聯合設備租賃 (URI) 2010 Q3 法說會逐字稿

Good morning and welcome to the United Rentals third-quarter earnings investor call. Please be advised this call is being recorded. Before we begin, note that the Company's press release, comments by presenters 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 access these filings on the Company's website at www.ur.com.

Please note that United Rentals has no obligation and makes no (technical difficulty) to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.

You should also note that today's call will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

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

Thanks, operator. Good morning, everyone and welcome. On the call, as the operator stated, is Bill Plummer, our Chief Financial Officer and other members of our senior management team.

I am going to start this morning by summarizing the quarter for you, particularly those metrics that relate to our strategy. I want to focus our discussion on the tie-in between our strategy, our actions and our results.

I will also talk to you about the operating environment and where we see the recovery going next and then Bill, later in the call, will cover all these in detail, all the results in detail and then after that, we will take all of your questions.

So let's start with the numbers. As you saw from our press release, we had a strong third quarter. We got some help from the environment in terms of demand, but for the most part, we generated our performance from the inside out by paying close attention to our strategy.

As I've shared with you in the past, that strategy is to transform the company for long-term profitability by defining United Rentals according to our core business of equipment rental, achieving customer service leadership in our industry, continuously improving our cost structure and fleet management and leveraging our size by pivoting our customer base towards large construction and industrial accounts that we service through a single point of contact. And we are being very disciplined about how we target these accounts while at the same time pursuing more profitable rentals from our customer base at large.

So as a result, we had positive net income of $23 million and an EPS of $0.33 per share. Now you compare that with the third quarter last year when we had a net income and earnings of zero. The change is even more dramatic on an adjusted basis with an EPS of $0.40 compared with $0.01 in last year's third quarter.

We've repeatedly said that we are only interested in profitable growth and here is the evidence. We increased our adjusted EBITDA dollars by 17% even though total revenues increased by only 2%. Our rental gross margin was up 1.9 percentage points for the quarter versus last year.

In short, the numbers clearly show that we are delivering on our strategic priorities and we are doing it within the context of a choppy recovery. That's true, the cycle is turning, but it is a slow turn and I'm happy to say that our performance has outpaced the construction environment for two straight quarters now.

We know the construction spending in the US actually took a step backward in July and August compared to last year, but I am happy to report that with the ABI numbers that came in last night, we are actually up, the first time since 2008 and we take that as a piece of positive news.

Our rental revenues were up 6%. Which that includes a same-store growth of 9.7%. Now these are all good indicators of how well-positioned we are to leverage this recovery.

We also continue to be diligent about costs. We took an additional $4 million of SG&A expense out of the business compared to last year. That is a sustainable improvement and it puts us steadily on target with our projections. But the cost of equipment rentals ex-depreciation, which is a metric influenced by demand, volume, increased by $12 million. And some of that demand is seasonal, some of it is cyclical. And some of it we believe is coming from our end markets opting to rent equipment rather than to purchase it. And when you take these external factors into account, and combine them with the impact of our strategy, it helps explain the record time utilization we reported last night.

Now given these market opportunities, we have increased our strategic spend on fleet in the quarter by $113 million. We also sold $74 million of used equipment at more than four times the margin we got last year. Again, another sign that things are stabilizing. We have a lot of discipline invested in both cost control and fleet management, which is why we feel very comfortable reaffirming our free cash flow estimate for the year, even with the projected increase in net rental CapEx. Bill will go over these numbers and elaborate on our full-year outlook after I complete this.

Now before I talk about the environment, I want to be very direct with you on the subject of rental rates. I know rates are a hot topic right now. I also know that there are some mixed signals in terms of the metrics being reported by our industry. As you saw last night, our own numbers showed record time utilization for the third quarter, but our rates were still down 1.4% compared to last year.

So what is going on here? Well, for one thing, rates in general are lagging utilization in the recovery as expected. Second, monthly rates are lagging daily weekly rates and because our strategy focused on large accounts, about 71% of our transactions are lumpy right now, that is up about 2 points sequentially year-over-year.

And the inherent difference in rates is obvious when you break it down in rental terms. For example, in the third quarter, our monthly rates improved sequentially 1.7% while daily rates were up 3%. That is almost twice the pace of monthly.

The third factor is fleet mix. Aerial equipment accounts for roughly half our fleet and we've said before dirt equipment gets rented first on projects followed by aerial. And we expect that aerial rates to be challenging in the short term and to some degree, they mask the environment in earthmoving and general rental rates.

Overall, our rates have turned the corner and in the third quarter, rates improved 2% sequentially from the second quarter and that is one of the largest sequential improvements we have seen. And since we are focused on achieving a more optimum balance of pricing and time utilization, our [doll] utilization is also improving, up 2.9 percentage points year over year in the quarter.

That is good, but we plan to do a lot better. Now at this point and given current trends, we expect our rates to be flat or slightly positive year over year in the fourth quarter and have a continued trend upward as we go into the next year and the first quarter of 2011.

