M&A announcement

May 14, 2012

Slides

Good morning, and welcome to the United Rentals-RSC Integration Update Investor Conference Call. Please be advised this call is being recorded. Before we begin, note the company's presentation, 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 are included in the safe harbor statement contained in today's presentation. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K, as well as to the RSC Form 10-K, each for the year ended December 31, 2011, as well as to subsequent filings with the SEC. 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. 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. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Thanks, operator, and good morning, everyone. I want to thank everyone for joining us for this special investor update. I'm here today with Bill Plummer, our CFO, and Matt Flannery, who was recently appointed as our chief operating officer, as well as other members of our senior management team. As you know, United Rentals and RSC officially became one company on April 30. While we were able to give you some pre-close estimates in areas like cost synergies, we feel even more comfortable with the information we're sharing today now that we've had a chance to really dive in and take a look at the RSC data. Back in December, we listed our strategic rationale for the transaction, and it included a larger, more optimized footprint, a more balanced customer mix, stronger positioning in front of strategic customers, and cost revenue synergies and favorable market conditions. Five months later, these reasons are not only still valid, they're even more compelling. So let's start on slide 3. I'm going to start with our market dynamics and Global Insight's forecast, which as many of you know, was revised last week. I'm going to bring you up to date on the integration, which is moving ahead very well. Two of our key estimates have been revised upwards. We raised our target for cost synergies to at least $230 million. We now expect rates to be up 6% for the year. So let's look at the marketplace and where it's headed on slide 4. This slide shows the most recent forecast from Global Insight, which is the primary source of economic data for the equipment rental industry. Last Wednesday, Global Insight issued these construction estimates for the United States. I want to call to your attention some key numbers on this slide. Total construction activity is projected to increase by 5.5% in 2012 on a year-over-year basis, followed by increases of 8.9% and 17.4% in the next two years. Commercial construction will lag this year, but is expected to come back strong in 2013, up almost 17%. Construction in the manufacturing sector is forecast to be up more than 11% this year, with continued strength in 2013 and 2014. Let's go over to slide five now. Here you can see the corresponding forecast for the equipment rental revenue growth in the U.S. over the next four years. Global Insight projects that rental revenue will grow 9.8% this year, reflecting a triple benefit from construction growth, rate improvement, and secular penetration. That's up one full percentage point from their forecast in January. This is the construction and industrial area, which is our two main sectors for the company. You can see the projected dollar growth is very healthy for the foreseeable future. All very positive. Let's go over to slide six and we can talk about Canada. Canada, as you know, is about 15% of our business right now. Here again, the projections are favorable as well. The forecast from Canada is about a 7% increase in equipment rental revenue this year, followed by modest growth through at least 2016. Now, we mentioned on our last earnings call that the rate of growth was slowing in Canada, and you can see that in the chart. But the market itself is still growing, and has been tracking very close to forecast. The external environment is on an upswing, and that's great. But here's what I want to emphasize based on these numbers. If you look at last year when construction was weak, our performance was driven by penetration and strategy. When the penetration should start to slow, the increase in construction activity, together with our strategy, will continue to create opportunities. So there are multiple dynamics in our favor, and we're confident that we can drive performance in any environment. So let's go over to slide seven. This is a map of our new regional alignment for the combined operations of both United Rentals and RSC. Our company coverage is the same as it was before the merger, but we now have 13 regions to support our scale. Now, this includes the 12 geographies that you see here, plus our specialty business of Trench Safety, Power, and HVAC. We consider that to be a separate operating region. I want to share just a few comments from our regional Vice Presidents. I think this is very important. In our Gulf South region, the project pipeline is very robust. We have several major projects scheduled to start in May and June, with only one project coming off at the end of that timeframe. Our Southeast region, which was hard hit during the downturn, is in a mild to moderate recovery across Florida and Georgia. We see high-tech projects are driving the growth in Oregon and Washington. As expected, oil exploration remains strong in Colorado, Wyoming, and Montana. This is a two-part opportunity for us. First is development of the oil field itself, and then the infrastructure that follows. So both phases need equipment to rent, particularly the equipment we rent. Now I could go through every region, but you