聯合設備租賃 (URI) 2009 Q2 法說會逐字稿

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

Before we begin, please note that the United Rentals' earnings-release comments made on today's call in responses to your questions contain forward-looking statements. United Rentals' business 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.

A summary of these uncertainties is included in the Safe Harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2008, as well as to the subsequent filings with the SEC. You can access these 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. You should also note that today's call will include references 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.

Thanks, Operator. Good morning, everyone, and thank you for joining us today. With me today is Bill Plummer, our Chief Financial Officer, and other members of our senior management team. Bill will discuss our current capital structure and review our financial results with you.

But first, I want to spend some time on our environment and operations, including the initiatives that led us to increase our targets for free cash flow and SG&A savings for the year. As we reported last night, we now believe our free cash flow will be about $325 million, instead of the $300 million we had originally projected.

We also expect to reduce our SG&A expense by $80 million to $90 million, which is about $40 million more than our original estimate.

Both of these metrics reflect our ability to manage our business with discipline and purpose in a challenging environment. Now, as you will hear from us today, our second story -- quarter story is one of sequential progress on key operational metrics in a market that is still declining. That includes rates.

But I also want to make it clear, right up front, that we are not satisfied with our current rate performance, even given the severity of this downturn. There are things that we can do to move our rates in the right direction and we're doing them, and I'll talk more about rates in a minute.

This construction cycle is more severe than any in recent history, but will run its course. We have made a conscious decision to manage the Company through the recession by balancing short-term and long-term goals.

At the corporate level, we are pursuing a strategy of long-term profitability that is based on customer-service leadership and shifting our customer mix toward larger, more profitable accounts.

At the branch level, our field operations are focused on managing daily performance and protecting key relationships. Equipment rental is a service business and, to some degree, the amount of weight we carry in facilities, fleet, and payroll is a function of the need of our services. Our branch count shrank by 6% in the quarter, which we believe is an appropriate amount of right-sizing given the current conditions.

At the same time, we are investing in making our existing operations as competitive as possible. We are bringing discipline to every area of operations and we believe that it is possible to continuously improve many of our metrics in the event -- even in this environment.

The timing of the recovery still has no consensus within our industry. Some of our customers are telling us that they are still working through backlogs of prior commitments, although the pipeline is dwindling. Commercial starts have taken the biggest hit. Institutional projects are doing better, particularly in medical, education, and energy sectors.

Commercial construction will get no direct benefit from stimulus funds and most analysts are predicting a decline in this sector in 2010. But the degree of decline is a matter for debate. We've seen projections ranging from nearly flat year over year to bearish forecasts with declines in the double digits.

Global Insight, which tracks market activity for the American Rental Association, expects commercial construction to decline 22% in 2010, hitting bottom in the third quarter.

There is still a lot of volatility surrounding all areas of construction. Just as one example, the Architectural Billings Index for June dropped nearly 5 points to a rating of 37.7, which is disappointing after seeing signs of stability in the ABI for April and May.

Despite some mixed signals, most construction analysts seem to think that the pace of decline will ease but it hasn't hit bottom yet, and we agree. We believe that our end markets may stabilize and begin a gradual recovery in the third or fourth quarter of 2010.

Part of this timing has to do with the nature of non-residential construction, which typically trails an economic recovery by six months or more. There are two exceptions worth mentioning. One is Canada. Global Insight predicts that Canada will show modest gains, both this year and next, in the commercial and manufacturing sectors.

As a broad statement, I can tell you that our own experience seems to support this. In general, we are finding the rate of decline to be less severe in our Canadian markets than in the U.S..

Another bright spot should be the stimulus spending. We haven't seen much impact from this yet, but Washington is beginning to apply pressure on states to spend the money more quickly on infrastructure. Our GSA certification and trench safety expertise make a strong case to use United Rentals for these jobs.

In fact, we just got the green light for trench safety work on five miles of pipeline in Utah that is being built with stimulus funds.

So that's a snapshot of our external environment. We are not prepared to say the worst is behind us, but for the first time, the worst seems to be in sight and so does the other side.

Now I would like to turn the discussion inward to our operations. A few minutes ago, I mentioned that our strategy is helping to drive sequential improvements in key metrics. The other factor at play is that equipment demand always trends upward late in the second quarter, although this time the trend is very modest.

We went into the quarter with our eyes wide open, knowing that any seasonal uptick would be muted by the recession and there would be no magic bullet. Instead, we stayed focused on our strategy of transforming this business to drive sustainable improvements in key metrics over time. As a result, we were able to mitigate the impact of the environment in the second quarter.

Now I want to spend a few minutes reviewing some of those metrics in the areas of rate management, fleet management, cost control, and our proactive approach to right-sizing the business, as well as our focus on national accounts through Operation United.

First, rate management. As I said in the past, rates are a complex issue and there's no common platform for comparison in our industry. That's why one of the metrics that we look at is dollar utilization.