Now we normally would be cautious about giving that outlook, but I have a lot of confidence in the discipline that we are creating around rental rates. For example, our price optimization software called [Core] is now in place in all of our branches except Trench. Core is giving us customer-centric pricing, which essentially means that our sales team now has a better understanding of optimal pricing. They know how far they can negotiate and more importantly, they know when to walk away. Now price optimization is an example of how we are continuing to invest in technology again to support our strategy. Another one is our mobile website, which we announced last month.

Now when I look at all these initiatives, I see our strategy at work, but I also see a marketplace that is ready to move away from the downturn. I want to share some information that we are making available for the first time this morning. It supports what we hear from analysts and what our own employees report back to us in the field and are three good reasons to expect that rates will continue to trend upwards.

In September, we surveyed over 1600 of our customers with a wide range of rental spend and to get their outlook on 2011. It excludes the Gulf where the survey is being conducted this month and the results come from contractors out there in the trenches where they live in the reality every day.

43% of those surveyed expect business to increase in 2011. 38% indicated the status quo or uncertain and only 19% think things will continue to go downhill. The greatest uncertainty appears to be in the West, particularly the Southwest. The greatest optimism comes from the customers in our Northeast Canada and Midwest regions. So we are staying very close to our customers and listening to their input.

Now let me tell you what our own branches are seeing out in the field. All nine of our regions showed year-over-year growth in rental revenues in the third quarter with the strongest being in Northeast Canada and the weakest being the East and the Southwest.

And on a macro level, the picture is equally as encouraging. In the third quarter, our rental revenues were up year over year in 33 of our 48 states and all Canadian provinces. 22 states and provinces now show year-over-year growth for 2010 through September.

And our Trench, Power and HVAC business had a good third quarter, up 6.8% in revenues and a 7.2% improvement in operating margin and we are seeing demand from several directions. For one thing, the stimulus money is still in play and we have Trench safety systems out on about 150 stimulus jobs right now. Both Trench and Power HVAC are servicing more infrastructure projects. The public sectors together with growth in industrial are driving the results in this business.

I also want to mention the joint venture with Ameco that we announced in August. This is initially focused on oil and gas customers in the Gulf region. At this point, all the pieces are in place and both partners are moving forward and we will keep you posted as things progress, but I think we have made it clear how excited we are to be able to pilot with this industrial venture with Ameco. Now even without the joint venture, our industrial business contributed an additional $5 million of revenue in the third quarter versus last year.

Industrial rentals are just one example of how we are training our sales people to look beyond the traditional boundaries in the construction industry and pursue any market that fits our strategy for profitable growth.

As we identify these opportunities, we are seeking out large customers where our scale has the most appeal, particularly our ability to share fleet across our North American footprint. In the third quarter, national accounts accounted for about 29% of rental revenue, which is an increase both year over year and sequentially. Now it is worth noting that the increasing amount of our industrial business is coming from our national accounts, so as we grow our presence in the industrial sector, we are being guided by our customer segmentation strategy.

The concept of staying true to our strategy informs every decision we make as we steer our Company into the recovery. It is not going to be a smooth ride, but when we look out at the markets, we see customers choosing to rent more of the equipment they need. The demand is a part of the strong momentum that we are experiencing as we move into the two slowest quarters and should help soften the effect of seasonality. Now we have begun the process of putting our plans in place for 2011 and to the degree that we can comment on that, we will share our thoughts.

So now on that note, I will now ask Bill to review the results and then after that, we will take your questions. Over to you, Bill.

Thanks, Mike and good morning to everyone. As has become our tradition, I will give some more detail on the quarter -- revenues, our cost performance, a little bit on the fleet, liquidity, update our outlook for 2010 and then touch on, as Mike said, touch on 2011.

On the revenue front, it was a good quarter almost any way you slice it. Rental revenue, in particular, was up 6% year over year. That is the first year-over-year increase we have had in a quarter since the first quarter of 2008. So it has been a long time coming.

Within that, Mike mentioned the time utilization increase that we saw, 71.3% time for the quarter. That is up 7.1 percentage points year over year and I think it is legitimate to say that we didn't get it by shrinking the size of the fleet. Overall, the size of the fleet averaged slightly smaller this year compared to last year. The time really came out of stronger demand. OEC on rent was up 11% year over year.

Rates were working against us, so I think that makes that 6% revenue increase in rental revenue even more impressive. As Mike said, rates were down 1.4% year over year, although they were up 2 percentage points sequentially for the quarter. And when you look within the quarter -- in fact, if you look over the last couple of quarters, on a sequential basis, rates have been sequentially positive for six consecutive months. Starting in April, they have been up every month on a sequential basis.

Now Mike highlighted some of the internals going on within rate. For example, daily and weekly rates are clearly outperforming our monthly rates overall. And when you look at equipment-type earthmoving and other general rentals categories are clearly outperforming aerial and forklifts. But overall, the trend is established in the right direction and we certainly, as always, will continue to drive for better rate realization just across the board.

