聯合設備租賃 (URI) 2010 Q2 法說會逐字稿

Good morning and welcome to the United Rentals second-quarter investor conference call. Please be advised that this call is being recorded. Before we begin, 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 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 expectation.

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.

Thank you, operator. Good morning, everyone, and welcome. On the call with me today is Bill Plummer, our Chief Financial Officer, and other members of our senior management team.

I want to start with a quick overview of the results we reported last night, and then focus on the metrics that indicate changes are starting to take effect in our markets and with our Company. I will talk about the drivers of change, the seasonal, cyclical, and our strategy in particular, and share some insights into what kind of demand we expect to see over the next six to 12 months.

It's still too early to speak in absolutes, but the second quarter did shed some light on the cycle. As you saw in our press release, we had a strong quarter. The environment is better. Our strategy is taking hold. We are more optimistic than we have been for some time.

We appear to be seeing the early stages of an upturn. While we will continue to bear down on costs, our focus is now on growing the business.

So let's start with the results. We made money in the second quarter. Last year, revenues were slightly higher in the period, but gross profit was lower and earnings per share was negative. So it is clear that we have improved the business from top to bottom.

EBITDA is up. We reported a significant increase in adjusted EBITDA margin for the quarter, from 24.4% last year to 32.1% this year. There is a lot of discipline behind those numbers, starting with the revenue line.

Our rental revenues outperformed the operating environment in the second quarter. Total non-residential construction spending, which includes both private and public construction, was down 16.1% in April year-over-year and down 15.2% in May. Now you compare that to our rental revenues, which were down less than 1% for the quarter, and at the same time our same-store rental revenues were actually up 2.7%.

So we're going hard after the business that is out there, implementing our market strategy, identifying and going after the right types of customers, and winning more profitable jobs. But we're staying very aware of the quality of our revenues, not just the quantity. We will talk more about our strategy in just a moment.

On the cost side, we took $11 million of SG&A expense out of the business compared to the second quarter last year. We also brought down our cost of equipment rentals ex-depreciation by $4 million. Bill will talk in just a moment about where we are on these initiatives and what we see for the balance of the year.

With CapEx, we have a lot of bandwidth to react to the market conditions. We bought $125 million of new fleet in the second quarter. We also sold $80 million of used OEC at a 24.3% margin. We ended the quarter with $3.8 billion of fleet with an average age of 45 months.

So we're very disciplined around the use of our capital and CapEx, at the same time managing our liquidity very carefully. And despite buying more fleet than we originally planned, we still generated positive free cash flow of $8 million in the quarter.

Now I want to spend a few minutes to talk about the two dynamics that drive our numbers -- rental rates and utilization. As you saw, rates were down 2% in the quarter year-over-year. Still a lot of pressure on pricing out there; but if you dissect the quarter, the sequential trends are promising.

We are continuing to focus very intensely on rates. It is a huge priority for our business and I would say for the industry as well. We estimate that every point of rate is worth about $18 million of annual EBITDA to us.

So I can assure you we are doing everything in our power to reverse the year-over-year trend on rates. Our approach is very informed and very disciplined.

We are working to achieve an optimal price on every contract. We're also walking away from unprofitable deals. And we're implementing the price optimization software which we call [CORE], which if you recall is about dynamic pricing, pricing each price subject to that type of customer. CORE is currently rolled out to 75% of our branches, and we will complete it by the end of August.

Right now, short-term transactional business is trending upwards, as it always does in the spring and summer. Smaller construction projects coming online typically are daily and weekly rentals, and they involve less price negotiation and better rates.

In the second quarter, about 70% of our business was monthly. Now, monthly rates are always going to recover last because equipment stays out for longer periods of time at fixed rates. Monthly rates are still a good long-term strategy for us and are more profitable over time; but they also recover last.

Still, 30% of our districts in the US and Canada showed a year-over-year rate improvement in the second quarter.

The other dynamic I mentioned is utilization. As you know a combination of rates and time utilization drive dollar utilization in our business. Yesterday, we reported a record second-quarter time utilization of 65.4%.

Our dollar utilization increased to 46.7%, which is 1.8 percentage points higher than last year. It is worth noting that we had $40 million of original equipment cost on rent more compared to last year and even though the average size of our fleet actually decreased by $186 million.

So where is demand coming from? We believe that we are seeing the early stages of a cyclical uptick on top of the normal seasonal benefit. The tight credit markets are also helping us. Without access to capital, more contractors are renting equipment as opposed to buying it.

Now, from a macro standpoint, we're definitely seeing more spending in public construction. The public transportation sector in particular is showing year-over-year growth in spending.

Residential construction is recovering in some trade areas, but it's not a big market for us. But everything helps.

Infrastructure jobs are now becoming beginning to come online, and energy and hospital construction is holding steady. The weak link is commercial construction. There is very little activity and we expect it to recover last.

