United Rentals, Inc.
Q1 2010 Earnings Call Transcript

Published: 25 Apr 2010

[Operator:]

Good morning. And welcome to the United Rentals First Quarter 2010 Investor Conference Call. Please the advised that this call is being recorded. Before we begin, please 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, 2009, as well as 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 public release any revisions of 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 will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; and William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

[Michael Kneeland:]

Thanks, operator, and good morning, everyone and thank you for joining us on today’s call. With me is Bill Plummer, our Chief Financial Officer and other members of our senior management team. This morning I went to spend some time on the external environment, also to share with you where we think we’re in the cycle and then update you on the actions that we’re taking for both the short-term and long-term in order to move the needle towards profitable growth. Before I get to that, first the quarter is always -- the first quarter is always the weakest period due to seasonality and this period is no different, it’s been pushed down even further by the weather and also the economy. However, we’re starting to see some positive indicators, the turn in the industry, as far as our cycle is concerned was always not a question of if, it was more a question of when. And from the first days of the downturn everybody involved here at United Rentals from the senior management team all the way down to our employees in our front lines have been working hard to ensure that we’re in the best position to benefit in the upturn. Today we’re looking forward to sharing some of the specifics with you about the positive momentum that we’re seeing. The first quarter results we reported don’t reflect the strategic momentum that we’re gaining in the field. Rental revenue was down 15%, now some of that was due to fleet being down up by 6% on a year-over-year basis. The worst of the environment happened in January through mid-February and then we saw a shift late in February continue into March and March came back stronger than we anticipated. Time utilization in the quarter was basically flat on a year-over-year basis at 56.2%. Rates however were down 6.5%, not great, it’s not where we want to be, we put a lot of focus on this and a lot of effort and we’re managing this everyday. However, we’re still under pressure but declines are beginning to show signs of leveling off. We’ve been -- seen a very clear positive change in used equipment pricing. The used margin in the first quarter was 31.4% versus 11.9% a year ago. Used equipment pricing is a leading indicator of where we’re in the cycle. Now turning to cost cutting, obviously it’s a great story to talk about, particularly the first quarter. SG&A down $22 million, cost of rent down an additional $19 million. Bill is going to go into a lot more detail and discuss our decision to raise the financial targets for both SG&A, as well as the free cash flow target for the year. So where are we? It’s fair to say that we’re more optimistic than we have been for a while. We see a healthy mix of conditions driving our metrics for the first three months in 2010. Some of that’s coming from the external environment, I’ll talk about that next but a lot is being driven by our own efforts. And that will be my second topic that I want to cover this morning with you. So first, looking at the operating environment, here is a look at what we’re seeing in the field. It’s still challenging out there but as we move through the first quarter things seem to get a little better and so far in April the positive trend is continuing. Now in terms of geographies, Bill and I spent several weeks in the field during business reviews talking to district managers, branch managers and hourly employees. The tones changed, they’re now more cautiously optimistic. Canada, we talked about three months ago, was also going to be a bright spot and that’s holding true. In March rental revenue for Canada as a whole was basically flat on a year-over-year basis in local currency and that’s with 6% less fleet. Right now that’s being driven by the activity in Northeast Canada, but we’re also beginning to see Western Canada come back online as oil prices improve. Southeast is also picking up in projects like infrastructure, power plants and bridges. The Gulf area, activity is increasing as industrial plants return to a more normalized maintenance schedule, which impacts the local economies. California, if you recall was the first to see the weakness back in 2008 and had a terrible track record as it went through the recession. We’re now seeing that level off both in North and Southern California. However, the Midwest is still the weakest and it will be for a while. However, we got some good news yesterday with the ABI index for the region up over 50 for the first time in a long time. Now a lot of recent big projects are tied to infrastructure, helping the performance of our trench safety, pump and power operations. I’ll give you an example, revenues were down 7% in the first quarter and rental revenues for that segment were up 10% on a year-over-year basis for March alone. A stimulus money is driving some of that performance but there’s also uptick in underground construction which is also a typical of leading edge of a recovery. Now we’ve said that before, we expect public construction and infrastructure to recover first, followed by institutional construction and then, commercial construction being the last to show improvement. But there’s also a historical sequence to the metrics that I’ve experienced in my career with used prices improving, recovering first, then time utilization would improve and lastly, you would see rates improve after that. We believe that will happen in this cycle too. And when you look at the first quarter, as I mentioned, used equipment pricing for most categories is the best we’ve seen in over a year. Rates are lagging in the cycle, as we expected but the year-over-year decline is moderating. Now to give you some early insight into the first quarter (inaudible) into April, rates have been essentially flat. So when you put the rate trend together with used equipment pricing and time utilization, which is continuing a positive trend as we move through April, it