The other area of revenue that I wanted to focus a little bit of time on is used equipment sales. We sold $32 million in proceeds of used equipment during the third quarter. While it is down versus last year, you will all recall that we were selling at record levels of used equipment sales last year. So it should be no surprise that the proceeds came down.

On an OEC basis, we sold $74 million of OEC in the quarter and that was down as well versus $100 million or so that we sold last year. The good news is that we achieved a margin on our used sales this quarter of 31.3%. And as has been the case for the prior two quarters of this year, the margin story is really heavily driven by the distribution channel. We sold 57% of what we sold in the third quarter through retail and supported by used equipment pricing. The trends in used equipment pricing continue to be positive, that by the Rouse data that we receive, but also by our own individual experience in selling into the market. So the used equipment market continues to be robust and we will continue to use it very effectively to manage our fleet.

On the cost side, cost of rentals were actually up year over year in the quarter, $237 million, up $12 million compared to last year and really that cost performance is the tale of two cities. When you look into the fixed costs of our cost of rentals, we continue to deliver good cost performance on the fixed cost component of our cost structure. So when you look at salaries and benefits, you look at facilities costs, other structural fixed cost components, we continue to deliver reductions in those components. It is just being outstripped by the variable cost components that are flowing with the increased rental volume.

So when you look at repair and maintenance, delivery, fuel costs, those kinds of cost components that really are driven by how many transactions you do, they are up and they have offset the saves that we have realized on the fixed cost side. That has prompted us to reevaluate our outlook for cost performance over the remainder of 2010 and we are now saying that we expect cost of [rent ex] depreciation to be a save of $5 million to $15 million compared to last year. Longer term, we are still very comfortable that we have improved significantly the cost structure for this business and still feel very good about our work against the fixed cost components of our business.

The story on SG&A is better. SG&A was down $4 million year over year and the benefits are still coming out of the same places that we have been talking about. So salaries and benefits, those are really driven by headcount and the headcount reductions have continued, albeit at a somewhat smaller pace than in prior quarters.

Professional fees are still a very nice source of save for us as we continue to be disciplined about our spend there. The bad debt experienced in the quarter was higher. We actually had, year over year, about a $6 million negative in bad debt. And that reflects primarily the larger size of accounts receivable as we have driven higher revenue. We also had a slight deterioration in the aging of our portfolio, but the real driver was the size of the AR balance causing that $6 million negative year-over-year comparison for SG&A.

All in all, we feel very good about SG&A. In fact, we are reaffirming our target for a full-year SG&A reduction of $40 million to $50 million. Obviously, we have got $37 million of that in our pocket already year to date, so we feel very comfortable that we will be able to achieve the target that we gave of $40 million to $50 million.

Looking at the profit line, adjusted EBITDA came in at $216 million for the quarter and that is at a 35.7% adjusted EBITDA margin, 460 basis points better than last year. And to Mike's point, obviously, we are taking full advantage of the increased operating leverage that we have built into the business from lower costs. So a great story there. That in spite of a decline year over year in rental rates I think is very encouraging.

EPS, similar story there. Adjusted EPS of $0.40 for the quarter and the drivers are the same as the EBITDA drivers I talked about. It is worth noting that in calculating EPS, we used a tax rate for the quarter of 39.5% and I point that out simply because, in the second quarter, we talked about a 54% tax rate is what we were thinking about going forward. That change in tax rate we can talk about in Q&A if anybody wants to get into it, but as we look at the fourth quarter, we think something like the low 40%s to mid-40%s is the right way to think about the tax rate to apply to the fourth-quarter income and we will continue to update obviously if anything major changes there.

Just a couple of quick words on our fleet management in the quarter. We have continued to drive optimal use of our fleet. One of the ways we talk about that is the amount of fleet that we transfer within our system and the transfers were strong again in the third quarter. $1.6 billion of fleets transferred during the quarter. That is about 42% of our fleet overall moving during the quarter. And obviously, we have talked about how we believe that helps us more effectively utilize the investment that we have made in fleet.

In managing our used equipment sales for the quarter, we continue to execute our strategy of selling the older equipment first. So our used sales for the quarter came in at an average age of 78 months, consistent with where we have been over the last couple of years and again, consistent with the strategy.

Our net rental CapEx investment for the quarter was $81 million. That comprised of $113 million of gross capital spend and $32 million of used sales proceeds that I mentioned previously. Year to date, we have spent $287 million of gross CapEx and that spend has been, as we've talked about before, it has been directed towards supporting the growth that we are seeing with large accounts, supporting the reshaping, the mix of our fleet and making sure that we were making good decisions about the components that we have that need to be addressed and need to provide the maximum rental experience for our customers.

Where we are buying is in earthmoving equipment, a heavy proportion of the spend there. We are obviously replacing aerial. When aerial is nearly half your fleet, you are certainly going to spend to replace there. But we are also disproportionately spending on other general rental categories like light towers, compressors, supporting in areas like water trucks, pickup trucks and other important general rental categories.

