聯合設備租賃 (URI) 2012 Q2 法說會逐字稿

Good morning and welcome to the United Rentals second-quarter 2012 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the Company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The Company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release.

For a more complete description of these and other possible risks, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011, 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 revision to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.

You should also note that today's call includes 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; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. You may begin.

Thanks, operator. Good morning, everyone and welcome. With me today is Bill Plummer, our CFO and Matt Flannery, who became our Chief Operating Officer in April, with other members of our senior management team. We will take a look at the quarter with you and we're going to update you on the RSC integration and give you our thoughts on the balance of the year. And after that, we will take your questions.

The second quarter, as you know, was a transformation for us. It includes one month of our results as a stand-alone company and two months in combination with RSC. That meant our employees had to manage an incredible amount of change during the quarter and they still turned in some great results despite the attention required by the integration.

As we reported last night, we had a 61.3% increase in rental revenue year over year, a 7.4% increase in rates and a 63.7% increase in rental volume, and $418 million of adjusted EBITDA at an adjusted EBITDA margin of 42.1%. That is 7 points higher than a year ago and is a company record for us.

Time utilization came in a little softer than we expected in the quarter and it was down by 0.2 percentage point year over year. That is primarily tied to the deployment of our fleet and we brought $1 billion of fleet into the market and it performed very well for us with the exception of a few regions. We felt it was prudent to adjust our outlook for time utilization while we assessed the markets for our new combined footprint. And we now expect full-year time utilization to be at 68% on a pro forma basis and this is the same as last year, which is a record for United Rentals.

The other pro forma targets we issued last night are an increase in rental rates of approximately 6.5% year over year, up 0.5 point over our previous outlook and net rental capital expenditures of about $1.1 billion after gross purchases of between $1.5 billion and $1.6 billion and negative free cash flow in the range of $90 million to $140 million. And that excludes the impact of the merger-related costs. All of these numbers are based on the assumption that full-year results for 2011 and 2012 reflect a combination of operations of United Rentals and RSC.

Now there are a number of reasons our confidence in this outlook, especially when it comes to rates. One is rental penetration. If you look at how we performed over the last few years, you can see the impact of the change in market behavior. Our end markets are still evolving toward rental. That's one reason why we have been able to outpace the construction recovery quarter after quarter.

The other advantage is we have an expanded value proposition. Our footprint is going to end up around 850 branches with a fleet size of more than $7 billion in regional equipment costs. In addition, we now offer new site services like tool management and new customer-facing technologies and we have a much stronger industrial presence.

As a result, we have been able to engage our larger customers in discussions about serving more of their needs. Now I am particularly proud of how quickly we were able to align our sales organization once the transaction was complete. The transition of our national accounts and strategic accounts has been nearly seamless. Our rental revenue from national accounts grew by more than 20% in the quarter year over year and that is on a pro forma basis. Now this should give you an idea of how well we have managed the combination. So we have rental penetration driving incremental demand and a stronger, much stronger menu of competitive advantages.

There is also a third reason we feel good about 2012 and that is the level of project activity in our end markets. And we know there is uncertainty on the macro level. We hear the same cautions you do. Fluctuations in indicators like the ABI are making it difficult to pin down the path of this recovery. But from where we stand today, we like what we are hearing from our customers. We stay in constant touch with our customers and what we are hearing is things are looking good. Our customers are not just optimistic now at midyear as they were six months ago. In some cases, even more so. They are telling us that it is competitive out there, but it is active.

And we are hearing the same thing from our branches. And at our national sales meeting just last week, the reports from the field were very positive. The government numbers support this. Nonresidential construction spending in May was flat with April, but it was up about 7% compared with last year.

Now it is worth mentioning a couple of sectors. Energy -- still robust, particularly in the US and manufacturers are spending more on construction each month with some forecasts calling for double-digit growth this year. Commercial construction is still lagging, but there is a sense that the turnaround is in sight and most likely by mid-2013.

Now within our own business, all of our regions had positive year-over-year growth in rental revenues for the quarter and all but four had double-digit growth. So it is a good picture out there, but we are not complacent and we continue to keep close watch on our markets and we are not averse to fine-tuning as you saw with our outlook. We are in an upturn and we believe that is the right move to get our fleet in place sooner rather than later so that we can take market share and be positioned to grow even faster as activity picks up.

And we firmly believe that the next several years will be strong years for our Company and our industry and we are looking at our CapEx investment as a multiyear exercise and a competitive advantage, one that may put pressure on a couple of our metrics in the short term, but will deliver higher returns in the years ahead.

