聯合設備租賃 (URI) 2011 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, commits per 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, 2010, 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 [comment] 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 would now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Thanks, operator, and good morning everyone and welcome in joining us on our second-quarter call. With me today is our Chief Financial Officer, Bill Plummer, and other members of our senior management team.

Last night we reported numbers that showed significant progress towards our targets as part of a multi-year strategy that is focused on profitable growth and margin expansion. And as you know, we reported earnings per share of $0.38 on 16% increase in rental revenue. Our rates were up more than 6% year-over-year, and with a stronger performance each month in the quarter.

I'll give you an example. Rates were up 5.4% year-over-year in April, 6.2% in May and 7.2% in June. And time utilization of 69% -- which, by the way, was our fifth consecutive quarter of record time utilization, and we did it on a larger fleet -- and our adjusted EBITDA margin was 35%, up 3 percentage points year-over-year.

Now, these numbers are solid in their own right, especially given our operating environment. But they also reflect a strategy that is engineered for long-term improvement of our operations, our market opportunities and the financial attractiveness of our business. Virtually every arm of our strategy is clearly working. However, there's more to come.

For example, our model is capable of generating more operating leverage through continuous improvement of our cost structure. One priority is our cost of rent. Some of the increase we saw in the quarter is a consequence of volume, but we believe there are untapped efficiencies, and we are looking hard at those opportunities. At the same time, we want to make sure that any moves that we make are in the best long-term interest of our Company. We are not interested in quick fixes. The actions that we are taking, like investments in technology, are strategically sound for us.

Now, looking as a whole, we hit the midyear point solidly in line with our internal expectations. And that was no small feat, given that this is not a summer of recovery for construction, as some industry analysts originally forecasted. Nonresidential construction for the US year-to-date is still declining from 2010, with May being particularly weak in terms of construction starts. Now, other indicators, like the Architectural Billing Index, are reflecting the choppiness that seem to be the main characteristic of this recovery, and the ABI has bumped around between 47 and 50 since January. It's slightly better than last year, but overall still disappointing.

And the industrial sector is doing better, both in the US and Canada, and we have put our Company in a strong position to capitalize on this opportunity with our recent acquisitions of the Venetor Group in Ontario and the Gulfstar acquisition in Texas and Louisiana. And we made these acquisitions because they tie so well to our strategy. Together, they contributed almost $6 million of EBITDA in the quarter.

So also on the bright side, our customers are reporting that they are seeing more bid activity, which is consistent with what we are hearing from other sources. And the backlog of our larger customers seems to be improving. The biggest challenge for contractors right now is margin, and that pressure is being felt along the whole supply chain.

So how are we getting double-digit growth in this environment? In a nutshell, when we formulated our customer segmentation strategy several years ago, we got it right. For our key customer groups, demand is up more than the market overall. In addition, when we signed these customers, we knew that we had the ability to earn more of their business through superior customer service. We estimate that our share of wallet with national accounts ran about 53% through June, which is significantly higher than last year. In other words, our segmentation strategy is unfolding exactly as envisioned, and all of our operating regions had positive growth in the quarter.

And we had double-digit growth in key strategic areas. Let me go over some of them. Rental revenue for national accounts was up 17% year-over-year. Industrial was up 18% and included the impact of the acquisitions, and our key account business was up 16%. Our Trench Power HVAC business had a very robust, up 29% growth due to the combination of cold starts, our acquisition and demand for our specialized expertise.

Now, Canada, which is being compared against a banner year in 2010, was up 45% in the quarter. And even if you exclude the impact of Venetor, it was still up significantly. So the provinces are becoming a more important part of our business. Now, as I mentioned before, we also believe that we are benefiting from the secular shift towards rental as well as the growing appeal of our brand as a premier customer service provider. These two dynamics can be difficult to measure, but one thing is clear from our performance this year. This is not increasing utilization on our fleet by buying share at the expense of rental rates. Now we can say that with confidence because, as many of you know, [Rouse] has initiated metric tracking in our industry, and rates are part of the data that we see.

Now, all of our employees understand the importance of rates and return on assets. Our approach to fleet management is much more disciplined this year and well-rounded than prior cycles. And our CapEx plan for the year, which Bill will discuss in a minute, are calculated to drive returns, not just in 2011 or 2012 but over the full life of the asset. And we see opportunities to protect key relationships with certain types of fleet.

But we also see more room to push rate in local markets. Let me give you an example of how hard we have been fighting for rates out there in the trenches. In the second quarter, we continue to shift toward monthly rentals, which, as you all know, is part of our strategy. Last year, monthly rentals was 69.6% in the quarter, and this year they are at 72.8%, up very nicely. And that's part of what we call the period mix. We truck fewer dollars per day on a monthly rental, but these transactions are typically more profitable than daily or weekly term.

Now, in addition to that, national accounts as a percentage of rental revenue increased 33% in the quarter, and these are negotiated agreements tend to be more competitive on rates. But even with that, we brought rates up more than 6% in the quarter, so we stayed true to our strategy of transforming our customer mix while, at the same time, we did the most effective job yet of raising rates in this cycle. In fact, rates were up in every one of our target customer groups and in every equipment category.