suggests that though we saw the worst part of the cycle in the first quarter. So the big question is, where do we go from here? Our opinion hasn’t changed. We expect to see an increasing number of local markets begin to recover as we move through the balance of the year. It’s not going to be an upward trajectory. It’s going to remain choppy. A broader recovery will begin in the back half of 2010 and take hold in 2011. Please feel free to ask us more about the environment in the Q&A. Now I want to turn our discussion to operations and talk about actions that we’re taking to transform the way we create long-term value. We’ve been very successful at cutting costs; as you know, we reported last night further cost reductions. It’s becoming part of our culture and we’re committed to doing more, providing a low cost structure going forward. Now we’re pivoting towards revenue generation. See -- we’re beginning to see some momentum of our strategy, which is our customer service and customer segmentation to operation of United. Our strategy is not about the economy, it’s about United Rentals and it’s where we intend to take this company and the actions that we’re taking to reach those goals. Leveraging our footprint and fleet through our people, focusing our sales efforts on larger more profitable accounts, key accounts, national, strategic, government and local accounts, that have been assigned a single point of contact. Also investing in areas to drive growth, for example, our headcount is down in the first quarter year-over-year, but the number of national and strategic account managers is up 27%. So the segmentation strategy is working. Numbers show that our larger target customers are the right customers for our long-term growth. They’re more stable in times of economic uncertainty. National account revenue is only down 6% year-over-year in the first quarter. We serve these accounts more profitably overtime, there’s more upside in terms of share of wallet and there’s more benefit realized on both sides from servicing these accounts through a single point of contact. Today we now have coverage of 50% of our revenue, meaning our reps are assigned directly to customers. Equally as important, complete visibility through our sales force automation, also pursuing industrial business with our goal of 30% of rental revenue, currently for the quarter at 19%, but it continues to make progress. Of the 65 national accounts signed in the first quarter, 25 were industrial with a total wallet estimated to be at $25 million. Now within our national accounts team we now have a broad base of managers who are subject matter experts in industrial to help us grow that business. Everything I just mentioned relates to target customers, also paying close attention to the rest of our customer base, our sales initiatives in place and designed to drive revenue generation across all markets. One of the examples of that is reactivating dormant accounts. In March, we pushed out through our sales force automation tool 7,000 we call quiet accounts, accounts that revenue was declining over the last trailing 12 months. We generated over $1.3 million of additional revenue in March alone by calling on these customers. Our customer care center is taking more proactive call and revenue generation to cold calling. Our center to us is a key differentiator and we believe our center is the only one in the industry with the ability to solve 100% of the customer’s needs with one contact. For example, you can take an order and place it anywhere in North America, you can take a unit off rent or just answer a question, it’s multilingual, open 24x7. There’s a lot going on with our service initiatives as well in 2010. The customer focused scorecard, our price optimization software or workflow process to drive efficiencies and field automation. We’ve talked about these initiatives before and we’ll have more to say as we move through the year to report our progress. But if you’ve specific questions today we’ll be happy to answer the best we can. So, service is where our business is at. It’s the right thing to focus on as a differentiator. It’s also listening and learning from our customers. It’s critically important to revenue generation, exceptional service earns that customer loyalty, it lends to repeat business and referrals and also strengthens that relationship between the company and the customers. And makes it easier to ramp up new business when we open cold starts or warm starts. We’re now much more efficient at customer service than we have been in the past, able to handle greater inflow of business at lower cost. In March, we also streamlined our field platform under the leadership of Matt Flannery, an industry veteran with over 20 years of experience. We also continued to optimize our footprint by closing and consolidating seven locations in the first quarter without leaving any market. And our business development team is constantly reviewing market opportunities to expect to open some strategic cold and warm starts later this year plus do some selective consolidations. We also continue to repurpose our capital to serve the needs of our targeted customers. An example would be our fleet mix, less aerial, more earthmoving because that’s what our customers need. So to summarize, our first quarter results were down year-over-year; we believe that we’ve seen the lowest point in the cycle based on what we’ve experienced in March and now what we’re seeing in April. We’re comfortable that the estimation to recovery will begin in the back half of 2010 and become more universal in 2011. The things that we are hearing and seeing in the field support this, we see positive signs, our branches are more optimistic in many trade areas. But more importantly, when we go out there and we talk to our customers, we’re hearing that there’s more bidding activity. It’s competitive, but nonetheless there’s more bidding activity. We’re also in a great place to jump on opportunities presented by the recovery, not indiscriminately but where our efforts can bear the most fruit. Everything we just discussed today will be covered in more detail in our new investor presentation. However, we’re doing something different this quarter, it’s not posted on the website yet, it contains a lot of new information. However, we want to walk you through it and we’re going to be introducing it this Thursday the 29th, we’re going to webcast it 12