And if you look -- for some reason the economy stumbles, we will deal with it. There is enough flexibility built into our model to address changes in economic circumstances. For example, we still have the ability to reduce our gross capital spend below $1.5 billion floor of our outlook and we could also accelerate used equipment sales in the back half of this year. But right now, that is hypothetical and we don't see a reason to alter our course.

Now virtually every construction forecasting service shows some level of market growth in 2012. And for the equipment rental industry, Global Insight's latest outlook shows a bullish 9.5% increase in equipment rental revenues, which is several points higher than their forecast for the increase in construction spending.

Finally, the most important to our investors is that we're structuring our Company to deliver on the bottom line. As I mentioned earlier, our adjusted EBITDA margin was 42.1% for the quarter. That is huge for us. You know how hard we have worked to get that number over 40% and we did it at the height of the integration and we won't stop there.

I am also happy to report that we are ahead of plan in capturing our cost synergies related to the combination and Matt will discuss that in just a moment. But before I hand it over to Matt and Bill, I want to mention our employees. This integration has tested every aspect of our business. We are not just combining two companies. We are identifying the best way to go forward on every level. And fortunately, we have 11,000 of the best people in the business working for us and it is to their credit that our customer service and our metrics have held up so well since April. And that includes safety, which has been a constant topic of communication with our branches. Our combined recordable rate is an industry best and we intend to keep pushing it towards zero.

Now in closing, I want to say that the RSC combination was never about just getting bigger. It is about raising the bar on every conceivable financial and operational metric. It is about becoming indispensable to our customers as a way to create long-term value. Now 11 weeks ago, our goals were completely aspirational. Today, we are well on our way to making them a reality.

So with that, I am going to ask Matt to give you an update on the integration and some regional detail about our performance and then Bill will cover our financial results and then after that, we will take your questions. Over to you, Matt.

Thanks, Mike and good morning, everyone. I would like to start with a progress report on our integration efforts and then give you a brief overview of market conditions across all regions. I am happy to report that our integration efforts got off to a very strong start in May. We have made significant progress since our last call.

In early June, we integrated the legacy RSC branches onto our technology platform, so the entire network is now operating on a common ERP system. Now this was a key dependency for the majority of our cost synergies and we hit that mark ahead of schedule. The fact that we achieved that conversion within six weeks of closing the transaction is a credit to the tremendous effort and hard work of our combined IT teams. And most important, from our customers' perspective, it was a smooth transition that resulted in minimal disruption to our base business and it allowed us to launch our branch consolidations ahead of schedule.

But as you saw last night, we plan to consolidate 185 branches and we expect to have the majority of those completed by the end of this month. That should give you an idea of how efficiently we are moving through the integration. This has allowed us to achieve $17 million in cost synergies in Q2 verse an original estimate of $6 million. So as a result, we have raised our 2012 realized cost synergy target to $80 million and we are reaffirming our total cost synergy target of $230 million.

We are making good progress on the revenue side of the integration as well. We have identified $50 million of incremental EBITDA from approximately $65 million of revenue synergies and similar to the cost synergies, we expect this to be fully developed and achieved in 2014. Now this is net of any negative impact we may incur as a result of store consolidations and it is consistent with our initial thoughts when we priced the RSC deal.

We plan to accomplish this by leveraging many of the best practices of each legacy company. One early revenue benefit we have seen has been the cross-selling of our specialty rental services. We have already secured close to $2 million in annualized revenue from our trench power and HVAC business with legacy RSC customers. In addition, we started to cross-sell RSC's industrial tool products to legacy United Rentals customers. These are early indications of what we anticipated from the start, that our new combined value proposition will improve our ability to win in the marketplace.

To support some of our new sales processes, we kicked off an aggressive training schedule for our strategic account teams last week. They are training on the use of salesforce.com and the Total Control technology we acquired from RSC. For those of you who aren't familiar, Total Control is a system that helps us create win-win opportunities with our large customers. That is a strong differentiator in the market. The software focuses on consumption management. It can help our customers reduce their total cost of rental spend by increasing utilization of their rented and owned assets.

We have also taken this opportunity to harmonize other practices from the two organizations. For example, just this past week, the RSC branches went live on our CORE price optimization tool. CORE manages pricing at a local level and optimizes the rates based on market demand. Now this will help drive consistent pricing methodology throughout the combined network.

I know there is some curiosity about the harmonizing of our large accounts. We have been actively renegotiating overlapping agreements and while we are still in the early stages of these negotiations, we have seen a net positive impact and this is due in large part to the fact that we offer a stronger value proposition with more ways to serve the customers' needs.

Another major priority for us since the close of the RSC transaction has been the retention and the engagement of our employees. We have made a concerted effort to reach out to all employees and to be sure that we understand any of the challenges they may face as a result of the integration.

