United Rentals, Inc.
Q2 2008 Earnings Call Transcript
Published:
- Operator:
- Good morning, ladies and gentlemen, and welcome to the United Rentals Second Quarter 2008 Investor Conference Call. Please be advised that this call is being recorded and is copyrighted by United Rentals Inc. Before we begin, the company has asked me to remind you that many of the comments made on today's call and some of the responses to your questions, will contain forward-looking statements. United Rentals' businesses 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 by any such forward-looking statements. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's second quarter 2008 earnings release. For a fuller description of these and other possible uncertainties, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2007, as well as to its subsequent filings with the SEC. You can access the company's press releases, as well as its SEC filings on the company's website at www.unitedrentals.com using the link captioned, Access Investor Relations. 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 expectations. During the conference call, references will be made to pro forma EPS, free cash flow, EBITDA, and pro forma EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, and Marty Welch, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.
- Michael Kneeland:
- Thanks, Operator. Good morning everyone, and thank you for joining us today. With me is Marty Welch, our Chief Financial Officer, and other members of our senior management team. I want to open today’s call by saying how pleased we were to announce the election of Jenne Britell as Chairman of our Board of Directors earlier this month. Jenne has been an invaluable member of our Board since 2006. I can say with certainty, that she shares our excitement about the future of United Rentals, and I look forward to working closely with her as we move forward. We would like to discuss with you this morning, starting with our recent share repurchases and our second quarter results. Marty will cover both of these topics in detail with you in the call. I also want to address our strategy in operating environment, specifically what the second quarter told us about our end markets and how they may perform in the balance of 2008. But first, let’s start with the repurchases. As you know, in June we repurchased all of our outstanding C and D preferred stock in preparation for launching a tender offer. We have now completed the tender and brought back 27 million shares of common stock at a price of $22 per share. These repurchases give us greater flexibility in many respects earning the best interest of our company and shareholders. The net result is, that with the share repurchases complete, we expect the company’s fully diluted share count to decrease by approximately 39% to 70 million shares in 2009. Now let’s turn to our operating results for the second quarter. And we continue to focus on driving profitable growth in our core rental business, managing our fleet and controlling our costs. The construction [stocks] environment which was robust at the start of the year began to falter in the second quarter, impacting our topline numbers. Rental revenue was $620 million, down about 6% year-over-year, due primarily to a 1.4% decline in rental rates and a 0.8 percentage point decline in time utilization. Total revenue was $831 million, down 13.6% year-over-year. Our decision to de-emphasize our contractor supplies business in favor of more profitable revenue [for] our top line down by about $52 million in the quarter as we expected. Our pro forma EBITDA of $266 million for the quarter tracked about 10% less than last year. However, our pro forma EBITDA margin grew 1.3 percentage points to 32%. So even though our revenues were down, we operated our business more profitably. Our stronger EBITDA margin is a sign that our strategy is working and that right dynamics are in place. Let me give you a few examples
- Marty Welch:
- Thank you Michael and good morning everyone. Thanks for joining us today. Michael's discussed some of our highlights for the quarter, and now I'd like to get into some of the details of the recently completed share repurchases, and our second quarter performance including the progress we are making on our cost saving initiatives, and then I'll review the outlook for the year. First, the share repurchases. As Michael mentioned, in the second quarter we repurchased all of our outstanding Series C and D preferred stock for $679 million. The removal of the preferred stock from our capital structure was a necessary step in proceeding with the tender offer, and will give us greater flexibility going forward. The preferred stock repurchase was funded with $254 million of cash and the issuance of $425 million principal amount of new 14% HoldCo notes due 2014. It's important to point out that the reason we issued the HoldCo notes was not for liquidity reasons. Rather, we were careful to protect the restricted payments basket contained in the indentures for our existing notes which have very attractive low coupon rates. I should also point out that the most important feature of the new 14% HoldCo notes is that there is no call protection, which means we can prepay them at any time without penalty. In fact, as we pointed out in our earnings release last night, we've already given notice of our intent to repay 125 million of these notes at the end of the third quarter. After this payment, the restricted payment basket will be approximately $200 