聯合設備租賃 (URI) 2009 Q4 法說會逐字稿

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

Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's 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, 2009 as well as to subsequent filings with the SEC. You can also 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 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. You may begin.

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

Bill will discuss our 2009 financial performance, which as you know from the release, we showed a loss for the year of $0.98 per share. That is obviously not where we want to be, but 2009 was more about controlling the things we could control and in that regard our performance included numerous accomplishments. This morning I want to spend some time on the improvements that helped us outperform almost every target that was part of our outlook.

As reported last night, we reduced our SG&A expense by $101 million in 2009 year-over-year. The reduction in cost of rentals excluding depreciation was $227 million. Our free cash flow was very strong at $367 million. And our net rental CapEx showed a modest outflow of $31 million compared to the net zero we projected because we saw opportunities to make strategic investments in the right kinds of rental fleets.

This was a solid performance. With the cost of rentals we fell short in part because our rental revenues were higher than we expected in the fourth quarter. Now, Bill is going to go over and discuss this further in just a minute. But still as I mentioned, we took cost of rentals down by $227 million which is still a big number.

As you'll hear from us today, the numbers are only part of the story. I want to use our time this morning to talk candidly with you about where we're taking this company, and how our strategy is intended to transform United Rentals into a company that is much better equipped to create value.

It began with Operation United more than a year ago. Operation United is the foundation of our strategy that defines United Rentals as first and foremost the equipment rental company. It mandates that we continuously improve our cost structure and our fleet management on the basis of profitable growth. And it challenges us to win customer loyalty through customer service leadership. If anything, our strategy intensified in 2009 as we continued to analyze our opportunities.

We're now operating with these specific objectives. First to continue to ensure efficiencies throughout the business. Second, manage our rates for the maximum return on fleet, and third to leverage our size and serve the right customer segments. When the economy does better even a partial realization of these objectives would benefit our topline and bottom-line. In the current environment the impact is more modest but still apparent.

For example, our rental revenues declined in 2009 but we still outperformed our peers in the first nine months. The idea of resilience is a big part of our story today. We didn't just weather 2009. We showed the financial and operational discipline to outperform the industry in an economic trial by fire.

Before I move on to operations let me tell you where we stand on 2010. Realistically it's going to be another tough year. In our opinion a turnaround in construction will happen sometime in the back half of 2010, but we won't see any significant improvement in our end markets until 2011. When that happens we think recovery will be slow and steady. That seems to be the consensus of industry forecasters as well.

If the worst of the cycle is behind us, then most of the heavy lifting has been done in terms of branch closures and workforce reductions. The same goes for fleet. We will continue to de-fleet this year but at a slower pace. However, if the downturn drags some on longer than expected, we won't hesitate to pull all the levers at our disposal.

Now our plan takes the economy into account. But it also is about the optimization of our operations, branches, fleet, sales force and corporate infrastructure. Last year we closed 64 branches and opened 4 specialty locations where we saw market opportunity. We also reduced our average fleet by 9% based on OEC. But if you unbundle that number you would see investments in earthmoving, light towers, and other strategic purchases.

Now for us, optimization is about making sure that we have the right types of branches in the right markets with the right fleet serving the right customers.

Now, I want to turn to the three objectives I mentioned a minute ago. Efficiency, rate management and customer segmentation. There is no question we became much more disciplined with our costs in 2009. We saw that in the numbers we reported last night.

Now I want to share some metrics that were not in the press release, so you understand how serious we are about weeding out inefficiencies. Our repair and maintenance expense was 17% lower in 2009 than in 2008. Some of that comes from a decline in our fleet size, but there were also other drivers including new technology that lets our service departments communicate in real-time with the front counter.

That's a good story especially given our fleet age of three months.

And while we're spending less, we still kept our preventative maintenance currency above 90% for the year. Our OEC available for rent improved to 90.2%, so we know for a fact that we're servicing our fleet more efficiently in the shop.

And equipment transfers among branches are proving to be very valuable in managing our fleet. Transfers allow us to allocate our rental CapEx more efficiently and to act quickly to capture business that might otherwise go to competitors. In 2009 we leveraged our footprint and transferred 36% of our fleet each quarter on average compared to 30% in 2008.

So these are just four of many examples that I could name, but we're doing a lot of things right in the field and we have 8000 employees to thank for that progress.

[I'll move on] to the second objective, rate management. I'm very passionate about rates because they are such a powerful force for us as a company but also as an industry. Over the last four months of 2009, our rates were essentially flat on a sequential monthly basis, which shows we were successful at pushing back against the environment.