Our performance in the quarter also makes an important statement about the cohesiveness of our Company, particularly our field operations. And we're continuing to invest in the field where it will pay off both revenue and cost control. Now, we have already done that with CORE, which is the software our branch has used to manage rates, and we are also continuing to roll out our FAST technology, which should bring more efficiency to our logistics end of our business.

Now, investments in technologies are not Band-Aids. They are a prudent way to improve our top line and our bottom line by change the fundamentals of how we do business.

So looking ahead, it's obvious to everyone that there's a lot of macro uncertainty out there that can be difficult to pin down end market behavior within any real position, and that's the reality of our marketplace.

But it's not our reality. Our results are defining our operating environment because they are being propelled by a strategic plan that does not rely on a rebound in our end markets, and that gives us a lot of confidence. It tells us that we can make progress where we need to. And we expect our performance to remain robust for the balance of this year.

The 35% adjusted EBITDA margin we reported in the second quarter for our Company, it's a solid step forward to our bridge to our near-term goal of $1 billion of EBITDA and stronger margins. And equipment rental, like a lot of industries, may be looking at the new normal, but this is a new United Rentals, and we are prepared to take that on.

So on that note, I will stop here and I'll ask Bill to review our second-quarter numbers. And then we'll take your questions and we will go from there. So over to you, Bill.

Thanks, Mike, and good morning to everyone. As always, I will give you some more detail on the quarter, a little bit more color on the drivers and then spend a little time updating the outlook for the remainder of 2011.

Starting with revenues, overall revenues were up solidly, as Mike said. Rental revenues were up 16.4%. Within that, rate and time utilization, strong drivers, rates being up 6.1% year-over-year and time utilization also being very strong, 69% or up 3.3 percentage points over last year.

To dive into rates a little bit more deeply, that 6.1% year-over-year performance was one of the stronger quarters that we've seen in the history of the Company. If you look at it sequentially, the second quarter was up 1.8 percentage points compared to the first quarter -- again, very strong relative to where we've seen second quarters come in sequentially in the history of the Company.

If you break down the months, within the first -- excuse me, the second quarter of rental rate performance, Mike gave you the year-over-years by month. Just to flesh that out a little bit more, the sequentials by month were as follows. April was up 0.6 sequentially versus March, May was up 1.1 percentage points versus April, and June was up 2 percentage points versus May. So nice, robust sequential growth in the quarter on rental rates as well.

If you look at rates year-to-date, our year-to-date rate is up 5.2 percentage points over last year, and that's very clearly in line with the guidance that we've given for rates over the full year of 2011. So we feel very comfortable of being able to deliver that 5% or more for rate performance in 2011.

Looking at volume and time utilization, at least on rent, our measure of volume was up 13.8% year-over-year in the quarter. That happened along with an increase in the fleet size. Our average fleet size was up just under 8% over the second quarter last year.

Put those two together and you get the time utilization performance that we mentioned, 69% up 3.6 percentage points over the prior year. That is a fifth consecutive quarterly record for the Company in time utilization performance, and it certainly bodes well for the second half starting out on a strong note.

That's enough about rental revenue for now. Let me move to used equipment, briefly. Used equipment proceeds for the quarter were $41 million, and that's up from $37 million the prior year. More importantly, the gross margins were quite nice in the quarter. We realized 31.7% gross margin on our used sales in the quarter this year. That's up 7.4 percentage points compared to last year. As has been the case recently, the main driver was the channel mix. We continue to flow a tremendous amount of our used sales activity through our own retail channel. It was about 68% in the second quarter this year. That's up from 61% prior year.

Auction also continues to decline. Again, as has been the case recently, we were only 12% auction in the mix this quarter. And that's down from 22% in the second quarter of last year. So continued good performance in the used equipment sales in the quarter. As we look forward, we certainly expect to continue to drive good, robust used equipment volume over the second half. We will continue to manage also the margin. The challenge there is that we plan, as we've said in our previous filings, to use more sales to vendors as one of the channels this year. And that may depress the margin that we realized somewhat in the second half compared to the first half.

Let me move briefly to our cost performance in the quarter. Starting with cost of rent ex-depreciation, they were up $29 million on a year-over-year basis versus last year. Within that $29 million of unfavorability, volume accounted for about $10 million of it. And I will point out that the volume included a little under $5 million of re-rent expense increase compared to last year. So $10 million attributed to volume of the overall $29 million year-over-year change.

Compensation contributed about $5 million to that change. That included increases in profit sharing among our field operations as well as the increase in merit increases that we told you about in the first quarter. Those combined gave you $5 million for comp. Along with compensation we also had about $5 million impact from the acquisitions in our year-over-year cost of rent performance. That's just a straight add of their cost.

Fuel pricing was another driver. Our fuel prices were up roughly 33% on a year-over-year basis. We did have hedges in place, as we've mentioned. But even so, the hedge prices were such that our fuel impact this quarter was significant. About $3 million of the $29 million was due to fuel price differences this year versus last.