Given our spending in the quarter and what we have done year to date, we feel very comfortable with spending more to support the environment that we are managing in. And so as we look at 2010, we now believe that we will spend net rental CapEx in the range of $180 million to $200 million. That is up from the $160 million to $180 million that we had guided to last quarter.

Free cash flow for the quarter was solid, $37 million in the quarter and that brings us to $144 million for the year to date and again, that is very well in line with the guidance that we have previously given of full-year free cash flow in the $200 million to $225 million range. That obviously in spite of the lower cost saves on cost of rent and in spite of the higher spend on net rental CapEx. So we feel very good about being able to preserve that kind of free cash flow.

Our liquidity position ended the quarter strong again. We ended with roughly $860 million of total liquidity. And so we feel very comfortable with the position of the capital structure currently and how it supports our business.

As it relates to the capital structure, I will just touch real briefly on the bond yield that we issued a press release around this morning. Many of you saw that, I am sure. We are announcing that we expect to issue 10 years of senior subordinated notes and the notion there is use the proceeds to redeem our 7.75% notes that are maturing in 2013. This is consistent with our ongoing strategy of making sure that the maturity within our debt is well-managed and pushed out far enough so that we don't have any undue concerns about refinancing needs in the near term. We will be in the market today. We expect the issue to go well and we expect that we will price and finalize terms over the next couple of days.

Just real quickly on our 2010 outlook, I think I touched on most of the components of our outlook. But just to reaffirm, our SG&A guidance for the 2010 full year is still expected to be a reduction of $40 million to $50 million, so no change there. Our cost of equipment rentals, we now expect a reduction of between $5 million and $15 million for the full year. That is down from the $30 million to $50 million that we had previously guided to. Net rental CapEx, we expect to spend between $180 million and $200 million. That is up from the previous range of $160 million to $180 million and then free cash flow, no change there, between $200 million and $225 million.

Real briefly, on 2011, as we look down the road, we have started making some high-level decisions, but we are certainly deep into our budgeting process as we speak. Still we thought it was appropriate to give you some highlights as we are thinking about 2011.

So on the rate front, Mike said that we expect, if trends continue, that the fourth quarter of this year will finish out with rates flat to up slightly year over year. If we achieve that, then, going into 2011, we will have nice momentum and in fact, if we achieve that fourth-quarter performance and then just kept those rates flat throughout 2011, we would experience carryover in 2011 of about 2 percentage points year over year. Obviously, we will drive for more than that, but I just wanted to give that data point that there is a couple points of carryover in 2011 as we think about it today.

On the CapEx front for 2011, we have said this in one-on-ones, but I wanted to say it here more specifically. Our gross and net rental CapEx spend next year will be more in 2011 than it is this year. And in fact, I think we'd say now that it will be significantly more. Somebody is going to ask me what I mean by significant in Q&A, and I will tell you that we don't have that number yet. But what we are thinking for 2011, based on the good momentum that we have seen with key relationships from 2010, we are going to need to spend to support those relationships, as well as to continue to position the fleet for where we want it to be over the long haul.

That said, we still expect that we will deliver positive free cash flow in 2011. Again, somebody is going to ask me, well, what does positive free cash flow mean? It is somewhere between zero and infinity, so we can talk about that in more detail as we go forward as well.

Those are the comments I wanted to make. Maybe I will stop there and open it up for Q&A and we can take it from there. So operator?

Henry Kirn, UBS.

Good morning, guys. Could you dive a little deeper into the increase you saw in time utilization this quarter? Is there any way to attribute the improvement between the secular shift to rental, the underlying demand improvement and what you are doing on the fleet management and mix side? And maybe any other bucket I am missing?

I will take a first stab at it, Harry. It is really hard to decompose it into those kind of buckets. I do think that it is fair to say that the seasonal pattern was stronger this year and so that certainly helped. We have argued earlier in the year that this year's seasonal pattern seemed to be stronger than where it has been over the last several years, certainly stronger than last year. And so if you think about 7.1 percentage points of year-over-year time utilization improvement, I would hate to put a number on how much of that is just seasonal -- excuse me -- that year over year won't have a seasonal component. I would hate to put a number on how much of that is broken out into the other buckets.

That said, we have got nice growth in our key account relationships year over year in the quarter. So clearly a portion of it is just growing those key account relationships. Mike, I will let you put a number on how much of it might be the shift to secular -- the secular shift to rental versus owning, but I would say that that is a smaller component of that year-over-year change. It is just really hard to put numbers on it.

Henry, it's Mike. It is. It is very difficult. I mean what we can say is that when you look on a year-over-year basis, last year, it is safe to say that we really didn't see any kind of seasonal uptick at all. It was very lackluster I think because of where the economy was and the lack of any kind of visibility and the uncertainty in the financial markets. Seasonality has returned.

The one thing I can tell you is that we look at and is on a year-over-year basis, our new accounts are up. So that means people are looking at ways to rent. They are up about 15% year to date on a year-over-year basis. But as Bill mentioned, it is very difficult to quantify the number specifically.

That's helpful. And as a follow-up, given your increased focus on sharing of fleet, how high do you think you could get time utilization over the course of a cycle when demand picks up?