Bear in mind, the seasonality always affects our business in the winter. In 2009 market activity went deeper into the red because new projects were tailing off while existing projects were ramping up. So the pressure on rates is coming from several different directions but we managed that pressure aggressively.

For the full year we reported last night our rates were down 11.8% and clearly we're not satisfied with that number. We're doing something about it.

You can say that our approach to rate management is a mix of brains and brawn. By brains I'm referring to our strategy and focus on profitability. Every pricing decision we make takes margin into account as well as the customer relationship. The brawn is being provided by our new price optimization program. This is just one of the technologies that are helping us to transform our business along with sales force automation and additional changes to our branch operations.

As most of you know, we put optimized baseline rates in place in all of our branches in early September, including hard stops for price exceptions. In a few weeks we will review and refresh those rates.

We're also testing dynamic customer centric pricing in 10 of our branches with plans to roll it out companywide later this year. As part of that pilot we've implemented new tools so that price optimization extends from the counter to the field, where our sales force reps will be able to quote rates on their Blackberries.

From age to fleet to customer mix, we're looking at our business very differently than we have in the past. If a transaction isn't profitable [for] taking all costs into account, we don't want to book that that business. Our people understand that we're not trying to add to our topline at any price. The goal is to grow our revenues by using customer service to earn a premium price for our services even in this environment.

The third and in many ways the most important part of our transformation has to deal with customer segmentation. Earlier I mentioned Operation United was the original initiative in our strategy. We now know for a fact that Operation United is moving us in the right direction, focusing on customers that best fit our vision for growth. These are large national accounts as well as regional accounts, industrial accounts and to a lesser degree government business.

Let me explain why. Our analysis has shown that large customers can be very profitable for us if we serve them properly. They share similar characteristics.

They rent equipment for longer periods of time. They pay in a more timely fashion, they return equipment with less damage and they see our broad North American footprint as an advantage. In addition, larger accounts also prefer to place their orders through a centralized point of contact. Our customer care center in Tampa handled more than 368,000 calls in 2009 and wrote about 30,000 reservations which helped our branch teams focus on customer service during the fulfillment process.

Of the 233 national account agreements we signed in 2009, 62 were industrial companies. This increased our national account base to more than 1200 customers. Our national account revenue was 24% of total revenue in 2009 and our industrial account revenue was 18%. Both represent an increase over prior-year on a percentage basis.

Also we know that we increased our share of wallet with our top 25 customers in 2009. That tells us even if rental demand declines again this year, we're building the right kind of customer base for long-term profitability.

Customer segmentation is far more than a sales strategy for us. It extends to our entire operation. For example, our fleet mix and fleet management are changing because our strategy calls for something different now.

Large customers understand where our priorities lie and it is earning us a larger share of their wallet. Like the contract we recently signed with one of the world's largest civil engineering companies. It's a national account who liked what they saw from us and gave us the opportunity to earn their business on a major rail project in the US. We won the contract because we persevered as a team at the national level, regional, district, branch and corporate. It's a perfect example of Operation United in action.

At the same time, we're working to optimize our transactional business. And by that I mean the occasional or one-off rentals that come our way at local levels. When we get these requests, we want to make sure that we quote a price that reflects the real cost of fulfilling these transactions.

This standard has meant even a small rental has a place in our strategy. Small customers represent the potential to grow with us over time.

On our last call I gave you an overview of our customer focus scorecard which measures branch performance in five dimensions that customers value most. These metrics are largely universal, meaning they're important to our customers of all sizes.

The scorecard was rolled out in June 2009 so the data is relatively recent. But I want to give you a couple of metrics to illustrate how quickly we can move our field operations along the path of continuous improvement.

In our Southwest region, the total response time improved by more than 15% in the fourth quarter. That's the time it takes to get a machine up and running at a customer's job site after he puts a request in for service. It's a huge deal for our customers.

And in northeast Canada, on-time delivery improved by more than 17% in the fourth quarter. This is a meaningful improvement based on real-life expectations of our customers. But we're not done yet.

We believe that the customer service analytics available through our scorecard are the most comprehensive in our industry. We can track how we're doing at any level -- branch, district, region and company. And by the end of this month we'll be able to drill down and look at how we performed for individual customers -- not just key accounts; any customer. This is a major differentiator that gives us real ammunition in the battle for customer loyalty.

