聯合設備租賃 (URI) 2011 Q3 法說會逐字稿

Good morning and welcome to the United Rentals' third quarter investor conference call. Please be advised that 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 operation are subject to a variety of risks and uncertainties, many of which are beyond its control and, consequently, actual results may differ maturely 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 the subsequent filings with the SEC. You can access these filings on the Company's website at www.UR.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectation. You should also note that today's call will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

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

Thank you, operator. Good morning, everyone, and welcome to today's call. With me today, as the operator mentioned, is our CFO, Bill Plummer, and other members of our senior management team.

Last night, as you know, we reported a very strong quarter. It started at top with a rental revenue increase of more than 19% and ended with an EPS of $0.91 per diluted share. Now, behind those numbers was a solid 7.5% increase in rental rates and some exciting milestones for United Rentals. We reported time utilization of 73.5% on a larger fleet, and that's a record for us, and our adjusted EBITDA margin was 39.6%, the highest margin we've ever achieved and almost 4 points better than last year. Now, a lot of that credit goes to our employees. They have been really putting their backs into driving our performance. They believe, as we do, that customers will see us as the best choice for equipment rental at any level of demand.

Now, I want to spend the next few minutes on demand, and there I will talk about our operating environment. As you saw last night, we have updated our full-year outlook for rates to an increase of about 6%, and we think that time utilization will run about 3 percentage points higher than last year. So there's demand for our equipment in the marketplace, and more than you may expect given the fact that construction as a whole is still weak.

And here is what we are seeing and how we are responding. We attribute the increase to our business to a mix of factors. First, we believe that we are taking share from smaller rental outfits that make up the bulk of the industry. The recession left many of these companies starved for capital with downsized fleets and fewer service capabilities, and we compete very effectively against that.

Then there's the secular penetration, meaning companies of all sizes are opting to rent more of their equipment they need, rather than buy it.

And third, our push for customer service leadership continues to gain traction where it matters most, with our key accounts. In the third quarter, key accounts were 53% of rental revenue. That was up 23% year-over-year on a dollar basis. And national accounts, which is a subset of key accounts, also grew 23%. National accounts were 34.4% of rental revenue in the quarter.

Now, you compare that to four years ago, when rental revenue from national accounts was just 19.6% for the same period. Now, in addition, our customers themselves are optimistic about where things are going in the coming months. Experience has shown us that feedback from the field can be an excellent yardstick. So when our customers have an opinion about future activity, we consider that very carefully along with leading indicators like the Architectural Building Index. Although the ABI index declined overall in September to 46.9, our sectors, commercial and industrial, increased to 52.4. This supports our belief that the worst is behind us. And Global Insight, the research firm that tracks our industry, expects rental revenues to grow by 5% next year.

Now, I'll talk more about 2012 in a minute. It's still a bumpy recovery for construction; but, as you saw last night, our Company is outperforming the environment. All of our regions had positive year-over-year growth in the quarter, and 88% of states we serve had an increase in rental revenues. Canada remains particularly strong, as do the East and Gulf regions. Our Midwest and Southeast regions still face the most challenging conditions, but both regions showed stellar improvement in the third quarter.

So that should give you an indication of how our strategy can supersede the environment. From a sector standpoint, commercial construction, lodging and office space are not yet in recovery. But infrastructure projects like power and water and transportation have picked up and energy remains strong. Also, healthcare is still a very viable part of our business. In addition, our industrial business is performing well. Manufacturing has been especially strong for industrial, as has energy, and right now we are tracking [hundred] of industrial projects in our system in those two sectors alone.

We're also finding that our industrial expertise carries a lot of weight with these customers, and once we've established a relationship, it often leads to cross-selling.

Another highlight is our specialty rental operations, which had a very good quarter as well. Rental revenue for our Trench, Power and HVAC operations was up 56% in the quarter, including the benefit from acquisitions, and most of that increase came from industrial growth in the Gulf and -- where energy construction and expansion is booming, and disaster recovery, which creates demand for our power and climate control equipment.

We are also seeing a lot more internal lead generation, and that's a two-way street between our traditional rental branches and our specialty operations. Everyone has figured out that we can keep our customer in the fold and build more share of wallet if we are considered their single source for all their rental needs.

So as you can see, there's a lot of different engines driving demand out there, and even though we are not at full throttle yet.