get the picture. It's very positive out there. And that's just not from the external, that's also from an internal perspective. Within our company, the cooperation between legacy United and RSC employees has been tremendous. In fact, our regional vice president in the Mid-Atlantic region just sent an email that described the cooperation between the organizations as exceeding all expectations in deal sharing, networking, and fleet sharing. I can tell you that's not unique. It's what we hear, the comments like this in the field every day. Our Power & HVAC group has been working closely with the team from RSC. With our specialty rentals, each company has its own fleet mix, so there's an opportunity to reduce the amount of re-rent to capture better margins. I can tell you personally from our town hall meetings that we just started, that the pulse of our operations is very strong. I was down in Florida last week in town halls in Tampa, Davie, Orlando, and Jacksonville. Other senior managers are also holding meetings throughout the U.S. and Canada, and we're getting a lot of feedback, most of it positive. Let's go over to slide 8. Here's the reason why things are going so smoothly. It's a world-class integration effort. Very proud of what the team has put together. In just two short weeks post-close, we have our field leadership team in place. Extremely important. We have sent detailed playbooks to the branches so that all of our employees are on the same page. These are very detailed and outline every step. We have cross-company visibility of fleet. This is critical for equipment sharing and customer service. We've also launched a comprehensive microsite for employees that focused on the integration process and its goalposts. The town hall meetings I just mentioned are in full swing, scheduled to go on for the next several months. We're taking numerous actions to capture the synergies anticipated in our plan. Let's go over to slide 9, and I'll talk specifically about the cost synergies. On the left side, you can see the areas where we've identified major cost-saving opportunities. Obviously, the two largest buckets are corporate overhead and branch consolidation. Moving over on the right side is the projected run rate. We will exceed our original estimate of $200 million and achieve a new goal of at least $230 million in synergies realized in 2013. I understand there's some problem with some of the slides out there, so I'd ask you all to please be patient. We also, once completed the transaction of both operations, they became very transparent to each other. We're comfortable in raising our synergy target by an extra $30 million. I can only tell you if there's more out there, we're going to find it. I want to just stop for a moment and talk about revenue synergies. We're just two weeks into it, so it's really too early to offer any solid projections. But we're confident that we're going to show a net revenue gain. Very important. Moving on to slide 10, and hopefully, you're all with me on that. It's about rates, the areas that we see opportunity. Number one, we're going to roll out our Core price optimization software. Core has been a great tool for our branches, and we want the legacy RSC branches to have it as soon as possible. Second, we now have a more compelling value proposition and customer service infrastructure. And third, we have the opportunity to optimize our relationships with larger accounts, many of which are using both companies before. There are another five objectives that we're going to move forward with, which are immediate. First, we're going to realign our combined sales force. We're also going to consolidate our IT platform. We're going to optimize our branch footprint and the merging of best processes from both organizations, particularly as they relate to fleet management, repairs and maintenance, and delivery service. The realization of our cost and revenue synergies. I'll add CapEx synergies to that list as well. Because with a $7 billion fleet, we see all kinds of opportunities to engineer our spend. Now we should hit some milestones in June, and that's when we expect to have all of our branches running on the same IT platform. That's a monumental task. We'll also be ready to proceed with branch consolidation starting next month. That's an overview of the considerable progress we're making. Matt is here with us today to answer any questions about the integration during the Q&A. But first, I want to hand over to Bill, and he'll walk you through the outlook and the capital structure. So over to you, Bill. Thanks, Mike, and good morning to everyone. I understand we're still working on the issue with the slides, so hopefully we'll get those up before we're all done here. I will try to be descriptive of what's on each slide, just so that folks can get a sense if you haven't downloaded the slides from online. I start with just a quick recap of the first quarter. Actually, didn't want to spend any time on slide 11 talking about it. These are the numbers that both companies reported for Q1 standalone. So RSC's numbers are just taken from their reports. We have not restated them to our accounting and philosophical approach. But I just wanted to put those in so everyone had the numbers side by side. Similarly, the next slide, we use the standalone reporting basis for each company to give you an update of how April has gone for us. In short, April was strong for both United Rentals and RSC. Revenue growth was close on to 20% for RSC and a little over 19% for URI in the month of April. Rates were a major driver for both companies, being north of 7% in