Even with these focused objectives, we're still keeping an open mind. Markets are never static and under penetrated rental market has more potential than most. Our most profitable customer segment 5 or 10 years from now may not even be on our radar today. Or a new kind of equipment may come available with applications in completely new markets.

I can tell you 30 years ago I drove an aerial machine around to contractors who had never seen a lift and had no intention of renting one. Today everyone in construction has an appreciation for aerial equipment. So I know it happens.

Looking back to late 2008 we stood on the brink of a downturn and decided there was no good reason to set our engine on idle while the economy turns around. We've chosen to take advantage of these volatile times by showing that we know how to steer a steady and purposeful course.

And by the way, we're not the only ones acting now with an eye towards the future. We see that same strategic thinking driving large projects [where] we have a presence. For example, the Philadelphia convention Center, that is a $786 million expansion with 440,000 sq. ft. of exhibit space. We've had more than 100 aerial machines on rent with customers for over one year now. When the facility opens in 2011 it's going to give Philadelphia a huge advantage in competing for convention business. We like that kind of thinking.

But 2010 is not a new roadmap for us. Operation United already has us moving in the right direction. This year is about executing with increasing precision on the roadmap we already have.

In January we brought all of our branch managers and field leaders together with senior management and board members at are annual meeting in St. Louis. It was an intense three days of preparation for 2010. By the end, it was evident to our employees that were as inspired as we were about the possibilities for a new United Rentals.

I saw more than an acceptance. I saw real excitement. We're moving forward together united as one in total agreement about our goals.

Let me tell you what I told our managers. This path we're on takes courage and it takes willpower. We have deliberately set a course that makes demands on our leadership and our willingness to innovate. Right now the economy is working against us, but our strategy is more enduring to any environment and is being executed by a seasoned management team that brings the right mix of executive ability and industry experience to the job at hand.

Every objective we set for 2010 builds on the fundamentals of Operation United. Every opportunity ties to our competitive advantages of customer service and size. We're taking our core business to a more profitable place with the ultimate objective of creating value. We will create that value by delivering the most efficient and customer focused services in the equipment rental industry.

With that I will now pass it over to Bill, who will review our results. And then we'll go to Q&A and we'll take your questions. Bill?

Those of you have followed the Company for a while may note that this call is happening about three weeks earlier in the month than it has historically. And I just wanted to point out that that is the result of a tremendous amount of effort on the part of people within the financial organization here at United Rentals.

Our view is that the sooner we can get through the reporting process, the sooner we're able to refocus driving improvement on the business. So we have set an objective of continuing to report on an earlier basis. So you'll see our annual reports happen along about this time every year going forward. You'll also see the quarterly reports happened a week sooner in the quarter than we have historically as well.

This is no accident. It's the result of a lot of hard work by a lot of people in United Rentals. So I want to take this opportunity to say thanks to all the folks who made it happen.

So let's turn to our performance against the targets we have been laying out for the -- for 2009. Starting with SG&A, as Mike noted, we delivered $101 million of SG&A reductions for the year. That included $20 million of reduction in the fourth quarter alone.

Consistent with what we saw through 2009, those saves in SG&A came in nearly every line of our SG&A total. So we had reductions in salaries, benefits, travel and entertainment, professional fees, marketing spend. Again, anywhere you look in SG&A we had improvements.

On cost of rent excluding depreciation, we reduced costs by $227 million for the year. That included $51 million of reduction in the fourth quarter. Like SG&A, the reductions came in virtually all lines -- salaries, benefits, delivery cost, fuel, repair and maintenance, facility cost, again just about every line in our cost of rentals ex depreciation.

Mike mentioned that $227 million reduction fell a little short of our target of $240 million to $250 million. Quite honestly that was disappointing for us, but there were a number of puts and takes that happened at the end of the year that resulted in the $227 million number I reported.

Part of it is good news. The fourth quarter revenue was actually stronger than we had in our forecast when we gave the $240 million to $250 million range. Variable cost that came with that stronger revenue explained part of the variance.

But there are also other puts and takes in several noncash nonoperating lines. For example, we had a $4 million adjustment in a self insurance reserve. So, between the extra revenue and the self insurance reserve, that's the bulk of the miss versus the $240 million bottom of our range.

Despite the shortfall though, $227 million of reduction is real money and it is the result of a lot of work. So we're proud of that performance in 2009. We simplified, we streamlined, we've automated more of our rental processes and we think there is opportunity to continue to drive cost out of this business.

