Red Rock Resorts, Inc.
Q4 2007 Earnings Call Transcript

Published: 21 Feb 2008

[Operator:]

Welcome to the RSC Holdings fourth quarter earnings conference call. All parties are now in a listen only mode. We will be facilitating a question and answer session towards the end of this call. The slides that accompany this earnings call are located at www.rscrentals.com. My name is Denise and I’ll be your conference coordinator today. As a reminder, this conference is being recorded for replay purposes. The webcast and the fourth quarter earnings slide presentation including any non-GAAP reconciliation tables that are warranted can be accessed on the RSC Holdings website at www.rscrentals.com under the “About Us” tab. A replay will also be available shortly after the conclusion of the call and posted on the RSC website. Before the presentation begins, RSC would like to alert you that some of the comments such as the company’s outlook and responses to your questions may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties and actual future results may vary materially. In addition, the factors underlying the company’s outlook are dynamic and subject to change and therefore this outlook and all the other information mentioned today speaks only as of today and RSC does not intend to update this information to reflect future events or circumstances. RSC encourages you to read the risks and uncertainties discussed in the company’s prospectus filed with the SEC on May 23, 2007. Speaking today for the company are Erik Olsson, President and Chief Executive Officer, and David Mathieson, Chief Financial Officer. I will now turn the call over to Mr. Erik Olsson. Please go ahead.

[Erik Olsson:]

