聯合設備租賃 (URI) 2009 Q1 法說會逐字稿

Good morning, and welcome to the United Rentals first-quarter 2009 investor conference call. Please be advised that this call is being recorded.

Before we begin, note that many of the comments made on today's call and some of the responses to your questions will contain forward-looking statements. United Rentals' businesses and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected by any such forward-looking statements. A summary of these uncertainties is included in the Safe Harbor statement contained in the Company's first-quarter 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, 2008, as well as to its subsequent filings with the SEC. You can access the Company's press release as well as all of its SEC filings on the Company's website at www.ur.com.

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 may be made to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

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

Thank you, operator and good morning, everyone. And thank you for joining us today. With me is Bill Plummer, our Chief Financial Officer, and other members of our senior management team.

Let me start by looking back to our last call about nine weeks ago. At that time I spoke frankly about our expectation that 2009 would be a difficult year for the equipment rental, a year in which there is little or no real visibility. Nevertheless, as I said in February, there are many areas of the business within our control.

As you will hear from us today, we have our hands firmly on the steering wheel. We are taking action, and our actions are having the intended results. We are meeting our customer needs. We are maintaining a healthy liquidity. We are shifting our revenue base towards larger customers. And we are positioning the company to benefit significantly when the recovery begins.

Now, I want to address all these topics today. Our goal is to provide as much transparency as possible within the realities of the current environment. If we cannot state something with certainty given the environment, we will be forthright about that, too.

As you'll see, we have two stories to tell. We are a Company that is taking all the right actions to remain financially solid in the current economic storm. We are also a Company that is looking ahead to where we see enormous opportunity. In short, we remain very confident about our long-term vision for profitable growth.

In a minute, Bill will go over the numbers with you, including the $129 million of free cash flow we generated in the quarter, and the decision we made to reduce our debt by $113 million. Given the depth and potential duration of the downturn, liquidity is of paramount importance of our plan.

We are still comfortable with our estimate of $300 million of free cash flow this year. Both our capital structure and our liquidity are in a very good place, as Bill will discuss.

But first, I want to give you my thoughts on the macro environment and where we are seeing some mixed signals. I will also put some operational detail to our first-quarter performance, which as you know from our earnings release resulted in a loss. And, I want to spend some time on rental rates, because I think it is important for you to see the rate environment through our eyes.

Then I will give you a progress report on Operation United, which is our customer service call to arms. We feel very strongly that Operation United is one of the keys to staying resilient in this economy. Even more exciting, we are using it to leverage our broad footprint and build a road that leads directly to market share and profitable growth.

First, the macro environment. Here is what we are seeing out there. Since December there's been a rapid decline in construction activity, largely due to a lack of credit. From what I can see, the credit markets are still frozen, despite some optimistic press reports predicting a thaw. The slowdown in construction appears to be universal, affecting all geographic regions. And it isn't just construction starts that are problematic, although that is the bulk of it. We are also seeing some projects stop before completion because funding has dried up.

Fortunately, we have a presence on a number of large projects that are still going strong, particularly in the energy sector.

We are also beginning to see a seasonal uptick, although at a lower level than last year. And where the local economies are holding their own, we are finding municipal and infrastructure work. However, none of these upsides are strong enough to offset the overall decline in construction.

Industry indicators would seem to support our observations. The McGraw-Hill forecast estimates that commercial construction starts will drop by 21% in 2009, and industrial starts will slide by 35%. This is close to Global Insight's forecasts, which is the rental industry's touchstone. And for the most part, industry experts think that construction spending could erode further going into 2010, although at a more modest rate.

On the bright side, the Architectural Billings Index, or ABI, came in at 43.7 for March, up more than 8 points in February but still weak. The March reading is the highest since August of 2008, and ends a four-month streak of sub-40 readings.

Another metric, the Project Inquiries Index, which was 49.5 in February, climbed to 56.6 in March. The ABI reflects demand for architectural design services. The approximate lag time between architectural billings and construction spending is 9 to 12 months. So it takes a while for any uptick to flow through to our industry.

So we are very happy to see the index go up, and hopefully that it will continue. While it is too early to determine any trends, we are cautiously optimistic about these numbers. We would like to see the cycle turn more quickly, perhaps aided by the stimulus package. But right now we are basing our expectations on the industry consensus, which is for a turnaround in late 2010 and then a slow climb through 2011.

What we do know is that the next two or three quarters will be difficult, but the situation will turn, and we will come out the other side in a much stronger position. Until that happens, our response will continue to be swift and disciplined, as it was in the first quarter.

