity position.

We have one of the strongest balance sheets in the industry. This means that in a softer market, we will focused not only on the cost cutting and fleet initiatives that Michael discussed, but also on generating significant free cash flow, which will allow us to delever when appropriate.

Turning to our capital structure, as many of you are aware in the second and third quarters of this year, we repurchased all of our outstanding series C and D preferred stock, as well as 27.2 million shares of common stock in a series of transactions that were accreted for the quarter, and will continue to be accretive for next year.

These stock repurchases, which will reduce our 2009 share count by about 39%, were funded with existing cash balances, borrowing under our accounts receivable facility, the issuance of HoldCo notes and borrowings under our new and recently upsized $1.285 billion ABL facility.

At September 30th, following the completion of the share repurchases, our debt to EBITDA ratio was 3.2 times. An amount that is well within our comfort zone.

Further, we expect this amount, which is both below our historic average of 3.4 times, and significantly below our historic high of five times to be about 3.0 times by year end. The overall economic environment also provides important context for these actions. As we discussed in the past, and as our results reflect, our business is counter cyclical from a cash perspective. Therefore, in a softer environment, like the one we're experiencing now, we have the ability to generate even more free cash flow.

Last year, we generated over $150 million in free cash flow, and this year we expect to generate about $375 million, including $240 million in the fourth quarter. And you can expect more free cash flow next year as we further reduce our CapEx and defleet.

In terms of liquidity, at the end of the third quarter, which marks the seasonally high point of our working capital usage, we had over $450 million of liquidity based on availability under our ABL and accounts receivable facilities as well as cash on hand. Another measure of our financial health is our DSO. Our day sales outstanding, which improved from 53.6 days in the prior period to 52.9 days currently.

Looking forward, if the market continues to remain soft, which we expect that it will, we will use this free cash flow to further delever. And when the cycle turns up, which it will do, we will redirect this cash to growing our fleet and further increasing share.

Now, normally I wouldn't do this, but given the current economic environment, I think it would be useful if we review the covenants underlying our new ABL facility. I'll focus on the ABL, because the covenants underlying our existing high yield indentures are currency based.

There are two financial covenants associated with the ABL, a fixed charge coverage ratio and a senior secured coverage ratio. At the end of the third quarter, our fixed charge ratio was about 3.1 times, which is significantly more than the minimum threshold of 1.1 times.

In terms of the senior debt ratio, it was about 0.9 times at the end of the quarter, which is significantly less than the maximum threshold of 1.75 times.

So as you can see, we have significant cushion in both of these covenants and looking ahead, we're very comfortable, even under increasingly challenging economic conditions that we will be in compliance.

In other words, we've stressed our models, and we were comfortable and confident that we have the flexibility and liquidity to manage through the downturn.

It's also important to point out that these covenants will spring off next June in the one-year anniversary of the ABL, provided our availability exceeds $257 million, or 20% of the facility, which is fully our expectation. That gives you on aver view of our capital structure and liquidity.

Now, let's turn to the third quarter panels. First, our revenues. Our rental revenue decreased 6%, reflecting a 3.4% decline in rental rates, as well as particular softness as Michael mentioned in California and Florida.

Although rates were down slightly more than we liked, our time utilization of 68% was flat year over year, driven by fleet transfers, and a greater proportion of monthly rentals. In terms of contractor supplies, our revenues were down about 44%. but our gross margin improved 530 basis points versus the prior year, in line with our strategy of repositioning this business.

Second, our SG&A of $133 million decreased $17 million, reflecting our continued focus and disciplined approach to right sizing our cost structure.

Third, our EPS for the quarter was $0.98 on a share count of 77 million shares, compared with $0.97 on a share count of 115 million 2007.

As I mentioned earlier, the share repurchases will reduce our 2009 share count by about 39%. So we expect continued accretion from the transactions next year.

And finally, EBITDA. Our EBITDA margin increased 190 basis points to 36.4%, also reflecting the success of our cost initiatives. While we were especially pleased that we generated this margin expansion when total revenue was down 12%, we are not complacent. There is much more work to be done, and savings to be realized.