The remainder is a host of items -- fleet age. We've talked about that in the past. Fleet age contributed a little under $2 million of incremental expense just servicing an older fleet. We had an insurance benefit last year that didn't repeat this year that contributed roughly $2 million. And then the remainder was a host of puts and takes on a variety of lines within our cost of rent.

Moving briefly to SG&A performance, we continued to leverage our SG&A more effectively as we go forward. This year in the second quarter SG&A represented 15.9% of revenue and that's a 30 basis points improvement over last year. The SG&A dollars were up $10 million in the second quarter compared to the prior year, and the big drivers of that change were compensation with the G&A-related bonuses being up, with higher performance. And volume was another significant driver, primarily commission expense increases with the higher revenue.

The other components of SG&A change were puts and takes here and there, including about $500,000 of fuel here as we include fuel for our management vehicles in SG&A as opposed to in cost of rent, another $500,000 to represent the increase in investments and things like that in core systems over last year and then a host of puts and takes elsewhere in the SG&A area.

Let me move now to profitability, starting with EBITDA. On an adjusted EBITDA basis you saw the report of $221 million for the quarter, and that's up nicely versus last year. 23% improvement over last year, obviously driven by the key components that I mentioned in revenue and cost.

As a percent of sales, Mike mentioned 35% is a very nice increase of 300 basis points over the prior year, and it represents a record for the Company in the second quarter in its history.

Moving to EPS, GAAP EPS of $0.38 for the quarter and adjusted EPS of $0.40 for the quarter were nice improvements over the prior year. On an adjusted EPS basis, the prior year was $0.25, for example, so a nice, robust improvement there as well.

Let me just address our fleet management activity briefly in the quarter. First, starting with fleet transfers we continue to transfer fleet at a rapid pace across the business to leverage the fleet that we have as effectively as possible. Transfers totaled about $1.4 billion in the current quarter. That's very comparable to where we have been over the last number of quarters.

As we think about the size of the fleet, we reported already that the average fleet size increased almost 8% year-over-year. Clearly, that reflects the spending that we have been doing. Our gross CapEx in the second quarter for rental fleet was $297 million, and the net rental CapEx was very robust as well, well north of $250 million. We continue to look for opportunities to invest in our fleet, and we are investing in those places where we get the best bang for our buck. So, for example, of that 297 gross to spend in the second quarter, 20% of it was spent in Canada. And Mike told you about the strength that we are seeing up there.

Of the spend in the second quarter, we continue to emphasize those categories of equipment that represent the best opportunity, i.e., earth moving equipment and generatant categories like generators, compressors, trucks and other general categories. And we continue to spend, albeit at a lower than pro rata share, on scissor lifts and other aerial work platforms. AWPs were about 33% of our overall spend, for example, in the second quarter, compared to a mid-40% share of our overall portfolio.

Touching quickly and cash flow and liquidity, free cash flow for the quarter was a use of $118 million, clearly reflecting the heavy CapEx spend. That brings our year-to-date free cash flow to a use of $48 million. This is still very much in line with our view of being free cash flow positive for the year. And so we look for nice positive free cash flow over the third and fourth quarters as we finish out the year. I will touch on that when we go through the outlook as well.

In terms of liquidity we finished the quarter with a total of about $610 million of overall liquidity. That includes our ABL availability, our cash availability and our AR facility.

Let me briefly update our outlook for 2011. As you all are familiar, we have been guiding to rate performance of the year of 5% or more. And as I said earlier, we still feel very comfortable that we will be able to achieve 5% or more for the full year, even though the comps get more challenging in the second half, given the increases that we saw in rental rate during the second half of last year.

On time utilization, the year has been very robust, and we are therefore raising our expectation. Year-over-year, we expect time utilization to be up 2.5 percentage points compared to our previous target of up 1 percentage point.

On a CapEx basis, we now expect to spend about $650 million of gross rental CapEx. That's up $25 million versus our prior guidance. We also have raised our expectations of net rental CapEx for the year to the range of $450 million to $500 million, again up $25 million.

Even with this increased spend, however, we still expect to be free cash flow positive. We are now saying between $5 million and $10 million of positive free cash flow for the year. And as always, we will continue to look to drive that even more positive, given the opportunity.

In terms of our flow-through outlook for the year, we are revising our view of where flow-through for the year will come in from 65% to 70% previously. We now see it at 62% to 67% for the full year. Again, that's adjusted EBITDA to total revenue as a flow-through measure.

The decline of 3 percentage points reflects the impact of the acquisitions. You can all do the math. You can see, when you add acquisitions, you add 100% of the revenue, but you only add EBITDA at their margin, not at their normal flow-through. And that's the impact that we are anticipating and leading us to decline -- to reduce the range of expected flow-through for the year.

I will stop there and open up the call for Q&A. But before we do, I would just like to offer my view, which echoes the view that Mike espoused. This was a strong quarter for us in so many ways. We are very pleased to be able to deliver the rate that we did in the quarter, 6.1% increase. We are very pleased with the level of time utilization on the fleet that we have been able to achieve. It's very robust, that, in the face of an increased fleet size -- and we are also pleased that the margin expansion that we have been able to deliver, 300 points of EBITDA margin expansion in the quarter.