Now, taking a look at it from a geography standpoint, our key indicator is same-store rental revenue. Six out of our nine operating regions showed a year-over-year growth in the second quarter. Canada continues to be strong, especially Northeast Canada.

In the US we're seeing activity increase by trade area rather than broad regional patterns. Revenues increased in parts of the Southeast, driven by demand for general construction equipment. The Southeast had year-over-year growth in rental revenues.

In the Gulf, we saw choppy growth and the region as a whole was basically flat. However, if you set aside the impact of Mexico, which we sold to Briggs halfway through the quarter, revenue rental revenue for the Gulf was actually up year-over-year.

Now our weakest geographies are still the Southwest and some of the markets through the central part of the US, although we are beginning to see pockets of opportunity in both those regions.

I want to mention our Trench, Power & HVAC business, which reported a 13% increase in rental revenues in the second quarter, obviously getting a boost from stimulus spending.

Our Trench business has equipment currently today on 194 stimulus jobs. They are mostly infrastructure projects, and we expect to see stimulus spending last for at least another 12 months or maybe longer.

The Power & HVAC rentals is a growth area for us in that business. Our teams responded to floods this spring in Rhode Island and Tennessee, and we are currently supplying power and climate control to a number of cleanup camps in the Gulf. Right now we're averaging approximately $0.25 million of rental revenues per month related to the oil spill.

So basically it's very choppy out there, but things are getting better. We can sense it in the field as well. Customers are telling us that they are bidding more jobs, although it is still extremely competitive.

Now, we are cautiously optimistic, but a little less cautious and more optimistic than we were in April. At the same time, we're not relying on the external environment. We are taking control by driving some of the performance from the inside, using our customer segmentation strategy to focus on building relationships with large construction and industrial customers, service through a single point of contact.

We know from experience that large customers are less cyclical and more stable. They appreciate our broad footprint across North America, and they almost have an untapped share of wallet that we can earn at a lower cost.

We signed 130 new national accounts through June 30. 40% of those were industrial accounts. As you can see, we are moving closer to our goal of 30% of revenue from the industrial market. It will take some time to get there, but each quarter brings us closer; and I have all the confidence that we will achieve our goal.

Segmentation is a larger part of our go-to-market strategy called Operation United. It includes optimization of our fleet, footprint, corporate operations, and most importantly our customer service capabilities.

We have said many times, service is a critical differentiator for us, particularly in our industry. If we get service right, the revenues will follow.

We received some good news with service recently, with our net promoter score. It told us that customers, especially the larger customers, are recognizing how committed we are to customer service. That is gratifying for our employees because they are the ones on the front lines driving customer satisfaction.

Now I mentioned that we are pivoting the Company toward revenue generation. That's going to be the story going forward. It's about growth and value creation.

In addition to segmentation, we have a number of revenue initiatives underway, some of which I started talking about in the first quarter. An aggressive push to new business -- in the second quarter we signed 6,600 new accounts. That is a 25% increase over last year.

We also reactivated dormant accounts. Year-to-date we reactivated 6,100 dormant accounts and generated $16 million of rental revenue from this group alone.

We are continuing to optimize our branch footprint, positioning our branches in promising markets where they have the opportunity to perform well. We closed or consolidated 10 branches in the second quarter. However, we also opened two new cold starts, and we didn't exit any markets in that process.

We also intend to grow our Power-HVAC presence this year and into next. So as you can see, all the various parts of our strategy are starting to mesh.

Our employees have been exceptional in pursuit of these goals. Our second-quarter performance is really a credit to their hard work, great attitude, and their professionalism. They really embraced our strategy.

It's only appropriate; I want to tip my hat to all the employees who are on this call today, and they deserve it.

So to summarize, we said in April that we believe the first quarter was the lowest point in the cycle; and so far that appears to be true. Now, I want to be very candid with everyone. This is an environment that is still uncertain. There are challenges, but things are getting better.

The second quarter started well, and we got better as we moved through the quarter. Construction spending is still spongy, and activity will shift up and down for a little while. But our current vantage point today, we expect many of our end markets to show modest growth as the year progresses, moving toward a broader recovery in 2011 and 2012.

So when you look at our second-quarter performance in this context, frankly we are very encouraged. Now on that note, I'll now shift it over to Bill to review our results; and then we will take questions after that. So, over to you, Bill.

Thanks, Mike, and good morning to everyone. As usual, I will give a little bit more detail on the financial results for the quarter, and then I will update our outlook for the remainder of the year.

First, looking at our revenue performance, in the rental line of business, as Mike said, this was a strong quarter for us. Rental revenue was down less than 1% in quarter. And as you would expect, it's about the interplay of fleet size, fleet utilization, and rental rates.

On the fleet side of things, the average size of our fleet was down by about 5% in the quarter compared to last year. But despite that smaller fleet, we were able to put more OEC on rent. OEC on rent for the quarter was actually up by 2% versus last year in the quarter.