Mike mentioned earlier what a stellar job our employees are doing in serving customers and adapting to change. We are staying on top of their needs by listening to what they have to say. To help accomplish that, we have conducted more than 50 Town Hall meetings of branch-level employees in our most populated markets. I am pleased to report that time after time, we have encountered team members whose morale is high and who are focused on safety and customer service.

Now, shifting gears to the marketplace, I would like to comment briefly on how our regions performed in the second quarter. Overall, our growth in the quarter was very broad-based. We saw growth in every one of our geographic regions with the strongest increases coming from the Southwest and the South regions. Both of these teams achieved rental revenue growth of approximately 29% in the quarter and our Midwest region grew by 23%.

And I would be remiss if I didn't mention that our specialty region, trench power and HVAC, had one of the highest growth rates at over 20% and that is excluding the impact of acquisitions.

Now when you look inside the regions, we achieved positive year-to-date rental revenue in all but four states and 35 of these states grew by double digits. This demand for our equipment allowed us to put more than $600 million of additional OEC on rent for the second quarter on a year-over-year basis.

Now on the flip side, an area where we have seen some softness is in eastern Canada and more specifically in the greater Toronto area. We have had a minor decline in volume there, but profitability remains strong. We have been shifting the excess assets to serve markets where the potential is stronger. Deployment of our assets will continue to be an area of focus for us, particularly with our new larger footprint.

But before I turn the call over to Bill for the financial update, there is one more thing I would like to share with you all. Last week, I was able to attend our first sales leadership meeting in Phoenix. Now this was our first meeting with all of our combined team of national and strategic account reps and their managers. The energy at that meeting was very strong and the teamwork that I witnessed was very encouraging. And our rents confirm that the demand we are seeing from our larger accounts is substantial.

I came away feeling good about where we are headed and more importantly, I feel good about our ability to create value for our customers as a combined operation. Ultimately, it is that value synergy that will give us the ammunition to grow our Company ahead of the industry. That has been our focus all along and that is what will determine our success. So thanks for your time and now over to Bill.

Thanks, Matt and thanks, Mike. Good morning to everyone. As is our usual practice, I will go through the second-quarter numbers in a little bit more detail and hopefully add some color so that everyone can understand a little better how the quarter played out. This quarter is one of the most difficult challenges a Company could have in talking about its results however with a large acquisition. The reported numbers really look different than what you are used to, so I will try to add some texture to help you understand that and talk a little bit about our performance on a pro forma basis.

Apologies if I get a little repetitive on that as reported versus pro forma, but I think it is really important. We will start with the P&L, touch on liquidity and cap structure and then finish up with an update on the outlook for the full year.

So starting with the report -- the results as we reported, Mike hit the highlights already. Revenue, our rent revenue was up 61.3% in the quarter, a strong rate, end-volume contributions in the quarter's results. So rates were up, as Mike said, 7.4% year over year and if you look at that on a sequential basis compared to the first quarter of this year, rates were up 1.3 percentage points. So a strong rate performance any way that you look at it and certainly it is a great way to start the first half of the year. In fact, I will touch on it a little bit later, but the momentum that we are experiencing in the first half has given us the confidence to raise our outlook for pricing for the full year.

If you look at our volume performance in the quarter, our measured volume OEC on rent was up 63.7% over the prior year. Obviously the acquisition is the main driver of that kind of strength, but even underneath, excluding the acquisition, there was robust growth. I will touch on that in a second.

That volume growth tied to a time utilization performance that was at 67.1% in the quarter, which was down 0.2 percentage point compared to last year again on the reported basis. And again, in our outlook, I will touch a little bit more on our view for the remainder of the year on time utilization performance, which we took down.

Looking at used revenues, we had a used revenue result of $81 million of used proceeds on a reported basis. That compares to $41 million last year and we delivered a margin in our used sales of 30.9%. Again, distorted by the acquisition, but certainly our margin performance we feel good about in the quarter at 30.9%. It is down a touch from last year on a reported basis, but you will see on a pro forma basis it is basically flat with the prior year.

Enough on revenue. If I move down to profitability, our as reported adjusted EBITDA profit was $418 million and that was an adjusted margin of 42.1%, as Mike said. That margin performance is a record for United Rentals and it represents a 700 basis point improvement over last year. Underneath that margin performance was a pretty solid cost performance both at cost of rent and SG&A and both were helped by our performance with the synergies. But even excluding the synergies, it was a pretty solid cost quarter for us. In fact, if you look at just the metric that we've talked about of flow-through of adjusted EBITDA from revenue increases, flow-through on a reported basis for the quarter was 54.1%. Again, a number distorted by the acquisition, but still a robust flow-through performance overall for the Company.