[William Plummer:]

Thanks Mike. Good morning to everyone. As usual I’ll give more detail on the numbers, but also hope to provide some more color on what made them up. We’ll look at cost revenue and then we’ll update our outlook before I finish up. So first turning to revenues, for our rental line of business, our rental revenue, as Mike mentioned was down 15% in the quarter and as you’d expect, that revenue was really a story of rates, fleet size and fleet utilization. Mike touched on the rates, down 6.5% for the quarter on a year-over-year basis. But as you delve a little deeper there’s some positive news there in that the year-over-year decline for each month of the quarter was less successively as you went through the quarter. So, March less of a decline then February less than January. We’ve seen that momentum continue in April and are heartened by the fact that that is continuing and we hope that portends a better rate environment as we get further into the year. Looking forward, in fact, while we’re not going to get too aggressive about -- talking about the rate impact that we’ll see over the full year, we do think that we’ll see a slight modest decline of rates overall for the full year. What we’re talking about is something in the low single digits on a full year basis for rates this year compared to last. A bit more context on our fleet. Our fleet size during the year or during the quarter was down versus last year, down 6% at the end of the quarter. And obviously that was a positive in supporting utilization. Utilization, as Mike said was essentially flat. It was up actually 10th of a percentage point compared to the same quarter last year. As you look within that, well, the other interesting piece is that we’re seeing some significant gains from certain categories. For example, the earthmoving categories were up significantly, earthmoving categories were up 6.5% on a year-over-year basis in time utilization. As we’ve said before, that’s an early cycle component of our portfolio and so we take that as positive news for utilization of the equipment. Turning to used equipment sales, revenues from used equipment this quarter were $35 million for our sales and as Mike mentioned. The margin was 31.4%, that’s up 19.5 percentage points, compared to last year. And within that we’re seeing, as Mike said, improvement in the prices that we realize in our used equipment sales, whether through our retail channel or through auction or other channels. That’s good news. We certainly take that as positive news for where the market is overall. The mix of channels that we used this year was also very favorable, that was another significant part of that improvement in margin. So we sold 70% of our sales in the quarter through our own retail channels this year that compares to 34% through retail last year. Auction was 17% of our sales this quarter, compared to about 39% last year. So, that certainly was a positive contribution in addition to the improvement in underlying equipment prices. Earthmoving in particular was a better performing component of our used sales than other categories. For contractor supplies, another solid story for us even though the revenue was down materially, down 28% year-over-year, the gross margin improved very significantly. Gross margin was up 230 basis points for the quarter to just over 30% in our contractor supplies business. So we’re continuing to execute the strategy that we’ve talked about, focusing on the higher margin sales opportunity, making sure that the sales that we do do support our rental line of business and that’s playing out to better margins in that line of business. Let me now turn to costs and touch on our SG&A performance for the quarter. We delivered $22 million of SG&A reduction for the quarter, compared to last year. And that’s consistent with what we’ve been focused on for the last number of quarters. We’re looking to take advantage of cost savings in every line of our SG&A and in this quarter virtually every line was, again, a save versus last year. Specifically salaries and benefits were a major component and they came down in line with a significant headcount reduction. Professional fees were down materially as well, they came down in line with our greater focus on being careful on where we engage professional service providers. Travel and entertainment came down as we focused more on what’s the right travel and what’s the right way to travel to drive savings there. We also saw a modest reduction in bad debt expense for the quarter. So all in all we feel very good about the SG&A performance, good enough in fact to raise our target for SG&A reduction this year to $40 to $50 million for the full year and that compares to our previous target of $25 to $35 million. Now because of some discrete items that we had in the quarter, we won’t just annualize the $22 million save that we had in the first quarter. But we’re very confident that we can deliver $40 to $50 million of SG&A reduction and as always, we continue to look for more opportunities. On our cost of rent excluding depreciation, that came down $19 million in the quarter and like SG&A we had contributions from most of the lines of our cost of rent. Salaries and benefits again in line with headcount was a significant contributor. But other areas such as R&M, facility costs were also down and we continue to look for opportunities to continue that momentum. As we streamline, as we automate, as we really drill into our rental processes we believe there are more opportunities available, things like the fast initiative that Mike mentioned to help optimize our logistics operation we think will contribute to our path on costs in our cost of rent lines. We feel comfortable with the outlook that we’ve provided $70 to $90 million. Quite honestly we’re focused on opportune -- greater opportunities there and hopefully, we’ll be able to continue to deliver good results in those areas. Put it all together between revenue and cost and you see that we delivered adjusted EBITDA of $115 million for the quarter and that was at a margin of 21.4%. So none of us are satisfied with 21.4% EBITDA margin but for the first quarter, seasonally the weakest quarter and compared to last year we think that represents solid performance in the quarter. The EBITDA margin was only three-tenth of a percentage point down versus last year and obviously in light of a 15% rental revenue decline nearly 19%, total revenue decline, we’ll claim that as solid performance and we’ll continue to look to drive it. Turning to free cash flow, we generated $99 million of free cash flow for the quarter that included a $55 million cash tax refund that we received in March. That tax refund is consistent with the cash tax impact that we talked about in February. As we’ve looked at that cash tax refund and some other tax planning strategies and changes in our estimate we now think that cash taxes will be a greater contribution to free cash flow than we had initially guided to. So it contributes to our increased outlook for free cash flow for the full year. We now expect a total of $200 to $225 million of free cash flow for the full year and that’s up, compared to the $175 to $200 million that we gave in February. It’s up primarily because of the SG&A cost reductions which were essentially all cash and with an improved view on what the cash tax benefit will be roughly $10 million more cash tax benefit than we were in February. A couple of thoughts on fleet, we continue to drive the fleet strategy, in terms of leveraging our fleet, the best way that we can. Transfers are a key component. We had $1.2 billion of transfers this quarter and that was about 33% of our overall fleet involved in our transfer activities over the quarter. When you look at our used sales activity, the age of what we sold from the fleet in our used sales this quarter was 75 months, again consistent with our strategy of selling the oldest fleet first. And within those sales about 60% of the sales were in aerial and reach forklift categories, categories that are lagging a little bit in terms of overall market performance. As I mentioned, on a year-over-year basis our overall fleet size is down 6% at the quarter end and this helped us achieve the essentially flat time utilization that we remarked earlier. In terms of rental CapEx, we spent $40 million gross in the quarter and we spent that money buying categories that we expect to perform well as we go forward. For instance we’re buying high capacity reach forklifts, we’re buying light towers, compressors, excavators and a host of gen rent and earthmoving products that help us focus on the earlier stage activity that we’re starting to see. We’re skewing our buy away from aerial products except for very specific categories that continue to see good demand. Importantly, among that $49 million of spend about $10 million in the quarter was spent for two specific strategic relationships that we have where we had identified needs with the customer that we spent into. And that reflects the approach that we’re trying to take with our rental CapEx spend this year. We want to be targeted and focused in trying to support specific customer needs along with our general level of spending needed to keep the fleet fresh. Now just a couple of thoughts on our capital structure, last night you noted that we filed an update to our shelf registration and I must admit, I’ve been surprised by the level of questions and energy that we’ve gotten around that filing. Recall last year that we had initially filed a $1 billion shelf in the summertime. We drew down on that shelf in November for our issues of senior unsecured and our convert issue. It left us with a shelf that was about a little north of $300 million, that’s not a usable level of shelf capacity from our perspective and so our filing last night was simply to push our shelf registration size back up to $1 billion. There’s nothing specific, nothing concrete going on, we don’t have a current plan to issue anything out of the shelf whether debt or equity and I just wanted to take some time to emphasize that point. It is housekeeping and we’ll certainly continue to talk actively about what our thoughts are around the capital structure. In the quarter on the capital structure you’ll note that we did redeem the 6.5% senior unsecureds in February that was $435 million of an issue that matured in 2012. So with that redemption our maturity debts are now essentially clear until 2013 when our ABL matures. During the quarter we also temporarily moved a large portion of our Canadian cash position down to the U.S. and we carried that intercompany loan position over the quarter end so that explains the significant decline in cash balance that you see on the balance sheet. It was roughly $160 million U.S. and obviously when we moved the cash into the U.S. we used it to pay down the ABL. Total debt at the end of the quarter was down by $245 million since the year end and our net debt was down by $96 million. On liquidity, we continue to have an exceptional liquidity position. We ended the quarter with about $800 million of total liquidity, that’s made up of $713 million under our ABL facility and another $58 million of capacity under our accounts receivable facility. So continue to be well-positioned in terms of liquidity. Those are the key comments that I wanted to make for the quarter. Before we open it up for Q&A, I’d just like to echo the sentiment of Mike’s comments. We’re seeing positive momentum in our business and indeed we’re as optimistic as we’ve been in quite some time. Obviously rates are still a challenge, but we’re focusing on managing rates as actively as we can. The uptick that we’ve seen in used equipment pricing, the strength that we’re seeing in time utilization we think will give us a better basis for managing rate and managing our business overall. We’re positioning ourselves to take full advantage of it. Too soon to say whether it’s cyclical or seasonal but we certainly feel optimistic and we’re going to go after the businesses as strongly as we can. So with that I’ll stop and ask the Operator to open up the call for questions-and-answers. Operator?