We closed 10 locations in the quarter, nine of which were consolidations. The majority of these assets were transferred to branches within 20 miles of the closed locations. In the second quarter, we plan to close another 39 locations. We have also temporarily suspended operations at four additional branches, and reopen for business when those markets recover.

If you recall, we closed or consolidated 75 branches in 2008, so we are not hesitating to prune our network when warranted, although the second-quarter closure should complete the heavy lifting.

We reduced our headcount by another 500, bringing our base to about 9,400 employees. Some of this reduction came from closed locations, and some came from process improvements within the organization.

We also exceeded our first-quarter target for used equipment sales. As a result, proceeds from used equipment were $15 million greater than the rental CapEx spent in the quarter. We now expect net rental CapEx for the year to be near zero or even at a net positive inflow. Bill will discuss some additional comments, including our success in reducing SG&A expense by $21 million for the quarter. And looking at the full year, we expect to reduce SG&A expense by $50 million to $60 million, which is an improvement over our earlier estimate. All these areas of business are within our control.

By contrast, the story on rates is somewhat different. There are many things that we can do to manage rates, but there's also an external element that we must contend with despite our best efforts.

As we reported last night, our rates for the first quarter were down more than 11%. That was disappointing. We are dealing with a very challenging pricing environment this year, and we expect our rates will decline further before they turn around. Nevertheless, we could not have done a better job at pushing back pricing pressure, and we are addressing that now.

Given our scale, we have more options than most when it comes to managing supply and demand. And here are some of the actions we are taking.

First, we're making sure to communicate a balanced perspective on rates to our branch managers, one that will help guide them when pricing comes under pressure.

We are taking care of our core customers when we have to, and vigorously protecting those relationships. And we are walking away from unprofitable deals, or deals that would set the wrong precedent. For example, we were bidding a stadium in Kentucky, but we walked away when the rate got to a place where it no longer made economic sense. This is just one of many examples, but we refuse to commit to unprofitable business.

In addition to these ground-floor tactics, ground-level tactics, we are making some systematic improvements surrounding rates. In the short term, we are enforcing strict guidelines that tighten our oversight of rates by our district managers, while improving branch-level accountability. District managers are reviewing variances from book rate on a daily basis. They also advise our branches in situations where customer loyalty, market share and volume negotiations come into play.

We've also set the wheels in motion for some longer-term initiatives. In the next month or so, we will pilot a new price optimization software, and by the end of the year we expect to be using price optimization in all branches. This will provide our managers with dynamic pricing tools, and allow us to take a much more scientific approach to rental rates.

And we will continue to be very focused on fleet management. We are continuing a program of aggressive used equipment sales and transferring equipment among our branches, to tap into pockets of demand, which is another way of managing rates and elevate revenues. In the first quarter, we transferred $1.3 billion of equipment among our branches, based on our original equipment costs.

I can assure you that every level of management at United Rentals -- branch, district, region and corporate -- understands the importance of managing rates in the short-term, and the long-term health of our business.

Now I'd like to step back from the numbers for a minute and bring you up-to-date on Operation United. For those of you who weren't on our last call, Operation United is the result of market research we commissioned in 2008. We discovered that no rental company has succeeded in truly differentiating itself in the eyes of the customer on the basis of customer service, particularly with larger accounts.

And we see this as a huge opportunity on two fronts. First, the idea of providing a consistent and superior customer service dovetails with our renewed focus on national and industrial accounts.

National accounts need to know that their business will be recognized as a top priority, even when they send a crew out in one of our markets for the first time, that they're getting the same level of service through us through Operation United.

Industrial accounts, as I've mentioned on prior calls, are also a key part of our strategic plan. The industrial market tends to be more stable than construction. These customers use many of the same types of equipment as contractors, although for different purposes, such as periodic plant shutdowns and facility maintenance.

We are pursuing share in that $12 billion industrial rental market, primarily through targeted sales efforts and branch specialization. In the first quarter, we signed 12 new industrial companies to our national accounts program, increasing our presence in sectors ranging from wind energy and refrigeration to distribution and mining. We estimate that in total, these 12 customers represent a potential rental wallet of over $28 million annually.

And the pace is accelerating. We've already signed another eight large industrial companies as national accounts in April, including a leading chemical manufacturer and a Fortune 500 company.

We estimate that our April signings represent a potential rental wallet of about $40 million annually, and while we may not capture 100% of that business, we certainly intend to try.

The second opportunity has to do with becoming the first choice for equipment rental with customers of all types and sizes. By capturing the loyalty of our customers, we can lock in their business in good times and bad.