Thank you, Denise. Good afternoon and welcome everyone to RSC’s fourth quarter and full year 2007 earnings call. With me today is our new CFO, David Mathieson, who joined the company on the 2nd of January and we are very pleased to have someone of David’s caliber to join our team. I am also pleased to share this report with you today as we have continued to perform very well during the fourth quarter thus capping off another very strong year for RSC. Executing on our strategy and leveraging our robust and industry unique business model have allowed us to continue to grow our company in a profitable way in a competitive environment. I will go over some highlights of the quarter starting with what we’re seeing in the marketplace and then focus on the main factors that drive our industry leading performance and enable us to continue to deliver strong financial results. David will then talk in more detail about our financials. I will also talk about our outlook for the year and we will end with a Q&A. We have put together a number of slides to accompany our comments which you can find on our website. Turning now to slide number 3 with highlights of the fourth quarter. First of all we continued to see strong demand from our core end markets which are non-residential construction making up about 65% of our revenues and the industrial market which makes up over 30% of our revenues. The most recent US census data on known residential construction spending showed 18% year-over-year growth with significant increases in almost all the 16 different segments being tracked such as office, power, commercial, healthcare, and educational construction. Most, if not all of these segments making up non-residential construction have different cyclicalities from each other and different funding from private and public sources. Our industrial business is also doing very well. Plant capacity utilization continues to run at the historically high level of 81% indicating high level of activity driving maintenance and expansion needs. RSC continues to see above company average growth from this market and we are serving a number of different industries within the industrial sector such as petro chemical, mining, food processing, and power plants. The industrial business provides a different cyclicality and seasonality from the traditional construction markets giving us a significant revenue stream removed from these markets. The industrial market is a key area of growth for us and we have already solid presence in these markets. More than 30% of our revenues are generated here and we believe are flexible and service-oriented business models combined with proprietary total control software for our customers, rental fleet management, and [mobile crew rooms] are uniquely suited to serve the sector. The industrial market and the non-residential market with its many different segments comprised 95% of our revenues and provide what we believe are well-diversified end markets. Only the remaining 5% of our revenues come from residential construction. We also benefit from having a good geographical diversity across North America and we have grown our business year-over-year in all regions except for the hard-hit Florida. I would like to take this opportunity to highlight two examples of how the RSC business model works in challenging environments. First, on the regional basis in Florida, and second, on a company-wide major product category basis. Continuing to slide number 4, we have talked about our performance in Florida and in our southeast regional prior calls and our actions and results here are very good examples of the proactiveness and flexibility we have in our business model. We have produced very good results while operating in a difficult market with profitability comparable to company average EBITDA margins in the mid-40s. When we saw the slowdown in Florida coming in late 2006 we immediately started to shift fleet out of the area, move some other categories in demand into the area, and kept our fleet and utilization very balanced. We had 72% utilization in Q4 down only marginally from previous year on comparable total [inaudible] levels which means that we have defended volumes very well in the marketplace that in many areas may have been down well over 30%. We added 14 sales people during the year which may be counter intuitive but drove market share gains for us and we opened one new branch in the area while competitors are closing locations. Our superior profitability allowed us to be on the offense in a difficult market but at the same time we balanced and right sized the fleet and other costs. Slide number 5 demonstrates another great example of how we operate on a company wide scale. This example relates to the dirt equipment segment or earth moving equipment like backhoes or excavators. As you may know, this is one of the few categories where the residential slowdown has had an impact on our core market, mainly through a large influx of dirt equipment to the non-residential sector from residential markets. Once again, through our systems and business models, we identified this trend in late 2006 and started to take corrective action. Reduced purchasing, moved and shifted fleets to areas where it could be better utilized, and the end result for the company is that dirt equipment has shrunk as a percentage of our total fleet but it has grown in dollar terms as the whole fleet is larger. In fact, we have more dirt equipment in Q4 2007 than a year ago at similar levels of utilization and returns. These two examples, one regional in Florida, and one product category company-wide, clearly demonstrate the strength of our company and strategy and how we execute, identify trends early, and taking decisive and prompt action. Turning now to some key financial trends on slide number 6, we are very pleased with the way we have performed and continued to drive above industry average growth. We have continued to invest in customer service and local markets through additional sales people and new stores. As a result, rental revenues increased 10,8% in the fourth quarter and we saw a strong 8.1% same-store growth. Once again, we are convinced that at this level of growth we continue to take market share on a local level away from competitors of all sizes. Last quarter we talked about our same-store growth strategy and adding outside salespeople as a means to expand territory coverage and further penetrate existing markets. In the fourth quarter we added a net of 11 new sales people and have added 99 for the full year which represents a 60% increase from 2006. As we also noted on the last call, it typically takes 3 to 6 months to bring new salespeople up to speed depending on industry experience so we should expect to see further impact of this investment in people in 2008. We continue to strengthen our market position by opening 4 new branches in the fourth quarter, bringing the year to date total to 21 new branches in line with what we previously had targeted for the year and in total we now have 473 branches. We have been very successful in opening the new branches and making them profitable in a matter of quarters. The 21 branches we’ve opened in 2007 had above company average margins as a result of our very diligent selection and start up process.. Lastly we achieved another quarter of very strong profitability with an operating profit margin of 26.3%, adjusted EBITDA margin of 46.4%, up from 44.5% previous year, and a return on operating capital in Florida of 24%. We saw an operating capital [inaudible] operating profit divided by average capital employed and it is what we used internally to guide our decision making. Our pre-tax weighted average cost of capital is estimated at 10% so we are creating significant value with these high levels of returns. Slide number 7 shows our rate and volume development for rental revenues. We have enjoyed increased rates for 19 quarters in a row as well as driven significant organic volume growth over the last 17 quarters with double digit volume growth for the last 9. Our volumes were up an impressive 10% in the quarter illustrating strong ramp of demand and market share gains. The fourth quarter rate improvement was up 0.5% over last year up from the 0.2% we saw in Q3. I am very pleased with our rate management and our ability to maintain positive increases in a very tough pricing environment. Our objective is to continue to manage rates very tight and focus on value selling and service as opposed to price competition. However, we’re not completely insulated from the competitive environment around us and we will have to continue to monitor pricing on a daily basis and continued to manage rates versus volume growth very carefully to protect profit margins. Slide number 8 shows our utilization trends. Utilization is a key mesher in our business model and something we track and manage on a daily basis to capitalize efficiency, monitor demand levels in the field, and our ability to service our customers. For example, our utilization screens provide instant input for fleet transfers between stores, districts, and even regions, which allows us to run high utilization on our equipment while keeping our focus on fleet availability to meet our customer’s expectations. I’ve already given you two good examples, Florida and dirt equipment and how we monitor utilization to identify trends and initiate action. As you can see on slide number 8, we reached a healthy 72% utilization in the fourth quarter resulting from good fleet management and allocation of fleets the way it was best utilized. This was basically the same level as fourth quarter previous years and took the yearly utilization to 72.8% up from 72.0% a year ago and we saw no trend shift in utilization on any major product category. We continue to make improvement in shop efficiencies and reached a new low of non-available fleet of 8.2% in the quarter, well below our previous benchmark of 9%. The fleet is in excellent condition thanks to our high standards for preventive maintenance where we were 98% current on the manufacturer’s recommended steps at the end of the year. Thanks to the young age and condition of the fleet, we’ve been able to reduce our used equipment sales to limit the need for replacement CapEx. The used market itself remains healthy and we have had no problems in disposing of equipment at very good prices, primarily through retail channels. Our fleet at the regional cost amounted to $2.7 billion and the average age was 26 months. This age provided us with tremendous cash flow flexibility on a go-forward basis because we can reduce CapEx and comfortably age the well-maintained fleets. As you can see on slide number 9, our adjusted EBITDA reached $213 million for the quarter and a record $824 million over the last 12 months. The adjusted EBITDA margin reached an impressive 46.4% in the quarter, up from 44.5% in the previous year and a record 46.6% over the last 12 months. Our ability to leverage our infrastructure through same-store growth as well as successful execution drives volume growth combined with margin expansion. With that, I would like to turn the call over to David for a few words on our financial statements.