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Henry Kirn of UBS.

[Henry Kirn:]

Good morning, guys. [Henry] from Munich.

[Michael Kneeland:]

How are you?

[Henry Kirn:]

Good. What was the weather impact to the first quarter?

[Michael Kneeland:]

What was the weather impact, I mean, obviously…

[Henry Kirn:]

Yes, is there any way to quantify it or?

[Michael Kneeland:]

It’s hard to break it apart, Henry. You just have to go through it and obviously it affected our time utilization, it affected our cost structure because you just can’t remove cost out because you’ve got snow or bad weather. But it’s safe to say that across North America from the Mid-Atlantic all the way up through the Northeast we were impacted by weather. We saw a significant amount of rain and precipitation out on the West Coast as well. But it’s very hard to break it apart and put your finger on it.

[William Plummer:]

Yeah. Henry, it’s Bill. I agree with Mike, it’s hard to put a number on it. Qualitatively I guess the way I would say it is January and February were both softer than our forecast had and we update our forecast every month, as you might imagine, March was stronger. And so if you look at that pattern very clearly there was a weather impact. It’s just hard to put a dollar number on it.

[Henry Kirn:]

That’s helpful. And I guess on the industrial accounts that you’re going after. Could you chat about maybe how the demand there is trending and maybe some of the internal progress that you made?

[Michael Kneeland:]

Yeah. And it’s a great question. We continue to focus on it, Henry, as you know, when you look at the amount that we continue to sign more accounts. If you look on a year-over-year basis, in all of last year of all the national accounts that we signed 27% was industrial, in the first quarter 38% of what we signed were industrial. So we’re, it’s a long drawn out process, we go after it. We’re seeing some uptick in some of the clients that we’ve. Obviously petrochemical as oil prices continue to improve and just industry as a general rule continues to see some momentum, positive momentum. So we’re seeing demand in our industrial side of the business and it’s clearly a focus for us and its part of our national account program.

[Henry Kirn:]

Okay. That’s helpful. Thanks a lot, guys.

[Michael Kneeland:]

Yeah.

[William Plummer:]

Thanks.

[Operator:]

Thank you. Our next question comes from [excuse me] from Philip Volpicelli.

[Philip Volpicelli:]

Thank you very much. Good morning, guys.

[Michael Kneeland:]

Good morning.

[Philip Volpicelli:]

With regard to the time utilization, is that more of a function of you guys having right sized your fleet or I guess the industry having right sized fleets or is it a pickup in demand that allowed time utilization to be flat year-over-year?

[Michael Kneeland:]

You hit the nail on the head. It is part, taking your fleet down and rightsizing it and we did that and we were proactive last year. And just to remind everybody on the phone call, last year we sold $650 million worth of OEC and going into this year and so that as part of it. The other part of it is, as Bill mentioned, demand that we saw in the first, January, February impacted by weather but our time utilization is improving. And inside of that there’s some good color to look at. When you look at OEC on rent, the one area where we’re seeing improvement is in earthmoving. Actually OEC, which has nothing to do with the size of your fleet, it’s how much fleet you have out on rent, earthmoving is actually up on a year-over-year basis.

[William Plummer:]

And actually our trench business is also up year over year in OEC on rent. And the other categories of our equipment, other than aerial are all either a little better or only slightly worse in terms of the percent OEC on rent year-over-year.

[Philip Volpicelli:]

Great. And that earthmoving equipment that’s up year-over-year, is that regionally focused? You mentioned southeast and the Gulf Coast being stronger, is that, were that activity is happening?