The price a company can get for rental transaction is affected by the overall economy, by fleet mix, customer mix, the duration of the rental, and, most of all, by strategy. We manage our business for a balance of rates and utilization, taking all these factors into account.

Right now, our focus is growing our relationships with key customers while ensuring that we make profit from those transactions.

When we break the quarter down in terms of rate activity, there are some positive signs. We actually saw an improvement in sequential monthly rates in the quarter, when June rates increased 0.3% from May. July will show an even larger sequential improvement.

Rates are still very much lower than we'd like, but we're moving them in the right direction through intense rate management and a willingness to walk away from unprofitable deals. The challenge will come later this year and early next year, when demand is likely to fall off. By then, we will have several months of data from our pilot program for price optimization.

We are currently using additional software to set rates in 92 pilot locations. This is letting us take a more scientific approach to rate management in the field with a goal of capturing business at an optimum price. We can make more informed decisions at market level and unprofitable deals will be more obvious to our branches.

Now, turning to fleet. The three fleet metrics I want to focus on this morning are used equipment sales, OEC on rent, and time utilization. We have consistently said that defleeting is one of the levers that we could pull if necessary, and we're making good on that promise.

In the second quarter, we sold 47% more fleet than in the prior three months, based on original equipment costs.

Another metric that showed sequential improvement in the second quarter was OEC on rent. On average, we had about $150 million more of OEC on rent in the second quarter than we did in the first, despite significant defleeting. And we're going to have another sequential increase in July.

Now some of this can be attributed to seasonality, but there is also an indication that we're doing an effective job of fleet management.

Time utilization is the third key metric related to fleet. Although time utilization is down year to date, we achieved sequential increases in the second quarter at a pace very similar to last year. Time utilization in April was 59.4; in May, 61.2; and in June, 63.3.

Now let's turn to cost control. In the second quarter, we brought down our SG&A expense by $27 million on a year-over-year basis. That followed a reduction of $21 million in the first quarter.

We closed 38 branches in the quarter, which brings our total to 48 closures through June. We also opened two cold starts in the quarter, and since January of 2008, we have reduced our network by a net 115 branches, from 697 to 582.

Now this reduction is a dramatic shift from our Company's historic pattern. It shows that we are committed to taking decisive action, as difficult as those decisions may be. As our markets continued to shrink in the early part of the year, we made proactive adjustments to our second-quarter plan and, as a result, we were able to further consolidate our operations with almost no disruption to customer service.

However, reductions of any kind are never easy. There is always a human impact. In the second quarter, we lowered our headcount by another 800 employees, with the majority of them at the branch level.

Now before I leave the subject of cost control, I want to emphasize that the actions we're taking are proactive rather than reactive. There is a strategic rationale for every decision we make. For example, in the process of closing branches, we are also optimizing our footprint with an eye toward an eventual recovery.

And while we've increased our target for SG&A savings for the year, it's not the end of the story. We will continue to look at ways to take excess cost out of this business now and in an upturn.

Now before I turn the call over to Bill, I wanted to spend a minute on Operation United international accounts program. For nearly a year, we have been acting on our decision to shift our customer mix toward larger construction and industrial accounts. From July of 2008 through June of 2009, we signed 157 accounts. 111 of them came on board since January. So our national accounts program is making significant progress.

As expected, many of these larger accounts are proving to be more resilient than our smaller, more local customer base, which is why we intensified focus on national accounts and should help with future cycles. We estimate that the new national accounts signed in the past six months represent a total of potential wallet of about $70 million in annual rental revenues, even in this economy.

We are confident that once these customers do business with us, our ability to meet their needs will earn us a significant share of that buy.

Now, under the umbrella of national accounts, we are having success in leveraging our size to attract large industrial customers. 28 of the national accounts signed this year are industrial companies, and we have more on the horizon. Now, through mid-year, industrial rentals contributed about 19% of rental revenues, which is about 10 points shy of where we see as an optimum mix.

We're definitely on the right track with our industrial business. Of our top 50 industrial accounts, 37 have been on board for at least a year, giving us a basis for comparison. For the second quarter, more than half of these 37 accounts increased their revenues with us, even through -- as the economy declined.

Now as I've mentioned in the past, industrial rentals have a prominent place in our long-term strategy for growth, both organically and through acquisition. Last week, we acquired Leasco Equipment Services, an industrial rental company in Ohio, and while we remain open to additional strategic tuck-ins, our current operations are capable of handling much more than our current 4% share of the $12 billion industrial rental market.

All of our customers, large or small, construction or industrial, are dealing with the same economic challenges we are. Customers are looking for a partner, not just an equipment rental supplier. Rather than sit back on our heels, we're using Operation United to push forward with our customer-service improvements that will cement our relationships now and bear fruit in a recovery.

Every United Rentals branch is now using an Operation United scorecard that tracks performance against benchmarks for metrics such as on-time delivery and service response time. Having visited dozens of branches, I can tell you that our employees are embracing the scorecard and are starting to use it daily in their operations. They see customer-service leadership as an attainable goal, one that will set us apart from the competition. We plan to share more of these metrics with you on our third-quarter call.