On net rental CapEx we finished the year with a net outflow of $31 million which was slightly above our target of about zero for the year. That additional CapEx reflects what we talked about in the third quarter, which was our effort to take advantage of opportunities that we see in the market and reinforce those opportunities with investment as appropriate.

As Mike mentioned, the equipment that we bought during the quarter immediately was put on rent at high utilization levels. And again that supports the extra revenue we saw in the fourth quarter.

Turning to free cash flow we, delivered $367 million of free cash flow. That was better than our target of $350 million despite having spent the incremental amount of rental CapEx. Within free cash flow we generated $440 million of cash from our operating activities.

Our ability to overachieve on free cash flow despite the additional CapEx shows that we built flexibility into our ability to manage the company and manage the cash flow of the company and we exercised that flexibility in the fourth quarter. You can expect us to continue to exercise that flexibility and respond to investment conditions as we go through 2010 as well.

Now, a few thoughts on our capital structure and liquidity. In this area we made significant progress in 2009. As many of you are aware, in November we issued a total of $673 million of new debt. That included $0.5 billion of senior unsecured debt and another $173 million of convertible notes that we issued out of our holding company.

When you combine that November activity with the $0.5 billion of the 10-7/8 notes we did in June plus the redemption of our 14% hold co notes we did in the fourth quarter, we substantially improved the profile of our debt maturities over the next several years. We don't have at this point significant maturities other than the 6.5s in the next several years. And as again many of you have noted, we already announced that we will be calling the 6.5% senior unsecured notes on February 16 of this year.

So that will be a $435 million worth of maturities in 2012 which will be called and removed from the maturity profile. So you put all this together and you can see that we proactively addressed the capital structure throughout 2009. We don't have any significant maturities until 2013 and the decks are very well cleared for us to be able to respond to any level of investment we might need over the next several years.

On liquidity, we continue to have a very strong liquidity position. We ended the year with over $1 billion of total liquidity. That includes $954 million of availability under our asset based loan facility plus $169 million of cash on hand.

I just mentioned the redemption we're going to do of the 6.5s. That will eat up a part of that available liquidity. But even after redeeming the 6.5s we'll still have about $700 million of total liquidity available to us. So that puts us in a very strong position for a company of this size in a cycle -- at this point in the cycle.

A few thoughts on our fleet. We continued to manage the fleet consistent with our fleet management strategy during the quarter. We continue to aggressively transfer fleet as Mike mentioned to optimize the use of the capital we have invested in the fleet.

So we transferred $1.4 billion of fleet in the quarter and that represents about 36% of our overall fleet size. As Mike said, this is a nice lever we have to address our customer needs with greater utilization rather than putting more capital into the business.

At the end of December, our overall fleet age was 42.4 months. That is up a month from September, but it is still below the 43 months we previously guided to at the end of the year. Again that is consistent with the approach that we decided to take in managing the fleet.

On a year-over-year basis, our overall fleet size was down by 9% while on a unit basis the OEC was down 26,000 units or 11%. Again, consistent with the strategy we're taking, we wanted to size the fleet last year appropriate to the level of demand and we think we've done that well.

So, with all of that is background let me address a few of the financial results, first on the revenues. Rental revenue was down 26% in the quarter, and within that, rates were down 9.6% year-over-year for the quarter. Time utilization was down 2.4 percentage points and dollar utilization for the quarter came in at 46.0% which is down 2.7 percentage points from the third quarter, which is a seasonally strong quarter for us.

For contractor supplies, revenue was down 40% year-over-year and that reflects our continued strategic focus on the higher-margin contractor supply sales along with the overall soft operating environment. We did improve margin. Gross margin improved for the quarter by 130 basis points compared to last year.

On used equipment sales we generated $37 million of proceeds during the quarter of used equipment sales. Although that is down slightly from the third quarter, our sales were in line with our fleet strategy and our margins were up sequentially, consistent with the trend we saw in the third quarter.

So when we put all that together with the cost performance I talked about earlier, our adjusted EBITDA for the quarter came in at $149 million and the margin on that EBITDA was 46.8%. Even though that is not where we want to be on a margin basis it still allowed us to end the full year with a margin of -- excuse me, I said 46; it is 26.8%. That allowed us to end the full-year with a margin of 26.6%, that in a very challenging environment.

So those are the remarks that I wanted to make on 2009. Very briefly on 2010, we'll continue to execute the strategy that Mike mentioned. Driving efficiency is a prominent part of that, but also the customer segmentation strategy is key as well.