In terms of our cost-saving initiatives, we believe we can generate about $200 million of savings over the next five years from the execution of these plans. During the quarter, where we saw our EBITDA margin improve 190 basis points, we realize $39 million in cost savings.

These savings come from a number of initiatives, including our strategic sourcing initiative and head-count reductions. To put it in perspective, our workforce, at September 30, 2008, is lower by about 1,400 FTE' s year over year. This is the equivalent of about 12% of our workforce.

While we're pleased with our progress on these initiatives, we realize there is more opportunity that. That's why we have taken action to close an additional 30 branches in the fourth quarter, bringing our full-year count to about 60 branches or around 10% of our total.

Besides these anticipated closures, we've also recently completed the outsourcing of our accounts payable function, which will not only improve cost, but also controls.

Now, let's take a moment to review our revised expectations for full-year 2008. Our proforma EPS guidance has been revised to a range of $2.55 to $2.65 per share from a previous range of $3.15 to 3.25 per share.

This outlook, which reflects the acceleration of softness in our end markets includes an estimated fourth quarter charge of about $0.13 per share, principally related to the closing of approximately 30 branches.

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 proforma EBITDA guidance, which excludes the impact of the SEC settlement is $1.07 billion to $1.1 billion, and represents a proforma EBITDA margin of 32.6%, which is up 110 basis points year over year.

We're forecasting a full-year tax rate of about 37.7% before discrete items, and approximately $350 million to $400 million of free cash flow after a total CapEx of about $715 million. That summarizes our outlook, and now I think we'll turn it over to the operator and begin the Q&A. Chris, if you can start the Q&A session.

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question or comment from the line of Alex Blanton with Ingalls & Snyder. Your line is open.

Hi Alex.

Good morning. Just a question on your rental CapEx for this year and next year, you mentioned -- and it's down 33%, by the way, for the nine months, according to the cashless statement. But what is your -- and this is the gross, not the net. You gave the net figures earlier. But we haven't talked -- I don't think about the gross rental CapEx for this year or next year. What's the forecast?

I'm going to ask Chris brown to answer that question. He's our assistant controller.

Hi. How are you? In terms of 2009, I think, 2009, I think Michael mentioned directionally would be down, but we wait until the first quarter to give additional guidance.

In terms of 2008, our full-year outlook for rental CapEx is 630 million, which contemplates no growth capital, and that will be down from the 770 million of gross rental CapEx last year.

Okay. So that's only 40 million then in the quarter, because you did 590 through the 9 months.

That's correct. We do substantially all of our CapEx purchases by the second quarter to get them ready for the traditionally busy third quarter.

Well, now you forecast a decline in the net for next year, so you must have a forecast for the gross rental CapEx. You're just not sharing them with us? I mean, you said 190 million would be the net figure for 2009. So you're not -- you don't want to share the gross figure with us?

I think as Michael mentioned right now we're going through the planning process. I think the message we were trying to deliver is that from a net perspective, our net rental CapEx will be down significantly from a level in 2007 from 550 million to an '08 level of about 350 million.

Yes. And for next year, you said 150 million.

The net figure. That's correct.

So that's a decline of 250. Can we look for a similar 250 decline in the gross, or are the sales of rental equipment going to change?

This is Mike, Alex. Basically the message is, we're going be defleeting next year. And we're going to be taking -- one of the levers that we always talked about is our capital spending, and we will this aging our fleet out, as we go into what we believe, and all industry resources are telling us that next year will be a much softer year. So we'll be defleeting.

It's too early to tell. We do plan to give guidance in early 2009.

Okay. Any idea how much you're going to age the fleet?

It's too early until we go through -- our rage has been always 35 and 45 months, and we'll still been within that range.

Okay. Within that range. And then finally, AWPs, versus in the dirt equipment. Do you see -- would you comment on that for '09, both going down the same amount, or one less than the other?

I think that one is market-driven. It will be -- you know, our plan process is very much all the way down to the branch level. They build it up.

Too early to tell if you're asking for my professional opinion. We will probably continue to hold some of our dirt. We've defleeted a lot of dirt this year, and we'll probably defleet some of our aerial business as we go through '09.