So that's a great starting point to finish out the year. Why don't we stop here and ask for your questions. Operator?

(Operator instructions) Manish Somaiya, Citi.

Good morning and congratulations, Michael, and to your team on a solid performance.

Thank you.

A couple of questions, and I think you touched on this before -- obviously, you had pretty strong growth for rental revenues. Obviously, you talked about the weak macro environment. And I guess the question that we as analysts get consistently is, where is the growth coming from? So perhaps, if you can touch on that a bit, and then I have two more follow-ups, please.

Sure. Basically, when we talk to a lot of our customers, obviously, given the uncertainty in the marketplace coupled with the fact that the credit markets are still very tight, particularly for lower tier type of clients, they are going to be prone to renting. You talk to them, we see it in our new account activity. And then we see our current customers focusing on rental, given the fact that a lot of the jobs they have are various jobs that they otherwise would not have been bidding on.

So the need to have the depth of equipment is going to be very important for them. That, along with our strategy of focusing on the customers, of making sure that we earn their worthiness to rent from us through our service, is very important. So I look at it as a three-pronged approach. It's our strategy with our go-to-market with single point of contact, focusing on the customer with that one-on-one relationship and following the customer with our customer service, and the uncertainty and the tight credit markets.

And keep in mind, Manish, as you know, during the downturn a lot of companies, not only the large public companies but a lot of companies, de-fleeted, and they don't have the ability to fleet up because of the credit market.

So I think a combination of all those things are playing true to the industry today.

Okay, wonderful. My second question touches on the Rouse information packet that you have been receiving. And I was hoping that perhaps if you can offer some high-level comments on how you stack up vis-a-vis some of the participants in the study, and where do you see the opportunities for the Company?

Well, it's a newly formed metric program that they put forward. Rouse puts them out. They are key metrics, things like rates, age, dollar utilization, time utilization, and they are working very closely with ARA. As you know, we were supporters of ARA, coming out with a set of industry standards so that we can all look at the world the same way, particularly for the investors. That's why I said, it gives us confidence on our rental rates that we are not growing our time utilization at the sacrifice of rate. That I can say with confidence, based on the data that they're supplying to us.

We are well-positioned, Manish, in almost every one of those measures relative to the competitors that are included in the survey. So we feel pretty good. Obviously, there's always room to improve. But for the markets that we have seen out of Rouse, whether it's dollar utilization, time, whatever measure, we are at or near the top in the reports that we see.

Got you. And then just lastly, obviously, we're week three through July. Can you give us some initial impressions of how July has fared?

Well, I will just tell you that, again, we took up our guidance on our -- the time utilization. So it's safe to say that we continue to see that level of activity go forward in July and, as well as a rate improvement, a sequential rate improvement month over month.

I have been using the word robust, so I think that gives you a sense, whether it's rate, time -- there's a pretty strong start to July.

Okay, so the best is yet to come?

I didn't say that, but (laughter) --

Okay, thank you so much.

(Operator instructions) Jerry Revich, Goldman Sachs.

Michael, we have rising engine regulations for under 150 horsepower construction equipment coming next year. I'm wondering if you can talk about what proportion of your fleet will benefit from rising replacement costs as a result and what the extent of replacement cost increases that you see for those product lines, based on your conversations with OEMs.

Yes, that's great. And for everyone on the call today, as Jerry is alluding to, it's called the tier 4, and that's 75 to 175 horsepower, which is required in 2012. And the manufacturers have been struggling and working diligently to reengineer their products to get those things ready for the demand that we will all be looking for next year.

As far as the Company is concerned, the way we look at it, and we have analyzed it, my fleet team does a lot of work on this, dividing out the different types of engines and requirements that are needed, right here now today, about 3% to 5% of our total units or about 10% to 15% of our total fleet would fit in that category. Now, you're not going to replace that all in one year. And keep in mind, on the larger products the engine is a small portion of the total piece of equipment.

So when we look at what the cost impact could be next year, it's not going to be a significant number. As we reported this year, I think our prices were flat to up 1%. I think what we would see next year, a blended increase in the low-single digits, given the fact that it's a small percentage of our total fleet.

And just a clarification question in terms of the 2013 piece -- can you tell us the proportion of your fleet that will be impacted at that point? I believe it's all under 75 horsepower at that point?

Yes, that's correct. And that actually fits that whole bucket. Anything over 75 horsepower fits in that complete tier I just talked to you about.

And 2013 will be under 75, though. Do you know what proportion of your fleet --

Yes. It goes to 25 to 75. We have been working diligently for several years on the lower-class assets. So again, we don't see it going up significantly.

Okay, thank you.

Philip Volpicelli, Deutsche Bank.

First question is with regard to the free cash flow guidance. You guys clearly, I think, made a point of keeping it at $5 million to $10 million positive. Does that underscore management's commitment to stay free cash flow positive this year?