The environment continues to be challenging for us in terms of visibility for our outlook. So we've chosen to continue the same level of guidance we have given throughout 2009 and it will focus on the same metrics. So for SG&A we expect to continue to reduce SG&A this year by another $25 million to $35 million. On cost of rent excluding depreciation, we expect to reduce another $70 million to $90 million for the full-year compared to 2009.

Put those together, that's $110 million worth of additional cost reductions in 2010. And if you look back over the last couple of years, 2008 and 2009 combined have resulted in nearly $0.5 billion of total cost reduction for the company. That's consistent with the strategy and certainly going to be a continuing focus in 2009.

On fleet we expect the fleet to age into the high 40s during the course of this year. But again, we don't expect any significant impact of that aging to our ability to generate revenue. We're keeping our fleet well-maintained and that is really all that matters to the customers.

For free cash flow, we expect to generate $175 million to $200 million of free cash flow in the year. That will be after investing about $100 million to $120 million of net rental CapEx during the course of the year. That will also include, by the way, about $40 million of a net cash tax refund for the year. And like in 2009, we'll use that free cash flow to pay down debt.

So those are the comments on 2010. Before I open for Q&A, I would just like to reemphasize the point that Mike made.

We've got a clear strategy. We're focused on driving it and we believe we have a lot of good momentum built up. We certainly have the people to execute on the strategy, and we feel confident that were to make progress in a challenging environment in 2010 and position ourselves for better performance when better times come.

So, with that, I would ask the operator to open up the call for Q&A. Operator?

(Operator Instructions) Henry Kirn, UBS.

Could you talk a little bit about how you see non-residential and industrial demand for rental as we go through 2010, maybe compared with what you saw in the fourth quarter?

What we saw was, we continue to see a decline in our primary markets that came down and through the back half of 2009. The rate of decline seemed to have mitigated itself ever so slightly. As I stated before, we do believe will hit bottom in 2010 and began a slow climb out. But it's not going to be until 2011 before you really see any meaningful comparisons on a year-over-year basis.

We're going to continue to de-fleet, Henry, as we go through this year but just not the pace we did last year. So that will obviously have some impact on our revenue generation.

That's helpful. And a couple of I guess detail follow-ups, on the -- how should we be thinking about the CapEx for non-rental PP&E? And how should we be thinking about interest expense as we go into 2010?

It's Bill. For non-rental CapEx, I think you can look for us to continue to be aggressive in how we manage that number. And so, compared to 2009 I think that would be a starting place, but we will be aggressive in trying to shave non-rental CapEx against what we did in 2009.

And on the interest expense?

Interest expense, it's -- well you see all the components of debt. You can probably do the math as well as I can. I would expect that, on a GAAP basis, interest expense will be up slightly compared to the 2009 simply because we had so many of the gains on debt repurchases that flows through interest expense in 2009. If you adjust to take out those gains and other amortization write-offs from the 2009 number, I think you're looking at interest expense being again just slightly down from that adjusted basis.

Up slightly on a GAAP basis, let's put it that way.

David Wells, Thompson Research.

First off, could you walk us through the difference in your rental margin between Q4 and Q3? And just trying to get a sense of -- given the topline decrease, we saw I guess a greater decrease in margin and was that just a deleveraging effect or were some other factors in that?

So if I understand your question, rental margin Q3 was 32%, Q4 26.2%. So you're trying to understand that change?

Correct.

So within that, seasonally soft period for us, so revenues in general will come down, so you'll have less ability to amortize fixed costs over the revenues. So that is sort of a normal seasonal pattern for us.

We did have, as I noted, greater investments in some of the fleet. And so we had a little bit of incremental cost to get that fleet out into rental status. We had the adjustments, the nonoperating adjustments I referred to as well. So the $4 million of insurance reserves that we took in the fourth quarter contributed to the margin reduction. And then a host of other puts and takes that really are a lot of small ones. So, those are the key things I would point out.

That's helpful. And then, looking at free cash flow guidance for the year, I'm trying to get a sense of where the swing is coming relative to 2009. I guess your CapEx is going up $70 million plus. Presumably you have $100 million of additional cost saves.

Where is that differential, that $150 million relative to 2009 coming? Is that just softness in operating results or is there some other factor at work there?

You have to remember that we're de-fleeting during the course of this year. So our average fleet size is going to be down significantly from 2009 to 2010. So a smaller fleet, less fleet on rent, less ability to generate operating CapEx.