Now, I want to talk about how we are responding to those drivers. Demand for us is a calculated opportunity, and by that I mean our CapEx decisions is very disciplined and analytical. There are near-term and long-term considerations. As you saw last night, our gross rental CapEx this year will end up around $775 million, which is significantly higher than we originally projected. That tells you something about our outlook for 2012. We expect non-residential construction to grow next year, and with the fact that we can make these investments while still maintaining adequate liquidity is an important advantage in the upturn. Some of this CapEx is going to replace older fleet, although not necessarily in the same equipment categories. Replacement CapEx is an opportunity to redistribute capital to assets that command better rates or can position us for even better utilization as construction projects move through their phases. And that's equally -- that's an important point, the way we spend our capital. We're investing where we see opportunities to move the needle on returns.

Equally as important, we can adjust our spend if warranted without impacting our customer services. We have worked very hard to establish our reputation for service and, believe me, that's not going to change. So we are very focused capturing profitable business now, positioning ourselves for the year ahead and cementing large-scale customer relationships for the long-term.

This morning, I can tell you that we feel very good about all three of these objectives. And we hear the same talk that you do about the possible double dip, but let me be clear. From our vantage point here today in our end markets we serve, we do not see a general decline in 2012, and our customers agree.

We recently surveyed 2700 customers with a wide variation of rental spend. 80% expect their business to be as good as or if not better than 2011 and 2012, and only 14% expect their business to be down. And we are encouraged by that. However, if things change, we have the flexibility to adjust our plan and mitigate our risk. Now, that gives us a safety net for 2012 as conditions evolve. And I'm talking specifically about rental CapEx, which Bill will discuss in a minute.

And he'll also talk about the American Rental Association's new standards for fleet, rate and utilization calculations, which we will adopt starting in 2012. As you may be aware, we have been working with ARA and other rental companies for 18 months on this project, and we are very pleased with the end result. We encourage the industry to adopt these metrics as a consistent basis for reporting performance.

Most important, you will see us continue to leverage every arm of our strategy in 2012 just as we are doing this year -- that is, customer segmentation, price optimization, customer service differentiation and cost efficiency. We have an ambitious vision for United Rentals, but our entire Company has embraced this challenge, and now that we are seeing the results.

And with that, I'm going to ask Bill to review our third quarter numbers in detail, and then we'll go to your questions. So over to you, Bill.

Thanks, Mike, and good morning to everyone. As normal, I will try to offer some color on the actual results for the third quarter revenue cost, profitability. I will update you on our liquidity position, talk a little bit about the capital structure actions that we have taken recently, update the outlook for 2011 and offer a few comments on 2012 and then talk a little bit about the ARA metrics project and how we are going to approach implementing it.

Real briefly on the quarter, as Mike said, it was a very good quarter almost everywhere you look, and particular looking at our rental revenue, up 19% year-over-year. And that was driven by strength in all aspects. So our rate performance is very strong -- rental rates up 7.5% for the quarter. Rental rates were sequentially better by 3.6% compared to the second quarter, also a very strong progression in rates sequentially. So rate was a very significant contributor and certainly is a part of the story that we have been pushing for the entire year.

If you look at our rate performance year-to-date, we are up 6% through the end of September on a year-to-date basis. And that was, again, a very, very robust performance. And it is what prompted us to raise our outlook for the full-year rate performance to about 6% for the remainder of the year.

So all in all, a very strong story about rates. And we certainly, as we have been, will look for opportunities to drive rates even more significantly as the opportunity presents itself.

Rental revenue was also very strongly supported by our volume performance. OEC on rent was up 15% year over year in the quarter. That was driven both on a larger fleet overall as we have invested more and also better utilization performance.

If you look at utilization in particular, it was up 2.2 percentage points for the quarter over last year to 73.5%. And it is becoming a familiar refrain by now, but that represents another record for the third quarter in the life of United Rentals. And that's the sixth consecutive quarter that we have been able to say that. So we have been driving very strong time utilization performance. And as you look at the months throughout the quarter in the third quarter, each month was successively stronger than the month before. So a very strong time utilization environment in the backdrop of a larger fleet as we've spent more on rental CapEx.

So put those together, and that's what really drove the 19% rental revenue increase for the quarter.

Let me move just real briefly to used equipment for the quarter. We delivered $42 million of proceeds from used equipment sales. That compares to $32 million the prior year. And very importantly, we delivered 35.7% gross margin associated with those used equipment sales. That's a 440 basis point increase in margin over the third quarter last year. It certainly is reflecting the channel mix effects that we have talked about all year.

So our retail channel mix in the third quarter was down a little bit where it has been for the first two quarters of 2011, but still a very significant 50% was flowed through our retail channel. We did make more supplier sales during the quarter, and that was partly what drove the 35.7% margin, gross margin, to be a little bit lower than maybe what you saw in the first quarter, for example. And that is consistent with what we said we were going to do on the used sales front, which is to use that vendor channel more as we went through the course of the year. I'll touch on the outlook for fourth quarter in the outlook section.