Thank you. Our next question in queue is from the line of Henry Kirn with UBS.

Hi Henry.

Good morning, guys.

Good morning.

If you look at prices in the used equipment market today, you held off on some of the sales in the quarter because you're -- looking at the fleet -- what are you seeing in the market today? How are used equipment prices trend?

Let me break that down into several buckets. First and foremost, our utilization was high. It was 68%. That's one of the reasons why we kept it. On on the top of that, the used prices specifically, we reported 32% margins.

The vast majority of our sales is retail, and -- but if you're talking specifically about the auction, some of the auction prices, we have seen some softness, particularly in the area of the dirt equipment.

Okay. And as you look at the runway on SG&A going forward, how much more do you think you can take that down over time to offset some of the negative right now?

Again, we're going through our plan process. We made a commitment to reduce our SG&A and our cost overall. That's something that we started out in 2008. Very happy to report that we continue the focus on that $17 million. We still want to knock our range down, and we have a lot more to go.

Okay. And one last one. Have you seen any changes in the pricing of new equipment from OEMs to you to get you to buy a little more than you otherwise would?

No. We don't buy based on the pricing they give us. We have a history of being very aggressive, of negotiating, partnering up with our vendors. We are going through that process.

It's too early to tell. But we do work with them over the course of the year to find ways in which we can both take cost out of the business.

That makes sense. Thanks a lot.

Thank you. Our next question or comment is from the line of Scott Schneeberger with Oppenheimer. Your line is open?

Hi Scott.

Good morning, guys. Could we focus a little bit on the pricing? Was it just a matter of the high exposure to California and Florida and not being able to -- you obviously you had a great quarter of moving fleet around, but could you just delve in a little deeper on what you think impacted you versus your expectation there?

Yes. And that's a great analogy. You know, when you take away -- you know, California and Florida, they are depressed. As we mentioned 60% of our revenue in the third quarter in the decline we saw in rental revenue was attributable to those two states.

When you look at the rental revenue, the rental rates specifically, they accounted for about 25% of the decline as we went through. We are defleeting in that area, in both of those areas. As a matter of fact, we have done a very good job.

We're down almost $80 million on a year over year basis of defleeting and repurposing that capital. But there are still good customers there that we need to wrap our arms around and focus.

Great. Thanks. Shifting gears a little bit. Contract supply sales, a nice year over year margin move there. You mentioned on the call, you're down the two distribution centers left. Are you going to go to a pure outsourcing model or keep the two DCs into '09? Just kind of the strategic thoughts there.

I would say right now we are very comfortable with where they stand today. We reserve the right to always focus on them and to the extent that they're not performing or we can find an alternative. But we will continue to focus on improving our margins. We made progress, but we're not done yet.

Scott, this is Marty. The two ADCs we have are out sourced. So we can change our minds on those with very short notice.

Okay. Great. Thanks. Marty, just real quick.

The leverage at the end of the year, I believe you said on this call 3.0. I realize I'm being nitpicky, because I think the company line before was 2.9. Is there anything that we should read into that? Just to a little bit less of that reduction? Just if you could elaborate there, even if I am even accurate on that?

You are accurate. It's just rounding EBITDAs down a little bit. And I don't think we've changed our mind at all about the cash generation that the Company is going to have.

Okay. Thanks so much.

Thank you.

Thank you. Our next question or comment is from the line of Seth Weber from Banc of America Securities. Your line is open.

Hi, Seth.

Hey, thanks. Good morning, guys.

Good morning.

Just going back to the rental pricing discussion for a minute. One of your competitors, I think, this week announced, you know, a pretty robust increase in floor pricing. Which contradicts the number you put up.

I mean, can you just talk about what you're seeing in the marketplace? Is it rational out there? Are you seeing anybody, kind of off the reservation at this point?

Let me just -- that's a great question. And let me address it this way. One of which is, we proactively manage our rates and will continue to do so. 25% of our rate decline occurred in two areas of the country where we have a strong presence. They are down significantly.

With regards to our competitors. One, I don't know how they calculate rates. We're not seeing, we're seeing good discipline out there.