We've also got rate carryover, 2009 to 2010. Our rates came down during 2009 so even if we kept rates at constant level throughout the entire year, there would be a negative carryover effect from rate. And a point of rate is worth a decent amount of EBITDA and cash flow. So, those are probably the two big offsets to the benefits we'll have from lower costs and the other good things that are going on in the company. Does that make sense?

That's helpful. Lastly and I will get it back in the queue, given which you seen on the rate front over the last four months, would you anticipate you'd be able to push rates up on fleet? [Calling back] incremental piece of fleet that goes out the door or is it just too early to tell?

This is Mike. It's still too early. You know, we're right in the thick of the lowest part of the cycle, our seasonality in the first quarter. And, you know, we combat rate every day. As Bill mentioned, our rates were down 11.8% for the full year. It's not where we want to be. We do have systems in place.

Having said that, there are opportunities in areas where we are seeing demand. We're taking full advantage of that. So, where we're spending our capital and where we see demand in the field, clearly that's where we see the opportunities to improve rate.

It's still challenging. It's something that we as an industry have wrestled with. But the reality of it is, we continue to struggle with all the competitors out there for various reasons. But the actions we're taking we think will bear some fruit.

What do I mean by that? I do think that the ability to change our rates systematically with one switch overnight will give us the opportunity to react quicker and to adjust our rates. So, that's where we're going. And the hard stops also, having that discussion before you make that rate has also helped us. But it's an ongoing process in our industry and for the company.

Scott Schneeberger, Oppenheimer.

Bill congratulations on the faster reporting. It's symbolic of the improvement that is going on there, so nice work. Just following up on some of the free cash flow questions.

Would you guys -- how did you think about it with regard to your spend? I view it as potentially conservative. If we have another tough year there will be a lot more probably fleet reduction and therefore you would be spending less on growth. And there could be upside from that, of course, with the offset of cash from operations. But kind of how did you build that up? And would you say that it comes at a conservative level or -- I will stop there.

This is Mike. I think we've always been labeled as being conservative. We try to be kind of down the fairway. The one thing that, for both Bill and I, if we can wrap our arms around it clearly we'll update you as we go forward.

What we see right now, to address your question on spend, is really driven by demand we're seeing from some of the customers we're bringing in, these national accounts, these industrial accounts; areas and where it will position us well. It's a balancing act. It's balancing against what demand is and where we anticipate it going.

Keep in mind, you're right, we could always sell more fleet. We could spend less if need be and I think we've proven in 2009 that we're willing to do that if we have to. For 2010 we think we'll start to see the bottom and see some improvement. We're making some strides in some of our customers and we see that as opportunity.

So, the way we look at it today, it can change obviously and we'll update you, but with cost it's what we can wrap our arms around. If we get more, we'll report it and we will say we can do more.

With regards to our spend, if the demand is there we'll spend it. If it's not there, we won't. If we have to balance that against selling something today in a market for $0.30 or $0.40 on the dollar and say next year you have to spend 100 cents on the dollar, that is the ongoing process that we go through every day. It's not a perfect answer to your question. We're balancing it. But we have the vision of looking at what our customer demand is.

Thanks. I appreciate the color. A couple more if I could, with regard to industrial, could you speak to developments you are seeing and pricing there relative to the nonindustrial business? Are the pricing trends similar or are we seeing a spread between the two emerging?

On average it's not dynamically different from our company average. And again what [you mean] the characteristics that are attractive is the fact that they keep it out for a longer period. They don't damage it. It's less costly for us to turn it around. So that's the opportunity that we see out there on the rate side.

Okay, thanks. Finally with regard to industrial, and I'm going to tie national accounts into this, you said industrial in the past a goal of 30%. I think it's at 18% if I'm recalling correctly.

How quickly do you get there based on what you're looking at for 2010? What pieces of your mix have industrial, nonindustrial, other do you see going up and down over this coming year? And then just tying in national accounts as well?

Of the 233 national accounts, 62 were industrial. We have to continue to earn that business every day. Joe Dixon and his team are continuing to focus with them to sign more accounts, to bring them into us. And then our management team has to go out there and continue to earn not only their business but their share of wallet, and that's what we're focusing on.

My goal, our goal is to be at 30% in two years. That is our goal. It's a stretch goal, but I think we can get there. I think that we're setting the stage today as an organization, that we're focused on the customer and that we're driving the metrics that will attract that customer and hold that customer. But that's kind of where we stand and that is our internal goals.

On national accounts, any particular goal for 2010? I think that is -- is that 24% right now?