So more OEC on rent, smaller fleet size; put them together and you get was really impressive time utilization for the quarter. 65.4% is a record for the Company in the second quarter. That is up 4.1 percentage points versus last year.

And as we look closer at that increase, we saw very nice improvement in certain key categories. Earthmoving equipment for example was particularly strong. The OEC on-rent dollars for earthmoving equipment for the quarter was up 11% compared to last year. So that helped drive that overall 2% improvement in OEC on rent. We take heart from that because, as you know, earthmoving equipment tends to be earlier in the cycle when things are improving.

When we look at our rental rates, as Mike mentioned, we were down 2% year-over-year on rental rate, although on a sequential basis the second quarter was about flat with the first quarter of this year.

As you look within that and take a look at each month's sequential improvement during the quarter, it was an improvement. So every month in the second quarter was better than the prior month in the second quarter.

That follows the first quarter, where the pattern was the opposite. In the first quarter, every month sequentially was a little worse than the prior month. That turned around in the second quarter. So the net effect in the quarter was a quarter that was sequentially flat with the first quarter.

By the way, that string of sequential month improvements in the second quarter so far continues into July.

So you put that rate performance together and, while rates are not where we want to be long term, the trend is positive. It fits with the view that we've expressed about the sequence of a recovery.

So first, we expected to see used equipment prices recover; that has been going on, according to Rouse and others. Then you would expect to see utilization rebound; certainly you would have to say that we got a nice rebound in utilization. And then we expect to see rates improve; hopefully we're at the early stage of a sustained improvement in rates.

When you look at rates on a full-year basis, we are still saying what we said at the last quarter. We expect the full-year rate performance to be only modestly down. We are still calling it down something in the low single digits compared to the year.

When we look at our used equipment activities this quarter, we generated $37 million of proceeds from our used equipment sales. Though that is down significantly from last year, remember last year in the second quarter we were aggressively downsizing the fleet, and so we were selling a lot of equipment. We sold $271 million of OEC last year compared to only $80 million of OEC this year.

Our margins have shown a dramatic improvement. The 24.3% margin that we realized in the second quarter compares to a negative 9.5% last year. That margin performance reflects both a shift in channels and also overall improved pricing.

In terms of channel mix, our retail contribution was 60% this quarter; that compares to only 26% last year. On the flip side, the auction channel this quarter was only 22%; and that compares to 52% auction last year.

Pricing meanwhile has improved across nearly all categories. That certainly is reflected in the activity that we are seeing in the used market, and you can see that in external sources such as Rouse Reports.

Turning to our cost performance, Mike mentioned we delivered $11 million of SG&A reduction this quarter. Consistent with what we've seen over the last number of quarters, that reduction came across the great majority of lines within SG&A.

In particular, we had benefits and salaries and benefit expense. Those came down in line with headcount reductions that we have realized since last year.

We also had a nice quarter in professional fee reductions. We have been more disciplined and focused on use of service providers, and professional fees came down nicely as a result.

But we also had contributions in the SG&A save from many other lines as well. So given the trends that we've seen, even though the top-line performance is stronger than what we expected earlier in the year and therefore there is going to be pressure on selling costs, even with all that we still are comfortable reaffirming our target for $40 million to $50 million of full-year SG&A reduction. As always, we will keep looking for more and drive that as much as we possibly can.

On the cost of rent lines, excluding depreciation, that story is a little bit more complex. We did reduce cost of rent ex-depreciation by $4 million versus last year. Within that, salary and benefit costs were a main driver, again, headcount reductions being a main component there.

We also had lower facility costs as we see some of the impact of the closures that we have had since last year. But when you look at the full year for cost of rent, we're taking down our estimate for the full-year reduction by about $40 million.

So right now we are looking for a full-year savings in cost of rent in the range of $30 million to $50 million. That is not great news on the surface, but there are some real positives when you look into the details.

That reduction in the expected save really is driven by variable costs that flow from higher volume. We've got more rental transactions than we expected. We are running at a higher time utilization than we expected. We have got more OEC on rent, as a result.

So you put all that together and the variable cost components are going to be higher, and so our ability to save versus last year is reduced. In particular, repair and maintenance expense, delivery expense, and overtime are the biggest drivers of our revised outlook.

Turning to EBITDA and EPS performance, first on EBITDA. Our adjusted EBITDA for the quarter was $179 million, and that was at a margin of 32.1%. Very nice improvement in the margin, 770 basis points versus last year. That is especially significant given that our total revenues were down 9%.

While 32% is not where we want to be long term, it certainly is a significant improvement and it gives a sense of the very nice operating leverage that we are building into the business as we focus on driving those key customer relationships and continuing to manage costs.