I should point out though that the flow-through did benefit from a self-insurance reserve adjustment in the current quarter. Year over year, there was about a $7 million benefit from self-insurance reserve adjustment that is playing through the profitability numbers. But even excluding the self-insurance reserve adjustment, flow-through was 52% in the quarter, still pretty robust.

If you drop down to EPS, our reported EPS on an adjusted basis was $0.66 for the quarter and again, that includes all of the adjustments that we talked about previously in our update call that are called out in the 10-Q. It is also worth pointing out that the adjusted EPS in the quarter includes a tax rate that was a little unusual. Our tax rate, our effective tax rate for the quarter was 18.8% and obviously a long distance from the low 30%s percent that we've talked about as a tax rate previously. That tax rate was impacted in the current quarter by several discrete items, the largest of which was about $8 million worth of deferred tax charges that arose out of the acquisition.

Maybe we can talk more about it in Q&A if anybody is interested, but those deferred charges really arose out of the merger of the legal entities primarily at the state level.

If you adjust for that tax rate, if you had a tax rate was a little bit more normal, let's say 35%, our EPS would have been roughly $0.13 higher than the $0.66 adjusted EPS that we reported.

Those are the comments I wanted to make about the as reported figures, but, as Mike said, the way we think about our business is really on a pro forma basis. That includes RSC results for all three months of the current year quarter and including RSC on the prior year. So I will give you a few key data points on the pro forma performance of the Company overall.

Starting with rent revenue again, our pro forma rent revenue was up 15% in the quarter and again, rates and volume were both strong contributors. Rate, as we said, was up 7.4%, which is actually a full pro forma figure. That is the way we talk about rate now. And OEC on rent, the volume measure was up nearly 14% in the second quarter, so a pretty robust environment, pretty robust performance there. If you look at OEC on rent compared to the first quarter on a sequential basis, it was up 11% and again, pretty good momentum for us on a sequential basis.

Regarding utilization, the pro forma time utilization for the quarter was 67.4% and that was down a 0.1 percentage point compared to the second quarter of last year. So it is slightly less than the as reported figure, but it's still up a pretty healthy 340 basis points when you look at it sequentially versus the first quarter of this year.

Used revenue in the quarter on a pro forma basis was $96 million and that was up 20% versus the pro forma used revenue in the prior year and the pro forma gross margin on used was at 40.1% gross margin and that was basically flat. It was actually down 0.1 percentage point compared to the prior year, again, on a pro forma basis. The used margin performance is pretty robust and it's certainly helped by the used environment, which is still pretty solid, as well as our focus on the retail channel, which was a very strong contribution in the current quarter.

If you drop to profitability here, our adjusted EBITDA for the quarter on a pro forma basis was $474 million for the second quarter. That is at a margin of 41.9%, which was 640 basis points better than last year's margin on a pro forma basis, again, comparing apples to apples. So a pretty robust performance on an EBITDA basis and it certainly does reflect again all of the positives that are flowing throughout our business overall.

At EPS on a pro forma basis, just to give you a rough indication if you were to make all the adjustments and include RSC for all periods, our EPS pro forma would have been something like $0.82 a share in the quarter. So again, a strong representation at profit.

Let me move briefly to our cap structure and liquidity and then I will update the outlook. In terms of liquidity overall, we ended the quarter with about $555 million of overall liquidity available to us and that includes $494 million of ABL capacity, plus our cash and availability under our AR securitization facility. So it is still a solid liquidity position for the Company and if you look at how we have used some of that liquidity during the second quarter, we reported previously that we repurchased about 2.4 million shares for an aggregate purchase price of about $100 million. You will all recall that we were authorized to repurchase a total of $200 million by the Board at the close, which we plan to execute over the 18 months following the close.

But before we move onto Q&A, let me just update the outlook real briefly. First, in terms of rental rates, as I mentioned earlier, we now expect rental rates to be up for the year. It will be up about 6.5% for the full year and that is compared to our prior outlook of 6%. The momentum that we are experiencing right here and now gives us that confidence that we certainly should be able to hit that 6%. And in fact, if you just look at the momentum on rental rates that we are experiencing in the first half of July here, it certainly does support our raising of the rate outlook for the full year.

On time utilization, recall that our prior forecast was that we were going to raise time by about a percentage point on a pro forma basis for the full year. We now expect that time utilization will be about flat for the year and that will be flat at about 68% on a pro forma basis last year. Keep in mind that, last year, it was a record utilization year for the URI side of the Company and certainly we are comparing to a very strong environment on time utilization.