Now since we've launched Operation United in January, all of our branches have started using customer service scorecards which measures performance at key points during the rental process. The scorecards are first of many steps we're taking to distinguish our service from the rest of the industry. Our branches have really stepped up to the plate with Operation United, which in turn has helped grow our national accounts program. In the nine months since we launched our strategic push for national accounts, we have signed about 100 of these large customers, with more under negotiation. 45 of them were signed in the first three months of this year.

When we sign a new national account, there is a good chance that customer has rented from us at some point in the past, and this gives us a valuable basis for comparison. I can tell you that the 45 national account customers who came on board in the first quarter generated nearly two times the revenue in total compared to the same three months last year. The difference is that last year, we were merely a local supplier for their job sites, and now we are relating to them as a true partner on a national level.

Now, one of the things we look for when we sign a national account is their growth potential, and in terms of share of wallet. National agreements have a slightly negative effect on rates in the short-term, but these large accounts are also more efficient to service, with fewer touches, and are therefore more profitable for us, particularly given their volume over time.

So as you can see, we are taking many steps to weather the economic storm. It's fair to say that this is the most severe downturn I've seen in my 30 years in the industry. We have been presented with historic challenges. Nevertheless, we have a team at the helm and have seen cycles before. And we've put a plan in place before the headwinds hit. We also know what to expect as we come out the other side, and we will be prepared for that as well.

Now despite a rocky quarter, employee morale remains high, even in the current environment. Our senior management team has continued to hold town hall meetings with employees in the US and Canada. We sit down face-to-face with our employees. We see concerns about the economy, but we also see the strong belief that the Company is headed in the right correction.

Now as the year progresses, I can promise you that we will continue to do everything within our power to take command of the circumstances. Our hand is firmly on the levers of cost control, CapEx management, and fleet management. And we are effectively working to reduce the impact of further rate declines, and to generate free cash flow. And we are continuing to shape our revenue base to be more resilient to cycles, with an increasing emphasis on industrial customers and large, geographically diversified national accounts.

As for the balance of 2009, it's impossible to say whether the worst is behind us at this point. What I can tell you is this -- we have the most horsepower of any company in our industry, in the form of seasoned management, an expert board, the benefits of scale, and a rock-solid plan that serves both our short-term needs and our long-term vision for profitable growth.

We are not just riding out the cycle, we are managing our way through it, with the help of more than 9,000 talented employees who go to work each day determined to win. And we are doing our job to make sure that we meet this challenge.

And with that, I'll ask Bill to review the first-quarter results and our capital structure, and then we will go to Q&A and take your questions. Bill?

Thank you, Michael, and good morning to everyone.

Today I'd like to spend some time reviewing our capital structure and liquidity, our fleet management strategy, and our first-quarter performance. Before we get started, though, I would like to review where we stand on the objectives we established at the beginning of the year.

With respect to SG&A, we committed to reducing the absolute level of our 2009 SG&A spend by $40 million to $50 million. I'm pleased to report that in the first quarter we achieved the $21 million reduction by focusing on all areas of our spend. This includes salaries, benefits, advertising, and professional fees.

Given this performance, we are now expecting a full-year reduction of $50 million to $60 million in SG&A, and we are still looking for more.

Looking at CapEx, as Michael mentioned, we are now expecting net rental CapEx for the year to be near zero, and perhaps even producing positive a cash inflow. This represents an improvement versus the $100 million of net rental CapEx that we forecast earlier. And perhaps more importantly, it illustrates our capacity to adjust fleet management plans in real-time as market conditions change.

The third objective we laid out related to free cash flow. At the end of February, we indicated that we would generate about $300 million of free cash flow, and that we would use this cash to reduce debt. I'm pleased to report that in the first quarter, we reduced our debt by $113 million, including $22 million related to open-market repurchases of our 6.5% senior notes.

Additionally, despite the challenges of the current environment, we believe our $300 million target for free cash flow is still achievable, and will create opportunities for further debt reductions.

The reason we identified these objectives and made them the cornerstone of our 2009 strategy is because in this environment, liquidity and a flexible capital structure are of paramount importance. Let's take a moment to review where we stand.

First, liquidity. At the end of March, we had over $650 million of available liquidity. This includes both availability under our ABL, and cash on hand.

Turning to our capital structure, the most restrictive relevant covenants we face are in our ABL. There, we have two financial covenants -- a fixed-charge coverage ratio, and a senior secured leverage ratio.

At the end of the quarter, our fixed-charge coverage ratio was 2.59 times, which is significantly more than the minimal threshold ratio of 1.1 time. Meanwhile, the senior leverage ratio was 0.95 times at the end of the quarter, and that was significantly less than the maximum threshold for that ratio of 1.75 times.