million. Our tender offer closed and funded last week. In the tender, we repurchased 27.16 million of our common stock at a price of $22 per share for a total cost of $598 million. The tender offer was funded primarily through borrowings under our new $1.25 billion ABL facility and our existing accounts receivable securitization facility. Now let me discuss what these transactions mean in terms of leverage and accretion. First, with respect to leverage, since the company's inception, on a debt-to-EBITDA basis, United Rentals has operated at an average leverage ratio of 3.4 times. Following the completion of the tender, we're at 3.1 times, and we expect the ratio to be 2.9 times by year end, a level that is within our comfort zone. This means that the share repurchases have added less than one turn of leverage as compared to our pre-repurchase ratio of 2.3 times, and significantly below the historic high for the company of 5 times. From an accretion perspective, the repurchase of the common and preferred shares will reduce our 2009 fully diluted share account by about 39% to 70 million shares. And as Michael mentioned and as our outlook for 2008 illustrates, these repurchases represent an opportunity for us to achieve significantly more accretion and to capture it more quickly than through any other means. Before I turn to our second quarter performance, let me just touch on one more point. We've consistently talked about how this business can generate significant free cash flow in any environment. Our ability is secure financing under the ABL, the size we did - 1.25 billion at attractive prices and in the middle of one of the most challenging credit markets seen in recent history, is a testament to the resilience of our business model and to the credibility of the strategy we have put in place. I'd like to turn next to the second quarter performance. First let's talk about equipment rentals. Our rental revenue decreased 6%, reflecting a decline of 1.4% in rental rates and 0.8% in time utilization. The balance of the decline primarily relates to a shift in mix towards monthly contracts. Second, our SG&A of $126 million was 15.2% of revenue for the quarter, an improvement of 10 basis points compared to 2007, reflecting lower rental revenue and the ongoing benefits of our cost-saving initiatives. On an absolute dollar basis, SG&A decreased by $21 million. Third; earnings per share. On a pro forma basis, our EPS for the quarter was $0.62 on a share count of 97 million, compared with $0.60 on a share count of 115 million shares in 2007, and a GAAP loss per share of $2.33. Our pro forma EPS essentially adjusts our GAAP EPS to reflect our new capital structure and to exclude the impact of the $14 million provision relating to the SEC inquiry. As I discussed earlier, the share repurchase will reduce our 2009 share count by about 39%. For these reasons, we believe pro forma EPS is a meaningful measure of our future profitability. And finally; EBITDA. Pro forma EBITDA margin, which excludes the impact of the SEC provision, increased 130 basis points to 32%, reflecting the success of our cost initiatives. Turning to our contractor supplies business; our second quarter contractor supplies margin of 23.7% improved 390 basis points versus the prior year. These results are consistent with our strategy of repositioning the supplies business and reducing the number of SKUs, especially in lower-margin commodity categories. In terms of our cost saving initiatives and in line with our goal of generating $500 million of incremental annual EBITDA within five years, we believe we can generate about $200 million of that improvement from the execution of our cost saving plans. During the second quarter, where we saw a pro forma EBITDA margin improve 130 basis points, we realized $34 million in cost savings. These savings came from a number of initiatives including our strategic sourcing initiative and our headcount reductions. To put it in perspective, our work force at June 30, 2008 is lower by about 1800 FTEs, which is the equivalent of 15% of our work force, as compared to last year at this time. And importantly, we believe these reductions remain without impacting customer service. Now let's take a moment to review our expectations for 2008. Our pro forma EPS range is $3.15 to $3.25, reflecting the benefits of a lower share count. From an operational perspective, this outlook is in line with our previous guidance of $2.65 to $2.75 per share. Our revenue EBITDA and free cash flow guidance is as follows
- Operator:
- Thank you, sir. (Operator Instructions). And our first question or comment comes from the line of Manish Somaiya with Citigroup. Your line is open.
- Manish Somaiya:
- Good morning, Marty and Michael and everyone else. Couple of questions. Michael, you talked about a mixed shift in the second quarter to more monthly rates which resulted in lower rental revenue. Is that something we're likely to see in the second half as well?
- Michael Kneeland:
- Well the lower rental revenue was caused by timing. We did shift away from our -- we're doing more, monthly business is up one percentage point, so that's almost 68% of our revenue, it's generated -- our transactions are monthly. We will continue to see the trend go towards monthly revenue transactions, but the real significant second quarter does two things, I'll give you two data points, Manish
- Manish Somaiya:
- I see. So basically what you're implying is that markets in Florida and California are actually getting worse. They haven't stabilized.