For CapEx, we haven't changed anything in our CapEx view from the May update we did. So we are forecasting gross rental CapEx of about $1.5 billion to $1.6 billion with a net of right around $1.1 billion, $1.075 billion on the low side, $1.125 billion on the high side.

Free cash flow, we still expect to be a usage of between $90 million and $140 million and again, that is unchanged from our May update. And I will remind everyone that that excludes the impact of the merger-related costs, but it does include the impact of the change in payment terms that we called out back at our May update. So as we accelerate payment terms on RSC side fleet purchases, we are going to pay those faster and that impact we estimate at about $200 million.

So all in all, a fairly robust quarter for us. As you look at a variety of measures, it is pretty strong. I didn't mention, for example, the flow-through that we achieved on a pro forma basis, but it was very strong relative to what we have talked about in the past. Pro forma flow-through in the quarter was almost 89%. And even though it benefited from, as I said, a $7 million year-over-year self-insurance reserve adjustment, even stripping that out, it was about 84%. So very strong profit performance as we see it in the quarter and that sets a nice tone to tackle the second half and we look forward to being able to report our results going forward. So with that, I will ask the operator to open the call for questions and answers. Operator?

(Operator Instructions). Henry Kirn, UBS.

Good morning, guys. On a pro forma basis, rental revenue was up 15% in the second quarter. Now I know you don't give full-year revenue guidance, but could you give some color on the level of growth that you might expect for the second half of the year given the comps that you face?

Sure, Henry. It's Bill. I think the fair thing to say would be that we would expect the level of growth in let's say the third quarter to be down a touch from where it was in the second quarter. So on a pro forma basis, we were 15%. I would expect that we would come down just a shade from that just given the strength of the third quarter last year. And obviously the interplay of rate and time utilization in the quarter will determine exactly where we ended up. But it is hard to keep repeating against the comps that we know are coming in the third and fourth quarter. And so I would say down a touch.

That is helpful. I will pass the baton. Thank you.

Peter Chang, Credit Suisse.

Good morning, Mike. Good morning, gentlemen. Thanks for taking my question. I guess to build on Henry's question and again, with the caveat that you don't give specific financial guidance, but with the interplay of the growth in your rate guidance compared to the decrease of the utilization, I mean would you say if you did give explicit financial guidance that this would be flat, raise or lower? I mean it looks like a flat to me, but the reason why I ask because is I think there is some confusion that utilization is more important than the increase in rental rates, which actually drive higher EBITDA. And I just want to get your comment on that.

Sure, Peter. So maybe I will try it and others can chime in. Maybe I can simplify it. As we think about the full-year today compared to the way we thought about the full-year back in May when we gave you that outlook, the interplay between rate and time results in a view of profitability that is really not significantly different today than it was back in mid-May.

So even though rates have done a little better, time has done a little worse, when we look at that and blend it with the underlying cost performance that we expect, the synergies that we expect and so on, the profitability looks -- the picture looks very much the same today as it did back in mid-May.

Okay, great. Thank you for taking my question. That is all I needed to know.

Seth Weber, RBC Capital Markets.

Good morning, guys. Going back to the rate question, I am just trying to understand the sustainability, your comfort in the sustainability of the rate strength. Do you think it is a function that your smaller customers just don't have product to put out in the market or is it that you are resetting previously lower-price contracts and the reason why I'm asking is because one of your bigger competitors reported recently with rates that were more like in the 3% to 4% range.

Yes, I can't speak for my competitors because I don't know where they are coming from or what their dollar utilizations -- all I can tell you is that the way we report rates is based on ARA metrics and that is how we go forward. But what we see is -- what we are doing is -- one, our value proposition we think is more attractive. We do think that we are harmonizing our contracts with some of our larger contractors, but that is not -- that is only part of it.

I think the other part of it is our broad footprint and having the fleet to satisfy the demand that we see out there. I just want to point one thing out that I think gets lost in the shuffle here is -- and I have mentioned this in the past -- based on my experience of 34 years in the industry, rates -- one is very near and dear to me, I have said it several times over the years, but typically with rates going up, it should give you some comfort that the underlying business is doing well. Overall, I have never experienced a downturn where time led it. It was always rates led the downturn.

So I look at rates as a lever that we are pulling, something that we think -- we are good stewards of our industry. And we are going to continue to drive. We are still not anywhere near where we came off from our peak and we are just driving it to the extent we can.

Okay, maybe if I could shift gears a little bit to the equipment, to the fleet. The fleet age, the age of the booms and the lifts is up to 55 months. Can you talk about what your target is for that category and maybe just help us understand why the utilization in that particular category came down from 1Q?