So as you can see, we are acting on a realistic and achievable blueprint that raises the bar on rental operations, customer service, and national accounts. All of these things are within our control and largely unrelated to the economy. We've given you an unusual amount of operational detail this morning because we want you to understand the depth of our commitment to continuous improvement.

We are hitting our marks on cost control, cash flow, and fleet management. And our revenue mix is responding to our focus on larger accounts, even though our total revenues and EBITDA remained lower than we would like. We remain committed to improving our margins, in taking disciplined actions to do so.

Now, the depth of this construction cycle is testing our entire industry, and while we've had to take some unprecedented actions, we also refuse to be distracted from our goals. With a strong strategy in place and plenty of levers at our disposal, we are prepared to manage through the remainder of this downturn, regardless of its duration.

When the cycle turns, you will see us capitalize on the same strengths that we are cultivating this year -- rate management, operational efficiency, fleet management, financial agility, and the pursuit of customer-service leadership. These are the qualities of a company focused on industry leadership, long-term growth as well.

With that, I will ask Bill to review our second-quarter results and the recent positive changes to our capital structure, and then we will go to Q&A and take your questions. Over to you, Bill.

Thanks, Mike, and good morning to everyone. I do want to touch on the second-quarter financial results, but before I get there, I would like to go back and update everyone on where we are against the outlook that we've been updating throughout the course of the year.

I would also like to spend a little time on our capital structure and liquidity position. Maybe I can add a little bit more detail on the fleet management activities over the quarter, and then, as I said, we'll end up with the financial results.

So, on the outlook, we gave three targets -- SG&A reduction, net rental CapEx, and free cash flow -- at the beginning of the year. And we've been updating them as we've gone along. Mike noted that we've actually raised the target on SG&A to $80 million to $90 million reduction from our previous target of $50 million to $60 million reduction. That was up from the initial target we gave at the beginning of the year of $40 million to $50 million reduction.

We raised this target because we put a lot of effort into identifying ways to save on SG&A and we're starting to see benefits of all that effort. We're seeing it in just about every line of SG&A -- salaries, benefits, T&E, professional fees, advertising. Anything that is part of that total SG&A, we are looking at, and we've got initiatives around to try and drive further reductions as we go forward.

And as I said, we've got more visibility. We've got more confidence, and that led us to raise the target to that $80 million to $90 million level.

On net rental CapEx, we are sticking with the target that we laid out originally for net zero -- for net rental CapEx over the course of the year. We were about zero in the quarter, $84 million in proceeds from new sales against $86 million of purchases for rental equipment.

If you look at the first half, we are actually at a net inflow of about $13 million over the first half, and as we've looked at our activities in the fleet, looked at our customer needs, and looked at our used sales opportunities throughout the course of the first half, we've become more and more convinced that we've got the ability to manage our capital spend in a disciplined way, manage our used sales in a disciplined way, and therefore you should be able to hit that net zero target for the year consistent with all the other targets that we've laid out for ourselves. So we are sticking with net zero for rental CapEx.

On free cash flow, we initially had a $300 million target for free cash flow. We've raised that to $325 million. That reflects some greater performance that we are expecting on costs, as you've seen in our target adjustments there. We've got a little bit better sense of where rates are and where they are headed, in the near term at least, and we've got some other cash flow levers that we haven't pulled yet that we still have the ability to resort to.

So we think that we've got enough visibility and confidence to be able to raise that target to $325 million. We made a good down payment on it in the first half. Close to $200 million of free cash flow generated in the first half. So we are well on our way, and again, we've got confidence on the $325 million target.

So those are the comments I wanted to make on the three previous outlook targets. I do note that, as Mike noted, we have added a target on cost of rent. I'll touch on that a little bit more later in my comments.

As to our capital structure, a couple of major events with regard to the capital structure happened in the quarter. The big one that you all know about, I'm sure, is that we issued $500 million of new senior unsecured debt. We issued a 10 7/8 note, maturing in 2016.

We issued that note as part of our strategy for managing the maturity profile of our debt portfolio. The notion is that we'll use the proceeds to manage our ABL balance, but also other senior debt maturities, in particular the 6.5s, which mature in 2012.

As we go forward, we'll employ those proceeds in open market transactions and, if necessary, in other ways to address the overall maturity profile that we are managing.

In the first -- excuse me, in the second quarter, we put about $200 million of those proceeds to work. We bought back just over $200 million of face of the 6.5s using the proceeds of that debt issue. The remainder pays down the balance of the ABL.

Going forward, we will look at opportunities as they are presented in the marketplace and make decisions about where to deploy those proceeds.

In addition to using the proceeds from the new debt issue, we've also used other cash to buy back other debt positions in our capital structure. And if you want more detail on that, we provided a table in the Q that we filed last night, breaking out the debt tranches that we bought and giving some more detail about the purchases there. So I refer you to that table.