both cases. In the case of RSC, almost 8% on a year-over-year basis. Encouraging was the fact that both companies had a nice sequential rate improvement, a 0.7% improvement for United Rentals, and another 0.3% sequential improvement for the month for RSC. So a really nice rate environment that goes along with a pretty substantial volume improvement. On volume, our OEC on rent measure for both companies, again, very strong, 16% in the case of RSC, 17% on the URI side, driving nice utilization performance. RSC was 69.6%, a 2.7 percentage point improvement over last year for the month. URI's time utilization was 64.2, down a little bit versus last year. I think that reflects the tremendous amount of fleet that we have brought in over the course of the first quarter and the month of April. If you look at the month of April standalone, URI brought in $138 million worth of gross CapEx in the month or $113 million net rental CapEx for the month. So a very strong month of April following a very strong amount of receipts in the first quarter. $72 million of CapEx for RSC side. EBITDA performance for both companies was also strong in the month. $85 million or 36.7% margin for the United Rentals side and $56 million or, excuse me, 40% margin for the RSC side. You have heard me say the word strong three or four times at least during that description, and I think that is very apt for the month of April. Early in May here, just about halfway through the month, I think the fair characterization is that May continues good positive momentum and looks to be shaping up to be another strong month so far this month. Let me move on slide 13 to updating you on our outlook for 2012. We have decided to keep with the structure for updates that we have had from the URI side for some time now in talking about our rates, time utilization, rental CapEx, free cash flow, and flow-through assumptions for the year. So this slide is laid out that way. We give you the standalone URI outlook that we had given at the end of the first quarter, and then we compare that to what we expect to report as a combined company going forward in our external reports. That will be in the center column. Then the pro forma metrics that we expect to deliver, assuming that the deal had closed at the beginning of the year and comparing it to the combined companies over the prior year. So you can see that if you had the slides, you would be able to see that against our 5% rate improvement outlook that we had previously. On a pro forma basis, we expect to deliver a combined 6% year-over-year rate improvement for the two companies together. We do not show anything in the as-reported box, but the as-reported numbers that we will give you will be essentially pro forma numbers. There is a technical issue around whether you can compare combined rate calculations this year with standalone rate calculations last year, which is the basis for the reporting of revenue and the other financial metrics. So we are working through the complexity of perhaps doing something there. But the pro forma year-over-year and sequential rate performance, we will definitely give you, and we feel that will be a robust performance this year, giving us a 6% improvement on a combined basis. Time utilization, we have basically kept constant with our standalone guidance on a reported basis. So we expect to report a half percent improvement in time utilization for the full year, and that is where we were as a standalone company. If you look at the pro forma performance of the combined companies, it will be somewhat more with the RSC side driving most of that year-over-year improvement. On a pro forma basis, we expect time utilization to be up about a point. Rental CapEx is going to come in on a reported basis in the area of $1.3 billion to $1.4 billion. Keep in mind, that excludes the first four months of the year for the RSC purchases. If you include that first four months, it will be in the area of $1.5 million to $1.6 million of gross CapEx on a pro forma basis. That compares to the standalone URI number that we had of approximately $1 billion. On a net rental CapEx basis as reported, net rental CapEx will be right around $950 million. We give a range around $950 million there. On a pro forma basis, it will be a very robust investment of right around $1.1 billion with the range that we give around there of $25 million plus or minus. Free cash flow for the year on a reported basis will be in the negative $100 million to negative $150 million range, whereas on a pro forma basis, in that negative $90 million to $140 million range for the year. I will point out that these are, if you will, adjusted free cash flows, so they exclude the impact of the merger-related costs like broker fees, legal fees, underwriting costs for the debt, and so on. On an adjusted EBITDA flow-through basis, the as-reported numbers should come in in the range of 50%-55%. That compares to the 62%-67% that we had standalone, and it obviously reflects the impact of adding the RSC revenues and EBITDA at roughly a low 40s% margin. When you do that calculation, the impact of adding that amount of revenue and that amount of EBITDA drags down the overall reported flow-through. If you adjust everything on a pro forma basis and compare to the prior year on a pro forma basis and include the impact of the synergies, you get something north of 70% on an adjusted flow-through basis. We think that for flow-through, that is the more appropriate way to think about the flow-through of profitability. Those are the key measures that we will continue to update you on going forward. If we move to the next