From the aerial perspective or you are talking about any other specifics?

Specifically on the aerial side. The age of the fleet is up to 55 months. What is your target for that category and maybe just some explanation why the utilization in that category came down?

Sure, Seth. It's Matt. How are you doing? So as far as the age, we are very comfortable with that age. Within that, you have your scissors, your rough terrain scissors and then your boom lifts and we can age the boom lifts significantly further than our current age if we needed to.

As far as the time utilization, our time utilization is still well into the 70%s on almost every category in our aerial and even our reach forklifts. Part of what we are running up against is we were probably losing business last year. We were running time utilization well into the 80%s on many categories and long term, that is not healthy. There could be some discussion overall of whether the denominator versus the numerator drove our time utilization issue here this year because we did have significant growth. But I think we are in good position where we are and Mike stated in his opening comments to take advantage of opportunities in the marketplace, specifically while we are merging the customers from the two organizations together. So I am very comfortable with where we are from an age and time utilization from an aerial perspective and we continue to see that ramp up throughout the -- to the peak season in the fall.

And just real quickly, some of the change that you are seeing in both the age and the time utilization probably comes from the fact that this is presented on a pro forma basis now whereas, in the prior period, they would have been in URI only bases. So I don't know off the top of my head how much of an impact that is, but that might be some of the change.

Sure. Okay, all right. Thanks very much, guys.

David Raso, ISI Group.

Hi, good morning. Real quick, the July rental rates so far, if your pro forma year to date is around 7.3%, 7.4%, full year is at 6.5%, obviously it implies a second half, call it, 5.5%, 5.7%, something like that, quarter to date, where are we versus that implied second-half average? Are we even above 6.5% to 6%? Where are we?

Well, quarter to date is pretty short right here, but, right now, we are better.

Better than the 6.5% or better than the 5.5%, 5.7% back-half implied guidance? Are you above the full-year 6.5% still?

We are better than both.

Okay. What I am alluding to is you mentioned the incremental margins in the second quarter were high and obviously I think the year-to-date pro forma incremental margins are 76%. The second half of the year, your comment about the interplay between rates up, utilization down is about the same profit profile as you had. We saw in the second quarter, when rate drives the story more than utilization, it's actually usually a net positive for the EBITDA, the drop-through. Second half, we have more synergies as well than we had in the second-quarter run rate.

So when you look at the incremental EBITDA for the back half of the year, you can answer it anyway you want. You can answer it versus the 76% you had in the first half, you can answer it versus the 89% you had in the second quarter, with or without the self-insurance reserve. How would you look at the second-half incremental EBITDA? Because the way you are laying the guidance out, it is going to be more of a rental rate-driven second half than you even saw in the first half, which is usually a positive for EBITDA. So I am just trying to get a feel how you're looking at the profitability.

So you are right. Year to date, our adjusted EBITDA margin -- or excuse me -- flow-through is about 76%. As we look at the second half, those are positive forces, better rate and the synergy is kicking in. We expect also that there will be solid underlying cost performance. So we feel very good about our ability to deliver flow-through in the second half. When we guided in May, we said 70% plus. We are already on track to do better than that and we are hopeful that we will do better yet. But it is -- without nailing the number too specifically, I would just say it feels pretty good right now for being able to deliver flow-through in the second half.

Well, if you won't give us a bogey versus that 76% first half or the 89% 2Q, is the premise accurate that -- let's take it at face value -- that you feel you are raising rates, it's hurting utilization; it is your choice. We could argue it is a deteriorating marketplace, you are not seeing it. But basically if it's as what you're saying, rates up, we get a little bit dinged on utilization, but look at what drops to the bottom line.

If you just change the guidance to be more rate-oriented and less utilization-oriented, why was the earlier answer that your outlook on profitability is similar to a couple months ago? The premise would be that that would be a better profit profile because it's more rate-driven in the second half. And you didn't change your CapEx, so the size of the fleet is not going any differently than you thought.

It is more rate-driven. I think the way I would say it is that our view on profitability in dollar terms is about the same as it was back in May, but our view on flow-through is higher.

Okay. All right, I appreciate it. Thank you.

Manish Somaiya, Citi.

Hi, Mike. Good morning, everyone. Just a follow-up on what Matt outlined. I think he mentioned that one of the weak markets that hurt utilization was Eastern Canada with some of the other markets being strong. But, Matt, was that the only weakness in the quarter or were there other regions (multiple speakers)?