But in total, we purchased about $125 million of face, of other debt issues other than the 6.5s. And that was part of our focus on paying down debt with free cash flow.

In the quarter, we reduced our face amount of debt by about $57 million. And as you look at the first half, we are now down $170 million in face amount of debt over that first half, and if you include the cash build-up, the net debt position is now down $218 million in the first half. So, making good progress on paying down our total debt balance and will continue to do so as we go forward.

The other significant item that we had on our capital structure in the quarter was the springing off of our financial covenants under the ABL. Recall that we had a test under the ABL that allowed the financial covenants to spring off if we maintained 20% or more availability in that ABL.

The test date was June 9 and we passed that test with flying colors, if you will. So those covenants went away, and they will stay gone unless and until availability under the ABL drops to below 10%. Needless to say, we don't foresee that happening in any reasonable economic scenario.

And so, we feel very comfortable that we won't have to worry about the financial covenants of the ABL for any time soon. It's not an immediate impact for us, because, obviously we had lots of cushion relative to the covenant levels in the ABL. But it gives us a little bit more flexibility to have those covenants gone.

On liquidity, we ended the quarter with $915 million of total liquidity. That being the sum of cash on hand plus availability under our ABL plus availability under our Accounts Receivable securitization facility. Our view is that $915 million of liquidity in this point in the cycle is a very, very strong position to have.

We feel very comfortable that that's an appropriate level of liquidity for us today. And we'll continue to manage that as we go through the remainder of this year and into next year.

Let me just offer a few words on fleet management. Mike gave some good insight into some of the activities around fleet. Maybe I can add just a little bit more. We transferred a record amount of fleet in the quarter, $1.6 billion in fleet. Ended the quarter at a different -- excuse me, ended the month during the quarter at a different home than it began the month. That's how we account for transfers in our overall fleet metrics.

That has been a tremendous lever for us to be able to satisfy customer demand without putting more capital into the business. So we're looking more and more at ways to leverage the total fleet, and do so in a way that many of our competitors can't. Given the breadth of our equipment portfolio, given the geographic footprint that we have, and the range of customers that we serve, we see fleet transfers as a real competitive lever for us. So we're going to continue to manage that.

We already touched on used equipment sales and the role it plays in our fleet management. Just to add a little bit more flavor there, we sold $271 million worth of OEC and used equipment this quarter. That's a record. And we did it very consciously as part of our -- managing our overall used equipment sales strategy, but also as part of our fleet management strategy.

Within that $271 million of OEC sold, the average month of the equipment sold was 78 months, and so that played a very key role in helping us manage the age of the fleet overall throughout the quarter. We ended the quarter with a fleet age of just over 40 months, down just a touch from where it was in the first quarter and very consistent with the target that we have for the full year. We are still targeting just north of the 43 months of fleet age at the end of 2009.

Looking at our overall fleet levels, fleet OEC came down by $170 million during the quarter. Unit count came down by about 16,000 during the quarter. And then, if you look year over year, OEC was down just about $0.5 billion. 13%. And year over year, the unit count was down about 40,000 units, or 16%.

So, positioning the fleet, managing it well within the context of the market, that we are doing.

Let me add a few comments on our financials for the quarter. First on revenues, our rent revenue in the quarter was down 28%. That reflects a 14% year-over-year decline in rate and 2.4 percentage points' decline in time utilization.

Obviously, a challenging environment. We continue to manage it effectively and we'll continue to do so. We feel like we are doing a reasonable job in the context of the environment. If you look at our dollar utilization, as Mike touched on, it's holding up, although it's challenged versus prior years.

We ended the quarter, dollar utilization for the quarter, of 44.9%. That was up two percentage points from the first quarter, reflecting seasonal impacts, but down versus the prior year.

In our contractor supplies line of business, revenue was down 44%. That reflects a soft environment, but it also reflects our strategy of repositioning contractor supplies to make it complementary of our rental business rather than a stand-alone business.

The supplies' decline in revenue is the bad news. The good news is that we are getting a little bit more in margin out of that business. Gross margins for contractor supplies improved 50 basis points versus the same quarter last year. And if you look year to date, gross margins in supplies was up 360 basis points versus the same period last year.

Used equipment sales, again, we already touched on, with $84 million of proceeds. That was up 24% over last year's proceeds, but that reflects the increased level of sales.

The downside is that those sales in this quarter were out along a loss of about $8 million.

When we look at the cost side of things, we already touched on SG&A so I won't spend any more time there. But with our cost of rent, we see that as a real opportunity for further cost reductions. Last year, we spent $1.1 billion on the cost of rental -- cost of rent when you exclude depreciation.

A little bit on that goes a long way, and so we've been focused in a wide variety of areas on ways to drive down cost of rent. In the second quarter, we delivered a save versus prior year of $69 million. That came in a wide range of areas, including labor, benefits, facilities' costs, insurance, again on down the line. It's across the spectrum.