Obviously, there are regional areas where we do bump into things, but if you want to quantify it from a national level, we're not seeing anything that is dramatic, and I think that the industry overall is being very responsive.

Okay. Thank you. A separate question . You kept your revenue guidance intact, and you lowered your EBITDA forecast a little bit, which intuitively -- which implicitly brings your EBITDA margin forecast down.

Is there something that we should be thinking about that's kind of just a temporary pressure on the EBITDA margin, or is there something that I'm

I'll try to answer it, and I can't answer it we'll take it off line. But our focus has been on improving our EBITDA margin.

Our EBITDA margin is actually up, but one of the impacts we're having currently going into the fourth quarter is obviously closing our locations.

But we think that is the prudent thing to do for the long-term value of our shareholders. We will continue to focus on EBITDA -- EBITDA improvement.

Okay. Maybe we can take it off line. And just the last clarification, was the $0.03 -- the $0.03 charge in the quarter, was that in your previous guidance for the 3 -- the 3 -- I think it was what? Three and a quarter?

Chris is going to answer that question.

Yes. What you're referring to is the charge. It was a non-cash charge that we took attend of December.

Right.

In anticipation of paying down an additional 125 million of the HoldCo. So when we gave our guidance at the end of the second quarter, the 315 to the 325, it did contemplate that charge.

It did, okay.

Yes.

And just lastly, is there a dollar utilization for the quarter.

It was 60%.

Sixty?

Yes.

Okay. Thanks very much, guys.

Thank you.

Thank you. Our next question or comment is from the line of Christina Woo with Soleil Securities.

Hi, Christina.

Hi.

Hi.

Good to be back. I was hoping that you can provide some color on your acquisition during the quarter, the Corpus Christi industrials acquisition, maybe providing us with some information on the number of locations you acquired, the age of the equipment, value of the equipment, multiple paid.

Well, we don't give that level of detail other than the fact it was -- you know, it was a small acquisition of $11 million. We had three branch locations -- located in Corpus Christi. One of the advantages that we have is being able to bring that into our organization. These are independents that have a good line of business in the industrial. 60% of their business was industrial related. And we wanted to leverage our size with our fleet to grow that business. So we think it was -- it was a smart move, and gets us in the door towards the industrial side of the business.

That's great. I also noticed, in the quarter, that your new equipment sales continue to be quite robust, particularly in light of the weakening macro environment.

Can you give us some information on what type of equipment you're selling, if it's more aerial or dirt and what's buying this equipment.

Well, it's -- it's a diminish portion of our business, as far as the way we track it. What I will tell you is there is still a markets out there where people want to own equipment. There is a market, and some of our customers -- our largest rental customers will also buy equipment.

But it's a little bit of everything, from aerial equipment to material handling devices, to some small dirt equipment. But it's -- there's no one area that sticks out.

Okay. And last question, I was hoping you could give us some rule of thumb that maybe you use with regard to pricing.

We talked about pricing quite a bit, but an increase in pricing by 1% would lead to what sort of EBITDA impact?

It's about 20, 25 million -- it's $23 million, EBITDA impact.

Perfect. Thanks so much.

Thank you.

Thank you. Our next question or comment is from the line of Phillip Opecelli with Goldman Sachs. Your line is open.

Good morning, guys.

Good morning.

I just wanted to get some more clarification on the OEC. Can you give us some more decimal points than 4.3 billion.

Yes. At the end of the - Phil, this is Chris. At the end of the second quarter it was 4340. At the end of the third quarter it was 4348.

Okay. And you expect that to come down. Obviously, as you guys defleet.

Do you have a target for the end of the year.

Yes. I mentioned we're going to come back down 4.1 billion.

Okay. Flat, 4.100.

Yes. Somewhere through that range. We have to go to the back of the year, the fourth quarter, and we'll give that number out. But that's our target.

Great. And when I look at the cost savings, Marty you mentioned 39 million in the quarter. If I look back at my notes, about 23 million was supposed to be strategic sourcing initiative. So the rest is head count. But sounds like you cut more heads than you originally thought.

So the 200 million number sounds like it could be a little low, considering you've done more actions. Are we going to come above that. Is that something you're holding back for 2009 to give us more guidance on how much cost will come out?