In fact, to put it into some perspective, 32.1% margin this quarter is higher than the second-quarter margin that we achieved in the second quarter of 2007; and arguably you could call that the peak of the last cycle. So we feel good about the EBITDA performance we delivered this year.

Looking at EPS, we delivered EPS on a GAAP basis of $0.18 in the quarter. As we noted in the release last night, that $0.18 includes the effect of a tax benefit of $9 million taken in the second quarter.

That benefit arises out of a change in our full-year projection. As we look at the full year now and we calculate the expected tax that we will have to provide over the course of the year, we get an effective tax rate for the full year of about 55%. As we applied that 55% rate to the first-half performance, as GAAP requires, it resulted in the benefit that you saw in the second quarter. Even when you adjust for that tax matter, by the way, we still feel good about the quarter that we just delivered overall.

The only other point I will make on EPS is that the number of shares in the diluted EPS calculation went up. As we went into positive net income you have to include more shares. So the share count for the quarter was 68 million shares in the diluted EPS calculation.

Now some thoughts on our fleet. We continue to drive our fleet strategy. First on leveraging the existing fleet to the max, we are transferring fleet as we have been for the last several years. We are transferring fleet very aggressively.

We transferred $1.6 billion in fleet in total in the quarter. That is about 42% of our overall fleet moving around during the course of the quarter.

We continue to execute our lifecycle management approach by selling older equipment from our fleet. Our used sales during the quarter were made at an average age of 71 months. Again, that is consistent with our view that we should be selling the older equipment as we manage the fleet, to be more effective for our customers.

By the way, that 71 months is slightly lower than it's been over the last few quarters. That really reflects the impact of the sale of equipment in Mexico. The average age of the equipment that we sold in Mexico was a little less than normal. If you strip out Mexico, the average age of the other fleet that we sold was about 74 months, not significantly different.

In terms of our rental spend, we spent $125 million of gross rental CapEx in the quarter. We are buying categories with that spend that we expect will perform well in the near term.

So for instance we are buying forklifts; we are buying light towers; compressors; excavators; really a host of General Rental and earthmoving products, and skewing away from aerial products in the spend. We are spending a little bit on aerial, but doing so in specific categories like big booms, which are still in good demand.

We are also buying categories quite honestly that fit with the demand we are seeing from our customer groups. As we look at specific customers and specific projects, and we have visibility to the fleet that is needed to support those, we've been spending more money on those types of situations.

In terms of our full-year CapEx expectations and given the strong demand that we are seeing, and couple that with the focus that we have on supporting the key accounts, we decided that we should raise our outlook for full-year net rental CapEx. We are now expecting to spend between $160 million and $180 million of net rental CapEx. That is up $60 million from our prior range.

As I mentioned, that strong demand that we are seeing is expected to continue into the back half. We are confident that as we do put that new CapEx into our fleet that we will be able to put that fleet on rent right away.

So that is our strategy on fleet. We are going to target the spend on specific categories. We're going to support specific accounts. And we're going to really focus on driving returns out of the investment.

A couple of real brief thoughts on free cash flow. We generated $8 million of free cash flow in the quarter. While that may not seem like a big number, it is impressive given our fleet spend that I just spent some time on.

We think our full year, when you put all together the time utilization, the impact of our cost of rent changes, the greater fleet spend, the full-year free cash flow still feels good to us at $200 million to $225 million. So we are maintaining our forecast for $200 million to $225 million for the year.

As always, we are going to look for more and we will share it to you as we identify it.

Real briefly and lastly on liquidity, we maintain a very strong liquidity position. At the end of the quarter we had $800 million of total liquidity. Principally that was from availability under our ABL facility, so we are well positioned to be able to support whatever capital investment need that we identify.

So those are my key comments on the quarter. I will stop talking; open it up for Q&A right now. But before we do that I guess I'd just reemphasize that as we look at this quarter it was a strong quarter, and we feel very good about what we were able to deliver.

Continue to be cautious about our outlook going forward, but we are going to be there to take full advantage of whatever the market offers to us. So I will stop there and ask the operator to open up the call for Q&A.

(Operator Instructions) Henry Kirn, UBS.

Good morning, guys. Wondering if you could chat about rate improvement by equipment category and by geography.

Well, we don't have the specific geographies to outline. What I would say is where we saw the levels of activity that I went through on the geography, which would be in Canada, particularly Northeast Canada, and then pockets where we saw the year-over-year improvement, you can -- that is kind of where you would land on, where the rate improvements were seen.

As far as categories, I don't necessarily know that we have broken them down to specific categories unless, Bill, you have got that.

No, we haven't talked, Henry, specifically about rate changes by categories. I think it is fair to say the level of demand that we are seeing in some of the key categories would support higher rates. I will stop there.

That's helpful. Is there any way to categorize or quantify the stimulus benefit in the quarter? How much visibility do you have on the stimulus as we go in the back half of the year and into 2011?