We're continuing to look for other opportunities by streamlining, simplifying, automating wherever we can, and we'll continue to drive those kinds of ideas to realize even greater savings. In fact, so far through this year, we've got enough confidence and visibility on our ability to save costs of rent that we set out the new target that we've touched on already. Cost of rent this year we expect to be down between $190 million and $210 million for the year. That's all I wanted to say on costs.

Just real briefly on EBITDA. When you put it all together, EBITDA -- adjusted EBITDA for the quarter came in at $150 million. That's at a margin of 24.4%. Obviously, down significantly from last year. Last year in the second quarter, EBITDA on the same basis was 32.4%. Not where we want to be, in the least.

We're driving a number of initiatives to address that. Mike has touched on a lot of them, I've touched on a lot of them, and we're going to continue to do so in service of driving better performance at EBITDA.

Last thing before I wrap up. I wanted to offer a few thoughts on the shelf registration that we filed last night. If you noticed, you saw that we filed a $1 billion shelf registration, covering a wide variety of securities that might be issued from the shelf, including debt, warrants, convertible issues, and equity.

We put that shelf in place as part of our overall capital structure management strategy. I put it in the category of good financial housekeeping. As you think about managing your capital structure, having the ability to execute a transaction, do so quickly off of a shelf is just prudent management, and so we put it into place for that purpose.

We don't currently have any plans to draw anything under the shelf. We will continue to evaluate that as we go forward and let you know as we make decisions on that front. So those are my comments. I would like to turn it back now to the Operator for questions and answers. Operator?

(Operator Instructions). Henry Kirn, UBS.

Wondering if you could chat a little bit about your ability to age the fleet from here. How far would you be willing to age it and what categories could you age further than others?

That's a great question, Henry. We've always said the optimum range would be 35 months to 45 months. Clearly, right now we are at 40.1. We could conceivably go beyond 45. It's not beyond the realm.

If you look at the current average age today of the industry, it's currently at 44 -- a few points above and beyond that. And as you know, we continue to refurb our equipment, and as we refurb, we don't repurpose our -- the asset, we keep it at the original age. But if you were to do that, obviously our age would come down about -- a little, about three months.

If I could add -- equipment age is not physics. It's not like there is a set age at which the equipment, the average portfolio age, starts to really negatively impact us.

It does have an impact on R&M expense. That's something that we watch and manage actively. But we feel very comfortable that we've got the flexibility to manage age to significantly longer ages than we sit at right now, and indeed, we can go beyond the 45 months that we talked about as sort of an optimal top end of the range, as Mike said.

How much further beyond? We'd have to trade that off against what are the pressures driving us to age the equipment further.

Henry, one other point on that. I think as the industry goes forward, you'll continue to see the age of the fleets inside our industry continue to age out.

That's helpful. And as you look at the pockets of relative strength, could you talk a little more about where within your portfolio you are seeing the pockets and maybe, aside from Canada, which regions are stronger than others?

Sure. You know, if you take a look at the Gulf area, Texas is a large state for us. We are seeing continuous -- let me just go a step back for a moment, and say that the economy is touching all of our regions, but where we are seeing lesser amount of decline and some pockets of opportunity would be in Texas, Eastern Canada as well. Still within the Northeast corridor, there is still a volume of work that's on the books that still needs to be yet closed out.

Where we are seeing the weakness, obviously, remains in California, Arizona, Nevada, and also in Florida. By the way, if you take California and Florida, that's -- that's where we have a large population and a large portion of our business as well.

Scott Schneeberger, Oppenheimer & Co..

I guess, could we start out on the seasonality of the business? I saw the uptick, but obviously macro is a strong driver as well. How should we think about third quarter? Should we anticipate the typical seasonal uptick or is it going to be offset by macro this year?

Right now, we are seeing the seasonal uptick. I think it's too early to tell what the macro -- it will play out towards the tail end of the third quarter.

If you take a look at the ABI index a year ago, clearly towards the tail end of the third quarter, you start to see it decline. We haven't seen that play out yet, so it's yet to be determined. And that's the best scenario that we could just lay out between now and then.

Fair enough. On pricing, I'm -- back on paging my notes. I don't recall what you had said, but I heard something about pilots with the new software. Could you just take us a little deeper in the progress there, as well as the timeline as when you look to finish?

Sure. As you know, at the last quarterly call I talked about -- that we've engaged a company to work with us to put a software program in to manage rates -- to effectively manage rates. And we're going to shift away from just setting rates to more dynamic pricing.

As part of that progress in the second quarter, we rolled out 92 locations or pilot throughout North America, where we have automated the setting of rates based on logic that we have built. They take a lot of different things into consideration, like asset, time, and achievable rates that are in the marketplace. So we are rolling that pilot forward.

As we go into the fourth quarter, we would then start shifting towards piloting the dynamic pricing with the opportunity to -- our objective is, by the first quarter of next year, in January, to roll out a more dynamic pricing model.

And then, the last phase would play out to more of the national accounts and industrial accounts for just doing price bidding, so that we can take and look at these prices, long-term contracts, and look how we can determine the profitability and yield on those. So that's kind of the timeline.