So as you can see, we continue to maintain substantial cushion in both these covenants at the quarter end. And looking ahead, we expect these covenants to become even less restrictive since the terms of our ABL facility allow them to spring off in June of this year if we maintain availability in the facility of at least 20%. That is a threshold we expect to easily exceed, given that our availability was 44% at the end of March, and it is up to 46% as we sit today.

Now, let's take a few minutes to review our fleet management strategy, which provides important context for our first-quarter results.

Our fleet strategy, which is a priority in any environment, is even more important when construction activity is weak and a healthy balance sheet is critical.

Our strategy involves three principal objectives -- satisfying customer demand, managing utilization levels, and preserving cash. Here are some of the ways that we executed our strategy in the quarter.

On an OEC basis we sold $184 million of fleet, and that generated proceeds of $67 million. The average age of the fleet we sold was 78 months, consistent with our strategy for managing the age of our fleet.

As we expected, we did age the fleet slightly during the quarter, up from 39.2 months at the end of the year to 40.2 months at the end of March.

In terms of our used-equipment margins, although they were down this quarter, this was expected given that 40% of those sales were at auction -- more than double the percentage in the prior year.

Looking at fleet levels, our OEC decreased by over $100 million since year-end, and our unit count decreased by approximately 10,000 units or 4% over that same period.

Our net rental CapEx which included $52 million of purchases produced positive cash flow of $15 million for the quarter.

Turning to our first-quarter results -- first, revenues. Rental revenue decreased 23% in the quarter, reflecting an 11.5% decline in rental rates and a 2.4 percentage point decline in time utilization.

In our contractor supplies business, revenue was down 43%, consistent with the softer operating environment and our continued emphasis on only the most profitable supply sales. Our gross margins, however, improved 670 basis points, to 28.1%, again reflecting the ongoing repositioning.

Second, on costs. As I discussed earlier, reducing our cost base, including both the cost of rentals and SG&A, is a key part of our strategy and one of the levers we can pull to mitigate the impact of rate declines.

Already we discussed SG&A, so let me turn to our cost of rentals, excluding depreciation. We reduced these costs by $43 million during the quarter. Now part of this improvement relates to lower utilization levels, but the bulk of the reduction related to costs that are more fixed in nature, such as labor, benefits, facilities and insurance. We will continue to focus intensely on these areas, as we believe there are more saves to be had.

And finally, EBITDA. Our adjusted EBITDA margin was 24.4% for the quarter, compared to 29.7% in 2008. As expected, our EBITDA margins came under pressure as we were able to only partially offset the impact of rapid rate declines with costs saves.

Before we open up the call to Q&A, I want to spend a few moments on the announcement we made last evening related to the additional branch closures. As Michael mentioned, we plan to close another 39 locations and temporarily suspend operations at an additional four.

The process we went through to identify these branches was intense. Among other factors, we considered recent and historic branch profitability, proximity to other United Rentals locations, the quality of the real estate, and future earnings potential. By way of example, of the 39 planned closed branches, 38 were within 20 miles of another location. And even after these closures, we expect to have retained the market presence which is necessary to serve our customers.

In terms of the fleet at these branches, we expect to redeploy approximately 65% of this fleet, or $80 million of OEC, to nearby branches. The balance of the fleet will be sold.

These branches were strategically selected and, importantly, will allow us to improve our long-term returns while retaining our leadership position in key trade areas.

That summarizes my comments on the first-quarter results. Now I would like to turn it over to the operator to begin Q&A. Operator?

(Operator Instructions). Henry Kirn, UBS.

Good morning, guys. I'm wondering if you could talk a little about the historical experience when you closed branches are within 20 miles of another. How much have you been able to keep in house and how much has leaked out?

Henry, this is Mike. Actually, when you go through each, and the analysis -- by the way, I just want to quantify by -- we go into a very deep, deep analysis process that involves not only finance but the operators, all the way down to the local level. And we analyzed our deliver-to radius. And as a result we would expect to retain somewhere around two-thirds to -- 60% of the revenue.

Some of the other business which is walk-in and the cash business will go away. But this should have a high retention level. But each branch is really determined on its market and where it is positioned. But on balance, that's where it falls out.

Okay, and is it possible to talk a little about maybe as we go a couple quarters out, what the potential recurring tailwind from not having those branches around any more would be?

Henry, it is Bill Plummer. Without going into specifics, we do expect that there will be an incremental impact to EBITDA, positive. It's not going to make the year for us. But it certainly will be a positive.