[Michael Kneeland:]

It’s -- there are pockets in other regions but it’s safe to say that, as you can imagine, there’s going to be demand in Canada, there’s going to be demand in the southeast on some of these projects, the Gulf, absolutely. And then there are some pockets in California, quite honestly, that are showing improvements as well.

[Philip Volpicelli:]

Great. And then in terms of your fleet plans for the rest of the year, is it a question of, you have to reach a certain utilization level for you to add fleet or are you going to continue to shrink the fleet in an effort to try to get rates positive?

[Michael Kneeland:]

I’m going to answer the first part and I’m going to ask Bill to answer the second part. We basically said that we’re going to reposition our fleet to serve a broader targeted customer base. As a result of that, we will continue to de-fleet aerial and we’ll be specific in the areas of like 40 foot booms and smaller booms. We’ll also de-fleet in the areas of 6K Reach Forklifts. Those are the areas that we’ll continue to migrate away and then we’ll add in more earthmoving in a broad range of earthmoving. The process that we go through and how we determine when do we add that, I’m going to ask Bill to give you what his thoughts are and how we go about that.

[William Plummer:]

Certainly. So as we look at opportunities to send fleet and I touched on it in my comments. There are two things that we’re trying to serve. One is just the overall management of the fleet and to manage the fleet consistent with our notion that you can’t starve the fleet, you’ve got to feed the beast at least at a certain level even in very difficult environments like we’re in today. And so there will be some general fleet spend to address, components of the fleet that are aging out and that need to be replaced. But we’re also going to be focusing our spend on specific customer needs that fit with our strategy. So for large key accounts that are significant to our business today and going forward, if they have projects that have specific needs and we can’t draw the fleet for those projects from our larger portfolio, then we’ll look at spending money to support that. We did it in the first quarter for those two that I mentioned in my comments; we’ll continue to try and support those specific needs with customers throughout the year. What does that mean? That means that we expect to be able to do that within the 102 to 2, excuse me $100 to $120 million of net rental CapEx that we have offered as our outlook. If we have more opportunities, we’re not afraid to spend a little more as long as we can justify specific opportunities.

[Philip Volpicelli:]

Last question. The one and seven are potable back to the company in October. Do you plan to satisfy that put, assuming it comes to you with revolver or with free cash flow?

[William Plummer:]

Yeah. Essentially, yeah, six of one half a dozen of another. As we build free cash flow between now and then we’ll use it to pay down the revolver. On the day of the put I’m sure we won’t have a large cash balance, I’m sure what we’ll do is just draw the revolver for $115 million or whatever the outstanding as.

[Philip Volpicelli:]

Great. Thank you very much.

[Michael Kneeland:]

Thank you.

[Operator:]

Thank you. Our next question comes from Emily Shanks of Barclays Capital.

[Michael Kneeland:]

Hi, Emily.

[Unidentified Analyst:]

Good morning. It’s actually [Matt Chin] for Emily this morning.

[Michael Kneeland:]

All right.

[Unidentified Analyst:]

Just a couple of housekeeping questions for you. Could you guys give me an exact number on the OEC after the $1 million?

[Michael Kneeland:]

For the end of the quarter it was $3.741 billion and the average would be $3.750 billion.

[William Plummer:]

And you just ruined Chris Brown’s day, that’s his one moment to shine.

[Unidentified Analyst:]

I know, I apologize for front running him. And could you just clarify for me, again going back to the tax refund. And I know that on your last call in February you said the net cash tax was around $40 million and then you said you received a benefit of -- a tax benefit of $55 million in 1Q 2010. And then you said you were going to get probably a $10 million more increase is what you’re baking in for your free cash flow guidance. Do I’ve all those?

[William Plummer:]

Yes.

[Unidentified Analyst:]

Data points right? Okay. Great.

[William Plummer:]

That’s right.

[Unidentified Analyst:]

And then the other thing I was noticing was your accounts receivable days seem to have ticked up a little bit year-over-year and quarter-over-quarter. Could you just give me a couple of drivers on what’s causing this?

[William Plummer:]

Obviously revenue’s come down and so the denominator of that calculation is smaller and so that’s a important part of it. We’ve seen a little bit of extension in terms of the receivables that are outstanding, a little bit more relatively speaking going into the longer buckets as well. So, it’s certainly not anything that we’re overly concerned about. We monitor our position on a daily basis. We certainly will continue to do so and obviously we’ll just have to flow with the seasonal patterns of our revenue, that was a significant part of the extension that you’re seeing in the first quarter. I will add that as we look at write-offs of receivables there, the trend that we’ve seen it through the first quarter is not at all out of line with what we’ve seen previously. So, we continue to be very confident in our ability to collect and that’s one of the great things about this industry. Our lien rights are such that we tend to get paid, sometimes it takes a little longer than we expected but we get paid.

[Unidentified Analyst:]

Great. And then just one final question. I saw your comments in the 10-Q regarding your RP capacity, still look like you have any. Could you just quantify on the size and particularly where, what buckets those restrictions are coming in?

[William Plummer:]

Certainly. So, there are two RP baskets that are important to us, the one that is the most significant issue right now is the limitation at the subordinated debt level. The basket calculation for our sub debt RP limitation right now is negative 500 and change, it’s a big number. What that means of course is that we can’t use operating company cash to go below the subordinated debt level of the op co, meaning we can’t use op co cash to buyback stock, we can’t use op co cash to buyback any of the debt of the outstanding hold co issues. So that’s probably the most significant one. There is also an RP limitation within the senior unsubordinated debt of the op co and that basket is negative about $70 million or so as we speak and that’s really only -- that’s really only the result of the net losses that we’ve experienced since we issued our issues last year. Does that make sense to you?