We do have the 92 out there. It is marching forward. Too early to give you the results. When -- as we go into the third quarter, at the third-quarter call, we'll be deep into it so I'll be able to give you more details.

Great, thanks. And then, with the margin on used equipment sales swinging negative, but -- and you do have a big chunk of your free cash flow guidance already satisfied through half the year. But how should we think about your aggressiveness with selling used fleet now, given the fact that it looks like pricing is pretty tough in that market?

Sure. Let me just say that when we went into this year, we had a basis of what we thought we wanted to sell full year.

As we went through the second quarter, and I've mentioned on previous calls, that there are specific products that we saw weakness in. In particular, 19-foot scissors and some aerial equipment. They are related more towards retail, where I think there's an overcapacity.

When we take a look and march that out against the work that we see and the age of the equipment, we determined that we wanted to defleet specific categories of equipment inside of our aerial fleet.

We also do a financial analysis, as well, on those assets, to look at the return and cash flow that we would get.

When we started to see -- as we went through the first, second quarter, we didn't see our pricing in those products improve. In fact, we saw them weaken. So we took the liberty of -- and consciously moved those forward. So, we moved those sales forward in the second quarter.

It was a record sales for us. To give you the order of magnitude, we sold roughly 5,000 aerial pieces in the second quarter, which is a record and a large number by any stretch of the imagination.

As a result, we had to go through the auctions, and -- but it was a conscious decision that we made. We didn't see the pricing improving as time went on on these older assets.

Okay. Thanks. So should we anticipate big lump sales again, obviously, through the auction channel where you are going to get lesser economics, or was that a one-time deal and you think it's going to be a little bit more steady here through the end of the year?

I think it's yet to be determined. I think that as we go through and determine what the primary end market will tell us and what our customer demand will be, we'll make those decisions as we go forward. We are not prepared to say right today that we've got something that we're going to put out to auction or to extend our option the order of magnitude that we did before.

But it's one of the levers that we have at our disposal and we're not afraid to use it.

Scott, I'd only add that the fact that we accelerated into the first half gives us some more flexibility as we look at whatever the market delivers to us in the second half.

So, that's good to have in our pocket, but as Mike says, we're going to continue to monitor and make decisions based on where the market is, where pricing is, what we see sort of the volume capacity for the market as being, and what we think might happen as the end of the year comes closer.

Manish Somaiya, Citigroup.

A couple of questions. One, just to stay on the used equipment market. I guess one thing I'm trying to figure out is, do you sort of get the sense that the used equipment market will remain liquid as it has been for the last two or three quarters, or with all the excess capacity, what is your sort of likelihood that the used equipment market freezes up?

Well, I think it's very liquid. I think it really comes down to price, Manish. The auction market is a lever that we can pull and, obviously, as I just explained, we are not afraid to use it.

But there is still a retail sector that we do retail fleet. We are retailing our fleet, and those prices there have been resilient in comparison. But it's just cutting out the order of magnitude. You are right. There is an overcapacity within our industry. And it really determines how much is pushed through at one given moment.

It's fair to say that prices have come down because of the overcapacity and the willingness for companies to put more into the auction arena. But the auctions itself, to me, is still, and has been -- and I see as the foreseeable future, a conduit that will still remain open.

Secondly, as a follow-up, how do you guys think about balancing between selling more equipment versus just parking the equipment for the next upturn?

Manish, it's Bill. We've been actually discussing that notion quite a lot over the last month or two among ourselves and with our Board, and we've done some analysis to try and get at what's the right strategy for a piece of equipment.

You rent it, you sell it. We haven't gone through as detailed an analysis about the notion of you just sit on it for some period time. But that's the next iteration.

In looking at rent versus sell, we've modeled scenarios over various time periods under various assumptions about what you'd realize from a sale and what you'd be able to rent it out for in a rent scenario, and that's guided our thinking about how we are selling equipment. And how we might sell equipment in the second half. We'll continue to do that analysis.

As I said, we haven't gotten to that level of detail on the notion of I'm going to sit on it and wait until things get better at some point in the future. That strategy introduces even more variables around when might the market come back and what might rental rates look like at that time, and we just haven't gotten to that point of analysis.

And then, just lastly, Bill, since I have you, how much did you guys end up paying for Leasco?

We haven't disclosed that amount. It's a $14 million revenue company. We are going to stay away from disclosing the price right now.

Emily Shanks, Barclays Capital.

Thanks for all of the detail around the aerial equipment that you sold. Just as a follow-up question, if you had excluded those 5,000 pieces, would the margins still have been negative?

We didn't do the math that way. We can certainly take that offline and take a look at it. But we didn't break it apart that way. We'll have to come back to you on that.

Okay, great. Then, maybe as a follow-up, but know that if we have to take it offline, that's fine as well, but I was just curious what the average age of that aerial fleet that was sold was?