slide 14, you will see some other measures that we decided to disclose because it will help everyone understand better the reporting that we will be putting out going forward. This is a very complex combination from the perspective of someone trying to model it. We recognize that. We wanted to call out a few things that we think will be important in modeling the company's performance. First, with working capital. We have made a decision to convert RSC's payables policies to the United Rentals payable policies. That is a pretty significant impact because RSC historically has purchased their fleet on 180-day payment terms. URI has typically purchased on payment terms that are more like 50 to 60 days. When you convert to those payment terms, it is a pretty significant one-time cash hit. We show you here it is roughly $200 million of one-time cash hit. Why would we do that? We do it because we get a better purchase price on our payment terms. Through looking at the history of purchases at RSC, we have come to see that there is about a 5% purchase price benefit on the URI side, and that is what has really been driving our decision to move to the URI overall procurement policies for fleet. So there's the trade-off, 5% better price up front against giving up the longer financing terms that the vendors might otherwise provide. There will be a significant impact on used margins in the company as a result of the purchase accounting that we will apply for RSC. On a GAAP basis, you have to step up the assets that you acquired to a fair market value. And when we do that, we will be stepping up the basis for the acquired RSC assets roughly 21%. So obviously, that will have a pretty significant impact in lowering the margins that we report per GAAP on our used sales. Our intent is to call out this impact as we go forward and adjust it in adjusted EBITDA. On non-rental D&A, obviously, we will have, again, a purchase accounting artifact of amortization of customer relationships, trade names, and other intangibles. You can see in the S-4 description how we approach this whole issue, and we gave the number roughly $1.4 billion for value of all of those intangibles that we will amortize over a roughly 10-year time period. So that should give you a handle on the amortization of intangibles impact that we will be reporting going forward. Share count. The weighted average share count for 2012 for the fully diluted share count calculation will be somewhere in the range of $97 million to $99 million for 2012, so that should help on the EPS calculation. On the tax rate, the operational tax rate we are now calling in the low to mid 30% range, and that obviously reflects the combination of the two companies. And as well as the tax impact of certain of the expenses associated with the combination of the two companies that will drive down the U.S. share of profitability relative to overall. And that will skew the weighting of the tax rate more toward Canada in the calculation. So low to mid 30% tax rate range. On interest expense, all the data's there, you could calculate it, but we just thought we would make it simple and show that we expect a reported $440 million to $460 million of interest expense over the course of 2012, of which $370 million to $390 million will be cash interest. And both those numbers include the impact of the pre-merger interest expense. Recall that we funded into escrow, and we pre-funded the interest expense in the escrow period before the close, and that number was about $30 million. So now I will move you to slide 15, where we show our capital structure post the transaction. And we call out a couple of key points. One is the amount of liquidity that we have available to us. We talked previously about $600 million to $700 million of available liquidity. And essentially, at close, we had $700 million of available liquidity, including our ABL availability, our cash balance, and the availability under the accounts receivable facility. I will point out that we did, as we presented in an 8-K, purchase $75 million worth of shares. We bought them at $45 a share, and that purchase was in a private transaction that we executed under the $200 million repurchase authorization that we have from the board of directors. One other point, we do expect to increase the size of our AR securitization facility in the third quarter. Slide 16 is very familiar to everyone. It is just a maturity profile of our debt. Nothing really new to point out here. We just repeat it so that everyone has it in a handy form. Then slide 17 is an update to a slide on our leverage ratio that we provided during the first quarter earnings release. We did this to give a sense of how we expect the debt-to-EBITDA leverage ratio to decline over the next couple of years. I will just point out that this slide is based on the forecast that we gave in the S-4. So it is not a current view of the forecast. It is the S-4 data for 2012 and 2013 with some key assumptions about the amount of synergies that we will realize. They tie to the synergies that we presented earlier as well as some other assumptions that are broken out in the footnote. But the key theme here is one that we have repeated several times. We expect the leverage level of the company to decline rapidly, and it will be that way even if we do not get as much robust growth in the market as we expect. There is still plenty of room for the leverage ratio of this company to get better over the next couple of years. Those are the key points that I wanted to offer this morning. Looks like we never did get our slides back together. So hopefully this was clear. The