[David Mathieson:]

Thanks, Erik and good afternoon, everyone. I would like to spend the next few minutes going over some additional detail on our fourth quarter financial statements. On slide 11 you can see performance metrics. This is the way we look at the numbers at RSC. Here we show the results for the quarter and the total year with a variance column that shows the percent variance to the prior year. I will comment on the fourth quarter first then the total year. In the fourth quarter we had strong rental revenue growth of 10.8% with 8.1% coming from same stores and 3% from [inaudible] offset somewhat by other items. Included in these numbers is a positive [inaudible] of 0.5% which we are pleased about given the increasingly competitive environment. Total revenues increased 7.6% in the quarter which was less than the rental revenue growth as we continue to right size our merchandise business. These equipment sales were less than last year due to the condition and young age of our fleet with continued high utilization. Margins on equipment rental improved 120 basis points for the fourth quarter as we leveraged our infrastructure with a 10.8% organic growth in rental revenue. Merchandise margins continue to improve as we focus on higher margin, more relevant products for our customers. Margins on used equipment sales also improved due to the quality of our used fleet and a good market environment for used fleet sales. As a result of these moving parts, gross profit as a percent of sales total revenue is up to 38.5% up 160 basis points from the prior year. For the year we had strong organic growth of 12.7% driving margins on rental equipment up 100 basis points. You can see that margins on merchandise is up 120 basis points and used equipment is up 500 basis points. As a result, gross profit for the year ended at 38.4% up 180 basis points from prior year. Continuing to slide 12 where we have the same format as the previous slide, I will again comment first on the results of the quarter. SG&A is up as a percent of total revenue due to a number of things. As Erik mentioned earlier, we are investing and expanding our sales force. We are also adding cost to the public company in administration, legal costs, investor relations costs, professional fees, and so on. Depreciation on non-rental is up as we increase the number of delivery vehicles for the extra fleet plus the [warm stocks] and the impact of new cars for the additional sales force. Adjusted operating income is up 911% in the quarter at 26.3% of sales which is up 40 basis points from the prior year. Interest expense has a significant increase year-over-year but this is not comparable due to the change of control and the recapitalization that occurred in 2006. Included in the 2007 quarter is $2.7 million of amortization of financing fees. Adjusted EBITDA of $250 million is at 46.4% of sales up 190 basis points from the prior year. Adjusted diluted earnings per share is $0.56 for the quarter. For the year, operating expenses excluding fees are up as a percent of revenues for the same reasons as mentioned in the quarter. The main highlight on this page for the year is adjusted EBITDA at $824 million at 46.6% of total revenue which is up 270 basis points from the prior year. Coming to slide 13, you can see cash flow from operating activities is up 16% year-over-year and net capital expenditures is down 18%. This is notable in a year where we grew rental revenues 12.7% and total revenues 7%. You can see this was just a positive swing in free cash flow of $167 million from a negative $106.2 million in 2006 to positive $60.8 million in 2007. Slide 14 shows our balance sheet for the last five quarters and I would like to point out the following. You can see that the net rental equipment has grown from a value of $1.74 billion to $1.93 billion over the year. The fleet’s original cost has grown 13.8% to $2.67 billion dollars. Our debt has been reduced from just over $3 billion to $2.7 billion at the end of 2007 as a result of an IPO and positive cash flow and you can see that our leverage ratios have also been coming down as a result of reduction in debt and strong growth in EBITDA. On slide 15 we show the composition of our debt including the swaps that we entered into last year and the [Senior Town] facility. We show whether the debt is fixed or variable and finally the maturity date related toe ach part of the debt structure. We note that at year end we had 52% of our debt variable and 48% fixed. I want to make sure that investors can see [inaudible] over a number of years. Please also note that included in interest expense, we have amortization of the sub financing costs which excluding one-time items last year was $8.4 million. The variable interest rates use LIBOR plus different spreads or [inaudible] plus spreads. That information is all available in the credit agreement. We have a very flexible and liquid capital structure with $474 million available under a revolving credit facility. Now I’d like to turn the call back to Erik.