It does, Phil; it's Bill here. We view that as a good discipline mechanism for ourselves to make sure that we are using our fleet as effectively -- our existing fleet as effectively as possible. And so it's sort of arbitrary, but it is a good discipline mechanism for us as we go through the year.

Now, that's not to say that we are religious about it. I think I may have said this on a previous call. If we see very strong opportunities with important key customers that prompt us to say, you know what, this is business that we want for the long haul, we might dip into free cash flow negative for the right set of reasons. But we are being very, very conscious about when we might decide to do that. And the statement of staying $5 million to $10 million free cash flow positive is a statement that, as we look at things right now, we think that's the right place to be.

Great, understood. And then just on the volume and the rate question, was there any change in mix or was there any discounting of delivery costs or fees?

The delivery is not part of that rate calculation.

Right.

I'm not quite sure I heard your question. So was it that -- was there a change in mix in the second quarter?

Yes. What I'm trying to do, Bill, is that, when I look at volumes being up 13.8% and revenue being up 16 and change, with rates being up 6.1%, there's obviously some give-up there. And I'm wondering if that's mix or if it's just the way you guys talk about rates versus the way I might calculate what I call yield.

Okay, got you. So it's clearly a mix impact. We have shifted more of our revenue to monthly rates this year compared to second quarter last year. The monthly mix this year is up about 320 basis points higher as a share of our total revenue than it was last year. And, as you know, because of the pricing structure of the industry, the average daily revenue that you achieve from a monthly rental is less than if you rented it on a daily rate basis or a weekly rate basis. So that's a phenomenon that is clearly playing through our revenue performance.

We knew it was coming, right? It was an exclusive part of our strategy, as a matter of fact. We pursued the national and large regional accounts because they rent more and they rent for a longer period of time, and it offers the opportunity to serve them at a lower cost point.

So it was explicitly part of the strategy we've been pursuing. We certainly saw it in the second quarter, and it had an impact.

Great, thank you.

Emily Shanks, Barclays Capital.

This is somewhat a follow-up to Phil's question. I was just curious; I noticed that, beginning last quarter you stopped reporting dollar utilization on the full fleet. I see it by type of fleet. Do you have that number, and/or was there a reason for not including that any longer?

Our dollar utilization for the fleet was 49.9%.

Okay, thank you. And just one other housekeeping item -- what is the OEC on a -- out to the million-dollar number?

I'm sorry, Emily? Say that again.

I'm just looking for what the OEC dollar amount is out past the 4.18 that you have with the next (inaudible) point.

Okay, this is where Chris Brown gets his cameo appearance. Go, Chris.

4.175, Emily.

Well done.

And then one other -- thank you, Chris -- one other housekeeping item. You did highlight the fact that you are looking at hitting the billion-dollar mark on EBITDA in the near-term. And I wanted to get a sense from you, is that something that you think you're going to be hitting on a run rate by year end, or is that next year's business? What's the type of time frame associated with that?

Emily, in the investor presentation we put together a bridge on our EBITDA to get over -- at or above $1 billion over the next two to three years. Again, as I mentioned, that's our near-term goal, and we clearly see our focus and our way there. And we look at the second quarter as a step in the right direction.

Okay, great. And then, if I could, just one more quick question. So thank you for the comments around the used equipment sales margin and what the trends are we should expect to see in the second half. It looks like year year-over-year gains in 2Q were less than in 1Q. Should we just assume that that will continue to compress in the back half of this year around gross profit margins?

Yes. That's a fair assumption, Emily. It will obviously vary with how much of the vendor sales that we do in third quarter versus fourth quarter, but that's -- it's fair to assume that the trend will decline.

But you are still looking for gains, right?

I'm sorry? Say that again.

You are still looking to be up year-over-year for gross profit margin expansion, right?

For margin expansion we haven't guided to the full-year margin performance. I will say that the full-year margin for used sales will be lower than what we have seen in the first half, but we haven't gotten more specific than that.

Okay, thank you, good luck.

Ted Grace, Susquehanna.

Quick question -- I think your message on how to think about incrementals is very clear, so I appreciate that. What I was hoping you might be able to speak to is, at least thinking about the third quarter and fourth quarter, how we should think about the interplay of call it rates and costs, which will face various comps. And I know you don't give explicit margin guidance, but at least maybe some framework to think about how the two forces will counterbalance for the next couple quarters.

I will take a shot at it. But please, if I don't address your question, ask it again a different way.

As we look at -- maybe I will frame it in terms of our flow-through performance, given that we've given outlook there. As we look at flow-through, the impact of having relatively more of your year-over-year rate being generated by time utilization versus rate is to depress your flow-through because time brings along the variable costs associated with getting new equipment out on rent.

That's, quite honestly, one of the phenomena that we dealt with in the second quarter in the strong time utilization performance that we had. And while rate was strong, time was more of a surprise to the upside, if you will, and intended to depress the realization of flow-through in the second quarter.