Let me move briefly to cost performance in the quarter -- very good cost performance, weather and cost of rent, ex-depreciation or SG&A in the third quarter. On cost of rent, we were at $24.5 million higher in cost of rent than last year, and that certainly is consistent with driving the kind of productivity that we have been talking about across the Company. If you look within that $24.5 million change year-over-year, volume was a significant driver. About 7.4% of it was strictly related to volume increases.

Compensation and benefits were also a significant driver as we've implemented and drove through merit increases this year relative to last year, as well as the higher bonus accruals that we put into the cost of rent lines this year, reflecting our better performance as a company.

The acquisitions we broke out, and if you just look at the acquisition separately they contributed $5.3 million to the increase in cost of rent, and then fuel pricing was another significant driver at about $4.6 million. The remainder was a variety of other items, including timing of some of the expenses.

So all in all, we view a pretty good cost of rent performance to the year. Just a simple way to think about it -- if you look at the cost of rent in the third quarter, it was up 10% over last year, while rental revenues were up 19%. That relationship is much better than in the second quarter, for example, when rental revenues were up about 16% but the costs were up 13%. So getting the leverage on the cost side that we expect in the rental lines.

A similar statement about SG&A -- we were up $8.2 million in SG&A compared to last year. The key drivers there were volume of about 3.1, primarily selling cost and commission being the major part of that. Compensation was up 2.7 -- again, merit increases and incentive compensation accruals were the main driver there, driven -- the incentive comp piece driven by the better performance.

We also had a combination of investment expenses associated with system implementations, primarily like our core system and other investments that drove about $1.7 million of increased expense. Fuel, about $700,000 and a host of others for another $1.5 million, offset by what was a very nice bad debt performance in the quarter. Bad debt expense was actually favorable this year by about $1.7 million compared to last year. So all in all, we feel pretty good about SG&A in the quarter as well.

You saw the profitability numbers, but just to highlight again, $82 million of adjusted EBITDA for the quarter. That's a 31% increase over last year, and delivered at a margin of 39.6%, as Mike said, a record margin performance for the Company's life. That's 390 basis points better than last year and certainly something that we feel very good about the performance in the quarter.

EPS on a GAAP basis was $0.91 the quarter, $0.92 on an adjusted basis, and the flow through in the quarter of adjusted EBITDA to total revenue was 61.1%. That's fully in line with our expectations for the year, which I will remind you are in the 62% to 67% range.

Real briefly on liquidity, very nice liquidity position at the end of the quarter supported by our free cash flow performance. Free cash flow through the year at the end of September, year-to-date through September, was a use of $76 million. And that's really consistent with our plan for the full year, which I remind you is $5 million to $10 million of free cash flow positive. Our liquidity was good during the course of the quarter, and that was supported by some of the actions that we took on components of our capital structure. So real briefly, you saw the announcements that we renewed our accounts receivable facility in September and we also amended our ABL facility just last week.

On the accounts receivable facility, the overall facility, we extended that for 364 days and realized a very nice improvement in our interest expense associated with that facility, albeit we did it at a little bit smaller size, $300 million versus $325 million in the prior facility.

For the ABL facility, we increased the size of that facility from $1.36 billion to $1.8 billion, while also, at the same time, reducing the borrowing cost associated with it. Our current cost will be 100 basis points lower than the cost on the prior facility. And obviously, we pushed out the maturity of that facility to 2016. We also improved pretty significantly other terms associated with the facility. So very pleased with the actions on the capital structure front for this quarter.

Let me offer just some highlights of our outlook for 2011 and a couple of preliminary thoughts on 2012. For 2011, you saw in our press release that we now expect our rental rates for the full year to be up about 6% for the full year. That's up from the 5% or higher statement that we had made previously. In looking at time utilization, we are taking up our view for time utilization for the full year. We now think 2011 will be up 3 percentage points over last year, and that up from the 2.5 percentage points that we had talked about previously.

In terms of free cash flow expectations, we are sticking with the $5 million to $10 million free cash flow positive for the year, as I said, even though we are raising our expectation for rental CapEx this year to a gross spend of $775 million. We are also raising the net rental CapEx range that we expect this year to between $575 million and $600 million for the year. So putting more capital into the fleet, but sticking with the cash flow guidance for the year.

In terms of profitability and flow through, we reaffirm the overall flow-through target for the year of between 62% and 67%. And, obviously, we expect a strong performance here in the fourth quarter.