- Michael Kneeland:
- Through the second quarter they got worse on a year-over-year basis, yes; however, we are starting to see at this point in time kind of level off. Still early to tell yet.
- Manish Somaiya:
- Okay, fair enough. And then just secondly, on EBITDA, I mean I have been looking at the EBITDA distribution first half versus second half. Generally the second half has accounted for about 60% of full year EBITDA. Obviously with visibility what it is, and your guidance implies that you'll do about 60% of your EBITDA in the second half, how are you getting comfortable with that?
- Marty Welch:
- Manish, this is Marty. The third quarter and into October is always the busiest part of the year for United Rentals. So there is some seasonality in the business. We've got pretty good visibility to the third quarter at this point, and so I think we are comfortable in essentially reaffirming the guidance that we had put out previously.
- Manish Somaiya:
- Okay. And then just lastly, update on my used equipment prices, any changes since you last spoke on it?
- Michael Kneeland:
- Manish this is Mike again. We see actually improved margins in our retail sector where we're selling or where we have seen some declines is in the auction arena, and that's mostly around the earth-moving equipment. But by and large when you take a look at the general survey put out by [Ralphs], I think last month it was only down about 0.6 and about 1.5% full year.
- Manish Somaiya:
- Okay. I appreciate. Thank you so much.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you, sir. Our next question or comment is from the line of Matt Vitorioso with Barclays. Your line is open.
- Michael Kneeland:
- Hi Matt.
- Matt Vitorioso:
- Hi, good morning. Just wondering if you could comment on the fact that you kept the fleet size basically flat as far as the number of units, despite the slowdown in utilization? Did the slowdown in utilization catch you by surprise, and will you just compensate for that by, like you said selling off more used equipment in the second half or just some more color on that would be helpful.
- Michael Kneeland:
- Sure. We target the level of CapEx to begin with - of the 2007 - again the 2007 going into 2008; and we anticipated a decline towards the back half of the year. As I said earlier, there was a timing issue, we review our needs very carefully and we believe that the level of capital investment that we have right now is prudent and obviously it's an operating lever that we can pull. But during the back half of the year, we will continue to sell older fleet and more of it.
- Matt Vitorioso:
- Okay. And then just on the free cash flow and the possibility of debt repayment. Is it safe to assume that for the time being any free cash flow will be used to help reduce the level of those 14% at the HoldCo, would there be any [OpCo] debt repayment ahead of those 14?
- Marty Welch:
- Mike, this is Marty. The 14% debt is a priority for us, because of obviously of the cost. I think that if we have short-term free cash flow the ABL is a 100% revolver and we can very easily pay down the ABL and reborrow as we need. The decision to repay the HoldCo notes is a more significant decision because it's permanent and it also affects the restricted payment basket. So, we will take that in a more measured way as we feel comfortable that we have the ability to do it. By the way, we've mapped out over the next few years, and we're very comfortable that we can fully pay off the HoldCo notes in the next four years or so, without any additional refinancing just from operations.
- Matt Vitorioso:
- Okay. Thank you very much.
- Operator:
- Thank you sir. Our next question or comment is from the line of [Henry Turn] with UBS. Your line is open.
- Marty Welch:
- Hi Henry.
- Henry Turn:
- Good morning guys.
- Michael Kneeland:
- Good morning.
- Henry Turn:
- Quick question on the competitive response to the weaker markets. Have you seen anything different out of your competitors? How has the landscape changed?
- Michael Kneeland:
- Well, the landscape obviously has become more competitive in specific markets. I mentioned two of those in Florida and California. I don't comment on what the competitors -- they will announce their own rates and what they're doing as far as new business mode. But what we're hearing from our sales reps and from our customers, they're being very responsive. Are there pockets where we see some competitive nature? Absolutely. But I think that overall the industry is acting prudent right now. They're taking down their fleets and doing the right things.
- Henry Turn:
- Okay. And on the shift in mix to the monthly contracts. How does that affect your ability to plan the fleet going forward?