Yes, obviously, we have always said that as the stimulus dollars came forward and the projects started to break ground, the first area that we would see the benefit would be our trench business. That seems to be holding true.

As you know, there is 32,000 projects that are related to the American Recovery Act at value $195 billion. 72% of those have been funded. It is broken down to various buckets -- transportation, utilities, water infrastructure.

Our Trench, Power -- actually, the Trench segment alone is tracking in pipeline alone around 1,100 projects. They have got about 821 non-building projects, and they also have 153 projects that are nonresidential that they are tracking.

So as we go through, the 194 projects are worth about $3 billion in value. We estimate that we would generate somewhere around $3 million of revenue on those projects alone.

It's coming. It is taking a while to come online, and we expect that to continue to go up from here and peak in 2011. I hope that answered your question.

That's really helpful. One final one, then I will hop back in queue. Could you chat about the competitive dynamics today as we are at the outset of the cycle? How the nationwide competition looks compared to either a couple years ago, or at the outside outset of the last cycle.

Well, I mean obviously as you know -- and this has been a very, very stressful downturn for the industry. Rates have come down, and some of the regional players, as we all expected, felt the brunt of it.

I would tell you that as we go forward, we are seeing the volume increase that we experienced in the second quarter. My sense is that our competitors will respond as well.

I think there is an inherent need for our industry to get a better return on its capital. We all need to focus more acutely on rates, and I think that will play out over time.

Again, we went through a bad cycle. We started to get our fleets rightsized across all of the players. Sold off a lot in last year. Used prices were affected.

Used prices seem to rebound and continue to hold, as Bill mentioned, in all the reports that we are seeing from Rouse and others, plus ourselves.

And then we are now seeing volume increases or time utilization improvements, which is the sequence that we said would play out is holding true. So my sense is it is still competitive out there and there's pockets where we fight every day.

It's not easy. I understand that. We all have to go out there and try to earn the best dollar we can.

Thanks a lot. Congratulations on a great quarter.

Thank you very much, Henry.

Thanks, Henry.

Scott Schneeberger, Oppenheimer.

Hey, guys. First question, Bill, do you have a rule of thumb for incremental margin or flowthrough for each additional dollar of rental revenue? Is there a way we can think about that?

As we talk about it internally, we generally talk about something like 70% flowthrough on the rental line. You will note that the flowthrough on the improvement in the second quarter was better than that, and that reflects some of the cost actions that we have taken and the volume leverage that we are getting with improved OEC going out on rent.

But general 70% kind of number, maybe 65% just to hedge a little bit, would be a general rule that you might use.

Great, thanks. With regard to CapEx, incremental CapEx spend decisions, how do you guys look at that? Could you speak a little bit to what it takes to maintain the fleet age? Where you are with the fleet age, where you are comfortable going, where you have been historically with CapEx; just some color around that topic. Thanks.

Sure. So 45 months today; and what we have said about this year is that we can see it going into the high 40s. So call it between 47 and 49; 48 if you insist on a point estimate.

What we have said is that we don't feel uncomfortable at that level, even though it is higher than the optimum range that we talked about historically. Historically we talked about a 35- to 45-month optimum range. But operating in the high 40s or even low 50s, even mid-50s, would not impact our ability to generate revenue. We're very convinced of that.

In fact, again if you refer to Rouse about industry data, Rouse would tell you that the average rental fleet is already north of 50 months in average age. So we feel comfortable with what we've got on the plate for this year.

Next year, we haven't sat down and really nailed a view of where the fleet age is going to go next year. So we will certainly talk about it as we get further into our planning process for next year.

What I will say is that as a rule of thumb, in order to maintain the size and the age of our fleet constant through a course of a year, we would have to spend about $575 million gross rental CapEx. And obviously, the net would be less than that as you assume some reasonable amount of used sales.

So $575 million gross to keep age and size constant across a year; and that will inform how we think about our spends going forward.

Great. Thanks. That's helpful. One final one if I can sneak it in. Could you update us on industrial business, how that is developing? I think it's a 30% target mix. Just how all the dynamics are affecting mix and where you shake out there. Thanks.

Sure, this is Mike, Scott. Our industrial progress continues to march forward. If we take a look at the percentage, it is around 19%, up 2 percentage points on a year-over-year basis for the quarter.

We continue to add more contracts, as I mentioned, in our national accounts. 40% of our signed national accounts are industrial related. It takes a while to ramp those up. Very happy with that.

Our rental revenue alone is up 3.5%, so we continue to march forward, and very happy with our progress.

We are earning more business every day. As Bill mentioned on the capital, you can imagine where some of the capital is going for these longer-term profitable deals, and we're going to react to those.

Great. Thanks, guys. Congrats on your progress.

Thank you.

Thanks, Scott.

Seth Weber, RBC Capital Markets.

Hey, good morning, guys. How are you doing?