Real briefly on 2012 -- as Mike said, we are optimistic about 2012, but it's key in our thinking that there is a lot of flexibility in our business model. We certainly have a view that we will address some replacement needs in the early part of 2012 in our CapEx plans. Right now, we are thinking that we have a replacement spend somewhere in that $500 million to $600 million range for the year in 2012, but we are thinking very actively about how we might schedule that spend so that we can maintain flexibility. In particular, we have been talking about looking at the year in halves and focusing on the first half right now to lay out our plans for the overall year.

In terms of our rate experience or rate expectation for next year, we will note that we have a carryover benefit next year in rental rates. If 2011 finishes out the way we expect, that benefit will be in the area of 2.25% to 2.5% in carryover. So those are some of the preliminary thoughts. Obviously, we are in the process of sharpening our thinking about 2011 as we go through our budgeting process, and we will talk more about it when we deliver the fourth quarter and full-year results in January.

Let me just finish up by touching on the ARA metrics project that Mike mentioned. We are very excited about this initiative. We view it as a big step forward for the industry in adding clarity and a more standard approach for thinking about the business, and we are very supportive. For us, the impact will be some changes in how we report. In particular, on our rental rate statement, our current calculation methodology is different than where the ARA ended up. We will adopt the ARA measure starting in 2012. The main difference, as we talked with many of you about, surround the weighting of cat classes and rental periods. We use a current period weighting; the ARA method uses a prior-period weighting. ARA also takes out the effect of foreign exchange from the rate calculation, whereas historically we have left it in.

Also on the fleet age front, there will be a change in how we approach fleet age. We have historically talked about a unit-weighted fleet age calculation; ARA uses an OEC-weighted calculation. So we will make that change as well. Just to give you a sense of the impact of those changes on rental rate, the 7.5% year-over-year rate improvement that we reported in the third quarter on the new ARA model would be about 6.5%. On fleet age, the 46.6 months that we reported at the end of the third quarter would be about three months higher on an OEC-weighted basis.

As I've said, we plan to fully adopt next year and we will talk more about that when we deliver the fourth-quarter results.

That's about all I wanted to say right now. Before we open up for Q&A, I just wanted to reiterate -- my view is very much in line with Michael's, that this was a very strong quarter for us. As we look across the performance of the business, we feel very, very pleased about what we have been able to deliver. And what's really exciting for me is, as we look around, we still see opportunities to drive greater performance.

So I look forward to talking to you all about the results and driving forward. So we will stop there and open up for Q&A at this point. Operator?

(Operator instructions) Seth Weber, RBC Capital Markets.

I wanted to see -- can you spend a little bit of time talking about time utilization, how you are thinking about it? How high can you push that number? It sounds like you're going to end this year at about 68.5, which would be a record. In prior years of strength, you never got that high, but your CapEx was higher than the number you're talking about for this year. So can you just help us reconcile what you're -- how you're balancing those two?

Yes; your point is well taken that we have been driving time utilization up. As Bill mentioned, it's the sixth consecutive quarter that we have had significant improvement in our time.

I think overall, as we become much more efficient in how we do things going forward, I think that there's still a point to 2 points that we could get out of our business. Keep in mind, it also is how we change our products as we go forward. All the capital that we are spending goes to a plethora of different products that we have out there. So each one will have its own dynamics, but I think, overall, we have the capacity for the future to get a couple of points out of it.

Okay, well, I guess a follow-up to that -- it sounds like when Bill was going through the cost change in the quarter year-over-year, you didn't really call out repair and maintenance. Has that basically -- you know, anniversary? We had some head winds there in the first half, I guess. So repair and maintenance costs are no longer -- you have brought fleet age down now a little bit, so is that the right way to think about it, that we are not going to see -- even though utilization is high, we are not going see those repair and maintenance costs be as much of a head wind, then, going forward?

Yes, I think that's fair, Seth. We didn't call it out because, as we look at the year-over-year performance of R&M, we feel better about where it is in the third quarter than we did in the first quarter, for example. So I think that's a fair characterization. We think it's in the range of noise now.

Okay, so if that's coming down, and then presumably maybe fuel prices come down, should we think about pull-through next year being north of 60% again?

Yes, I think it's fair to say that it will be north of 60%. I don't have a definitive number right now, but I think it will be north of 60%.

Okay, great, thank you very much, guys.

Manish Somaiya, Citigroup.

Good morning, it's Manish Somaiya from Citi -- congratulations, Michael, on the quarter.

Yes, thank you, Manish, thanks.

A couple of questions, beginning with Bill. Bill, could you talk about why the new ABL does not have a rating? And then I guess when you increase the size of the ABL, how did you go about deciding between the largest ABL and the impact on ratings, on the bonds, in particular?