- Michael Kneeland:
- Well, we plan our fleet -- we review our fleet quarterly. And towards the -- in the fourth quarter we do a deep dive all the way down to branch level and build our way up. It's with the input from all of our branches or branch managers, sales rep, customer input, but really the driver is our customers. What type of jobs are they seeing? What type of equipment will they require as we go forward? So it's very much a ground-up approach. So it's too early to tell. But we continually shift our fleet and I think that the biggest data point is our ability to shift fleet today between our branches and districts which, I'm happy to report, is up four times over the last year this time.
- Henry Turn:
- Thanks. And if can just squeeze one more in here, a quick modeling question on the share count for the third quarter and the fourth quarter. Is it possible to give a little bit of guidance around what the third quarter share count might wind up being?
- Michael Kneeland:
- Sure. I'm going to ask [Chris Brown], Vice President and Assistant Controller to answer that.
- Chris Brown:
- Sure. In terms of for Q3 we're forecasting a GAAP in the pro forma share count of 70 million shares. The GAAP in the pro forma share counts are the same as the preferred securities are excluded from the GAAP share count and no adjustments necessary. The 5 million difference between Q3 and Q4, essentially weights to the weighted average impact of the tender which closed in mid-July.
- Henry Turn:
- Okay, thanks a lot. I appreciate it.
- Operator:
- Thank you sir. (Operator Instructions). Our next question or comment is from the line of Scott Schneeberger with Oppenheimer. Your line is open, sir.
- Michael Kneeland:
- Hi Scott.
- Scott Schneeberger:
- Thanks, good morning guys. Just focusing a little bit more on pricing, I think you guys answered this in a different way, but can I ask it in the sense of how much of the percent drop year-over-year in pricing was competitive versus some of the other drivers?
- Michael Kneeland:
- Well, again I can't report on what the competitors will report coming out, but there's two factors, one of which is we're going after monthly and longer term which comes down - will affect our price. And then we have seen some competitive pressure in specifically the markets where we see a significant decline. But to answer your question directly, it's very hard, because we don't have that type of information.
- Scott Schneeberger:
- Okay. Fair enough. Now you had mentioned, I think and correct me if I'm wrong, 68% of revenue is now monthly transactions?
- Michael Kneeland:
- Yes.
- Scott Schneeberger:
- Okay. And can you just give us, kind of how does that compare historically and then maybe year-over-year and quarter-over-quarter?
- Michael Kneeland:
- Well, on a quarter-over-quarter from '07 it's up 1.4 percentage points.
- Scott Schneeberger:
- Okay.
- Michael Kneeland:
- If you want more detail, Scott, we can do that offline and give you some more details.
- Scott Schneeberger:
- Sure. Fair enough. And just one more on the pricing or what occurred rental revenue in the quarter. The timing of projects; were these things that you feel you're going to get back in the third quarter, they were just pushed back or did they result in cancellation?
- Michael Kneeland:
- We have not seen any of our large projects of any magnitude be cancelled, what we did see was and particularly in the Canadian marketplace it was held up by the lack of engineering drawings. With regards to the Aerial East and our larger projects here was related to steel and weather getting the jobs up and running.
- Scott Schneeberger:
- Okay. So you do feel that it's just a pushback.
- Michael Kneeland:
- Yes, that's why -- that's part of the reason why we brought the fleet in to man those jobs.
- Scott Schneeberger:
- Okay, thanks. And following up on an earlier question on used equipment sales, I know first quarter's a big auction quarter. Could you and you've given good color on what you're seeing in auction and retail? Could you give us an idea of the mix of retail versus auction in the first quarter relative to the second quarter?
- Marty Welch:
- I don't think we've got quarterly numbers, but in general about 75% of our used sales are at retail and others one by one. And then another significant piece is a trade back to the manufacturers, particularly in large Aerial, so our auction has historically been less than 10% of our total used sales.
- Scott Schneeberger:
- Okay. I'm sorry I'm going to go back to a pricing question just by Aerial versus earthmoving, any additional color you guys can give on that? Is it all earthmoving or…
- Michael Kneeland:
- With regards to auction prices?
- Scott Schneeberger:
- Just by pricing in general what you're seeing out there. I'm sorry, I'm jumping back, not in used equipment anymore, but now I'm talking just in the rental space.