It's at 24%. We don't publicly come out with what we expect every year. Our goal over the -- for the next several years would be somewhere in the vicinity of 40 to 45%.

Emily Shanks, Barclays Capital.

I had one quick housekeeping question; apologies, Bill. I missed your comment on -- your free cash flow, if I caught it correctly, includes a cash tax refund of what amount?

About $40 million.

And when will that be paid out?

It will be in the first half. It could be first quarter. It could be second quarter.

What is the exact number of your OEC?

The amount outstanding?

Yes, instead of the 3.8 can you give us more figures?

Sure. It's [3763].

Thank you. And just speaking to the business itself, as you talk about incremental COGS savings that you're targeting for this coming year, where exactly are those coming from? Or can you bucket those for us and give us a little sense of how you will go about achieving them?

Sure. As I said, last year as I said they came in about every line and we expect that to be the case again this year. So, we will continue to make decisions about salary and benefit levels, headcount levels underneath those. We will continue to be aggressive around our facility costs. We had some benefits there this year.

Mike noted R&M expense was down 17% year-over-year. We put in some new technologies that we think can help us take R&M expense down again this year. So, again a host of other lines that we could point to that come out of process changes, out of technology changes, out of streamlining our processes overall and out of automating that we think can play through the whole rental process.

So, it's kind of hard to describe what the program is for taking cost out because it's so broad gauged across the entire organization.

Okay, well best of luck with it. And if I could the last bucket of questions I have is around the borrowing base. It's kind of twofold. First, can you remind us how often the borrowing base is calculated? And then secondly comment on what trends you're seeing around residual values, please?

Certainly. We have an audit and review every six months. The last one was in September so we're coming up again in March. So we'll be looked at, at the end of March. I'm sorry. Your second question on residual value, repeat that again.

I'm just curious what trends you're seeing around residual values.

I've think Rouse would probably be a better source. What they've seen is that values have increased over the last several months. I think the December Rouse Report was out just yesterday for example. I believe they showed an increase of about 1.6% over November, and that has been the trend for the last couple of few months. They have been up in that 1% area.

So, it seems like there is a little bit of an uptick in values. Let's hope that continues.

David Raso, ISI Group.

Good morning. I apologize. I just didn't fully appreciate or understand the answer about the reduced free cash flow for 2010. If we're generally speaking of $180 million decline in free cash flow year to year, we can account for roughly $80 million of it from the higher net CapEx. So, focusing on that other $100 million, first $110 million of cost savings year-over-year from a P&L perspective, is most of that cash savings?

Yes. Most of it is cash cost going down.

And then you also mentioned, I believe -- maybe I understood -- a tax cash savings of around $40 million?

Yes. There is a cash tax refund based on the losses were incurred in 2009 that we will realize in 2010. That's part of the free cash flow for this year and that was $40 million.

So the analysis of how do I lose another $100 million of cash, so far I'm up $150 million. So I've got to find a negative swing of $250 million. If your revenues declined 11% next year and you lose every dollar of cash, meaning every cost you have is fixed, which obviously is not true, then I see the 250. How am I losing $250 million of cash flow there somewhere? I must be missing something.

We have a powerful de-fleet cycle going and you have to really understand that to really be able to get into the cash impact of that. What we said in our press release was that our fleet would end the year at $3.6 billion, as I recall. That's down from the [3763] that I just gave at the end of 2009.

The average size of our fleet during 2010 will be down as a result of that. So, when you look at the reduction in size of our fleet, along with an assumption around time utilization, which is -- let's just say time utilization stays flat year-over-year, that is a pretty powerful negative impact on earnings and cash flow. So, that is a big chunk of that sort of missing cash flow, if you will.

And then you have to look at the impact of rate. I mentioned that we've got a negative carryover affect from rate and that is assuming that rates stay stable throughout the course of 2010. If revenues are going down, to use your 11% number, you'd have to make some kind of assumption about how rates are going to perform in that environment. They are likely to be down. So rate impact is very powerful in affecting cash flow as well.

So, the combination of de-fleet and rate challenges are probably the bulk of the delta that you're trying to explain in cash flow. There are other nits in that. I said interest expense would be up a little bid. So there will be a little bit of an impact from cash interest expense. It's not major.

And then there's some other elements in terms of the mix of revenues that could have an impact. So, those are the key missing pieces and we've made our estimate for what 2010 is going to look like and that is where the cash flow falls out. Does that make sense to you David?

Philip Volpicelli, Cantor Fitzgerald.