[Unidentified Analyst:]

Perfect. Exactly what I’m looking for. Thanks, guys.

[William Plummer:]

Thank you.

[Operator:]

Thank you. Our next question comes from Seth Weber of RBC Capital.

[Michael Kneeland:]

Hi, Seth.

[Seth Weber:]

Hey, good morning, guys. If we could just go back to Henry’s question real quick. Is there any, can you give us any color, any drill down a little bit on March versus January, February, just as far as time utilization? Can you frame that with any numbers as to how much better it was in March versus January and February?

[William Plummer:]

Give me one second, Seth. Let me see if I’ve got the month breakdown here. So, I’ll just give him the monthly numbers. For 2010 January our time ut was 54.6%, it bumped up a little bit in February to 55.2% and then it jumped to 58.4% in March. So, that gives you a sense of the pattern of the time utilization that we saw. Obviously, you’d have to factor in the path of our fleet size during that period as well to get a sense of what the OEC was.

[Seth Weber:]

Right. But was, so that 58.4%, I mean that’s got to be up more than the 0.1% year-over-year, correct?

[William Plummer:]

Yes. It was.

[Michael Kneeland:]

It was.

[Seth Weber:]

Okay. And you said that that’s continued into April. So is April kind of North of 60, have a six handle in front of it?

[William Plummer:]

I won’t be specific about April, but April is continuing -- we’re continuing the trend.

[Seth Weber:]

Okay. And did I hear correctly that you said rates were running flat year-over-year in April?

[Michael Kneeland:]

That’s correct. Essentially they’re flat year-over-year.

[Seth Weber:]

Okay.

[William Plummer:]

Sequentially.

[Michael Kneeland:]

Sequentially from March to April they’re essentially flat.

[Seth Weber:]

Sequentially.

[William Plummer:]

Yeah.

[Seth Weber:]

Okay.

[William Plummer:]

Sequentially.

[Seth Weber:]

Not year-over-year?

[Michael Kneeland:]

That’s correct.

[William Plummer:]

Year-over-year over there.

[Seth Weber:]

Okay. A separate question. Can you just talk a little bit about how you’re going to balance, as business gets better balancing your cost reduction initiatives versus adding sales staff, adding maintenance people to kind of keep the fleet working as your fleet is getting a little bit older here? How do you think about that?

[Michael Kneeland:]

It’s something that we -- it’s ongoing and we think through it. Now, let me just tell you, there are several components of how revenue comes in. Rate doesn’t really cost us anything, so there’s no real cost associated with that other than paying some sort of a commission. With regards to the time utilization, as it improves -- our infrastructure is still solid, it’s there, it’s there to support the field that we have or the OEC that we have. That’s not to say there’s not going to be challenges in specific areas. But we’ve changed the process as well. I mentioned the workflow process. There are a lot of things that we’re doing differently today than we’ve done in the past that will change the outcome in the future. Those things still have to play out. Obviously if we start adding fleet, yeah, we’re going to have to add more people as we go forward. But we still think we’ve got a bandwidth here that we can clearly control and when you look at the cost that we’ve taken out, we’ve said that roughly 55% or more is going to be out permanently…

[Seth Weber:]

Right.

[Michael Kneeland:]

… as we go forward. And obviously in SG&A, that’s one that’s going to fluctuate, it’s going to fluctuate as revenues go up, sales expense will be there. Other things, there are inflationary factors around fuel could go up and have an impact. So, on balance we think that we’ve got very good controls in place, our people understand it, our people buy into it and we’re clearly focused after a more profitable customer. So that into itself would help drive the performance.

[Seth Weber:]

Okay. Have you noticed any uptick in maintenance costs on the fleet as it gets older here or do you feel like you still have some, you can age it another four or five months kind of thing?

[Michael Kneeland:]

Yeah. Our age is up on a year-over-year basis, that’s correct. The percentage -- repair and maintenance as a percentage of OEC is flat. So, we are taking care of the equipment. We are monitoring it. We are making sure that it’s repaired. So we haven’t seen a significant increase in our repair and maintenance cost.

[Seth Weber:]

Okay. Last question. On the used equipment, is there any way to track, is a lot of that going overseas or is that staying here, the sales, do you think?

[Michael Kneeland:]

The retail channel, most of it’s here.

[Seth Weber:]

Okay.

[Michael Kneeland:]

Obviously we -- the idea is we really want to push as much as we can through the retail because we get the highest margin there. And so that’s what we’re focused on and that’s why we went out and we put -- we updated our website and that’s why we also have a new program out there with financing to get people attracted towards it. So most of the sales that we’ve retail -- 70% of our first quarter sales were retail were here.

[Seth Weber:]

Okay. So nothing, I mean, so there’s a reason why that number shouldn’t be sustainable? There’s nothing unusual in the quarter?

[William Plummer:]

Yeah. In terms of overseas shipment nothing unusual. But, I guess, I would caution against just a straight annualization of our used sales margin in the first quarter. We haven’t been at these levels of margin for a couple of years and quite honestly, well over a year we haven’t been at this level of retail -- the retail share of our used sales. So those mix factors had an important impact this quarter. As we go quarter to quarter throughout the course of the year we could sell a little bit more at auction, we could sell a little less at retail. That might impact the overall margin that we’ll realize in used sales over the course of the entire year. So, don’t just multiply it by four as the same margin.

[Seth Weber:]

Right. I mean, did the age of the fleet that you sold change materially from past quarters?