presentation is available on our website, and certainly would encourage anyone who does not have it already to download it and take a look. And our apologies for the technical issue here. With that, I will stop, and we can open up the call for questions and answers. Operator? Thank you. Ladies and gentlemen, if you would like to ask a question, please press star then one on your touch-tone telephone. If your question has been answered or if you wish to move yourself from the queue, you may press the pound key. In the interest of time, please limit yourself to one question. If you have additional questions, you may return to the queue. Our first question is from David Raso of ISI Group. Your question please. Hi, good morning. Good morning. One clarification. We had this nuance a few quarters ago as well. Mike, verbally, you're saying at least $230 million of cost synergies. The slides a couple times just say "targeting 230." I just want to be clear, is it at least 230, or is it a point estimate 230? At least 230, David. Okay. On the cost savings, on slide 9, you can see the way the pie chart's now changed and maybe for people who don't have the slides. I mean, basically, it looks like you allocated where the cost savings are going to come from, the now at least $230 million. You took down the corporate overhead savings about 7%, regional overhead down 1%, but you added back to other efficiencies and branch consolidation, rounding here, 5% on consolidation. You added 4% to other efficiencies. What changed as you went further along to, A, bump it up at least $30 million, and what changed so much here where, it's not immaterial that you found more branch consolidation but less corporate overhead. Is it just how you're accounting for the numbers, or you truly found maybe more branch closure but a little less corporate overhead opportunity. David, I'll start off, and Matt's here, so Matt, chime in with anything you want to add. I think it is very fair to say that we found more branch consolidation synergies, and that explains the somewhat larger share of branch consolidation in the pie chart, and also explains a good chunk of the absolute increase in the targeted or the expected synergies up to the at least $230 million number. The corporate overhead number, and Matt, if you've got it there, you might be able to help me here with the exact number, but I don't think the absolute dollars of the corporate overhead changed, and maybe they're even up a touch in absolute dollars. Yes. But as a share of the pie. Correct. The baseline moved, which changed the percentage. We had met our corporate overhead and actually exceeded it a little bit. As Bill stated, we found other opportunities, as we've gotten deeper in since the close, we've been able to look at some detail that we were not privy to, not allowed to previously. We've made the appropriate adjustments. David, you caught the most specific, is the real estate opportunity attributed to branch consolidations. Okay. To clarify again, especially for folks that own the slides, there is a slide here that has the bar graph, slide number 9. Increasing cost synergy targets, and you laid it out by year. Just so I am clear. On 2013, there was a slide from the first quarter earnings presentation where it spoke of 2013 as eight months of a $200 million run rate and four months of $147 million run rate. You blend that and say you used to think 2013 had savings of around $182 million. I should now read this bar graph of $200 million as, well, that is the bump up. That is part of the bump up. You were thinking $182 million for next year, now you are thinking $200 million. Is that the right way to read that graph? That is it, David. The $200 million is each of these years, each of these bars is the current view of direct realized savings. My question then on 2012. 2012, this new slide 9 says $70 million. Yes, sir. It might just be my misreading the old slide, but for 2012, it used to say $147 million annual run rate prorated for 8 months. Yeah. Now, what we- That would be like a $98 million savings, right? Two-thirds of 147. That's right. The one- Did we just take it down $28 million for the year? I'm just trying to make sure I get that right. Yeah. The 147 was the first 12 months following the close. And for modeling simplicity, I think you're talking about the leverage ratio slide, the way we calculated- Actually, no. Slide 9, the bar graph, the $70 million- Yeah, no, I- savings for 2012. It just could be when you timed the 147. The old slide just simply said, not much detail, "prorated for 8 months. Yeah. I just did two-thirds of 147, but I realize it could be a little more back half-loaded, but I am just trying to make sure I understand. Did we just lower the savings for 2012? No, we didn't lower the savings for 2012. What we did in the previous slide that you were talking about, which I believe was the leverage slide. Yeah, that would be it. Sorry. The old, yeah, leverage slide from last deck. Yes. What we did for modeling simplicity was just to prorate, and that 98 that you calculated is exactly right. That's exactly what we embedded in that leverage calculation. The actual realized number is actually a little bit north of $70 million. It has always been around that number, David. We just didn't disclose it. The timing of the synergies is the difference. Okay. Very helpful. Last quickie on April, very good rates for both companies. Your time utilization down 100 bips for April? I'm nitpicking here, but I understand why your rental rate guidance went up given the way April's going, the way you alluded to May. Just any color around the