First question is the restricted payments' capacity to go from United Rentals North America to United Rentals, Inc. please?

The RP limitation right now is -- the most stringent one is in the 6.5s which are still outstanding. And that is, as we said in the past, several hundred million dollars negative. The basket is negative by several hundred million dollars.

Once we redeem that issue, the next most restricted payments limitation will be in our senior subordinated notes, both the 7s and the 7.75s have RP limitations. Their baskets are also large negatives; several hundred billion large negative there.

The good news there is they're sub-notes, so the limitation would only prohibit us from upstreaming cash to the holding company. But I also should point out that the new senior subordinated notes that we did, the 10-7/8s and the 9.25s, have RP limitations as well and their baskets are also negative, but slightly negative. They're only negative to the extent of net losses that we've incurred since they have been issued. So, I think the 10-7/8s, the RP limitation there, the RP basket is negative in the tens of millions.

Great, thank you. And then in terms of free cash flow, I would assume that -- you said you were going to pay down debt. Does it continue to extend maturities or is there something special you plan to do with the cash flow?

We'll certainly look at the best opportunities for paying down debt. We've got, as I'm sure you know, a put on our 1-7/8ths convertible note issue that's due or that's available to investors in October. We expect that to be put. So that will absorb $115 million roughly of the cash flow. And then we'll look for opportunities beyond that that make sense for us.

We don't have a specific action in mind right now for using the rest of the cash.

Thank you. In terms of overall fleet I guess oversupply in the industry, it appears that it might be getting a little bit more in line with demand. Have you guys seen that and can you break it out possibly regionally?

This is Mike. I would say that there is still an oversupply of aerial equipment, particularly the smaller units. Large booms seem to be doing very well and that would be across North America on balance.

Earthmoving is starting to improve. Earthmoving is not just the big earthmoving but more like the excavator, small excavators, loaders, and skits loaders. And you see pockets of that. It's actually doing well on the West Coast and you know also up in the Northeast and Canada as well.

Florida I think is still a ways off from needing any kind of equipment. It's probably still a little oversaturated there. But I would say from a macro view, earthmoving is doing better, as you would expect, because it's usually the first line into the business or in the construction cycle and aerial will be towards the tail end.

That's also reflective, if you take a look at the Rouse Report. Their used prices are actually increasing on earthmoving and aerial is flat and in some products it's actually down.

Chris Doherty, Oppenheimer & Co.

On your expectations for fleet at the end of 2010. At that point do you expect that your fleet will be such that you're running at what I guess has historically been a 68 to 70% type target (inaudible) time utilization? Or do you think there will be some fleet in there that will be able to absorb demand as it comes back into 2011?

Given the profile of 2010 that we've assumed right now, I'd say it's hard to imagine that a $3.6 billion fleet would be able to operate at a high 60s, 67 to 68% utilization at the end of this year. Mike, feel free to disagree with me, but that would be a great environment if we were able to achieve it.

That's right. Are we building towards that? Yes. Are we changing our customer segmentation to maximize the fleet? Yes. Will it take time? Yes. But not in 2010.

So what I guess I'm trying to get to there is when demand does come back in 2011 as you expect, you probably won't have to increase your CapEx spend to handle that because you'll have some late EBITDA growth there before you have to actually spend. (inaudible)

That's a great point and it's something that I've mentioned when I was out on the road. You're right. When people ask us about the needs for capital, we still have room to improve our time utilizations. And it would also get improvements in our rate at the same time frame. So, those are the two areas you would see; first time, rate and then you would see more investment needed.

And then can you also -- your rates were down this quarter, I think you said nine-point-something percent. If you think of the effect of mix on that, is mix a positive or negative to that number?

Mix has some of it. Geography has it as well. It plays out all over North America. But given some of the regions, some of the regions do better. But it's all market driven. Mix is part of it but not all of it.

But that number you gave does not include mix, does it?

It's constant.

It's a constant mix calculation, Chris. And so there's not an explicit mix impact there. But I think Mike's comments are dead on. The mix is probably -- even if we had a mix impact, it's probably not the major part of the story.

I'd like to turn the program back to management for any further remarks.

Operator, great. Thank you very much. I want to thank all of you for joining us today. As you can see, while we are mindful of the economy our focus is on the elements of the business, our business that are within our control.

We've also updated our investor presentation on our website last night, so please feel free to download a fresh copy and call us with any questions here in Greenwich. And thank you very much, have a great day and look forward to our next call.

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