So specifically it was really Ontario in Eastern Canada. There were other parts of Eastern Canada -- as a region, as Mike had stated earlier, all regions were up year over year, but Ontario was down and we probably ran a little bit heavy on assets there. As they came out of the seasonality, we probably didn't recognize softness quick enough if I was going to be self-critical. I would have moved a few million dollars out of there sooner.

But as far as the growth overall in the rest of the regions, we have seen a little bit of softness in the Northeast, but softness is still high single digit to mid-single-digit growth on a year-over-year basis. It just doesn't keep up with the growth that we had there last year. That was our top geographic region in the whole organization last year. So that is what we are seeing, but overall we are still seeing growth in all of our geographic regions. I don't know if that answered your question.

Yes, that is very helpful. And then just looking at page 19 of the investor presentation, you talk about fleet mix and changes to them. Can you talk about leadtimes at OEMs as it pertains to earth moving, which is obviously a big focus item for you? And then where does pricing stand as far as buying new equipment?

So leadtimes in earth moving are actually not too bad. We can access earth moving equipment that we might be interested in with pretty short leadtimes and in fact, in some Cat classes, there is stuff in inventory that we can have right off the bat. So in earth moving, not too bad. In some of the more popular other Cat classes, still some decent leadtimes. If you're looking for high-capacity reach forklifts, it is still a decent leadtime to get some of those units.

So all in all, it is a little better than it was in terms of leadtimes earlier in the year, but it depends on the Cat class that you are looking at. I am sorry; I forgot the second part of your question.

Pricing.

Pricing is pretty good for us. As we said back in the May update, we have been rolling through looking at the RSC purchases or the purchases that we would do to support adding RFC to our business and we have been renegotiating the purchase agreements with the vendors for those purchases and we have been realizing some nice price reductions in the range of 2% to 5% consistent with what we have said previously. So that is going pretty well for the purchases for 2012. And at the same time, we are negotiating around our 2013 purchase plans and we feel good about how that has progressed so far. So the price environment still is pretty decent for us and we will continue to drive a hard bargain as we always do.

Thank you so much.

If I could take the opportunity to expound an answer I gave before. It'll correct what I didn't mention in our opening. As I said, we had 35 states that had double-digit growth. I forgot to mention the provinces and Ontario was the only province where we did not have year-over-year growth. So similar to the comments I made earlier, our growth has been really broad-based.

Thanks, Matt.

Nick Coppola.

Is there anything you are willing to share with us on how utilization has trended to date in July?

So I think the way I would say it is that the trends that we saw in June continue in July. And I say it that way very specifically because I think in order to understand what is going on in the business, you have to disaggregate utilization into the two pieces. OEC on rent, we are still seeing nice growth in OEC on rent in the numerator of that calculation here in July year over year.

Seasonal build, we are getting a seasonal build, so that's continuing. We can come back and talk about some of the factors that are driving that. But we brought a ton of fleet in in the first half of the year. We brought a lot in and we brought it in very quickly. That was a drag on utilization as we got into the May, June timeframe. It continues to be a drag on utilization here in early July.

I would also point out that we are also going through -- still going through the integration process where we have integrated 50 locations and we are going to ramp that up very quickly and as we go through this quarter, get most, if not all of them, behind us.

And then one follow-up question, the $50 million revenue synergy target, where is that coming from, what are the components there?

It will be a combination of harmonizing contracts, getting everybody on the CORE system. There will be some cross-selling, as we had mentioned, about the trench power HVAC. The mix will be -- have a higher flow-through and that is why we have stated $50 million of incremental EBITDA on somewhere from $60 million to $70 million range. And you could guess why the flow-through would be higher is because a lot of the synergies don't have any additional costs related to them.

Okay, perfect. Thanks.

Philip Volpicelli, Deutsche Bank.

Good morning, how are you guys doing? My question is with regard to debt and I am just trying to figure out where the debt balance is going to be at the end of the year. And you guys have maintained guidance for $90 million to $140 million of free cash flow usage and that does not include the merger costs. Is the merger cost you are referring to the $90 million that is in the appendix or is it more than that?

So the cash portion of our merger-related costs for the year, the cash portion is going to be -- bear with me one second here and make sure I have got a useful number. It is those transaction costs that we have already paid such as banker fees, lawyer fees and consultants, but it is also the other transaction-related costs that are in process now such as the lease termination costs, severance costs for employees and so on. And I don't have within my reach right here now the number that we have excluded, but that would be the simplest way to kind of get you to a year-end debt balance.

Okay, maybe I can follow up.

Yes, if you could follow up off-line, I would appreciate that.