So Henry, we have talked about, over the course of the year, getting time up into the high 70%s. As we sit here, I think 67% over the course of an entire year would be a very high level of time utilization for this Company. Could we do better than that? Yes, we probably could. But as we are seeing right now, operating at these levels of time utilization involves some operational challenges based on how we run the business historically. And so we are going to have to figure out better ways, new ways and different ways of operating in order to be able to sustain these kinds of time utilization levels at reasonable cost.

We are going through that right now. We are learning those processes. But we, as an executive team, are convinced that we can operate in the high 60%s. I think we put 67% as the target in our sort of normalized EBITDA analysis last quarter. And I think that is a good indication of where we think we can drive it to on a sustainable basis.

And one final one if I could. How should we think about the cadence of the repricing by customer type across your book of business?

I'm sorry. Ask that question again. You are breaking up.

Sorry. How should we think about the cadence of repricing by customer type across your book of business? Does industrial take longer to get repriced than the contractor fleet, etc.?

Henry, it's Mike. The way in which we set up our contracts, there is kind of a range in which we work within. It is -- the range would be, from a global perspective, not to exceed pricing, so you have a bandwidth in which you can work within within the current markets. In other areas, we have regional differences because of cost structures and where they are located. I think each one is priced accordingly. Typically, these are one year to three year in duration. So we do have flexibility within the contract itself.

That's helpful. Thanks a lot. Nice quarter.

Thank you. I appreciate it.

[Manish Samere], Citi.

Hi, Mike. Congratulations and good morning to everyone. A couple of quick questions. Bill, on CapEx, when you said significantly higher CapEx, I am not asking for the amount, but I am just asking for -- is it going to be more concentrated in earthmoving or aerials?

We haven't definitively laid out that level of detail in the CapEx spend for 2011, but I do think it is fair to say that I would be shocked if we don't end up spending -- relative to the breakdown of our fleet, the mix of our fleet today, I would be shocked if we didn't spend more than the current earthmoving share of our fleet on earthmoving, less than the current share of aerial on aerial, more than the current share on Trench and other gen rent categories on those categories and probably not dramatically different on forklifts.

So I know that is high level and just directional, but we want to continue that trend, right? We want to continue to focus on reshaping the fleet away from aerial towards earthmoving and then supporting the growth that we are seeing in gen rent categories, especially driven by industrial relationships, as well as growth in Trench and Power and HVAC. So that is where our spend is going to end up.

Okay, thank you. Michael, two questions for you. On Ameco JV, do you have revenue or EBITDA or industrial penetration type targets that we should benchmark against?

It is too early. Both Ameco and ourselves have gotten together and we have -- we are putting a plan together. As Bill mentioned, we are going through our planning process. They are as well. As things start to develop, we will be open to share those with you. It is too early to tell at this time.

Okay. And then just on the bigger picture, the industry, obviously with the ABI index, it indicates at least hopefully an initial step in the recovery process. The question really is on how impactful will the regionals be in the future? Is that a model that can exist? Is it sustainable or do you think that they might just need to consolidate?

It's a great question. It is one I often get and it is somewhat complicated to answer back, but let me just give it a try. I think, yes, there is always going to be an area for regionals. I do think that regionals have been severely punished and pressured in this downturn. The question is accessibility to the capital markets and whether they can, like anyone else, be able to sustain their capital structure and maintain their growth and their profitability to exist. So I do think that they will continue. There will be pockets, but I do think that they will always be pressured. It is kind of one of those things where you are not small enough and you are not big enough on the same coin.

I will tell you that, historically, there has been a lot of growth through regionals. I do believe that there will be further consolidation in our industry. Our industry is still immature and it is still very fragmented. So it wouldn't surprise me to see a continuation of consolidation.

And then just lastly for Bill, Bill, you mentioned the gross margin on the used equipment. You said that the mix helped with the higher margins, but compared to some of the peers in the industry, your margins have been running quite strong. And I guess the one question I have is I just want to make sure that the book basis of used equipment sold, was it ever impaired?

There might -- in the current quarter, there might have been some. I can't remember whether we had any impairment impact flowing through what we sold in the current quarter. Chris is shaking his head no. I am just trying to remember the timing of when we sold the Mexico assets, which we may have impaired previously, but that was in the second quarter or was it third quarter? But regardless, even if it was third quarter, it would be a small portion of the overall sales.

So there is nothing unusual going on in the book basis of what we are selling either in the third quarter or across the entirety of this year, if that is your question.

Okay, yes. I just wanted to make sure. Thank you again and best of luck.

Seth Weber, RBC Capital Markets.

Hey, good morning, guys. Going back to the CapEx discussion, I mean is that number that you are kind of thinking about, is that designed to bring the age of the fleet down? I mean you have talked about in the past kind of a maintenance CapEx level. Should we think about plus or minus that maintenance level is what you are thinking?