We do expect that we will improve margins as a result of the closures. Again, at the scale of what we are closing, it will be there. But it may not move the needle on our overall corporate margin. But certainly it's headed in the right direction. And certainly we expect that some of the other key metrics that we look at, in terms of performance per branch, performance per employee, other measures such like, will be improved as well.

Henry, I also wanted to kind of drop back to the earlier question, which may help you as well when you take a look at this. We look at not only where we are today, but where we expect this branch to perform over the next 3 to 5 years, using some projections -- whether it be the population shift, whether it be some of the McGraw-Hill projections -- to have a better understanding of where the market is.

And so all of those go into that equation when we look at these branches. And it's part of our longer-term strategy, that we will emerge as a leaner, stronger, more efficient company as we come out of this.

Okay, and if I could squeeze in one more, is it possible to talk a little about what you are seeing for prices in the used market, maybe by fleet type?

Sure. You know, let me just kind of give you a little bit of history. Based on the fourth-quarter call that we had about nine weeks ago, the lowest point that we saw was in December. The auction prices that came in in February did better than we expected.

We have seen a further decline in pricing. And it has kind of broken up into different categories. Obviously, larger earth-moving equipment is still being compressed. We are seeing also some compression on aerial equipment -- in particular, scissors lifts, things that are related to retail.

On the flip side, you are still seeing things are small in numbers that -- like some of the [reach] forklifts are still doing okay in material handling, and also lighting equipment. And some of the other light style of equipment related to general rentals is doing fairly well.

Okay, thanks a lot.

(multiple speakers) it's down.

David Raso, ISI Group.

Just a real simple question -- a little help with the interest expense for the rest of the year. How are you thinking about that figure? We started with 50 this year.

David, it's Bill. You know, I don't see any dramatic change to the interest expense over the remainder of the year, absent of course any repurchases that we might do later in the year. And so the first-quarter run rate I think is a fairly valid run rate for the rest of the year.

And when I think about the full-year free cash flow being maintained at $300 million, but it took $100 million of net CapEx reduction to keep it -- and obviously, that more than offsets the roughly, say, $20 million, $25 million of cash from the new restructuring in 2Q, that difference -- is it -- I know you don't give net income guidance for the year. But is that difference essentially an internal lowering of what you thought net income was going to be, and now where you think it's going to be? Or is there a working capital change in your thoughts as well?

Henry, Bill again. The rate environment we've seen is very aggressively down, and that flows through our operating results pretty significantly. And so we certainly have seen a more challenging operating environment, pressure on cash from ops. And we've got the ability to respond in the form of how we generate cash from our used equipment sales.

The good news is that the environment will allow us to ramp up used equipment sales, to respond and to offset somewhat, given the softness and the utilization that we have been seeing.

I think I called you Henry; sorry, David.

No worries. Regarding the EPS -- obviously, it was a loss this quarter. Do we expect each of the remaining quarters of the year to be positive?

We are not offering a specific number for the remaining quarters. So tune in. You will see as they unfold.

Chris Doherty, Oppenheimer.

Just a question on I guess, one, maintenance CapEx. What is your maintenance CapEx?

What is our maintenance CapEx? (multiple speakers).

(multiple speakers)

That is always a challenging question to ask. If you are talking about the amount of CapEx that we would need to spend to maintain our fleet at a given level of OEC, and a given level of age, it is a pretty significant number. It is something just south of $600 million.

If you are talking about the amount of CapEx that we would need to spend merely to keep the current equipment that we have operating, it is a materially lower number. I don't have one here sort of at the top of my head, but it is significantly lower.

I guess the question is, what do you think that your gross CapEx is going to be for the year? I mean, you discussed that on a net basis, it will be zero. I am just wondering from a gross CapEx --

Yes, again, we talk about it as a net. And we think about managing it as a net. And so we will continue to focus on the net number more so than the gross.

And I believe you actually should have had your appraisal done recently. Can you talk about that, in terms of what values were down and what your excess borrowing base is right now versus the commitment?

We did. [Rouse] completed their semiannual assessment of our fleet in March. The net result was that our values were down roughly 20% versus the September number, and that left us with -- still left us with very significant suppressed availability, i.e. a borrowing base above the max size of the facility.

We have suppressed availability of somewhere north of $0.5 billion still.

Then, just in terms of repurchases -- you talked about quickly maybe buying some more debt back. I thought on the last call you said your RP basket was negative, given the goodwill charge that you took in Q4. How are you buying back (inaudible), and where is the ability to buy these back, given the negative RP balance?