Good.

Actually, just to clarify what you just said, Mike, did you say that the industrial rental revenues were up 3.5% for the quarter?

Yes. Year-over-year, from Q2 '09 to Q2 '10.

Okay, and is that the same -- are national accounts up as well?

National accounts collectively are up 6%.

Wow. Okay. A couple questions here. On the pricing, I think last quarter you gave us some monthly visibility into how the numbers trended through the quarter. I am wondering if you would be willing to do that this quarter for April, May, June.

Really what I am trying to understand is, did June turn positive? I think March ended up -- was kind of down 4% or so, 4.5%.

Go ahead.

Mike is feeling generous yet again.

Well, he started the process last quarter (multiple speakers).

Yes, and that is one of the reasons why we try not to start some things. So last quarter, we gave the monthly year-over-year changes; so I will just repeat that.

For April, year-over-year April was down 2.6. May was down 1.8. June was down 1.1.

And you said trends have continued into July then?

My comment was about the sequential trend in July. But I think it is fair to say that July is doing well.

The problem with July on a year-over-year comparison is last year July was a blowout month in terms of year-over-year positive. It was up last year, so the comp is tougher.

So tune in three months from now. You can ask me about the three months in the third quarter, and we can talk about July then. Especially since it will be done then instead of two-thirds done now.

Okay. But just directionally, I assume you would expect to see the same sequential margin improvement that you usually see in the rental business from the second quarter to the third quarter. Is that fair?

I don't see anything that would keep us from having a normal sequential margin improvement in the third quarter.

Okay, great. Just switching over, on -- your aerial utilization is actually up, I think up to 70% or so this quarter. How high can you really push that? It sounds like you're not throwing a lot of CapEx at that space.

But your time utilization is over 70% for booms and lifts. So what is the trigger point there?

Yes, I mean obviously, Seth, we can run aerial at a higher time utilization. Yes, it is up; and it is expected what we see in the seasonal aspect of the business.

Also keep in mind that we also had defleeting and we're changing our mix. If you see the investor presentation, it is down a couple of points.

The capital that we are spending year to date, as Bill mentioned -- year to date, we have only spent 21% of our CapEx towards aerial. The rest is going to our other product lines.

Our time utilization, to answer your question specifically, it's not unusual to get it into the 80s. It's challenging, but it's not unusual.

It will peak out over the course of the third quarter, so I wouldn't be surprised to see that go up a little bit as we went through into the third quarter. Having said that, there are pockets. As Bill mentioned, bigger booms are higher demand than some of the other products that were related towards commercial construction. Small scissorlifts. And bigger scissorlifts towards bigger box, so it's a balancing act.

Okay. That's fair. Then last question. Last quarter you gave us -- I think you called out $10 million of the CapEx was dedicated to strategic opportunities. Is it possible to clarify how much of this extra $60 million is going towards those strategics?

Yes, I think it's fair to say -- well, first, the extra $60 million is across the entire year. But at least half -- let's just say at least half of the incremental spend is again specific strategic customers or projects that we have identified.

Okay, great. Thanks very much, guys.

Thank you. Appreciate it.

David Wells, Thompson Research.

Good morning, everyone. First off, just looking at the expectations that you've outlined previously for a cyclical peak number of a 40% EBITDA margin, given the performance that you seen out of the business in the quarter and the recovery in margins, how are you thinking about that number now, relative to where you were thinking about it two, three months ago?

We still feel very comfortable that we can achieve a 40% EBITDA margin. After this quarter? There were some -- I guess I would say there was some uncertainty around some of the assumptions underneath that 40% cyclical number. We feel less uncertain about some of those assumptions.

For example, remember we said that number assumes a 67% utilization across a whole year. Well, we just delivered a great second quarter, and that gives us more confidence in our ability to hit a full-year 67%.

So feel very comfortable with the 40%, and feel more comfortable today than we did when we first put it out.

That's helpful. Then just jumping back to an earlier question about stimulus-related projects, given the number of projects that you are tracking -- and I believe it is something around $100 billion of construction spend that is not tied to highway specifically. Do you feel like those projects alone could offset any continued increases in more traditional commercial forms of nonres construction as we go into the 2011 time period?

It's really hard to pinpoint that, David. The question of timing, the timing of when these projects start, how they start.

Certainly it is value added, and we will take it to offset any of the declines that we've seen in the primary end market. But it's really hard to quantify it in that form.

Okay. That's helpful. Then on the national account front, with the new accounts that you are signing, any sense of -- are these new national accounts signing a national agreement for the first time with United Rentals? Or are you picking up share from other competitors that maybe have faltered here in the downturn? Any sense of where the business is coming from?

It's coming from both. We are taking -- some people have faltered. Some people we know are looking at more streamlined, and the larger players versus the smaller players.