- Michael Kneeland:
- Well we have demand, our Aerial regions, their rental rates have been holding firm. We don't give specific categories of equipment other than the fact that the Aerial as we manage our rates with a lot of rigor and we have the reports and visibility, but so far, to date obviously the areas we saw the biggest declines, and would also affect some of the aerial equipment with the markets in particular.
- Marty Welch:
- Yes, you know Scott, our biggest weapon here is the ability to reposition this fleet as a national company. So in the weak markets such as California and Florida, we have moved very large amounts for us [fully] out of those markets and re-purposed that as Michael said, to markets where we have better demand. That is a very big weapon in terms of responding to pricing pressure.
- Scott Schneeberger:
- Okay. Thanks. A couple quick more, I'm sorry for being a hog here. The industrial, has that crept up as a percent of revenues I think we were at 17% last quarter?
- Michael Kneeland:
- On a year-over-year basis it's up, but it hasn’t moved significantly. It's our focus. It takes a longer term, turnaround time. The ones you have to negotiate, you have to keep yourself in the game. We are being proactive in that arena. It's a large market, the market is we only have about 4% of the total industrial market, so we see that as a very unique opportunity for us to leverage our size.
- Scott Schneeberger:
- Great, thanks. And one final on the margin front. Within contractor supplies do you have a target margin you're shooting for that you would share, looks like you're making progress there just any parameters you're thinking about there?
- Michael Kneeland:
- I think longer term we are looking at getting upwards of the 30% margin, that's the area that we're focusing on. Obviously the 24% is stuff in the right direction, and we'll continue to focus on as we go forward.
- Scott Schneeberger:
- Alright. Thanks very much guys.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you sir. Our next question or comment is from the line of Joel Tiss with Buckingham. Your line is open.
- Michael Kneeland:
- Hi Joel.
- Joel Tiss:
- Hello, how's it going?
- Michael Kneeland:
- Good.
- Joel Tiss:
- That's good. I wonder just sort of a little bit more on what some of the things Scott was asking about. Are you changing your CapEx plans more towards monthly to match your contracts, or you're going to keep it on a quarterly basis?
- Michael Kneeland:
- Well, right now our total outlook has not changed. We have $750 million in total capital. Let me give you some breakdown -- let me break that down for you in a little more detail. About $85 million is non-rental, which is associated with real estate. We have about $32 million of leases that we are buying out, so effectively we are paying down debt; and then we've got about $20 million of refurb, refurbishing equipment; that leaves about $580 million. And what I did say is, as we go back to the back half of the year, we will increase our used sales. So at the end of the year, we'll be below our fleet levels on a year-over-year basis.
- Joel Tiss:
- And then can you talk at all like just color-wise about the mix of your CapEx? Are you shifting a little bit away from Aerial work platforms or you are continuing to keep most of the downward pressure on the earthmoving side?
- Michael Kneeland:
- Well, we haven’t said we were shifting away from Aerial. In fact, our aerial purchases, and I announced this in our last quarter, we were going to have increases and in fact we have increased our aerial fleet. And in particular one of the areas is the large [brooms] for the power plants, which has that demand. Most of our purchases really come from customer demands.
- Joel Tiss:
- Okay. And then just two other ones. Marty can you talk a little bit about, I saw there was a big increase in the accounts payable in the quarter or year-to-date, can you just talk about maybe what's behind that or how sustainable is that direction, and that's what I'm trying to get at.
- Marty Welch:
- Yes. There's nothing unusual there. Must have just been the [cork] of when the check runs went out or something. We are moving, as everyone is, trying to move our AP more toward 60 day terms as a general standard, so we make progress on that as time goes on. But there is nothing unusual there.
- Joel Tiss:
- Okay. And then last, I wonder Mike if you can just talk about your comments about the gradual decline in non-res spending. What gives you confidence there? Can you give us some of the puts and takes? We obviously know California, Florida sink, what are some of the highlights on what's still growing and they're breaking ground on enough new things that gradual decline would continue, say, into 2010 as well?