[Erik Olsson:]

Thank you, David. Before we go to Q&A I want to give you our outlook for 2008 shown on slide number 17. For 2008 independent research firms are projecting that RSC’s major end market will increase at the low single digit rate consistent with proven performance the company believes the continued execution of its strategy and business model in combination with its strong market position in diversified end markets will continue to drive above average industry growth for RSC. In 2007 we had rental revenue growth of 12.7% for the year with 10.8% in the fourth quarter. Our guidance for 2008 anticipates a gradual slow down in rental revenue growth to 4% o 7% for the whole year. Our guidance does not consider rental rate declines in 2009 although we do see a tougher environment. We anticipate total revenues in the range between $1.8 and $1.85 billion. Diluted earnings per share for $1.44 to $1.56 and adjusted EBITDA from $835 million to $860 million. We anticipate net capital expenditures to be in a range from $200 million to $250 million. We also anticipate positive free cash flow to be between $100 million and $150 million for the year. This includes the negative impact of reducing our accounts payable by around $175 million reflecting the timing of capital expenditures and the favorable returns we have with suppliers which means that our run rate free cash flow is significantly higher than our outlook range indicates. In connection with the expected generation of free cash flow in 2008 we are evaluating a variety of options including paying down debt, talking acquisitions, and the repurchasing of common stock or debt securities. Our credit agreement limits our capacity to repurchase common stock or debt securities to $50 million this year. Note also that our EPS guidance does not reflect any of this but rather the most conservative use of free cash flow which is to pay down the lowest cost debt. Lastly I would like to add that in the event of a major shift in business conditions, we will take advantage of RSC’s flexible business model and short planning cycle and we are confident in our ability to continue to operate at the high level of profitability and efficiency as evidenced by the examples we have given you previously in Florida and for dirt equipment. I would also like to point out that in such a scenario we would be generating even more free cash flow than in our outlook as we would pare back our cap expanding further and take advantage of our young and well-maintained fleet. With that I would like to turn the call over to Denise for instructions on the Q&A.

[Operator:]

(Operator Instructions) Our first question comes from the line of Michael Schneider from Robert W. Baird. Please proceed, sir.

[Michael Schneider:]

Good afternoon, I wonder if you could first address the growth rates I guess between the non-res portion of your business and industrial. You said that industrial was above average. Can you give us a sense of what the discrepancy is and maybe what the trend lines were during the quarter and certainly as we’ve gone through January and February as well?

[Erik Olsson:]

As we said, we’re growing the industrial business faster than the non-res and it’s growing at the rate of almost 50% or so higher than the non-res segment and we have continued as we said through out all of 2007 really and in the fourth quarter to continue to see strong growth there and while we don’t comment specifically on what we are seeing here in the first quarter, I think in our guidance we said we’re coming off the fourth quarter of the 11% or 12% growth and we expect the year to be 4% to 7%. We have a gradual slowdown over the year so it’s sort of included in that rate, the guidance is that we continue to see good growth here at the beginning of the year.

[Michael Schneider:]

Okay and within industrial, it sounds like it’s growing double digits strongly, and this may not be possible, but to what extent is that being driven just by new sites versus actual same site growth within some of your industrial accounts?

[Erik Olsson:]

It’s driven by both, Mike. We are signing up a lot of new accounts as well as the accounts that we have are so very active as indicated by capacity and other... We’re getting growth from both sides of the specter.

[Michael Schneider:]

The reason I ask is you look into 2008 now. I presume your industrial forecast is probably still above average versus non-res?