That phenomenon could continue in the third and fourth quarters as time continues to be very strong, relative to rate. So that's one of the things that we think about in terms of judging the interplay of rate and time as it impacts flow-through. And all of this is excluding the impact of acquisitions.

So in the third quarter, we could see -- you saw in the second quarter here our flow-through of adjusted EBITDA was only about 58%. In the third quarter you could see something like that again, where the flow-through is a little less than the overall range we've given of 62 to 67. But we think that we will make up for that in the fourth quarter, and we will certainly continue to drive for all of the flow-through that we can.

One other thing, if I could on the second half, as it relates to flow-through performance -- we know that we've got some events coming in the second half that are going to help us. In particular, in the fourth quarter we know that last year we took the $18 million self-insurance reserve adjustment in the fourth quarter. That's not going to repeat this year. We feel very confident that that was an unusual set of items in our self-insurance activity.

So there is an $18 million benefit in the fourth quarter that will help flow-through significantly in that quarter. So you have to think about those specific items as you think about flow-through.

Sure, that's actually very helpful. And I know you don't give specific quarterly guidance on pricing, but should we think about pricing, at least, as offsetting or counterbalancing some portion of that incremental cost realized on higher time utilization? Or is that going to be more of a neutral impact?

So it all depends on what kind of rate you are able to realize, whether it offsets the incremental -- I'm not saying that incremental time utilization is a bad thing. Please don't take that away. It's a very good thing. It's just that as it relates to the flow-through calculation, if you get your revenue from time instead of rate, then you're going to get less flow-through than if you got it the other way around. That's all I'm trying to say.

Okay, that makes sense, and I appreciate the color there. Have a great quarter, guys.

Seth Weber, RBC Capital Markets.

Just going back to the pull-through discussion, I guess I also appreciate the color there on the acquisitions. Given just your last comment about having this tailwind from not -- the fourth quarter is going to have to an easier comp because the insurance settlement last year or the insurance expense last year -- what can we think about as the normalized pull-through for next year? Is 2012 -- is that still a 65% to 70% number that we should be thinking about for next year?

I'd rather not get into 2012. We will update as we get a little closer, get through our planning process and have a better sense of where we are going to fall on certain key decisions, like the amount of fleet spend, for example. So, because that number is so sensitive to different decisions, let's leave it until we get into 2012 in more detail.

Okay. Could I ask, then, I guess, a question on pricing? Maybe -- how would you characterize the health of the other 70% of the market that's outside the top 10? Are they distressed? I guess I'm trying to understand, is there a ceiling on how high you can raise prices? You already alluded to some margin pressure at your customers. If the 70% of the other rental guys are not doing very well, what's to prevent them from just getting more aggressive on pricing? And so I'm just trying to understand how high you feel like you could push pricing here.

This is Mike. Obviously, we have a goal, do we want to climb back, and in our bridge, we want to get back 10 to 11 points from the bottom of '010, at a minimum. And we're not going to stop there, by the way.

To talk about the market, my sense is everyone's going to see rate improvements. This is an industry that definitely has to get over its cost of capital, that it's going to be necessary to sustain itself over time. So my sense is that everyone will start to benefit from the rates and the demand that they are seeing in the marketplace. Whether people get aggressive, it depends upon their strategy. There are some pockets where there's some areas of the country aren't doing as well as other areas.

Are they being more competitive? Absolutely. But there's areas like Canada that are expanding nicely. So I think, in general, in order for people to expand their fleets, they are going to have to be able to show that they can have the ability to pay back their loans over time. And so I think that the trend will be towards better improvement in rates.

Okay, thank you. And then I guess if I could just -- one quick follow-up -- is there a fleet OEC number that we should be thinking about, target for the end of the year?

Well, we haven't given an explicit number. I think it's fair to say that if you use -- you can back into it fairly closely, Seth, if you use something like 48% of OEC as the used sales activity, where we will end up on used sales activity. So that will tell you how to translate proceeds into OEC. And then we've given you the gross CapEx, and that will tell you the used OECs sold on and you can back into a number from that.

Okay, all right, thanks very much, guys.

[Peter Chang], Credit Suisse.

Given that we are almost at a 5% increase in utilization if we average Q1 and Q2, and Bill's comments that, so far, July has been robust, is the reason why your target of utilization growth being only 2.5% higher -- is that because of tougher comps, because you are growing your fleet? Or should we be expect things some significant seasonal fall-off in Q4 versus Q4 of last year?

I think you just hit -- all those items, I would tell you, yes, we are going to -- against tighter comps. Two, there is typically a seasonal. We don't know what the winter will bring to us and when it will come, sooner or later. But it's really going to be based on customer demand out there. And we brought it up, full year, 2.5. Could it be another half a point? Possibly. But we are bringing more fleet in, and we will update everybody as we go through the third quarter. So -- and it's a lot better visibility into the fourth.

Just to remind you, last year, third quarter our utilization was 71.3%. Fourth quarter it was 69.3%. So those were, as we pointed out, records for those quarters in the history of the Company. And we are just mindful that we are comping against records last year along with the other factors that Mike mentioned.