Seth, it is not specifically -- the thought process is not specifically that we need to bring the age of the fleet down. Our view is that we can operate very comfortably at or above where we think we will end the year on fleet age. So that is not the driving consideration for our thoughts about how much CapEx to spend next year. It is a factor, but it is not the driving factor.

We are really more focused on what do we need to spend to support the relationships that we have deemed strategically to be the most important. And then how do we remix the fleet and then how do we make sure that we are addressing the replacement of the units across our portfolio that we think could interfere with the customer's rental experience. Those are the prime thoughts that will lead us to a CapEx number. It has just become very clear to us so far through our planning process that that number is going to be significantly higher than maybe it is this year. I don't know that I can say much more than that at this point. I wish I could.

Let me ask it a different way. Do you expect the age of the fleet to come down next year?

We haven't definitively decided. What I can promise you is that we will make sure that wherever the age of the fleet goes next year that it is not getting in the way of our ability to generate revenue. If we operated next year in the low 50%s, I don't think that would be a problem. Obviously, that is higher in fleet age than where we are today and so that would suggest that we could spend less than sort of the level that we talked about needing to keep the age constant. I wish there was a more definitive answer that we can give you right now, but we are still thinking a lot of these issues through.

This is Mike. We are going through our plan process, but the way in which we look at the world is based on demand and returns and our customers. Those are going to be some of the driving forces that we will be looking at very closely. As Bill mentioned, I think we have proven, the industry will prove that time utilization can go back up and age is not the deciding factor on that. It is how well you maintain it. To us, it is about discipline and demand and where we are going to put our money to get our returns.

And just don't lose track of the fact that we did say free cash flow positive next year. So that is a constraint and a constraint quite honestly that will flex based on how active the market is next year. If we get better rate performance than sort of we are thinking about right now, if we get better volume demand than we are thinking about right now, then we may flex the amount of spend up. If we don't get it, we may flex the amount of spend down. That is why it is so important for us to get through this planning process to have a better sense from our regions of where we think we are going to end up on the cash from ops side and then we will nail a CapEx number coming out of that.

Right. And do you think that used equipment sales will be about flat next year?

I think they will go up as well. Again, don't have a definitive view of how much they will go up. But if we are going to spend more, we are going to make sure that we are taking out -- as part of that greater spend, taking out the units that need to be taken out and we won't be shy about doing that. So I would say used sales will go up next year. Will it go up proportionally? Yet to be decided.

And then just a follow-up question on the fourth-quarter pricing commentary. Is that -- so you are talking about pricing up year over year. Can you give us what that would equate to on a sequential basis?

Sequential basis, I think it is 0.75%, 1%.

So I think, for the quarter, if we got sort of what we are thinking about for the quarter, it would be a little less than that. It would be sequentially -- the quarter would be flat to up just a little bit.

So from 3Q to 4Q, flat to up a little bit?

Exactly.

Which the seasonal pattern of our industry is we get into November and things start coming off rent. So that tends to put a little bit of downward pressure on pricing late in the year and early in the year for the winter months as well. So that is not a shock that we might be around flat in the fourth quarter, may be up just a touch.

Right. So that was the spirit of my question. How good is your visibility there? Is that being driven by longer-term contracts that you have signed recently that you can definitively say that you have that in the bag or do you think that the market is just getting better?

We certainly have some longer-term relationships that we have signed this year that gives us some more visibility. I would say though it is mainly just reasoning from where we are standing right now in terms of the amount of equipment that is on rent. We are at a high level of OEC on rent and on time utilization of our fleet, as you can tell.

Fourth quarter started out with good momentum coming in from the third quarter. So we're starting from a pretty high level of overall demand and we think that that will -- it will fall off seasonally, but it will fall off less severely than it has over the couple of years and the momentum on rates has been positive enough so that the seasonal impact won't be as negative as maybe it is usually. So that is the reasoning that we apply to say that we could get flat year over year and flattish kind of sequentially.

Was pricing up in September year over year?

We haven't addressed that explicitly. I guess in the past we have given the month year over year. In for a penny, in for a pound. September was not up year over year for the month. It was down --?

Half a point.

Half a percent.

Half a point, I mean if you -- yes, half a point.

Okay, great. Thanks very much, guys.

Scott Schneeberger, Oppenheimer.

Thanks. Good morning, guys. Just following up on that last question, Bill, you have breached it in the past. Could you give us a little color on the month-by-month pricing sequentially through the third quarter please?

Mike, do you want to do it?

Yes, I'll do it. In the month of July, it was down negative 2.3. August was down negative 1.4. And as I just mentioned, September was down 0.5. Those are year-over-year numbers.

Those are year over years by month and I guess I would only add that the down in July reflected what was a very strong comparison month last year. The July comp was through the roof last year and so I think that was the key driver for that down 2 and change for that month. We have reestablished the trend that we expected here in August and especially in September and what we are seeing so far in November gives us confidence in the statement we made about rate.

And if I want to give you the sequentially, it's 0.8 for July, up 0.7 for August and 1.4 for September.