Right. One of the things that happens with strategic sourcing is obviously if the business is a little smaller, than we buy less things, and we have less savings from SSI.

The head count is a little bit ahead of where we thought we would be as well. So it's a mix. As we said before, we have a five-year goal of 500 million of incremental annual EBITDA. I still think there's a good goal. We said 200 million of that comes out of the cost cutting. We're sticking with that.

The rest of it will come as we grow top-line and hold our cost in valance. So all of that is still part of our master plan. The individual mix of items does move around a little bit. But all of these initiatives are moving forward.

Okay. That's great. And then you repurchased 125 million of the 14% notes in the third quarter. You're going to generate 240 million of cash in the fourth quarter. Do you -- will you give us any guidance as to how much the 14% notes you plan the buy back in the fourth quarter? And what the restricted payments basket is before and after any such transaction. Sure. We look at all of the options for the use of our cash on or opportunistically. In the last year, we bought HoldCo notes, we bought back stock, we bought back preferred. We've done an acquisition. So as we look at all of our alternatives and consolidate our board, we'll continue to hopefully make smart choices.

We've set a goal that we never let the restrictive payment basket go below a hundred million dollars. There's a good goal. So whatever actions we take that would impact the basket, we would try the keep it in. I think the balance on the restricted payment basket right now is around 200. Okay. So you or not willing yet to tell us if you're going to or going to not buy back 14% in the fourth quarter.

I think most of the people will talk about that after they do the action. So I think we'll leave it at that.

In terms of the acquisition outlook, clearly this was a nice acquisition for you. Are there many more in the hopper, or was this a kind of one-off for you?

This is Mike. We're going to be on or opportunistic. We are going to take that look at what's out there.

The current business environment may provide us some opportunities, and we want to to make sure that we review those, analyze them and see how they fit.

This one we did in Corpus Christi fit everything we were looking for and goes after the business we want to focus on. So we will continue to look at the horizon with our eyes wide open. But we don't have anything we're going to announce.

Okay. And then just last question. In the past you've given us your 2008 outlook for time utilization and rates. I believe you mentioned that rates are going to be down, -- I think it's 1.2% if I'm not mistakenly. And then what's your estimate for time utilization for the 2008?

Go ahead, Chris. You want to answer that?

Just to confirm in terms of the rate, I think what Michael had mentioned, we forecasted to be down about 4% in the fourth quarter, which will be 2.5% for the full year. I think in terms of time utilization, full year they will be down slightly year over year.

Great, guys. Thanks. Good luck.

Thank you.

Our next question or comment is from the line of Emily Shanks with Barclay's Capital. Your line is open.

Hi good morning. This is actually Jason Trojeo in for Emily.

Hi Jason. Yeah. You don't sound much like Emily.

Definitely not, no. My first question relates to revised full-year guidance. Specifically, which markets are related to the guidance cut. Was it Florida and California?

This is Mike. That's part of it. You know, there was also a delay. We are seeing some delays in some of our smaller-end projects that we're looking at. But, you know, we go through a process of looking at all of our -- all of our branches and our districts, to put forward a quarterly review that we go through.

It was a collection of things. It was also looking at the branch reductions and taking down our fleet. Although our fleet OEC is relatively flat. It's important to note that our unit count is down by 6%. So, you know, all of those things go into our numbers, our calculation.

All right. Great. There's very helpful. And secondly, what percent of the fleet quarter end was earth moving, and what percent was aerial, if you can provide that?

Insofar as as our aerial, I mean, right now , we're looking at about -- you know, just aerial specifically is about 51%, and dirt is about 13, and then forklifts is 18%.

Those are the

All right. Great. And then, just lastly, is the plan around the 14% HoldCo notes? Still to pay those down within four years?

Yes. We will work those off as we think it's economic to do that. .

All right. Great. Thank you very much.

Thank you. Our next question or comment is from the line of Chris Dougherty, with on Oppenheimer. Your line is open.

Good morning, Marty and Michael.

Good morning.

Just talking about the rates a little bit and your dollar utilization. I mean, it looks like your dollar utilization was down roughly over 4%, and yet your timing utilization was flat and your bill rate was only down 3.4%.