We have capital to go after some of these projects with them. And the consistency levels of service that we are providing for them. I want to also say the success we're having with a single point of contact. So it's both.

Then last question. I noticed in the presentation posted that you had upped your expectation for the permanency of your cost saves from 50%-ish, kind of a 50% range, to 55%.

What has changed as you looked at those costs that you have taken out? Is it the systems that you have put into place that you feel like you can keep some of this cost out of the business? Any color there would be helpful.

You're catching me at a little bit of a disadvantage. Did we change the time frame over the saves?

No, no. It's 55%, David. I think it's been static. It is the same number we had before. It's 55%, and it would still holding true.

Yes. I think at one point we were saying about 50%; and as we sharpened precision around some of the numbers, I think we settled on 55%.

Okay. That's helpful. Thank you.

Chris Doherty, Oppenheimer.

Just a question in terms of the fleet size and your expectations for that. You upped the CapEx guidance. But in terms of talking about target utilization, you are still probably below that 67-plus-%.

Is the expectation that you're going to maintain the fleet size and focus more on driving rental rates at this point?

Well, I think it's a combination of both. One of which is of the accounts that we are signing, which will provide us with longer-term duration, we want to make sure that we have the fleet in order to achieve that, their expectations. That is one.

But obviously, yes, we want to get rates up. I mean, the rates is first and foremost on my mind. And any one of my senior managers, the first thing on their mind as well.

Are they looking for more capital? Absolutely.

Are we giving it to them? No. We are going to be very selective and have a lot of discipline around where we spend our capital and how we spend our capital.

So every day we are fighting on rate and we are going to continue to march towards that number.

Chris, just to put it -- your question kind of framed it in the context of the 67% utilization goal, if you will. I think it's fair to say that in the context of that analysis we did for the peak EBITDA margin performance, we did -- remember -- assume that the fleet size will increase over that time horizon, whatever it is.

But we assumed that it would do so in context with rates going up as well. So that was the exercise that we went through then.

As we look at what we're doing today and in the near term, it is everything that Mike just sad. We want to make sure that we're making decisions about the fleet size that support our ability to drive rate, to drive utilization, to drive return. And we're going to be looking at that everywhere.

And then, Bill, in terms of the operating leverage in the business, when do you think you have -- or have you achieved -- the run rate cost savings?

I think you brought this up, but one of the things I was impressed with this quarter was if you look quarter over quarter, implied volume was up about 16%; but yet your rental cost only increased by $3 million or 1% quarter over quarter, which I think is a pretty good operating leverage metric when things are improving.

Or was there some additional cost cuts quarter over quarter?

Yes, we continually look at opportunities. So quarter over quarter we had more headcount reductions and we had a greater focus on making sure that we're optimizing around our delivery processes. We just continue to challenge ourselves everywhere possible.

I think we will continue to do that and I think there's opportunity in the cost of rent areas to do more of that as we go forward. Obviously, I always caveat the volume component as to how it impacts our total cost dollars; but in terms of the impact on margin, better volume is going to flow through to better margin for us, as long as we're sensible about managing the cost structure.

So we're doing the normal things that we do. It had a very nice impact in the second quarter. We are looking for opportunities to keep driving it going forward.

Then just one last question, and it relates to the guidance where you increased the net CapEx of rental by $60 million but you maintained the free cash flow.

Are you getting terms on that? Or is there some working capital that benefits there? Given that you have now increased the usage of cash by $60 million. Or is that just an improvement in EBITDA, your expectations for EBITDA too?

I guess I have to say the words -- it's certainly mostly an improvement in EBITDA. Some of that gets eaten up with additional working capital, but there is an improvement in EBITDA implicit in what we said.

Thank you.

Emily Shanks, Barclays Capital.

Good morning, guys. I had, just if I could start with a quick housekeeping item. For the affirmed guidance of $200 million to $225 million of free cash flow, that includes the $55 million federal tax refund, right?

Yes, it does.

Yes.

Okay, great. Then, Mike, in some of your opening comments you had commented how the tight credit markets are helping demand for your business. I was curious what your view was around tight credit markets' potential impact on residual values going forward.

You know, that's a great question. I haven't looked at it from that perspective, to be quite honest with you.

What we look at is -- there is still a viable used market out there. I don't know where it's impacted. We have gone through tight credit market before, but I haven't seen it where it has impacted the residual values.

I think that if the contractor doesn't have the credit and you see an expansion in the secular side of the business, there is going to be an inherent demand for rental companies to probably add more fleet. Not everyone adds new fleet. A lot of the smaller localized will go to the used market. So I think it will still be a very robust market.

Keep in mind that 60% of everything that was manufactured still went into ownership. So we are still getting a bigger slice of that pie.

I think about it very simply. If credit is tight and people can't find financing to buy used, -- excuse me, to buy their own equipment, then that means that they are going to be demanding our equipment and there is going to be less used on the market. And that should support residual values overall.