Great, thanks a lot, guys. And then on -- just could you speak to pricing overall out in the industry? What are you seeing from the national players, the regional players, the level of discipline? Where is it now that we are into the fourth quarter to the extent that you can comment on that? Thanks.

Well, I think that everyone is being good stewards of the industry and doing their best to get rates up. That is the general comment I am getting across all of my regions and my branches when I go on visits. Is there pockets? Yes, there is always going to be pockets. Is there going to be one where we see competitive pricing? I think the area that we see the most competitive pricing is in aerial. In aerial -- the aerial players are scattered across North America and you can take that from small to medium, but I think, overall, the industry is waking up and responding to the need to improve on prices.

And by the way, the industry overall is healing. As I mentioned before, it is going out into the second quarter. Used prices improving continue. We have seen time utilization improve and my sense is that it will be across the industry as a whole. And as a result of that, pricing will follow.

Thanks. One more if I could. Bill, probably more targeted towards you. With positive momentum on SG&A relative to your guidance and obviously with a strong revenue, on cost of service a little bit with the variable in the different direction, for us building out our models in '11 and into the out years, where should we anticipate grabbing the majority of the leverage of those two line items and just a little bit more on how you are thinking about that. Thanks.

I'm sorry, you are strictly focused on the selling and G&A components of SG&A, is that your question?

No, no, no. Cost of services, cost of rental versus SG&A and yes, with a little bit of itemization of sales versus G&A if you could.

So again, I will plead the planning process to some extent, but I would -- if you had asked me that question a couple of months ago, I might have had a slightly different answer on the cost of rent components that I have today. Given the momentum we are seeing on volume demand and the variable cost drivers there, I am probably less optimistic about a dramatic reduction in cost of rent next year.

I know that we got some initiatives that will help us address some of the fixed cost components. I just think that the variable cost components could be a pretty strong headwind if the kind of volume demand that we are seeing continues into next year. So that one is a harder one to say that we will have absolute dollars saves year over year next year or how much those dollars saves might be.

SG&A, I think I am more optimistic that, while we should have a selling cost increase next year, that there is some other initiatives on the G&A cost components that we could use to offset those. I am not ready to put a number on the page just yet. I am hopeful that we will be able though to target further SG&A reductions next year. But I want to get through my planning process before I can say that with any conviction.

Fair enough and thanks for that color.

David Wells, Thompson Research Group.

Hey, everyone. I guess, first off, appreciate the color regarding the difference between the daily and the monthly rates. Just to get a sense of the elasticity, are you finding that, when you have a monthly rate that comes off, if the customer is renewing, are you being able to push that pricing up or are you finding some pushback from customers as you try to move the rate needle?

This is Mike. The way in which we measure that would be sequence one, which would be the first sequence as they come out and to your point, we are seeing the monthly rates improve as they come off rent and then go back out on rent. And that is on a global site of all of our assets collectively. So that's a fair comment.

If I can say exactly what you said in maybe a few different words. Sequence one is the first billing cycle of a new rental, so that gives you an indication of the new rate that is being established with that new rental. When you just look at those transactions, the monthly rate is up, as Mike said. When you look at the monthly revenue components that are from the mix of new transactions plus outstanding transactions that bill on a monthly cycle, the monthly rate is not as attractive.

Sure. That's helpful though. And then just looking at the location count in the quarter, continuing to find locations to close, as you look at the store count going into next year, what are your thoughts on that and is there room for additional cost take-out just from a consolidation of locations?

This is Michael. We have said that we are always looking at or optimizing our footprint and we will continue to look at where we can optimize overall. As we said before, we continue to look at this and we make sure that the idea is to not lose any marketshare or to capture the revenue in which we leave. A lot of these are consolidations and some will take longer to think them through than others. But we are going to continue this process.

Going back to even one of the earlier comments on cost overall, this is a dedicated team that is focused on cost reductions. We are not going to let up just because we have got a couple of good quarters behind us. We're going to continue to focus on trying to drive efficiencies, so it is still an area that we will focus on.

I would also point out that we also had some cold starts as well in our branch count and we are focusing on growing the areas of profitable growth. So we are going to do both going forward.

That's helpful as well. And then I guess an additional question regarding the cost savings that you have seen, just looking at I guess second quarter to third quarter, you saw almost 350 basis points of adjusted EBITDA margin improvement. Is there anything from like a one-time perspective that would have been a benefit in the quarter or is that just more a function of the cost take-out being leveraged as you get additional rental rates -- excuse me -- additional rental revenues through the door?

There is nothing that would have been a significant one-time benefit, no individual action. I might add that I called out the $6 million year-over-year change in bad debt. So on a year-over-year basis, that hurts us. Sequentially, it is probably not a dramatic change in bad debt. So I am not thinking of anything on a second quarter to third quarter comparison basis that was unique or significant in that improvement in margin.

Great. Thank you so much.

Philip Volpicelli, Deutsche Bank.

Good afternoon. So the first question is the bond offering that you guys have in the market today. Would you consider upsizing that to also take out your 7% notes or do you prefer to have two subtranches in your cap structure?