Sure. So the -- why no rating is pretty straightforward. We don't feel that we need a rating on that facility. I guess we had a rating from S&P; they elected to withdraw the rating upon the new facility, and we just didn't think that it was warranted to go and pay for adding a rating.

In terms of the impact, thinking about the impact on debt, there is no impact with S&P. And at Moody's, there's no impact on the family rating of the company overall. I can't remember if we've actually seen a decision out of Moody's -- sorry? Yes, so I guess we did get the decision out of Moody's to notch the unsecured. And then, that's really a function of their process for secured debt. They assume that the entire facility is drawn, and so they put that facility in as drawn at $1.8 billion, and then they work through their process and look at the impact on that basis of the securities that are underneath the secured loan. And it's a mechanical process, quite honestly. Not terribly logical, in my mind, but that's the way they do it. So I guess I would direct you to Moody's to ask how they do it.

As far as our consideration, we certainly understood that they were likely to notch down. But our view is that the fundamental credit characteristics of the Company haven't changed. And so we feel pretty comfortable that the market will understand that and there won't be a significant impact, if any, to our bondholders.

Okay, that's helpful. And then just turning to slide 5 of your presentation, where you talk about the 4 initiatives, under the soft 2012 scenario I think, Bill, you touched on the replacement CapEx portion. But is there a way, or can you kind of give us more color on what you're thinking on new sales, branch footprint, additional cost savings? Obviously, on cost savings you guys have been added for the last 24 months. Clearly, you have done a great job, but how much more is there to do?

So used sales will certainly reflect the overall approach to the fleet decision, but we have been focused on driving. As our fleet has gotten bigger, we have been focused on driving greater used sales over the forecast horizon that we have been talking about, and we'll continue to look to drive used sales. I think you can -- that replacement number that I gave you of about $500 million to $600 million is probably the OEC amount of the used sales that we would target, at least initially, in thinking about next year.

As it relates to other cost opportunities, we certainly are continuing to look at branch closures and consolidations as part of how we think about the business. So we will continue to make those choices. And if need be next year, we can pull that lever to respond to a softer environment. We are going to have some closures in the current quarter. We will announce those as we get through the quarter. That results from our look at our cost structure. But that is in the nature of sort of a normal review of our footprint. If things got tough next year, we would take a harder look on branch footprint.

Similarly, in other lines of cost, we think that we have some opportunities, either in good times or in tough times, to take a little bit more in the way of cost out. We're looking at our strategy, for example, of how we align operations in a given geography. Right? It's not just about what branches you open and what branches you close, but how the branches in a given geography work with each other. We think there's some opportunity there. We think there's some opportunity in some of the G&A lines in taking a harder look at what we do where and how we rely on outside support versus inside.

So we think there's some more cost opportunities. It's obviously much harder now than it used to be, but we think there are opportunities there.

Manish, this is Mike; I just want to reiterate what Bill said is that we are not done. We are clearly focused on driving much more efficiencies. And the other thing that we have talked about and we've talked about you and other investors is about FAST and the way in which we deliver equipment. We think that there is significant opportunities to further improve our cost structure while improving our services to our customer. So stay tuned, more to come.

Got you. And then just lastly, on the potential adjusted EBITDA slide that you guys have, that you have had for some time, it looks like you are sort of dead on sort of many operating metrics. Any thought on updating this slide?

We've tried to update it at the beginning of the year for the last couple of years, so we will talk about it in the context of what we talk about when we report fourth quarter.

Okay, great, thanks.

It's safe to say that we are marching closer and closer, and we are running as fast as we can.

Got you, thank you so much, guys.

Scott Schneeberger, Oppenheimer.

A question I've received a lot is -- it's kind of at two- or three-parter. The impact of think you're getting from, one, weather; two, government stimulus, local or national; and, three, energy, and then the concern is the sustainability of it. So if you could just address that, please, Mike.

Yes, well, weather is -- it's something you can't control; it comes and it goes. Obviously, in the last quarter we had some storms. We had some areas along the East Coast that had a minor effect, but nonetheless, it was an effect that drove some of our utilization a little bit higher, and particularly our Trench, Power, HVAC business.

As far as the government, we see the government as a unique opportunity and we think that the story behind rental is a very strong story for the government, and so we look forward to continuous improvement. Right now, there still is [the tiering] of small numbers. With regards to the government spending, as you know, we haven't been large participants of the stimulus dollars. But I will just say, any dollars that are put into the economy can't be seen as negative; it's got to be seen as positive. So we will take where that comes our way.