[William Plummer:]

No, it’s 75 months. And I think last year in the quarter it was 77 months or something like that.

[Michael Kneeland:]

77.9.

[William Plummer:]

It wasn’t a significant change in the age of the fleet. So it was mix and price.

[Seth Weber:]

Okay.

[William Plummer:]

And that will be the story as we go through the remainder of this year as well.

[Seth Weber:]

Great. Okay. Thanks very much, guys.

[Michael Kneeland:]

Thank you.

[Operator:]

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer.

[Scott Schneeberger:]

Hi, guys. Pretty good. Thanks. And – hi, guys. Nice work, by the way, good job. I’m going to follow up on that last question because that margin jump up in used sales was impressive. And the $35 million in the quarter, I guess, the core question I want to get at here -- is that a reasonable run rate for what you might be selling for each of the quarters for the remainder of the year or might that pick up? I’m just wondering if some of that what you selectively sold was just of a very higher margin and we would see that deteriorate on higher revenues of used sales going forward?

[Michael Kneeland:]

Yeah. No. Let me just say that going back to Bill’s comment, we sold older assets. We weren’t picking newer assets to sell. They are 75-month-old assets. Having said that, our goal is when you look at, when you go to auction you have to get it ready, you then have to transport it and then you also pay a commission on top of that to the auction house. We wanted to take a look at it and say is there a better way and a way we can expand retail? So we’re pushing that through and we have some initiatives underway which I already described, that’s one part. The other part is that we will ramp up our sales as we go forward and there’s an expectation that we’ll sell more fleet. Obviously as the seasonality comes on you would expect demand from people who want to buy something would increase. That being said, we still want to push it as much as we can through on the retail side. Push that all aside, we’re not afraid to use auctions if need be in order for us to achieve what we want to achieve. But we’re very happy with the signs that we’ve seen and the reality of it is if you could look at the auction prices that are out there, those prices are improving as well.

[William Plummer:]

And, Scott, I’d only add, so the $35 million was a result of selling $77 million of OEC in the first quarter. That was down significantly from what we did first quarter last year but last year was an epic here in used sales. Our view is that we’re going to have a more normalized used sales year this year, the quarters will breakout however the quarters breakout. We don’t feel that we were overly selective in what we sold in the first quarter and as evidenced by the 75-month average age of what we sold. We’ll continue to make decisions based on where the market is as to how much we sell in a given quarter and, in fact, the mix of what we sell in a given quarter and that’s why I threw out the caution about don’t just annualize the first quarter margin. As that mix changes, whether it’s channel mix or product mix, we’re going to have different margin results. But you can certainly look for us to sell a more normalized amount of used equipment over the course of the year. And it will just depend on what quarter we’re in as to exact results that come out of used sales activity.

[Scott Schneeberger:]

Great. Thanks for that color. Certainly reassuring. Along the same lines kind of flipping it. You mentioned these two specific customers in the quarter that you did spend a bit of CapEx on. I guess, the question here is, are these -- were these industrial long-term customers where, you know you will have utilization for a good long time? What or are you just serving a customer who’s a big customer to keep them happy, just kind of the strategy, the rationalization there? Thanks.

[William Plummer:]

It’s all of the above. One was industrial, one was more construction related. In both cases they were very long-term commitments that we made to them and they made to us.

[Scott Schneeberger:]

Okay. And then another big question that you responded, Bill, you didn’t know if it was cyclical or seasonal what you’ve seen so far and that’s fair given where we’re in the year. At what time, at what point do you expect to see or expect to have more confirmation of which or both that it is and just, any thoughts on that topic? Because you sound very, very optimistic and just wondering if it might not just be a seasonal uptick and this could be a head fake, that’s the root of the question?

[William Plummer:]

Yeah. And that’s the core question that we wrestle with every day. So, I would hope that when we’re on this call 90 days from now, we’ll be able to say, you know what, it certainly is seasonal but the seasonal was either helped by or hurt by the overall cycle -- point in the cycle that we’re at. I would hope that we’d have some more clarity after we got half the year in our pocket. And so that’s sort of the timing where Bill Plummer at least will be making a judgment. But, we’ll just play it however it plays out as aggressively as we can. That’s the strategy we’re taking.

[Michael Kneeland:]

Yeah.

[William Plummer:]

Certainly this is more of a seasonal uptick than we saw last year and that may not be saying a lot, but it is certainly more of a seasonal uptick if it’s all seasonal. It’s probably more of a seasonal uptick that we’ve seen in a couple of years if it’s all seasonal. So, maybe there’s some cyclical component to it. Mike?

[Michael Kneeland:]

Yeah. I’d just say, that you’re right, everything that Bill said is right on. What we did do is we went out and we actually talked to customers. We wanted to get from them, what are they seeing, what are they experiencing. And these relationships go both ways, it’s just a matter of sitting here and we got their business, we have to earn it every day. But it’s more of a partnership that we try to focus every one of these single point of contacts. And we actually went out and we talked to customers and we asked them, what are you seeing? What are you experiencing out there? And they say there’s more bidding activity. To Bill’s point, I think in 90 days we’ll have a better understanding of where things stand because of the weather that we had and we’ll have better clarity. But it was refreshing to hear from our customers that the level of bidding activity they’re seeing is increasing. Again as I mentioned in my opening statement, is that it is still competitive. But nonetheless there’s more bidding activity.

[Scott Schneeberger:]

Okay. Thanks. Two more quickies and I’ll hop off. Could you provide, you gave utilization in the monthly progression through the quarter? Could you offer that on pricing comps? I don’t believe we heard that? And then also, any thought, this is a suggestion and a question, any thought to providing enhanced level of guidance next quarter on the assumption that you may have better visibility? Thanks very much for everything.