Great, thank you, that's helpful. And then I just had a question -- on slide 13 of your presentation deck, it looks like in May strategic accounts growth spiked up to 40% year-over-year. And I just want to know if there was any sort of large one-off project that contributed to that or just anything unusual.

No, nothing is really unusual. It's really -- those are going after individual accounts across North America. And we are tracking them on a daily basis through our sales efforts and following the customer. As I mentioned before, even with our national accounts and -- our share of wallet increased nicely, significantly on a year-over-year basis. So we are earning more share of their wallet. And those are the things that we track.

Okay, great. Thanks again, and congrats on a solid quarter. I'll get back in queue.

David Wells, Thompson Research.

First off, looking at the rental rate guidance for the full year, here we are I guess kind of halfway through, and you have raised time utilization. You are already, on a year-to-date basis, over the guidance. So I guess I'm trying to understand what is it that may be lurking in the second half of the year that gives you more pause for concern, that would make you hesitate from raising that 5% number for the rest of the year here?

So I wouldn't say that there's anything that gives us concern about the second half. We are mindful of the fact that the second half last year, in addition to being a strong utilization environment, was a strong rate environment for us. We had rates marching up continuously through the second half last year. And so the comps do get tougher, just as a matter of history.

So that's what we are thinking about. We know that we've got to continue to manage rate higher in the third and fourth quarter in order to preserve that 5.2% that we've got year-to-date. And we are confident that we can do that. The question becomes, how much more than that can you do?

We feel good about the environment. Could it be better? As Mike said, yes, it could be better. But it's hard to say right here and now that we want to put a lot more -- especially for the full year, right, because you've got to drag the average that you've already achieved higher if you're going to raise the full-year average outlook. So we are being what we think of as observant of what the market is today and how we would have to perform compared to last year, in order to raise that rate outlook any more than where it is.

That's helpful. And then, to your point earlier in the call about seeing some additional re-rent expense, maybe could you walk us through the thoughts around using re-rent versus just doing more CapEx? Was this kind of like a one-off type instance? Or your thoughts around that would be helpful, too.

Just -- I've been in the industry for, what, 33 years, and the term re-rent has been around for many, many years. And just about everybody uses it.

The reason why you do re-rent are really two reasons, one of which is, if you have an immediate need, you determine whether it's prudent to have that machine hauled in from wherever it may be, look at what the cost is and how long you're going to need it, and you make your business decision. When we think about re-rents and we look at the large percentage of the re-rents that we incurred in the second quarter, it was really because what we are doing is performing more services for our current customers. We are renting assets that they're asking us to supply for them that we typically don't carry.

And in fact, some of our customers, as part of our agreement, we have to supply things that we don't carry. For an example, we don't carry cranes, with the exception of the acquisition that we had up in Canada. So if we need a crane as part of our contract, we will get a third party to get in there, and then we will bill for it.

So that's the reason. Actually, I look at it as a positive because our customers are relying on us to do more for them as part of their services.

That's helpful; I appreciate your thoughts around that. And then, lastly, if you look at the kind of percentages of wallet that you gave earlier on the call, being at 53% for your larger accounts, how much higher do you think that that number can go? And then ultimately, I mean I would assume that most of these folks are going to want to have at least a couple of suppliers, just to make sure they are optimizing their pricing. Do you read the situation, then, where to continue to grow those businesses, we ultimately have to see some in-market growth to return to the construction market?

Well, obviously, you're going to have to -- to answer your question, we are going to have to see some end market growth. At some point, it will come. It's not going to be held down forever, and even when I said that the ABI Index has shown some choppiness, it has improved year-over-year. It's just still disappointing that it doesn't have consistent growth at 50 or above.

That being said, with our share of wallet at 50%, that's a great percentage. Not done yet. Do I expect to have 100%? No, not at all. We want to earn the lion's share of their business, and that is going to be based on customer by customer. In some instances, we may be as high as 70%-75% of their business. And we fully understand that there are some products that we don't carry and there's some products that they will want to have as a backup -- fully understand that.

I'm very pleased with the results that the team has put together. It really shows that our services, our customer service and our model is proving true.

Great, thank you, appreciate your time.

Henry Kirn, UBS.

Could you talk a little bit about the timing of used equipment sales in the third and fourth quarter? Just philosophically, would you hold equipment for selling late in the year to maximize the fleet available in the peak third quarter?

Yes, Henry, that's a very common way to approach it, and it's one that makes sense. You would want to -- we've got a lot of feedback on the call here.

You would want to hold the equipment through the peak season, if you can, and then get rid of it when it normally is coming off rent, anyway. So this year will be back-end loaded. Many years are back-end loaded in our used sales activity, to reflect that.

Okay. And on M&A, you have made a few acquisition so far this year. Could you talk about your latest thoughts there? Are there still areas of interest, or would you prefer to integrate the existing deals?

Yes; obviously we are going to integrate those. In fact, Gulfstar has already been integrated, and we are in the final stages of integrating the Venetor, this much larger acquisition. We are always looking for things that strategically fit with the Company. And as we've always said -- we're getting a lot of feedback here on the call here, so I apologize if it's going through to everybody.