[Erik Olsson:]

Yes, we hope to continue to grow this business faster, yes.

[Michael Schneider:]

And how much of that business is visible to you today based on the site installations you’ve got within the industrial business? I’m just trying to gain an understanding as to how secure at least the industrial portion of your business and growth is in 2008 regardless of what non-res does.

[Erik Olsson:]

It’s like any business you have, Mike. A portion of it is very visible. We know what most of our existing accounts have in plans for 2008 but then of course there is an unknown factor in how successful we will be in signing up new accounts. Unfortunately I can’t be more specific than that.

[Michael Schneider:]

Okay and then just focusing in on rates specifically, the fact that it was better on a sequential basis or higher on a sequential basis, were you surprised by that and I guess maybe give us some insight as to how that’s possible in a decelerating market?

[Erik Olsson:]

I wouldn’t say that we were surprised, I think we were pleased to see that we continue to manage rates very, very tightly and very controlled. The reason we see that is very simple. We deliver a very high value to our customers and our customers value what we are providing so to speak so we can continue to charge our rates or even increase rates as we did in Q4. So it does really have to do with the service we provide and the value we provide to our customers as well as that we manage our fleet very, very tightly, of course very utilization very high and that supports also upwards rate pressure.

[Michael Schneider:]

You mentioned, Erik, that you don’t anticipate negative price in 2008, at least in your forecast. To manage that you must be aggressively managing utilization rates. Can you give us some forecast of what you expect or some insight as to what you expect on used equipment sales then as you go into 2008? Is it that you’ll be accelerating that to manage the utilization rate? Erik Olsson No, in fact I think that the combination of our CapEx guidance which is down significantly from 2007 and in fact I think we will see marginally less use than I have seen in 2008 and in 2007 but largely by the lower CapEx we will balance our fleet. That’s very high utilization levels.

[Michael Schneider:]

So you would expect the average age then to trend higher in 2008?

[Erik Olsson:]

Yes, we expect to age our fleet a couple of months in ’08.

[Michael Schneider:]

Okay, thank you again and congratulations on a great year.

[Operator:]

From Morgan Stanley, your next question comes from Christina Woo. Please proceed.

[Christina Woo:]

Hi, I was hoping you could give us a bit of color on what your branch growth prospects are for 2008, both in new branches where you may end up opening the new branches and also branch closures?

[Erik Olsson:]

David Mathieson - Our plans for 2009 calls for opening of 20 to 25 new branches and we are actually looking to open them again all across the US market even in some of these areas that are softer at the moment.

[Christina Woo:]

Okay, and what about closures?

[Erik Olsson:]

We have no closures planned at the moment which is not to say that there won’t be any but at this point there is nothing planned.

[Christina Woo:]

Okay, you had made some comments about your SG&A spending levels which were a bit higher than I was anticipating and you explained some of that in terms of being a public company, taking on some added cots. What sort of levels of SG&A as a percent of revenue do you anticipate seeing for ’08 and beyond? Should we be looking at the fourth quarter as an example or looking a the full year of ’07 and wouldn’t we consider modeling that SG&A cost? ‘ David Mathieson - You know we haven’t normalized yet in terms of... We’re still looking for, we’re still spending money on Sarbanes Oxley, that’s a big initiative that we’re undergoing this year, so I wouldn’t say that we’re normalized yet. I believe at the end of, possibly close to that, at the end of 2008, but I wouldn’t like to give you what the normal level of SG&A level for this business is because we’re not there yet.

[Christina Woo:]

Okay, and you’re expecting some decent revenue growth both in the core equipment rentals business and overall, yet your earnings growth is flat, and I was hoping you could help us reconcile this guidance.

[David Mathieson:]

You know, we’re still investing, our SG&A is going up.

[Christina Woo:]

Right, but you were also saying that a lot of the salespeople become profitable after 3 to 6 months, new stores tend to turn profitable in a couple of quarters, so is it really just the timing of the investments that they were happening at the tail end of ’07 and into ’08 and should we expect continued additions to the sales force?

[David Mathieson:]

Yes, I know that our [warm stocks] are back end loading to third and fourth quarter, the majority of them.

[Christina Woo:]

Okay, so third and fourth quarters of ’07?

[David Mathieson:]

And we continue to add sales people.