[William Plummer:]

Yes, Scott, give him an inch and he’ll take a yard. I’d rather not, Mike, I don’t know if you want to. I’d rather not go down the route of more detail of pricing data. Are you feeling generous today or no?

[Michael Kneeland:]

Since we gave out the other one let’s just -- it was down 8.1 in January, 6.9 in February and then 4.5.

[William Plummer:]

Those are the year-over-year comparisons by month…

[Michael Kneeland:]

Right.

[William Plummer:]

… for rate.

[Scott Schneeberger:]

Great. Thanks.

[William Plummer:]

And then, I’m sorry, the question about guidance is one again that we talk about a lot. We’ll continue to evaluate it every quarter and make a separate judgment. The reason we’ve stuck with the approach that we’ve is because of visibility. And we talked about it again over the course of the last few days. We decided that we didn’t feel confident enough about visibility to be able to go to a more revenue and EBITDA focused guidance. And we’ll make that assessment again as we get ready for the second quarter.

[Scott Schneeberger:]

Okay. Thanks.

[William Plummer:]

Okay.

[Operator:]

Thank you. Our next question comes from David Wells of Thompson Research.

[David Wells:]

Hi. Good morning, everyone. First off, I guess maybe a couple more questions just related to the rate outlook. Given what we saw later in Q4 of ‘09 where you saw your rental rates flat on a sequential basis. How does, if you look at that number relative to what you’re seeing in the late March and early April timeframe? Are we still seeing drops from that or are we flattish with what we saw at the end of the year?

[William Plummer:]

So, we did have a, I mean, when you look at sequential declines or we did have sequential declines in the first quarter. Each of the three months of the first quarter on a sequential basis were down. So we’re down from that essentially flat level that we maintained from August through the end of December.

[David Wells:]

Okay. And I guess, I mean, starting, I guess in this quarter and in the second quarter to some extent, you start I guess coming into easier comps somewhat looking back to what we saw last year. Keeping that in mind, I mean, what does it takes for the industry as a whole to see some sort of pricing power return if, here we’re, we’re actually seeing a seasonal uplift in the construction season, which we probably didn’t see to the same extent last year. Is it a matter of the players kind of being more rational collectively or is it a fleet size issue still or what are the puts and takes with regards to that?

[Michael Kneeland:]

David, this is Mike. You know, I would say that in some pockets it’s a fleet issue. I think that obviously discipline is part of it. I think the other part of it is the fact that, as I mentioned, sequentially what you want to see is the sequence of events, used prices, the time utilization and time utilization as it starts to improve. And as Bill mentioned, we saw it March, we see it continue into April. It has to play itself out probably for another 90 days or so for other companies to start thinking or plus other companies to think we can only talk about what we manage and how we focus. And we’ve systems in place, we look at every deal, we’ve got a hard stop, so we know when we go below a hard stop why, we’ve that question. And so it’s challenging, it’s something that we manage every day. It’s something that is near and dear to my heart and it’s my number one priority to make sure because it’s the biggest lever that we’ve in the industry, as a company as well and focusing on that. And but I think time utilization overall as it begins to improve and there are going to be pockets, ups and downs across North America and as I said earlier, it’s going to be a little choppy.

[David Wells:]

On the CapEx front, in terms of the categories of equipment that you’re adding, are you moving up category in terms of particular size or capacity classes as you add in earthmoving equipment? And does that potentially create issues from a maintenance cost if you’re getting into classes where you maybe don’t have the same level of expertise that you would for smaller categories?

[William Plummer:]

No. We’re focused on the cat classes that we’ve identified as the best opportunities for the market. We’re reinforcing there. So, I don’t think, I can’t think of any circumstance where we’ve gone somewhere where we haven’t been before in our spend and we’ll continue to think about it that way as we look at the rest of the year. We may emphasize some components but it won’t be anything new.

[David Wells:]

Okay. That’s helpful. I noticed in the Q that there were some hedges with regards to diesel fuel that were put in place. And maybe if you could kind of walk us through on your thinking with regards to that. And it looked like it wasn’t necessarily a significant benefit in the quarter but is it more just kind of some housekeeping looking at the potentialities out there or is that a new program or a resuscitation of a previously existing program?

[William Plummer:]

David, that’s essentially how we’re thinking about it. It’s a new program. We’re just looking down the road and asking ourselves where are the exposures that we’ve on a commodity basis. We’ve obviously over the last couple of years seen, at least at crude oil, the cycle blow up to almost $150 a barrel. And we just said, you know what, there’s really not a lot of upside in carrying that fuel risk unhedged. So we put in place a program, it’s roughly a quarter of our fuel exposure over the next two years that we’ve covered so far. We’ll continue to look at it and evaluate what’s the right amount of cover to carry and we’ll continue to report on it through the Q’s but nothing unusual there.

[Operator:]

Thank you. I’d like to turn the call over to you, Mr. Kneeland, for closing remarks.

[Michael Kneeland:]

Thank you, operator. I want to thank everybody for joining us on today’s call. Just as a final reminder, as I mentioned at the end of my opening comments. Our investor presentation webcast is going to be on Thursday the 29th at 12.30 Eastern Time. We also set aside some time for Q&A as well on that call. So until then, if you have any additional questions on anything we discussed today, please give us a call here in Greenwich and we’ll look forward to seeing you all or hearing from you on the 29th. Thank you very much.

[William Plummer:]

Thanks, folks.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Thank you and have a nice day.