Can you just describe the way you calculate the change in rental rates? Is that a mix-adjusted number? Is it a build number? Is it just a new contract rate? How is that calculated?

It's a weighted average between day, week and month, and everything is calculated accordingly, and that's how we put it forward.

And then can you just talk about your philosophy on time utilization versus rental rates?

I mean, is your priority to hold a target utilization rate, and then sort of have the rental rates move around, or is it to hold rates.

It's a combination of things. Depending upon the market you're serving and the type of equipment. We try to maximize and get the highest rate we possibly can in any given market, and we have a robust system that we put in place and to go after that.

The biggest areas that we saw weakness that was challenging was in Florida and California. And then we have some other markets that were also like that, but then we had some offsetting.

So we go through -- it's market by market and it's product by product. And we go through an evaluation.

We look at the returns that we're getting collectively across the Company; and to the extent -- give you an example. To the extent you can get something at a higher rate or higher return in one market and they have demand for it, and we've got another market that may have high demand, but not getting the return. Then, we're more prone to move that asset over to where we can get a better return. And now that we have changed our compensation system to more of an EBITDA driven, our branches are -- the result of our fleet movement is moving in that direction.

And, Michael, can you just -- I know you said there are differences in rates geographically. Can you tell us what the rates were down in Florida and California? Or just relatively how much more they were done?

We don't -- we don't have that. But we can do that off line and give you that data.

All right. All right.

Let me just add that, you know, when rates are down severely, then we respond by significant defleeting. So I mean, one of the real negligence of a national network is the ability to move fleet around.

All right. Thank you, gentlemen.

Thank you.

Thank you.

Our next question or comment is from the line of Joseph VonMeister with Black Stone. Your line is open.

Hi, guys.

Hi Joseph.

The game plan for next year, what's your -- is being driven by an outlook for the operating environment. Can you give us a sense of what you're seeing and what you're most worried about?

Well, I mean, obviously, as we went through the year, in the beginning of the year, I stated that we were anticipating a downturn in the back half.

I don't think anyone could forecast, you know, the current course of events that's happened over the last 90 days. And also the credit crisis. Having said that, the industry resources that s that we put out there kind of give you two goal posts. They go from 4% down -- all the way down to 9% down. Global insight, which works closely with ARA, is projects roughly around 5.5, 5.6% down on a year over year basis.

So we look at that level -- that was on a macro level, and then we go through our planning process, and we build everything up from the branches. As Marty mentioned, there are different markets. There's markets where we have, even in California, there are some markets in California that are very strong. But, you know, we have a strong presence there. So everything's from a grassroots. We build it up, and that's how we'll analyze the market going into next year.

What worries me the most is, you know, like what's on everyone's mind, is what happens to the credit. The credit crisis, how long and how deep will it be?

Yes. Joe, I think we definitely have a bias toward conservatism when it comes to the fleet for '09.

What cost reductions are currently in place, and what do you expect to accomplish for the rest of the year and next year?

Yes. I think the branch closing program is one of our bigger cost initiatives, because it takes overhead out, allows us the ability to move fleet around more aggressively. We've talked about head count. We've talked about strategic sourcing.

We really are looking there as we talked about on previous calls literally over a hundred line items that we track. We have a meeting every couple weeks. There's name next to every initiative, and we're trying to execute on all of them as we go forward.

To expand on that a little bit, there's a laundry list that we go through. We started out with 122 items. Some fall off as we successfully complete those, and some we add back on. The list is still in the hundred range, an we still focus on that. And the point is that there's nothing that we're not looking at.

We're looking at everything inside the organization from the executives all the way down to the field.

But SG&A is still high as a percentage of sales relative to to some industry benchmarks?

That's correct. And we are focused on that.

We are continuing to take costs out of the business; and as I stated, we're not done yet. We're going to continue to focus on that as we go forward.

Do you have a goal?

Yes, in previous calls, I said that I think something in the 13 range, SG&As a percent of revenue is achievable here. I think that will require some recovery on the top line. But certainly, I think we can look to that over a multi-year period.