Phil, it's Bill. We will continue to evaluate the strategy as we see how the demand develops. The notion going in was, as we said, 500 to take out the 7.75. If it is blow-out demand, we will give full consideration to upsizing and acting on the 7s. That would be sort of the logical thought process if we had more money. So go out and tell your folks to buy and we will see if we can face that question.

Sounds good. And then on the 1 7/8, I saw you had 93 million put back to you. The 22 million that remain outstanding, are they still putable to you or did that expire?

It was a one-time put at this point. There is another put in three years that they have available to them.

Last question and probably more philosophical. Clearly some of the regional players out there are I guess in more difficulty than you guys are at this point in the cycle. What is the thought process in terms of do you prefer greenfield starts or do you prefer to make a larger acquisition?

This is Mike. The reality of it is, as I mentioned, we have five cold starts that we put out there, so we are not afraid to do both. But to be clear, it has to be strategic, it has to fit with our strategic vision of where we want to take this company that we have articulated to everybody. But we will always be interested in looking and seeing if they do fit strategically, but we will take it as it goes.

Okay. So there is nothing -- you are not actively looking out there at acquisitions. It's more if something comes along, you will take a look at it?

Yes, we are always -- look, we are always scouring to see what opportunities exist out there. We are not going to lie idle. It is a matter of making sure that if we can find something, we are interested in it and that is what my team does and we will continue to focus.

Great. Thank you.

Emily Shanks, Barclays Capital.

Just two quick ones for you. The first one is more housekeeping. On the AR securitization, if I have it right, it actually matures I think a year from today. When will you start looking at renewing that? Is that within the year or just much closer to the actual maturity?

We will look at it on an ongoing basis. We haven't set a definitive time at which we want to renew it. And I guess I am a little bit relaxed about it just because those facilities have been so readily available. Even through the turmoil last year, they were readily available. Our lenders were coming in saying, hey, do you want more money basically. So we will look at it on an ongoing basis and I think we will pull the trigger as we line up a set of banks and a set of conditions that we think look favorable. So stay tuned.

Okay, great. And then my last and final one is just more of a bigger picture one. Clearly, before the consumer-driven recession, you guys had forged leveraged down quite nicely. What is your larger picture view on what the appropriate leverage target is for URI? And I know obviously you will have some growth in there, but how are you thinking about leverage over the next couple of years?

So I think what we have talked about internally and I have probably said it externally as well is there are two ways to approach that. One is to flip the question around and say how do I feel about the level of leverage that I am at today or that I got to last year in the most severe downturn that we have seen in a long time. And the answer was we felt comfortable with the level of debt that we carried even in the depths of last year. And so you can kind of back into what a debt to EBITDA ratio in that environment was and infer that we would be comfortable there.

Let's say that we got up to something in the 4.5 to 5 times debt to EBITDA range at the depths of last year on a trailing 12 basis, that probably defines the upper side of that leverage measure that we would look at. To peg a number, I would just say 4.5 if we had a choice of actively managing it on the high said.

On the low side, we have thought about the philosophy of the capitalization of this Company quite a lot actually over the last year and a half. And we feel comfortable operating at levels of leverage that imply being a high-yield issuer. At the low end of the range, 3.5 times debt to EBITDA is something that we think is probably a good place to look for the minimum of leverage. You go much beyond that and you start to lose some of the cost of capital benefits that we see from being a highly levered company. So that is the range that I talk about generally, 3.5 to 4.5 and I would say we will operate that way unless there is something really extreme one way or the other.

Just as a follow-up, I really appreciate that color, Bill. As you look at -- I mean you are obviously throwing out some pretty nice cash this year and as you indicated, you are expecting to be free cash flow positive next year. Your leverage could naturally work down below that 3.5 times. As you think about that priority for free cash, what are you targeting?

On the surface, we will continue to drive down debt until we get to that lower end of the range. We are not going to be religious about 3.5. If sort of the natural momentum of our business, making the decisions, the operating decisions that we want to make takes us to a slightly lower number than that, okay, fine, we can do that for awhile. So I don't know that we would go out of our way at the point we reach 3.5 to say, oh my goodness, now I have got to do something differently.

But at the same time, we do think that we have got operating objectives and some of those we might address more aggressively if we are getting toward the lower end of the range. For example, spending a little bit more on rental CapEx if it makes sense from an investment perspective. So we will balance all of those things as we go forward, but it would be a high-class problem to have to figure out how to manage a leverage ratio that is too low.

Okay. Thank you.

Thank you. This does conclude the question-and-answer session in today's program. I would like to turn the program back to Mr. Kneeland for any further remarks.

Thank you, operator and I want to thank everybody for joining us today. Please feel free to join us anytime or call us up here in Greenwich. And if you would like to go see one of our facilities, please get a hold of Fred Bratman and if you go to our website, you can download the investor presentation, which has updates from last night. And also I would like to point out that we also have a new page out there in our call center, which explains how the service is growing and the importance it is as a competitive advantage. So with that, that concludes today's call. Thank very much and looking forward to our next earnings call. Goodbye.

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