- Michael Kneeland:
- Well, obviously some of the sectors you're relating to is the industrial sector, industrial will continue to be a focus in growth opportunity. All of the refineries are working at full capacity to produce gasoline, oils and other industry, the power plants getting their EPA compliance by 2010, the health area is another area that we're going to see continuous strength as we see in aging population. And then infrastructure, there's a need for infrastructure and a compelling need for infrastructure; however, it will be tempered by the fact of the municipal governments' being able to fund it. But infrastructure will be at some point a growth opportunity. And it's a very large portion of non-building construction as well.
- Joel Tiss:
- But it's still kind of flattish to down right now, though, right?
- Michael Kneeland:
- That's correct.
- Joel Tiss:
- Yes. Okay. Alright, thank you so much.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you. Our next question or comment is from the line of Philip Volpicelli with Goldman Sachs. Your line is open.
- Michael Kneeland:
- Hi Phil.
- Philip Volpicelli:
- Hi. How are you today?
- Michael Kneeland:
- Great.
- Philip Volpicelli:
- With regard to the daily, weekly, eight-monthly, I guess there might be another category, can you give us the rest of the breakout? You said monthly was 68%. Can you give us the other pieces?
- Michael Kneeland:
- Yes. Our daily business is 13, that's down a point. Our weekly is flat, it's at 19. And then you've got 68 that's the monthly which is up.
- Philip Volpicelli:
- Okay. And you don't have like an other category for longer than that?
- Michael Kneeland:
- No, we don't.
- Philip Volpicelli:
- Okay. An as it's logical to think that your daily is probably your most profitable and as you move further along it gets less profitable?
- Michael Kneeland:
- No. That's not the case at all. Obviously when you have daily business, there's a lot more touches to it. You have to bring the equipment in, you have to service it, you have to check it over and it goes back out. The longer term in the monthly contracts is a profitable growth opportunity for us, we're focused on.
- Philip Volpicelli:
- Okay. So rates might go down but because there's less touches it actually might be more profitable for you as a business?
- Michael Kneeland:
- Absolutely.
- Philip Volpicelli:
- Got you. And then with regard to your outlook, I just wanted to make sure I'm thinking about this correctly, I think you mentioned that your guidance includes a 1.5% decrease in rates. And in the second quarter here we saw 1.4%, yet I think we all agree that the market is starting to soften. So how confident are you in that 1.5% rate decline in your guidance? Is it something that you're going to have to reassess as you go forward?
- Michael Kneeland:
- No. we've built in what we believe the market will be. Obviously year-to-date we're down 0.6%, and in the back half of the year we'll be down by about two points.
- Philip Volpicelli:
- Okay. Alright, that's interesting. And I think in the past we've talked a point of rating it was about $25 million EBITDA, does that still hold or is that changing with you guys doing all the cost savings?
- Michael Kneeland:
- No. That's great. That's a good number.
- Philip Volpicelli:
- Okay. With regard to the closures, were they in Florida and California, and are there other closures that might occur before the end of the year?
- Michael Kneeland:
- Yes. Some of the closures were there, and we don't talk about where potential closures would be, obviously because of our employee base. But we continually look at all of our branches on a monthly basis, and make the appropriate changes where necessary. That's why in fact we closed six more in the last quarter. And if we continue and see opportunities to repurpose our fleet in other areas and take down our underperformance, we'll do that.
- Philip Volpicelli:
- Okay. And with regard to the restricted payments basket, I think Chris you and I had talked about a number of around 165 pro forma the two transactions for C and D and the stock, and I think Marty you said there would be 200 million pro forma taking out 125 million of the [fourteens], and I only see about $37 million of net income in the second. I know there's going to be some in the third. So can you guys walk me through how we get from where we were pro forma the transactions of $200 million at the end of the third quarter?
- Marty Welch:
- Yes. A big factor of course is the we only paid $22 a share for the common and not $25. That's probably the biggest difference. I think rather than take up time on the call if you want to give Chris a call he can kind of walk you through the map on that.
- Philip Volpicelli:
- That sounds great. Thank you. And then finally, obviously the market's going to get tougher, there might be some acquisition opportunities out there. One; are you guys interested in looking at acquisitions; and two, what size would that be upto; and three, do you have a leverage target that you don't want to go above?