RFC is currently below 10. Is there a reason why you think you can't get there?

I think we're they're moving in our direction. As they experience being a public company and what that that means and other costs. I think we're both working hard on our costs and they have a certainly well run company.

Do you expect to be able to offset the decline, the economic -- the impact of the economic decline on your business with cost cuts more or less?

Not entirely. You know, I think it's unrealistic to think that you can take cuts in the top line that are severe, particularly on rates. I mean, the flow through on rates to the bottom line is virtually a hundred percent. The only thing we don't pay on a rate decline is the commission.

I think -- you know, we're going continue to work hard on this. But it's not entirely within our control to offset big declines.

Yes. I also want to point out that, you know, we don't have a high concentration of our business in industrial. And we do know that's profitable.

So we will focus on that, until we go through the planning process, it's too early to determine what '09 will actually look like.

Thank you.

Thank you.

We have a follow-up question or comment from the line of Cynthia Marenos with Lloyds TSB Bank.

Hi, good morning.

Good morning.

I actually have two questions. My first question is, can we expect liquidity to tighten, I guess, in the form of increased utilization under the revolver given this, you know, softness in?

No. It's actually the opposite.

As long as we're continuing to be in a defleeting mode, liquidity will continue to increase significantly.

The stress point in this industry comes at the point in time when the economy turns, and we want to pour back a lot of the fleet into the field.

I see. Okay. And my second question is, the 60 branches that you're going to -- going to look to have close d by the end of the year, what will be the impact on EBITDA?

Thirty of the branches were closed in the first quarter, Cynthia, and the other 30 we plan the close in the fourth quarter here. We've said it's a charge of about $0.13 per share. A lot of that is reserved for future rent payments. Chris, do you have anything to add to there?

That's correct. As Marty mentioned, the 30 to branch closers hit in the first half of the year. So that has already been absorbed into the first-half EBITDA. The additional charge associated with the fourth quarter closings is about $0.13 on a proforma share count.

Okay. Thank you.

Thank you.

Thank you. Our next question or comment is from the line of Yvonne Varano with Jefferies. Your line is open.

Thanks. I'd just like to clarify what you said earlier in regard to the gross capital spending. The 630 that you gave for '08, is that purely rental, or does that include other property equipment as well?

No, if you'll recall, it is total rental. Our total CapEx guidance that we reaffirmed was 715 million. That includes 630 of rental CapEx, all of which is maintenance, and then 85 of non-rental CapEx.

Okay. And then, when you gave the net, that includes the property of the other outside of rental as well.

No. That was a pure net rental CapEx.

That's net rental CapEx.

That's right.

Because if you do the math, then you're implying a pretty significant jump in sales of used equipment in 4-Q?

That's correct. I mean, we'll have to see what the pricing what we actually realize in the fourth quarter, but that does imply 280 million in used equipment sales for the full year?

Yes. This is Mike. It's important to note that, you know, it's not unlike any other year. Typically in the fourth quarter is when we have most of our used sales. You know, with 68% time utilization, which, you know, is an all-time high for us in comparison to last year. The best use of our fleet is on rent.

That's where we get the highest profitability, and typically as we go through the fourth quarter and into the first quarter is when we do most of our sales.

Okay. It's just 90 million for a 4Q number, and it just sounded a bit high. Will that include? I see that includes some of the sales of the equipment out at the branches as well?

Well, again, we're selling -- as I said, we're closing locations, and a portion of those assets will be sold off.

Okay. Great. Thanks.

Okay. Operator, I think this is a good time to wrap up the Q&A.

I want to thank everyone for joining us today. We've covered a lot of important ground.

I'm glad we had the opportunity see that our confidence in United Rentals is rooted in a Company that is rock solid both financially and operationally. I can point to a lot of reasons for that. The determination of our people, particularly in the field. Our proven ability to generate free cash flow. The groundwork that we've laid in advance of the cycle. And our willingness to pull all of the levers at our disposal, and the all important loyalty of our customers. When our end markets recover, we expect that more equipment will be rented more than ever before, and United Rentals will continue to be on the leading edge of that opportunity.

Now, this concludes our remarks for today, and operator you can now end the call.

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