[Christina Woo:]

Okay, and you’re expecting to continue that sales force ramp up through ’08?

[Erik Olsson:]

Yes, we do, Christina, and the [warm start] issues, the majority of our warm starts in 2008 is in the second half and that has some, a little bit of diluted effect on the earnings for the year, but we’re expecting to grow our EBITDA on an absolute level from an already high level so as we said there’s no price declines in our guidance but there’s not much on increase either.

[Christina Woo:]

Okay, great, thanks.

[Operator:]

Lionel Jolivot from Bank of America is on the line with your next question.

[Lionel Jolivot:]

Thank you. Can you go back to the free cash flow guidance once again? I mean it seems that you should generate a little bit more free cash flow and I think in your prepared remarks you talked about a reduction in [inaudible] and I’m not exactly clear with what you had in mind there.

[Erik Olsson:]

It’s a reduction in trade payables as we’re going to reduce them by $175 million in 2008 reflective largely of fleet purchases that we did in 2007 so there’s sort of a lag effect or a timing effect from that in our free cash flow. So if you would look at 2008 as a run year or as a run rate for a year like 2008 the free cash is some $175 million higher or say a range of $275 million to $325 million.

[Lionel Jolivot:]

But your payables already came down quite a bit in the fourth quarter and it seems you [inaudible] December 31st your accounts payable balance was only $264 million so you’re kind of implying that a year from now your payables will only be $90 million or even a little bit less?

[David Mathieson:]

Yes, that’s correct, what we are implying.

[Lionel Jolivot:]

Okay, second thing, you’re talking about potential uses of your cash [inaudible] stock as well, when you think about paying down debt, how do you think about it? I mean, your bonds trading [inaudible] apart as they are in the very low 80s at this point. Have you considered buying back bonds in the open market at this point?

[David Mathieson:]

We are looking at that. We are evaluating our options there. We haven’t made a decision yet but we wanted to make investors aware that we’re evaluation the options that we do have.

[Lionel Jolivot:]

Okay, that’s perfect, and then last thing, going back to the rates, the rental rates, can you just spend a minute on the different markets and what you’re seeing across the US? I mean it seems that even in Florida you’re doing okay now on the rental front. Can you touch briefly on some of the markets in California and the northeast at this point?

[Erik Olsson:]

We don’t want to be too specific for competitive reasons but where we see price increases and price decreases, there are many markets where we still get good rate increases and there are some where we have more pressure and I think you hit on the ones where we see most of the pressure at the moment. Certainly Florida there are price pressures and in California and to some extent I think we see some in the northeast also more from a competitive pressure than the market softness that we see in the other two markets I mentioned.

[Lionel Jolivot:]

Okay, perfect, thank you very much.

[Operator:]

Your next question comes from the line of Scott Schneeberger of Oppenheimer & Co.

[Scott Schneeberger:]

Hey, good afternoon. I guess just kind of going back to the question on what you might use with the free cash generated this year. The press release cites $50 million is what your credit agreements limit you to do for either a share repurchase or debt reduction, is there any thought of trying to change those covenants or might there be some kind of acquisition plan this year as you’re going to generate more cash than that $50 million allows?

[Erik Olsson:]

We are looking at smaller [inaudible] type acquisitions so that may certainly be the case that that happens during the year but we have no plans at the moment to try to change our covenants.

[Scott Schneeberger:]

Okay, thanks. I guess shifting now to utilization, obviously very strong. Erik, did you say that the down equipment was now 8.2% which is a new low? Did I get that number right?

[Erik Olsson:]

Yes.

[Scott Schneeberger:]

Okay. Any thoughts on how you’ll manage that over the course of this next year or should the fleet aging a couple months shouldn’t have much impact, should it? Do you think you’ll be able to maintain these levels going forward?

[Erik Olsson:]

Definitely. We don’t think it’ll have an impact on that number at all.

[Scott Schneeberger:]

What do you think you can take that to potentially if obviously it’s an area that you’re going to continue to improve?

[Erik Olsson:]

I don’t want to put the specific target out there but we have regions that are operating at 7% or so, so I see no reason why not the whole company could not go down to those levels.

[Scott Schneeberger:]

Okay thanks, and just kind of, can we briefly touch on your merchandise business continuing to contract that and work it for margins? Are we going to see expansion in that on the top line going forward or are we still in a kind of shrink and work margin mode?