- Michael Kneeland:
- This is Mike. We obviously were very opportunistic and we're going to take a look at the market. Obviously as we go through the climb, we're going to be making sure that if we can grow through profitable growth, we'll take a look at any one of the acquisitions and size is something that we don't necessarily pinpoint on. We take a look at does it accent our current model, while we grow on market share to profitable growth in that format. Obviously when you take a look at where our stock is right now and where it's trailing at a multiple of EBITDA, we will not want to go above that as a guideline. And again opportunistic we'll look at it, we don't really comment and talk about them because that's the nature of the business, but we are very opportunistic. And I would also point out that this is an area that's a core competency for this company because of our background, it's not only doing acquisitions but integrating them very well.
- Philip Volpicelli:
- Thank you very much guys. Good luck.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you. Our next question or comment is from the line of Yvonne Varano with Jeffries. Your line is open.
- Michael Kneeland:
- Hi Yvonne.
- Yvonne Varano:
- Hi. Thanks. I think most of my questions have been answered. Just on a housekeeping, you ran through the share account Q3 and 4Q, could you do something similar for the interest expense and maybe what the run rate you're anticipating coming out of the year is going to be?
- Marty Welch:
- Yes. What we can do, we can follow up with you offline in terms of modeling the interest expense.
- Yvonne Varano:
- Okay. Thanks.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you. Our next question or comment is from the line of Varadarajan Sundar with Deutsche Bank. Your line is open.
- Varadarajan Sundar:
- Yeah, couple of housekeeping questions. On the debt side, as you repay this $125 million [cold], do you expect to use the revolver or do you expect to pay that down with free cash flow? And could you give us what the pro forma debt number is going to be following the $125 million call that you're doing on the 14% notes?
- Michael Kneeland:
- Sure. The company is at its maximum use of working capital in the third quarter, so we will use the revolver for this specific transaction, however we do generate significant amounts of free cash flow in the fourth quarter. So we have a longer-term outlook here that says that we are not just substituting one form of debt for another but in fact we're going to pay down.
- Varadarajan Sundar:
- And then, on that working capital front, somebody asked the question of on accounts payable, and you were up about $110 million or $112 million on the accounts payable front in the first half of the year. As you look at the back half and given that your CapEx number in the back half is going to be somewhat lower on a year-over-year basis as well as on a first half to second half basis, do you expect that accounts payable to go down a little bit more than what you've seen in the past? How do you see that number accounts payable playing out in the back half of the year?
- Michael Kneeland:
- Right. I don't expect anything unusual in accounts payable. To be honest we haven’t even focused on that. We do have an initiative to - as we do strategic sourcing and as we work with our vendors to generally move our vendors to 60 days. We have made some progress on that. There's really nothing unusual going on in accounts payable this quarter and I would not think it would act differently at the end of this year than it has at the end of other years.
- Varadarajan Sundar:
- Okay, thank you. And finally, going back to this back half EBITDA number. At the mid-point of your guidance seems like your EBITDA will have to grow about 35% in the second half compared to the first half. Last year it was only up about 26% in the back half. Do you expect pricing to be down 2% in the back half of the year, compared to the first half, or are you seeing your proportion of monthly sales is higher? What gives you the better visibility to expect this second half to perform as well as it has on a seasonal basis and in fact better when conditions are actually getting a little softer?
- Michael Kneeland:
- Sure. Well the biggest factor there of course is our continuing focus on cost reductions. We are down absolutely $21 million less spending SG&A in the first half, and we can expect that to continue. And though the pricing and utilization outlook that we talk about includes the shift, the monthlies, if you will, these are not added as factors, we're just trying to give you a little color about why this is occurring. As the fleet shifts a little bit more towards aerial and away from earth, the aerial business tends to be more monthly. That's really what's driving that, but it doesn't necessarily mean we're deteriorating incrementally as long as you're getting pricing and utilization and shift monthly, we're just trying to give you a little bit more color.
- Varadarajan Sundar:
- Alright. And finally, the expense side seems to be the opportunity here, and you had SG&A of about $126 million this quarter, how should we think about that on an absolute dollar basis for the back half of the year?
- Michael Kneeland:
- Specifically for SG&A?
- Varadarajan Sundar:
- Yes.
- Michael Kneeland:
- We don't give line item by quarter kind of forecasting, but we are going to continue to make continued progress in these areas. We're working on very hard. It's one of our primary areas of focus.