With regards to energy, I think energy has been an ongoing dispute -- not dispute, but question for many, many years. First, oil; now fracking is a widely used term. I don't see that ramping up to the speed it did this past year, but I don't see it declining. I see it kind of leveling off and continuing to grow. But nonetheless, I see that as a viable -- it's very low-cost energy that's here in the United States. And all indications are that that's going to be a -- continue to go forward. So I see that as a positive within our industry.

Just following up on that, can you guys give us a rough breakout of your big verticals? You did mention in prepared remarks in the beginning healthcare, energy, a few others. Can you give us a feel about how they break out and a percentage of the total revenue and maybe how they are comparing to years past, the stronger ones and the weaker ones, I guess, highlighting?

The way in which we look at things -- our year-to-date -- and this is by SIC code, and this is how we have an internal report. Construction today is around 48.2% of our business. We have services and manufacturing; one is 12.5%, the other is 10.5%. We have transportation for government, 3.4%; mining, just under 3%. It's a long list of different SIC groupings that we track inside of our industry. Construction, as you know, the way we track it for SIC codes -- an electrician is an electrician. We don't change that and we don't know exactly what job he's on, whether it's a hospital or whether it's a power plant. We just track it by their SIC code.

So I don't know if that's answering your question specifically, or are you talking about -- ?

No; that was really helpful, Mike. I guess, just to round it out, if you can compare and contrast how that looks versus two, three, four years ago, and just -- how different is the mix of your customer now versus back then? And what are the main trends that you are seeing in that change? And I guess, taking a step further, what you see going forward -- which you've covered mostly, but if you can just kind of finish that out? Thanks.

Let me frame it this way. I mentioned on my opening comments that international accounts has grown from 19.6% to 32.4%. That has been a growing trend; I see that is going to continue to grow forward. But most importantly is the key accounts. And the reason I mentioned key accounts is, as you know, our go-to-market strategy is by account management. And we have identified what we consider very critical accounts, whether it be a national account, whether it be a strategic account, which is multi-state but not multi-regional, and then we have the assigned account. And the assigned account would be someone -- and I've used this analogy with you before, Scott -- someone, say, in the five boroughs of New York. He doesn't have any reason to go anywhere else, but he's going to get the lion's share of that business in that market.

That's how we look at the world. That's how we are measuring ourselves. Today, we are around 53%. I see that trending up closer to 60% over time. But there are always going to be the other portion of that business that we bring in new accounts, we classify them and then we will assign an account to them. But that's how I look at the world.

That is very different than the way we looked at the world three, four, five years ago. We kicked off Operation United in 2009 to focus in on these key accounts.

Peter Chang, Credit Suisse.

Good morning, nice quarter, guys. The first question I had was on a clarification. Of the 80% of the customers you polled, was that weighted by revenues or just by number of customers? And then what percentage of the key account customers would you say were bullish on 2012?

Well, the large portion of those customers were probably some of our key accounts. We didn't weight it by revenue; it is by actual account. So we didn't break it out by national accounts. We could do that, but we don't have that data readily available.

Okay, that's fine. And I guess, if we could focus on a different business, the used equipment sales for Q4, how should we think of the mix of that sales sold via auction, given the Ritchie Brothers announcement? Is it going to be kind of like 2009, where it's about 40% of the sales, or more like 2010 where was in the low 20s?

Peter, just to be clear, the auction share that we expect for the remainder of the year is going to be fairly small, let's say in the 10% to 15% range, just to give you a ballpark. The Ritchie Brothers announcement specifically was -- let's call it an experiment that we are running with Ritchie Brothers with the idea of saving on the cost and aggravation of shipping all of the equipment to a Ritchie Brothers auction site and, instead, leaving the equipment at United Rentals sites and asking people to either visit the equipment at those sites or to access data on Ritchie Brothers' website or our website.

We think that we can take some complexity and cost out of the process for us and still get a pretty good participation in the auction.

So that's what you saw out of Ritchie Brothers. It's not a signal that we are going to ramp up the amount of auction selling that we will do significantly. We've said that we are going to do more selling to vendors in the fourth quarter, so you will certainly see more of that. Vendors represented about, as I think I said, 25% of what we sold in the third quarter. They will probably be that or higher in the fourth quarter. And then we are going to push everything that we can through our retail channel. So, hopefully, that gives a little bit more insight, but if not, ask another question.

No, no, that's very clear. Thanks a lot, Bill, I appreciate it. I'll get back in queue.

Henry Kirn, UBS.

On the volume increase, is it possible to talk directionally about how much was from growth with existing customers, penetration into new accounts and how much came from the acquisitions?