The average age of the fleet that we sold in general was 78 months. So it's safe to say that aerial is one of the oldest assets.

Right. But that's no different than at any point during the cycle, correct?

Well, we have been attempting -- or, actually, been very good from a fleet management standpoint of selling our oldest assets first as opposed to newer assets. So, we didn't break down the average age by categories of sold. We just take it as an average overall.

Okay, okay. And then, just generally, I know that obviously pricing is down and you are implementing this new software. I was just curious how you view your competitors on pricing. Do you view them as being rational? Are you seeing aggressive strategies? What's your take on that environment?

I always get that question. And it's a difficult one to answer. Because there is some companies that are doing some good things, there are some companies that are irrational, and we always try -- to point fingers.

But the reality of it is, the industry, there are companies that are landlocked, that are desperate. There are companies that are trying to enter new markets. And as a result, the only way they do that is lower rates.

I think there are still some irrational pricing going out there. In particular, companies that are striving to try to find a way or carve a way to make it through this downcycle. The larger companies have the ability to sell fleet, move fleet, and go to other markets.

One of the things that we do do, because we always get the question on the rental rates -- as I stated in my opening comments, our rates -- there is no comparable for rates with inside the industry. There's been an open discussion with American Rental Association.

But one of the things that we do do is we kind of go out and we do some online shopping and try to do some comparisons based on certain categories of equipment, to kind of give a market check of where things are. And on balance, we are either at or above most of the competitors that are out there. So that kind of -- we use that as a check and balance.

Again, I'm not happy where we are and we have -- we've made definitive actions, ideas, process, management discussions to improve rental rates. And this industry needs to know we've got to get ample return for the capital that we have, whether you are large or small.

Are you still there?

[Philip Copasetti], Cantor Fitzgerald.

I'm trying to figure out the actual cash movement with regard to the refinancing and the debt paydowns that you did. If we kind of draw a line below the senior notes, because I understand the 6.5s have a very large negative restricted payments basket, there was about $129 million paid down of sub notes, converts, 14 [and] widths. Where did that cash come from?

And second question would be, how much cash is sitting at URI Inc. versus URI NA? Thank you.

Phil, it's Bill. The where did the cash come from is that we have, because of the negative restricted payments basket, we have to use cash that is available to URI -- United Rentals Inc.. That cash capacity, let's call it, sits up at URI and it is available to us to do essentially anything that we want or need to do with, and that's the cash that we used to repurchase the 7 3/4 [quips] and other subordinated pieces.

At the end of the second quarter, that cash capacity was $116 million up at the URI level. So, that's the capacity that we have up there at the end of the second quarter after those purchases. And we continue to manage that cash capacity. Excuse me. Yes, it's $116 million.

We continue to manage that cash capacity with the notion that it is the way that we have for buying pieces of debt below the senior level in our capital structure. Does that make sense?

That makes total sense. So when I'm looking at the balance sheet, the 125 number, that's the cash United Rentals North America, or is it only the difference between the 116 and the 125 that's at North America?

It's the consolidated cash position. It is primarily cash that is held by UR NA, the operating entity, and actually it's -- most of that cash is resident in Canada for more detail than you asked for. But it's primarily UR NA cash.

The one thing I should add, Phil, as you think about URI's cash capacity, don't think about it as cash that's sitting on the balance sheet. URI's cash, when URI has cash, what we do is we take that cash and make an intercompany loan down to UR NA, so that UR NA can then reduce ABL balance.

That's allowed, and pulling that cash back up to URI when URI needs it is also allowed, even with the restricted -- the negative restricted payments basket.

That's very helpful, thank you. And then, when you guys were talking about the June and July sequential, I guess it was month-over-month increases in rental rates, do you have a sense, both for the rates and the utilization, of what those numbers would be year over year? Are we still down 14% year over year, or is that percentage year over year declining with the monthly increase in rental rates in June and July?

It would still be down on a year-over-year basis. But we're measuring it sequentially from month to month. Kind of showing the progress of where we started after the first quarter, going into April, May, and June, and then into July, taking the actions that we've taken.

Yes, it will still be -- on year over year, looking at a month versus the prior year same month, it's still going to be down in the 12%, 13% area. I don't have the exact numbers, Phil, but it's still going to be down there, year over year, but up sequentially, as we said.

And is that showing an improvement, that year-over-year, month-versus-month comparison? Is that showing an improvement?

It is. A slight improvement. And hopefully, as we get later in the year, the comps will get easier, right, as you start to see some declines last year on rates through each month, so hopefully it will get a little better. But it's a little bit better in July than it was in the second-quarter months.

Great. And then, in terms of your industrial business versus your, I guess, regular commercial or non-residential construction business, the rates of declines that you saw there in terms of total revenue, do you see a material outperformance of the industrial business? Can you give us some numbers around that?

We are not talking about that level of detail with numbers. I think it's fair to say that we still believe industrial represents a good opportunity for us. That's why we're focused on that customer group. That's why we made that acquisition, and we'll continue to drive to invest in the areas that offer us the best opportunities.