- Varadarajan Sundar:
- Alright. Thank you.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you. Our next question or comment is from the line of [Chris Daugherty] with Oppenheimer. Your line is open.
- Michael Kneeland:
- Hi Chris.
- Chris Daugherty:
- Good morning Michael and Marty. Michael, you mentioned a dodge number down, starts down 14%. Was that both non-res and residential or just non-res?
- Michael Kneeland:
- I believe it's the non-res number that they got forward in June.
- Chris Daugherty:
- And then do they have an estimate for the '08 and '09?
- Michael Kneeland:
- They have some estimates that are out there. I think when you take a look at the consensus, it's coming down. '08 it's going to come down 1.2 points on year-over-year basis and next year 6.7.
- Chris Daugherty:
- And then can you just talk about the mix of your fleet and how you would expect that to sort of lag there? I mean, if we've seen starts increase up until now, are we talking six months, a year lag between when you might see your aerial being used or earthmoving, is there some sort of effect there?
- Michael Kneeland:
- Well, obviously when you start to see starts, the first thing that goes in is earthmoving equipment. And our earthmoving fleet has not, although it's down hasn't had dramatic shift. The area that we have fleeted up in 2008 is in the aerials sector. And aerial has still a lot of end markets that they can serve - not only construction but maintenance and also the industrial sector, which I mentioned is an opportunity for us.
- Chris Daugherty:
- And then just lastly, a housekeeping number. Dollar utilization for the quarter?
- Michael Kneeland:
- For the quarter it was
- Marty Welch:
- It was 56.8% for the quarter.
- Chris Daugherty:
- And what was the average fleet to the millions for the quarter?
- Marty Welch:
- The OEC at the end of the quarter was 4325.
- Chris Daugherty:
- Right. Thanks Chris. Take care.
- Michael Kneeland:
- Thank you.
- Chris Daugherty:
- Thank you.
- Operator:
- Thank you. Our final question or comment comes from the line of Seth Weber with Banc of America. Your line is open.
- Michael Kneeland:
- Hi Seth.
- Seth Weber:
- Hey, thanks. Good morning. On the used equipment, can you give us an idea, who's buying the stuff? Is this still largely international customers that are stepping in and buying a lot of the used equipment, and then I have a quick follow up question.
- Michael Kneeland:
- Well, obviously from the auction we're seeing more and more offshore international players coming in and buying our equipment, but the vast majority of our fleet is still being sold retail here and North America. Keep in mind that only about 35% of everything that's manufactured goes to the rental industry, there's still a very viable market out there for selling fleet.
- Seth Weber:
- Okay, thanks. And then conceptually, Mike, maybe you've been in this business awhile, can you compare how this downturn feels to the previous ones and how the operating environment compares and what you're seeing from a rationality among your competitors?
- Michael Kneeland:
- Well, thank you, Seth, I'm not going to give out my age here, but I've been in the industry for 30 years, and you're right, I have seen different markets, I think that I take a look at 1991, the last downturn and then I put a lot comparison to that, to where we are today. Having said that, the differences between our most recent downturn of 2000-2002 is really we're a different industry, and we're more professional. And I've talked about this one-on-ones and to the investment community, and I do believe that. I do believe that we're a different industry today. I know that this company is a different company today than they were back in 2000-2001. We're focused on rates, we're focused on driving profitable growth, and we're doing the right things going into a downturn, we're selling off the fleet and producing cash flow, and at the same timeframe improving our EBITDA. So I think overall we're doing all the right things here, and I do think that the industry overall is being prudent and focusing this downturn just like they did the last.
- Seth Weber:
- Okay, thanks very much.
- Michael Kneeland:
- Thank you.
- Operator:
- Thank you, Mr. Weber. Mr. Kneeland, I turn the conference back over to you, Sir.
- Michael Kneeland:
- Well thanks, operator. Now before we sign off, I want to thank all of you for joining the call today. And this is an opportunity for us to express how strongly we feel about the future in United Rentals and our company's ability to create value. Now our results show that we're doing all the right things, and that we will continue to be vigilant as we move through the busiest period of our year in the third quarter. And with that, that concludes our remarks for today.
- Operator:
- Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. You may all disconnect at this time. Good day.
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