So, penetration with new accounts, growth with existing accounts we haven't broken out historically. I think it's fair to say that the existing accounts were the big drivers of the volume increase as we have really ramped up our focus on driving more share of wallet. And so that has been the biggest chunk.

In terms of the acquisition impact, we added -- I can talk about it in terms of revenue, rather than OEC on rent. The acquisitions contributed about $22 million of total revenue in the quarter. And I'll just -- you didn't ask, but I'll add that that $22 million came with an EBITDA margin of north of 50%. So that gives you a sense of the impact on the financials of the acquisitions. If you really want what part of the OEC on rent, we could probably talk about it off-line.

That's helpful. And it seems that part of the fleet purchase is to take advantage of opportunities that you have had to let go over the last couple of quarters. I know you can't perfectly quantify how much better the third quarter would have been if you'd had the additional fleet in place. But in your thinking, would the third quarter have been much better, had you had this fleet available?

Clearly, it would have been better. How much is very hard to say. The key discussion that we had about whether we should have been spending more in the third quarter was around how do you trade off what would be a better third quarter against investing more fleet in the face of uncertainty about what next year is going to look like? That's the eternal tension in our business, that you take what's -- in an up cycle, at least. Do you take what's in front of you today and bear the risk that you may be carrying too much capital at some point in the future? And we ultimately decided, you know what? We've got enough confidence about 2012 and what's going to happen then, so that it was worthwhile spending some more in the late third and through the fourth quarter; that's why we raised our guidance. Does that help?

That's helpful, and one final one, if I could. How much impact was there from the hurricane in the East and the Midwestern flooding during the quarter? And is there any carryover benefit in the fourth quarter?

Henry, this is Mike. Like I said, it affected our -- if any one of our segments, it would have been the Trench, Power, HVAC with the generators and the dehumidification. It wasn't really a significant number in the quarter.

Thanks, great quarter.

Emily Shanks, Barclays Capital.

Thank you for all of the detail. I wanted to see if you could give us a little color around how demand trended intra-quarter. Was there any volatility, or was it fairly steady? Any color you could give would be helpful.

Yes, let me just -- I'll give it to you, the time utilization as we went through the quarter. In July, it was at 72.5, August was at 73.7 and September was at 74.3.

That's great. That answers it. And then --

Emily, I'll add -- all of that, while we were adding fleet in each of the months.

Okay, great, thank you. And then in terms of -- I know I asked this on the last call, but I'm just curious if there's any update in terms of the competitive landscape, how you would describe it currently and specifically as it relates to pricing trends by your competitors.

I think that the competitive landscape obviously is -- I think everyone is growing. I think you saw the results from one of our competitors last month. My sense is that -- and we saw some of the -- our early indications, from one of our other competitors. I think we are all benefiting from the secular shift. I think that we are all going to see rates improve as well. And as I mentioned, I think that if some of the lower-tier, smaller, local players -- I don't know that capital is really available for them. All indications are it's still very tight, which has enabled the larger companies to capitalize on this momentum. And I don't know that that's going to change relatively soon, given the uncertainty in the marketplace.

So I think everyone is acting great. I mean, you know, it's good stewards of the industry -- they're focused on driving their businesses, improving profitability and improving rental rates.

Great, thank you. And then, if I could, just one final question, just housekeeping. Can you give us the dollar utilization for the quarter? I don't know if I missed that somewhere.

55.1%.

Thank you.

Philip Volpicelli, Deutsche Bank.

Good morning, and nice quarter, gentlemen. My questions are regarding the revolver, and there's a couple of pieces to it. So first, I just wanted to make sure I understand the mechanism. You actually can only borrow $1.3 billion on the revolver currently because there's $500 million uncommitted. Is that correct?

No, Phil; it's $1.8 billion of available borrowings on the existing facility. There is an additional $500 million of uncommitted that we could add on at some future point.

Okay, so we could go to $2.3 billion?

Yes, exactly.

Okay. And then, what is the amount that your borrowing base would currently permit you to draw?

That's a good question. Against the $1.8 billion, there is suppressed availability. So the full $1.8 billion is available.

Great, and then with regard to covenants, your previous facility had a mechanism where you have no covenants unless availability drops below 125 or 10% of the -- the size. What's the new mechanism? Are there still covenants, and are they still springing?

They are still springing. They are spun off initially, so they are spun off today. And it's the same threshold, 10%.

Okay, great. And the rate, I'm sorry, is LIBOR plus 200? Is that accurate?

L plus 200 is what we are paying today. There's a grid that could go as low as 175 and as high as -- help me (inaudible) -- as high as 225. So we are at 200 today.