[David Mathieson:]

I think 2008 will be a year where we stop [cleaning] the business. We like where we are with 40% gross margins so the first thing to do is stop [cleaning] that business and then we’ll take it from there.

[Erik Olsson:]

And you know what we call merchandise or sales [inventory] is not only merchandise or supply type of equipment, it’s also new equipment, large equipment, and which is actually represents the majority of the decline that we’ve seen. We think we’ve reduced all that now and we have a healthy business here and we’d like to grow it.

[Scott Schneeberger:]

Okay, thanks very much.

[Operator:]

Your next question comes from Art Weiss. Please go ahead.

[Art Weiss:]

Good afternoon. You talked about the rental revenue growth of 4% - 7% declining or being higher at the beginning of the year, I’m guessing it’s going to be lower at the end of the year. Does that imply, would it be fair to assume, that so far what you’ve seen in 2008 is continuation of the growth that you’ve seen in 2007?

[Erik Olsson:]

Yes.

[Art Weiss:]

Okay, and you’re also assuming pricing, sounds like increases slightly throughout the year and if you expect there to be additional pricing pressure late in the year, would it also be fair to assume that pricing has been steady to improving early in the year so far?

[Art Weiss:]

You know, we don’t time the pricing pressure so I think we’re operating in a very competitive market at the moment which is very tough and we intend to try to manage rates as best as we can over the year. Our intention is as I said to maintain our rates in positive territory for the year.

[Art Weiss:]

Okay and can you talk a little bit about how your national accounts impact pricing? Do national accounts specifically have fixed pricing or do those vary the same way pricing might vary for anybody that comes on your lot to rent a piece of equipment?

[Erik Olsson:]

We don’t have much national account business action. We haven’t focused on so much. The ones that we have, some of them have fixed price, some of them have more loose pricing agreements.

[Art Weiss:]

Okay and last question, I just want to clarify what you said about Florida in your presentation. Did I hear you right that utilization in Florida was 72% which is the same as the fourth quarter of ’06?

[David Mathieson:]

That’s correct.

[Art Weiss:]

Okay. Great, thanks.

[Operator:]

(Operator Instructions) Your next question comes from the line of Chris Doherty from Oppenheimer.

[Chris Doherty:]

I was just wondering if you could discuss the industrial business a little bit more in terms of just the dynamics. Does that business tend to have longer lease terms than the construction equipment just due to the nature of it in terms of maintenance versus building?

[Erik Olsson:]

The rental periods are not longer per se but the relationships are typically longer with many of these industrial accounts. We have our own branch or site inside the industrial company’s premises and thus we capture 100% of their rental needs and many of these relationships are also contractual where we have 2 or 3 year agreements in place, so for these reasons it’s much more stable and predictable business.

[David Mathieson:]

And it’s not as seasonable.

[Erik Olsson:]

No.

[Chris Doherty:]

So you would actually have equipment sitting on site there. Can that equipment be used for other business or is it dedicated to that specific company?

[Erik Olsson:]

It’s dedicated to that specific company in those cases but as I said, it’s much more predictable and we’re on these on sites at utilization level significantly higher than the company average actually.

[Chris Doherty:]

All right, that’s it. Thank you.

[Operator:]

That’s all the time we have for questions. I will now turn the call back over to Mr. Olsson for closing remarks.

[Erik Olsson:]

So I would like to thank you for joining us today on our fourth quarter and full year 2007 earnings call. We have put another very strong quarter behind us with rental revenue growth of 10.8% including an impressive same-store growth of 8.1% and an adjusted EBITDA margin of 46.4%. The business environment was strong in the fourth quarter and we have grown our company over and above the underlying markets while producing exceptional results. The same can be said for our full year results, an impressive 12.7% rental revenue growth with an 11.1% same-store growth and an adjusted EBITDA margin of 46.6% up from 43.9% in 2006. As you heard, we expect 2008 to be another year of solid growth in revenues, profit, and market share as well as significant free cash flow generation. We believe that delivering industry leading results and continuing our strategy of growing profitably with superior cost and capital efficiency are the best ways to create shareholder value over the long term. We look forward to reporting back to you next quarter with our business results. We do appreciate your interest and support so thank you very much and have a great evening. Denise, that concludes the call.

[Operator:]

Thank you for our participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.