And the second part of the question is, as you look at the cap structure, clearly you have got some high coupon bonds that are I guess becoming callable in the near future. Is the thought process that you guys will try to keep your balance sheet -- in other words, will you try to do smaller refinancings or will there be a larger refinancing at some point in the near future to kind of term out a lot of the smaller pieces that are high coupon?

We are looking at our alternatives basically every day to see which is the preferred route to go. You are right. Right now, we don't have an immediate call available to us on any of the really high coupon issues that make sense to exercise. I think the first call that we have available on our 10 7/8 issue comes up sometime like this time next year if I remember correctly and so that certainly will be a point which we will make some kind of a decision.

Until then though, we will continue to look at not just the high coupon, but all of the components of our debt to see if there is anything that makes since to do right here and now. So far, the answer has been no. The one thing I would point out is that we will refinance our AR securitization facility over the course of the next couple of months, so that is something that we will get done. But in terms of the longer-term debt issues, we are going to continue to look at it on an ongoing basis and we will let you know if we decide to do something.

And presumably, the AR side of that can grow now that you have got the RSC AR to work with, is that correct?

I'm sorry, say that again?

Presumably, the AR securitization that you have got can grow now that you have got all of RSC's AR to also use.

Yes, we will look at upsizing it a little bit as we go through the refinance process.

Okay, great. Thanks, Bill.

Ted Grace, Susquehanna.

So I was just wondering if we could walk through the cadence of time utilization by month in the quarter and then kind of compare it to the monthly cadence of either CapEx spend or OEC additions and then also the store closures and kind of what I am curious to understand is just, even if we just look at it optically, how those would coincide, especially the store closures. You closed 6% of the fleet. In my mind, I just think there is a transient kind of dilutive effect it has on time utilization because, if you close a store, then, for some period of time, equipment is in transit being absorbed by new stores and I am just trying to understand how that also may have contributed to the commentary you made, Michael, about just the timing of CapEx.

So maybe I will start it. So the cadence of time utilization through the quarter -- I will just give you the months -- 66.3% in April and that was up 4/10 from the prior year; 67.7% in May, that was up 1/10; and 68.2% in June, which was down 8/10 from the prior year. And those are all pro forma numbers, pro forma numbers, so it is apples to apples in the periods.

And to compare that, most of the closures that we got done in the second quarter -- there were 61 of them -- happened in June. So it is always hard to kind of tie a direct correlation between those activities, but clearly if there was a distraction, June would have been the time that there was a distraction as a result of all the closures and personnel moves.

I was hoping that is the trend we would have seen. And then in terms of the OEC additions, can you just give a sense for how those kind of layered in across the quarter?

You mean the purchases?

Yes, whatever is the easiest way to express it, either it's CapEx or OEC additions.

Across the months, I don't have it handy here.

Okay, we can follow up on that.

They are showing it to me as we speak here. So in April -- gross, those are all gross? April gross CapEx was $210 million, May was $179 million and June was $120 million. Those are all pro forma apples to apples with both companies included.

Okay. Then the second part of the utilization question I was just curious to get your perspective on is it looked like there was a greater shift towards earth moving and trench and safety and other and away from aerials. And as we think about it, aerials tend to have the highest time utilization. So there is a mix shift that clearly ends up being manifested in your reported time utilization. On page 20, I know you show the time utilization in the second quarter. Could you either give us the year-ago comp or at least help us think about qualitatively what that impact or how that dynamic might have played out? Because, again, that would provide again optically a lower time utilization when, in fact, the numbers could have been better on an underlying basis.

That's a great question and it's also a great observation that our fleet mix has changed dramatically and it is more in line with our longer-term objective, which is to expand the horizon on our earth moving and trench and other. And when you take a look at the pro forma fleet mix, we are now around 45% versus 49% aerial. And to your point, that will have some bearing on our time utilization.

So let's -- I hate to do this on the fly -- but maybe one of the things we can do is just to give you a comparable pro forma number for some of the figures that are on slide 20.

That would be super.

Let us look at updating the slide to include some comparable information so you have a sense of where we are coming from on a pro forma basis.

Okay. Listen, guys, congratulations and best of luck in the back half.

Thank you.

This concludes the question-and-answer portion for today. I would now like to turn the call back to Mr. Michael Kneeland, Chief Executive Officer.

Thanks, operator. I want to thank everyone for joining us today and at our next call, we will have a full quarter of combined results to share with you as opposed to as reported. In the meantime, you can always look at -- look us up in Greenwich and please download our presentation from our website. If you have any questions you would like to put forward, please contact Fred Bratman and/or visit one of our locations. And with that, that concludes our remarks for today and I want to thank everyone.

Ladies and gentlemen, thank you once again for participating. This concludes today's presentation. You may now disconnect and have a great day.