Chris, you picked probably the most complicated question you could possibly have asked. But let me try it here.

The RP basket that is negative is the basket that arises out of our 6.5% senior unsecured notes. That negative balance in the basket restricts the operating company, URNA, from buying subordinated issues. It does not restrict the operating company, URNA, from buying the 6.5% notes. So we can still buy the 6.5s, which is what we did in the first quarter.

On top of that, there is cash available to us up in the holding company, URI -- the parent -- which could also be used to buy issues either of the holding company or the operating company. It has its own separate restricted payments limitation basket which is significantly positive.

And so if we decided we wanted to buy subordinated issues, we could do it using the cash that is held up at the URI holding-company level.

Now, if I am not mistaken, on the last call you said there was no cash up there at that point. Did you move cash up there?

No, there was cash at the last call. There was about $260 million, if I remember correctly, up at the holding-company level, at the last call. It's a little bit more now. And we have moved cash over the course of the last year to get us there.

We also have ongoing relationships between the holding company and the operating company, that are defined as trademark license agreements and service agreements that flow cash up on an ongoing basis, sufficient to support the debt service at the holding-company level, URI.

Of that $260 million that can still be used to basically take out the 1-7/8 converts, when those become put-able on 2010, correct?

That is correct, although it wouldn't need to be used to respond to the put of the 1-7/8. It would need to be used to buy them in the open market, but responding to the put of the 1-7/8 is a scheduled event in the indenture of the operating company, and we can respond to that regardless of what the RP basket status is.

Then just one last question, related to the trench business. You know, I look at that business, and you have some pretty good dollar utilization on that. But yet, time utilization is down. And I wonder whether there is an ability to liquidate some of that equipment and just get better time utilization and better ROIs on that. Is there a market for used equipment in that sector?

This is Mike. Yes, you are right, it does get a substantial return on invested capital in that business, the ROI is extremely attractive.

Most of the assets they have is not serialized. A lot of it is steel plate and more commodity than anything else. We believe that with the infrastructure and the stimulus package, that that is well-positioned to improve over time, and I think I would hesitate before [depleting] that area of the business at this point. Again, it will benefit quicker than any one of our segments with a stimulus package infrastructure spending.

That was part B of my question, so thank you, Michael. That's it.

Manish Somaiya, Citi.

Good morning. I had a question -- you know, one of your peers announced earnings yesterday. Their pricing is off 4%, yours was off 11.5%. And I am just trying to reconcile the difference.

Well, the difference are -- one, I don't know how they measure rates. I can only tell you how we measure rates, as far as the difference. You know, rates is a balancing act. As you know, we're transforming our business away from smaller customers to national accounts in industrial. Part of that is inflicted that we are doing it [intentionally].

The rest of it is, it is a very challenging market out there. And sometimes we have seen some irrational pricing. We have actually walked away.

But you know, my comment and my opening statement is we're going to do a better job. We are going to really dive in and we're going to make sure that we are really managing these rates effectively. And I think that is the prudent thing for us to do.

But I can't measure the delta between us and them. Different companies, and I'll leave it at that.

You know, my follow-up is, if I look at the rental fleet OEC, it was only down about $100 million sequentially. And I guess realizing that the environment was weak and getting weaker, what was sort of the decision not to aggressively bring that down?

Well, you know, one of which is it's the winter, it is the lowest part of the seasonal structure of our industry.

We have aggressively taken our inventory down. If you go back, we took $100 million out in the fourth quarter -- to your point, sequentially down another $100 million. We will continue to de-fleet as we go through the year and we are just doing it in an orderly process.

You know, we are also selling our oldest fleet at 78 months, which is part of our lifecycle. But it is safe to say, Manish, that we will continue to de-fleet through the balance of this year.

And in regards to the gross margin on sale of used equipment, I think you pointed out that they declined pretty substantially, and part of that [were] related to the mix shift from retail sales to auctions. Do you expect that to continue? And I guess with the weaker markets, would you be willing to sell equipment even as margins turn negative?

Well, in fact, we have been selling some fleet that has been negative. You know, as I just mentioned, some of the results that we are seeing, we have seen some excavators, earth-moving equipment has been negative. When you take a look at our rates, it is a balance of what we do on retail versus auctions.

This last quarter, 40% of our sales were actually at auctions, which is much higher than we've had in the past. We will continue to de-fleet, and to your point, the margins will come out where they fit. But I would expect the margins to continue to decline for some period.

Okay, I appreciate it, Michael. Thank you.

Seth Weber, Bank of America.