Okay. So is it safe to say, Bill, that there is less volatility in that business than there is in industrial nonres.

Yes, that's a part of why we are attracted to it.

Yes, absolutely, it's a longer-term play. Typically, the contracts, Phil, are anywhere between one to three years in duration, and there's less volatility in the pricing.

But that being said, our industrial customers are feeling it just like everybody else, and they are putting off projects, but they will have to come back online.

My last question. If I calculate correctly, your OEC at the end of the quarter was 3.795. Is that correct?

I don't have the exact number at the quarter.

Chris, can you answer that question?

3794.

Thank you very much. Good luck, guys.

Chris Doherty, Oppenheimer & Co..

Good morning, Mike and Bill. Following up on two themes, one just the used equipment market. If you look at the realized price versus the OECs sold, it looks like prices went -- the realization went to 31% from 36.4% last quarter. Can you tell -- is that a change in market prices or is it a change in mix, i.e., the fact that the average age of the fleet that you sold was 78 months?

Chris, it would be both. It would be both the mix that you put out there, the type of products that you have, and also the amount that we put through, and also the -- having more at an auction versus -- than any other format that we have available to us.

Do you think that used equipment prices, in general, are declining?

I think used prices are, yes, under pressure. To decline. As I mentioned earlier with the niche, that you still have a lot of companies that are trying to defleet and are going to go through this.

So I think for some period of time, they will be under pressure. Having said that, I think that as we start seeing some of the stimulus, you may see some categories begin to improve, such as earth-moving equipment first. And then, we will progress forward.

Then Bill, following up -- I guess, could you talk a little bit about your philosophy in terms of optimizing the balance sheet? One I just wanted to clarify, you said that you had $116 million of availability. I wonder if that's sort of an inter-quarter period. Because if you look at your balance sheet, there was actually -- the amount due to the parent was $170 million. What is the difference between the $170 million and the $116 million?

My apologies. So I will correct my previous number. The -- if you look in our guarantor statements on Note 8 in the Q that we filed, under the parent column, you will see intercompany receivable and that number is $170 million, not $116 million. I shouldn't do this on the fly, so again, my apologies.

So $170 million is the amount of cash capacity that we have available at URI at the end of the second quarter. So, Chris, ask me your question again, or did that answer it?

No, that was sort of -- I wanted to clarify. It goes to sort of your philosophy in terms of managing the balance sheet and possible repurchases.

If you look at your liquidity just under the revolver, you have about $760 million of availability, which, if you look at your fleet -- the largest your fleet has been recently is, like, $4.4 billion, just under. And now you're at $3.8 million, $3.9 billion.

That tells you that you probably have enough liquidity to ramp back up when the market comes down. So would your philosophy be to use whatever excess capacity or whatever excess cash flow you have right now to pay down debt at a discount?

Certainly, our philosophy is using free cash flow currently to pay down debt. Whether we do it at a discount or not will just depend on the ebb and flow of what's available, where's the liquidity, where are the yields available to us.

Certainly, we'd prefer buying components of our capital structure at a discount. In order to do that, as I described with Phil's question, we have to use -- the discounted pieces of our capital structure are primarily the subordinated pieces. And so, in order to buy those, we would have to use part of that $170 million of cash capacity at URI.

We want to manage that prudently. We want to make sure that we've got the ability to have some dry powder to buy subordinated pieces of our capital structure over time, so we've got to keep an eye on that cash capacity number as we buy discounted pieces. But certainly, buying discounted or buying even pieces of our capital structure that are near par is part of our strategy for deploying free cash flow.

Thanks. I mean, basically what you are saying is -- not to put words in your mouth, but as a treasurer, former treasurer type person, you would be looking at possibly calling 14 versus maybe buying 7 3/4, if the yield was sort of more on the 14s, just because it makes sense to buy higher-cost debt.

That would be the mindset. The question, then, would be does doing either make sense relative to other opportunities that we have.

So, I know I'm not giving you a hard and fast answer, but that's really how we think about it, is what is the range of opportunities that we have. What do we get when we buy a given piece and what's the -- and what do we give to do it.

So we may decide, you know what, I'd love to buy either 7s or 7 3/4s or 14s, but I still want to knock down that 2012 maturity of 6.5s, so I may want to buy some of those. Or, you know what, I want to build a little bit more liquidity because I think there is a roaring recovery coming, so I want to pay down some ABL.

We've got to factor in all of those business considerations, as well as just sort of the pure market/treasury considerations that may be natural for myself or Irene, our treasurer.

Thank you. This does conclude include the question-and-answer session for today's program. I'd like to turn the program back to Michael Kneeland.

Thanks, Operator. I want to thank all of you for joining us this morning and participating in the call. As always, we are available to speak to you from Greenwich and to continue the dialogue.

I also encourage all of you to look at our updated investor relations presentation, which can be downloaded from our site. So this concludes our remarks for today. And Operator, you can now end the call. Thank you and have a great day.

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