What leverage would you need to get to, to get down to 175?

It's the fixed cost -- excuse me, the leverage ratio.

It's availability.

It's availability? Where is the trigger point for 175?

(Inaudible - microphone inaccessible).

Between $500 million and $1 billion of availability, we are at 200 basis points. So, the breakpoints are at either end of that range.

Great. Well, congratulations on the new facility. I'll get back in queue, good luck.

Ted Grace, Susquehanna.

Hey, guys, congratulations. Just a real quick question on 2012 free cash flow to the degree you are willing to give us some -- a framework. And so if we just go through some of the stuff you have outlined, adding OEC, the pricing momentum and the encouraging signs on utilization next year, I think that the logical read-through is that cash flow from operations likely up.

When I kind of think through the gross CapEx you outlined and then thinking about the sales at OEC and applying a normal kind of discount rate to figure out the net cash, it looks like CapEx on that basis would be down year-over-year. So I'm just wondering if you would be willing to give us some form of field posts to think about what cash generation might look like next year.

Ted, we are certainly wrestling with those questions as we speak, wrestling only in the sense of we want to get our forecast for next year from an operating perspective set. So I am really hesitant to say anything, other than we are mindful of what we want to do to manage the fleet. I mentioned the replacement CapEx spend that we think about for next year as being in that $500 million to $600 million range.

We are also mindful of the demand that we are seeing from those key accounts that we want to build our strategy around. And so we are going to be very focused on what's the right strategic place to put our capital spent for next year. And that will be the big driver and where we end up in free cash flow. We have been free cash flow positive as a Company for at least seven years in a row. I think there's maybe only one year in the history of the Company where we haven't been, so we obviously take that as a standard seriously. At the same time, we are very focused on driving the strategy of the Company and positioning the Company for the long run, and we are in a mode now where there's a lot of demand for capital. So we're trying to balance those things, and we will talk about them more when we release earnings in January.

All right, super, well best of luck this quarter, guys.

David Wells, Thompson Research.

Looking at the fourth quarter and the used sales, the pickup in the rate that's going on there, it sounds like you are using more of the vendor channel for that. Can you talk about some of the incentives of why you would use the channel? Is there a trade-off where you're getting preferred pricing or something similar on the actual OEC that you are buying?

David, it's really being driven by the fact that they represent another outlet for taking a decent size of equipment. And that's the main driver of why we do the deal with them. We are buying equipment from them, anyway, so we might as well use that as part of leveraging the overall relationship, is the mindset.

Do we get special deals and their special purchase pricing in these deals? No. It's much more focused on leveraging the relationship and asking those vendors to step up and take some of the used equipment off our hands. The margins, the prices that they pay on the purchase side are certainly very competitive with the alternative of going to auction. And so that's the way we think about doing these vendor sales, is where does it position us versus taking that equipment to auction.

Our first choice always is to sell it ourselves, but if they could step up and take a big chunk of equipment, do it at a price that is not as bad as we would get through auction and we could leverage the spend that we are doing already, that's what we would drive us to do some of those sales to vendors. Does that help?

Yes, that's helpful. I appreciate that. And then looking at the $500 million to $600 million number that you gave for next year, should we think about that, then, as a floor and then, based off of your forecast for your key accounts, then you could see a growth CapEx kind of in addition to that level? Is that the right way to interpret that?

It's the right way to interpret it if next year turns out to be a decent year. So I hesitate to say it's a floor only because if next year turns out to be a really soft year, we could spend less than that. But that's the natural replacement level of spend that we think about for next year. And as long as the market hangs in, you could look for us to do at least that and then add growth CapEx on top of that in response to what we are seeing from the market and from our customers.

Okay, that's helpful. Lastly, as you look through that CapEx equation, with rates where they are, can you talk about what your kind of assumed IRR is on the CapEx now versus -- 2 to 3 years from now, hopefully you are further out. But is it still such that it makes sense to accelerate now?

Yes. Again, it depends on the path of demand between now and a few years from now. But if 2012, 2013, 2014 play out the way that we hope and expect, the incremental return from CapEx is pretty attractive. Without getting into a specific number, it's certainly going to be well above any reasonable view of what our cost of capital is.

Great, thank you.

This does conclude the question-and-answer session of 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 everyone for joining us today. And as I always state at the end of these calls, I urge all of you to download our latest investor deck, which has been updated on our website. And I invite any investor who would like to go to one of our facilities to reach out to Fred Bratman so that we can have an orderly presentation put together for you.

So with that I will conclude, and thank you very much, and look forward to our next call.

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