Mike, I know you are not giving quarterly guidance specifically, but can you comment on April and how that came in relative to, say, March? I mean, I know there is a seasonal uptick. But can you give us any color on what April looked like?

Well, we can't give you specific numbers. What I can tell you is that we have seen a slight seasonal uptick, albeit at a lower volume than it was on a year-over-year basis. And I think that is consistent with the current macro environment.

You know, everyone inside the industry, I think, is -- all of us are de-fleeting and taking as much cost out of our structure. We will continue that as well. But we are not going to give quarterly guidance, you are right, Seth. And it is too early in the game.

Okay. Have you started to see any improvement in Florida or California?

In California, we have seen it somewhat hit bottom. It appears to be leveling off. We are seeing some of our time utilization slightly improve there.

Florida is still a different story. It is still a mixed bag with regards to the markets. And by the way, those two states are the two states that we've had the most of our consolidation and closures.

Right, okay. Maybe Bill, can you talk about, are you seeing anything on the bad debt side? Have there been any pickups there that you are taking notice of?

Yes, I mean bad debt expense for us did tick up a little bit versus last year, as you might expect in the current environment. But it is nothing major, nothing that we are overly concerned about.

We ended the quarter with DSO of about 55.1 days, and that was only up about half a day versus last year at this time. So we're watching it very carefully. Our credit and collections people are calling earlier, calling more frequently. We are leaning more jobs. We are doing all the things that you would expect and hope that we would be doing in this environment. And I think it is playing to our benefit. But obviously, you have to continue to watch it very closely in an environment that is as soft as what we are.

Okay, and then just last question -- if you're net CapEx is approaching zero this year, do you have any idea where you expect to end the year as far as the number of fleet months, number of -- age and fleet months?

This is Mike. We are comfortable coming in around 43 months. And that's what we said on the last call. We are still holding to it.

Keep in mind, we are selling the oldest assets first, which is a key takeaway. And if you go to our investor presentation on the web, you will see it on page 32.

Tom Klamka, Credit Suisse.

On the fleet side, it sounds like you're going to be somewhat more aggressive on selling fleet. And I guess my question is, you are taking a lot out of SG&A. You took out, I guess, $20 million. You are targeting $50 million to $60 million.

As the environment continues to decline, what other levers can you push to take the fixed costs out of the business to try to keep profitability where it is, at least?

This is Mike. Obviously, you are right; we've reduced our CapEx. We will also increase our used sales. We've adjusted our headcount. We will continue to look at that as the market continues -- we transfer our fleet, and we've optimized our branch network, and that will play out over the second quarter.

But I'll tell you that we are still pursuing several areas, one of which is trying to build our business in the industrial -- that's one. So we are trying to look at putting a revenue stream in place. But we haven't -- there's more to come, and more for us to focus on on cost control. We're not done yet. And that's a commitment by me and the management team to continue to focus on. So I would expect more to come.

And what's the timing on the branch sales -- I'm sorry, on the branch closures? And did you quantify the cost savings that you expect to come out of that?

We certainly expect the closures to happen during the course of the second quarter. We haven't quantified really any of the impact in the P&L. Why don't we address that as the quarter unfolds?

Okay. And it looks like your availability on the ABL is somewhere around $550 million. Can you give us the balance on that as of the end of the quarter?

The end of the quarter ABL balance I have today is -- hang on one second; I will get you quarter end. We had $561 million at the end of the quarter.

Okay. And your availability of roughly $550 million, it looks like -- that's after the appraisal?

The availability after the appraisal -- I'm sorry, the $561 million number was the combined availability as of the end of the quarter.

Right.

So is your question about availability, or is it about --?

Well, two questions. Is that availability number under the ABL -- does that reflect the decline in [OLBs] per the Rouse appraisal?

Yes, it does. As I said earlier, the borrowing base which underlies the overall facility is more than $0.5 billion in excess of the $1.285 billion max size of the facility.

Okay, great. Thank you.

I always have to be careful with these things, because the bankers have their own languages. So I try to state it in plain English. But sometimes the terms get confusing.

Sure. I appreciate it.

Scott Schneeberger, Oppenheimer.

Thanks, good morning. Could we talk a minute on industrial? I didn't catch if you guys mentioned what the mix was now. It sounds like some good opportunity there; can we just go a little deeper? Particularly, I think I missed the detail, too, on -- was it eight new opportunities in April that you have closed, or were they looking to be signed in the $40 million opportunity?

No, we had 12 up going into the quarter and we had an additional eight in this past month, in April. So that makes the total 20. And that -- the total share of the wallet spend as estimated with our team and with our partner, gives us color as to how much they would spend altogether.