So I hadn't thought about it; I am like, Mike, I hadn't thought about it from the perspective of residual values. But I could very quickly convince myself that that is not something I would be concerned about.

Okay, great. That's helpful for that insight. Thank you.

Then finally, I just wanted to ask -- and this may be a question for Bill -- around the Canadian intra-loan cash movement. I just wanted to understand the $160-million-ish that moved. Was that the cash that was used for the open market repurchases of the bonds?

Then secondarily, can we still look at that $55 million intercompany receivable between URNA and URI as the amount that you can use towards future bond repurchases? Or should we be looking at another bucket? I wasn't sure how the two were related.

Sure. Just the intercompany loan, Canada to US, I think you should think about separately than the intercompany loan URI to URNA.

The intercompany loan from Canada to the US is strictly a cash management move, where we bring the money back into the US temporarily to keep the average balance of our ABL down.

And certainly that continues. We will continue to manage that within the rules set out by the tax authorities.

In terms of thinking -- and we did not use any of that cash directly from the intercompany Canadian-US loan to repurchase the sub notes that we repurchased in the second quarter.

On the sub note repurchases, that was done out of URI. It used part of the cash capacity at URI to execute those. We had to, because of the limitations on our restricted payments basket that arises out of various debt facilities.

We used roughly $24 million, $25 million of that cash capacity. At the end of the quarter, if you look in the Q, in the guarantor statements, you'll see that that cash capacity stood at about $55 million at the end of the quarter. So that is what we have available to make further repurchases.

Great.

This is a very confusing topic. I hope I cleared it up for you.

No, no. That is completely clear and you have done a great job on the last few calls. Just with the introduction of the Canadian aspect I wanted to make sure I was clear on that.

So that's great. Thanks very much. Best of luck, guys.

Thank you.

You're welcome.

Philip Volpicelli, Deutsche Bank.

Thank you very much and thanks for providing the greater disclosure on the OEC in the press release.

Thank you, Phil. We wanted to make sure that you got everything out there.

Thank you. My question is in regard to acquisitions. Clearly some of the smaller competitors out there are probably facing Chapter 11 or Chapter 7. Are there any fleets out there available for sale that you can pick up at a discount, maybe refurbish?

Then I guess a corollary to that would be -- in terms of the OEMs, do they have any equipment they have purchased in the open market and have refurbished that might be available to you?

The answer is yes. We go out and we buy used equipment on the open market. We are not partial to -- whether it is the vendors or going to auction and picking things up.

So, yes, we have taken opportunities to go out there and buy assets. We continue to do that. Our fleet management team is always looking at what is available out there.

So yes, we do take a look at it. From an acquisition standpoint, there is -- keep in mind that usually when companies get distressed the first thing that they falter on is their services, so we're very cautious to make sure that it's the right asset.

Got you. In terms of -- with your outlook brightening a little bit and still some free cash flow or strong free cash flow generation, are you looking to make tuck-in acquisitions? Or would you consider a larger acquisition?

I think that we always get that question, Phil, and the question is around -- this is a Company that, as you know, was founded on acquisitions and grew up in that era.

It has to be strategic, whether it is large or small or medium. Has to be strategic with our long-term vision, and that is expanding our geographic or our diversity around our customer mix.

We just don't need it to add more physical locations. We don't need to add it to every market. We are in 99 of the 100 markets, with the exception of Hawaii.

It has to be strategic. Are we open to it? Yes, we always will look at it. But again the discipline around is making sure it fits with our longer-term strategy.

My last question is with regard to maintenance expenses. Is there like a cliff where, if equipment gets above a certain average age, that that maintenance goes up dramatically? Or maybe asked a different way, can you give us a sense of, as each month the fleet gets older, what that equates to in more maintenance costs?

Yes, to your first question, there is not a cliff. There is not a point where it dramatically rises.

What we think about is, as a rule of thumb, something like an incremental $2 million to $3 million a year for an extra month of age on the fleet. So a month maintained over a year will cost you another $2 million to $3 million of incremental R&M.

That number does rise a little bit as you get older, but it is not like it goes to $10 million to $12 million as you go from 45 to 50 months, say.

Got you. Great. Thank you very much and very nice quarter.

Great. Thank you.

Thank you. This concludes today's Q&A session. I would like to turn it back to our speakers for any closing remarks.

Thanks, operator. First of all, I want to thank everybody for joining us today.

I also go back to wanting to thank all the employees who are on the call listening to us today as well, for their hard work and the production of the numbers that we produced on the second quarter.

Our investor presentation has been updated on our website and it reflects our latest numbers, so please visit and download. And as always you are welcome -- giving us a call, getting ahold of Fred to set up any additional questions or comments you would like to share with us.

Thank you very much and have a great day.

This concludes today's conference call. You may disconnect at any time. Thank you for joining us and enjoy the rest of your day.