But basically, when we look at our acquisitions, strategically they have to fit with the Company, they have to be a cultural fit and they also have to have an incremental margin improvement to the Company, internal rate of return that's positive. And those are the three key areas. The level of activity continues to grow, and we see opportunities, and some we pass on, and some we find of interest. So we will continue to focus on those, but the key area to think about is it has to be strategic.

Joe Box.

Mike, earlier in the call, you had talked about URI decoupling, to a certain extent, from what your end markets might do. I realize that you don't want to get too specific on next year, but with the ABI softening again this morning to 46, should non-res be flattish or slightly down again in 2012, is it reasonable to think that rates and fleet size could increase again next year? Even if you talk directionally about the possible impact on fleet size and pricing in a challenging non-res environment, I think that would be helpful.

Yes, Joe, look, anything is possible. Right? As Bill mentioned, we will have a better picture as we go through into the fourth quarter of what 2013 will look like. So it's a little too early to tell.

Having said that, what would be the components that would fall into that? The credit market being choppy, the uneasiness, the uncertainty I think will still be continued drivers for people wanting to rent as opposed to owning. There are pockets where we are seeing improvements, particularly power. We talk about and we've talked about this privately with a lot of you about the fracking industry and how that has exploded. So there's going to be opportunities like that that continue.

We also are penetrating new markets. The industrial market is a growth opportunity for us, and we can [really] see a lot of runway there. So yes, I think next year is -- it's always a possibility. As I stated in my release and on the opening comments to the call, we clearly see that we are marching towards the $1 billion of EBITDA at improved margins. So we will have to stay tuned.

Thanks, I appreciate the color.

Scott Schneeberger, Oppenheimer.

I guess, on Venetor and accretion with regard or the impact diluted in this quarter on incremental EBITDA margin, basically since we took that guidance down by that 3 percentage points, should we expect that that may be conservative, as I would guess that integrates ever the second half, and maybe what we saw in the second quarter improve? Am I thinking about that the right way?

Well, we certainly will look to take more synergies out of Venetor and Gulfstar as we proceed with the integration. And to the extent that we do that, it could be better than the full-year guidance. The full-year result could be better than the guidance range that we've given.

If you look within the quarters, it's a harder thing to judge. Right? I think we've said before, flow-through will vary from quarter to quarter. And so it's harder to say what the impact of Venetor or Gulfstar might be on flow-through overall in the third quarter. As we sit here today, flow-through in the third quarter could be a touch lower, again, than the range that we've given for the full year. It's hard to say, because that flow-through calculation is so sensitive. Our year-over-year total revenue increase in the second quarter, for example, was, what, $72 million. In order to impact flow-through by a point, that's only $700,000 worth of change in expense. That's not a lot of money.

So that's the kind of variation that we are trying to manage through, and that's why we're reluctant to give more specific guidance on a quarterly basis on a measure like flow-through. But, for the full-year, we feel that we've got levers that we can pull to make it happen at the 62 to 67 range that we're talking about.

Okay, thanks, just a couple more. With regard to the second half pricing, someone asked earlier why not upside. I frequently get asked, hey, the comps were easier in the first half. And I know, we've certainly seen it month over month building sequentially through the year. Could one of you guys just re-stress maybe what would give you the most pause of why that could be at risk, and then dispel that? Thanks.

Really, it's just -- I don't know what you'd put it down to. Maybe it's nervousness on the part of our CFO. But these are pretty heady rate moves. And it's hard to write down on a piece of paper that I expect to see year-over-year rate increases at 7% plus, like we have in the month of June. So I'll take a little bit of the heat for maybe not being as aggressive on rate as some other people could be. But it's something that we are being very conscious of.

The other thing I would point out is that we want to make sure that the rate that we realize out of the market is supported by the services that we offer to our clients, is supported by the fleet we have available for them and is supported by the whole strategy behind operation United. And as we get assurance on our ability to serve, we have no hesitation about pushing rate. We just want to make sure that we are doing it in the context of our strategy.

Scott, I'd also say that you've got to put it in context that you go back to the beginning of the year, we are the ones that basically said 5%, at least 5% this year. And we stuck our neck out to do that, and the team has delivered on that. And we are not done. If we can get more, you can bank on it that we are going to go out and find it. So we will continue to focus. And rate is the biggest driver of profitability in our industry.

Thank you. And due to time constraints, this does conclude the question and answer session of today's program. I would like to hand the program back to Michael Kneeland for any further remarks.

Thanks, operator. And I just want to just wrap up this call by saying, thank you for joining us today. But more important, I want you to take a look at the bigger picture. The way I look at it, it was a strong quarter. We had time utilization up 3.6 percentage points, a fifth consecutive quarter. We had rates up 6.1% with the fleet, on average, up 8% for the quarter. And on top of all that, we had margin expansion of 3 points.

I clearly see how this Company is transforming itself. And we are not done. We have more work to do, and I look forward to talking to all of you on our third quarter call. So thank you.

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