What was the other part of your question?

Just, what is your mix now of industrial, given that you are actively pursuing it?

Yes, right now it is roughly 19%. Our objective is -- that's what you're asking me?

Yes.

-- is to go towards 30%.

Okay, thanks. Switching up -- on pricing, you mentioned the new systems and looking to have more centralized control and standardization for the branches. How far out is achieving that? Is it something where you may not be able to properly communicate this for the next quarter or two, or is this just something that is going to happen instantly?

Well, it is a phase in process, and that's a great question. And to be quite candid with you, I am very excited about this, because I think the industry is ready for something like this.

Starting in this quarter, we will pilot and then we will roll out the base going into the third quarter, which will effectively automate a lot of the processes that we have today. So it will be real-time information available.

As we go through into the fourth quarter, we will roll out a dynamic pricing model which takes into account a lot of different things, like the customers, the type of customer, the type of equipment, how they pay, the return, their ROI on the customer -- just a lot of different things that are a little more scientific. And that will be very, very robust and I think cutting edge, I know for this company, and certainly, I think, for the industry.

And it will have a hard stop that will require approval process. And so you can look forward to us rolling that out starting in the second quarter -- this quarter today, into the third quarter. But it's not going to stop us from doing all the other fundamentals that we are doing. It is just going to speed up the process.

Okay, thanks on that. And then finally, a two-pronged question.

Auction percentage of used equipment sales went up in the first quarter. Can you give us an indication of -- do you think that will tick up or down in the second quarter?

And then also, to the extent you can answer, used equipment margins -- continuing to trend down in the second quarter? Thanks.

The answer to both is yes. Because of all the closures, we will probably be pursuing -- some of that will go retail that we are not using for the closures. But we'll push out the remainder through auctions.

With regards to -- so as a percentage of our total sales, auctions will increase as we go forward. And what was the other part of the question?

Just maybe intuitively -- I think you already covered it, not a surprise -- margins in used equipment probably still continuing to decline, 2Q from 1Q?

Yes. Yes, it will be balanced -- the auction prices will be balanced against our retail prices, because we still are retailing equipment to our sales force.

Philip Volpicelli, Cantor Fitzgerald.

I was wondering about the timing of the free cash flow. Is it correct to assume that the bulk of the free cash flow will come in the first and fourth quarters, with very little in the second and third?

I think the timing really will depend on how the timing of the used sales flow throughout the course of the year. And so we will have to see how that plays.

Again, the watchword for us is flexibility and being able to respond as the market unfolds. And we will ramp up or ramp down [new] sales, new CapEx in response to what we see in the operating environment.

Okay. And then for the year, do you have an estimate of cash taxes?

For the full year? One second here. (multiple speakers) 12.

$12 million, great. And then working capital -- do we expect that to be a source or a use as we go through the year, in your [tracking of] the business?

That one is going to be a source for the year -- probably decent sized, and just responding primarily to the decline in accounts receivable.

Okay. And then, as we look at the one-time costs associated with the cost savings that you guys have implemented, I think you made it very clear in the second quarter it is $11 million to $16 million of cash costs. What's the total year expectation for the cash costs associated with the cost-saving programs?

Most of it will be cash. Honestly, I don't have a number right off the top of my head, so let me hold off on offering a specific cash target there.

Okay. I guess what I'm trying to do is, I am trying to build back to an EBITDA number going from the bottom up. And if you have $300 million of free cash flow, let's say $200 million of interest expense, zero on CapEx, roughly $12 million on cash taxes; let's say $20 million on one-time costs -- the number is more in the $500 of EBITDA. That sounds a little low based upon what you are seeing. Am I wrong, or is the free cash flow number very conservative?

I certainly won't offer an opinion on whether you're right or wrong. We believe the free cash flow number is achievable, and that is what we are going to manage to.

Okay. Last question -- the annual trademark licenses and service agreements that go from URNA to URI -- do you have a -- how big is that? What's the number?

Roughly $75 million between the two of them.

Great. Thank you very much. Good luck, guys.

Thank you. I would like to hand the program back to our presenters for any further remarks.

Well, thank you, operator. I want to thank everyone for joining us today. You can see that we are looking at the year very realistically, but at the same time, are refusing to concede in any area that was within our control. We are steering the ship accordingly to a clear, defined strategy for long-term growth, and we're taking all the necessary steps to strengthen our current course, which is meeting our customer demand, a healthy liquidity, shifting our base towards longer accounts, larger accounts -- and positioning the Company to benefit significantly when the recovery begins.

This concludes our remarks for today and I want to thank everybody. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.