utilization being down 100 bips, just so I can feel comfortable with the 50 bip increase for the year you're still assuming for URI standalone. Sure. Matt's going to take that one. Yeah, David. Thanks. We've obviously been cognizant of that. We made a conscious decision in some models to bring in the equipment earlier. We knew that there was going to be opportunity in the combined organization, if there was any risk to deploy that fleet. The other factoid is that we do have $450 million more fleet on rent. The market was very robust, and we didn't want to get into the situation we did last year, where we were unable to take advantage of the late spring, early summer push for OEC on-rent. We made a strategic decision to bring in the fleet. That was the logic behind us increasing the amount that we expect to take in the first half from about 600 to north of 700. So, we feel very good about how we're positioned for the remainder of the busy season. All right. Thank you so much. I appreciate the time. You're welcome, David. Thank you. Thank you. Our next question is from Henry Kirn of UBS. Your question, please. Hey, good morning, guys. Morning. Maybe to dovetail with David's question, could you talk a little bit about your view for normalized EBITDA flow through for the consolidated entity now that you're a couple of weeks into the deal? When you say normalized, I want to make sure I understand what's in your head as the normalized. The 70+ on a pro forma basis that we have, is in the area of normalized, if you allow for the impact of the synergies, right? Once the synergies, on a year-over-year basis, go away, then it will drop back to something like what we've seen for the two companies standalone in the past, which probably is in the- I don't want to limit ourselves, but it's probably in that 65% area. The 62% to 67% that we've been talking about for URI standalone the last couple of years, or the last year, is probably not far off of where we should be as a combined company once the impact of the synergies are all gone. But you can see we've got a couple of years' worth of synergy year-over-year impacts that should bias that number higher. That's helpful. And one quick follow-up. Could you talk about the employee morale so far, and how's employee retention going? Dave, this is Mike. I'm going to ask Matt to answer that, but I will tell you on the town hall meetings, as I made comments, very enthusiastic, very positive. Matt? Yeah. So to Mike's point, Henry, we had great response just last week, so it's very fresh in our mind how encouraged and how much anticipation there is amongst the branch labor force. I think the biggest surprise, and maybe surprise shouldn't be the right term, but encouragement, is that from day one, on May 1st, we were getting pictures from all around the network of RSC legacy trucks moving United decaled machines, and vice versa. And getting success stories from an RSC branch saying that, "We had five big boom orders that we normally would've had to pass on or try to re-rent the assets, and we were able to share it with our URI brother store next door and fill the order." We're getting those stories around North America, and it's been very encouraging. I will say that although the forced period of the no-touch period between us announcing the deal and closing, I think, really got people to get their heads wrapped around it. So we're not dealing with any cultural issues because everybody couldn't wait to get to work with the store down the road, and we've seen great morale and great opportunities due to that. Thanks a lot. I'll pass the baton. Thank you. Thanks. Thank you. Our next question is from Ted Grace. Morning, Ted. with Susquehanna. Your question please? Thanks. Hey, guys. How you doing? Good. Hey, Ted. So a quick question on pricing. Now that we're a couple of weeks into the combined company, I'm just curious if you could speak to your observations on URI's kind of legacy pricing versus RSC's legacy pricing for like products, kind of what the observations would be, and then what the strategy is for kind of migrating towards one or the other. Maybe I'll start, and again, Mike and Matt, if you guys want to chime in. Yeah, I think the short and sweet is it varies as you look at different markets around the country. And in some cases it'll be RSC higher, in other cases it'll be URI higher. It also varies by the Cat class that you're talking about. And again, it'll be one way in some places and the other in the other. As a general statement, I think pricing for both companies, you would have to put in the premium pricing category relative to typical pricing in the markets that we participate in. And in some cases again, URI might be a little bit higher, some cases RSC might be a little bit higher. I don't know if you guys want to add anything or correct anything, and then maybe touch on how we're approaching reconciling the pricing. Yeah, certainly. This is something that on, I don't know what time the deal closed, I think it was 3:00. I think by 3:15, our national account team and our corporate sales teams and our corporate pricing teams were into the data as quickly as they could be. So wherever we are seeing variations, the biggest challenge for us that we want to get on right away from a customer service perspective is to get to our key accounts, our top quartile, and harmonize them, take away any confusion. That's what our sales team is focused on right now. As far as the local contract rate or the non-corporate account-based teams, we have our district managers. We were able to give them data almost immediately. By day 2, these folks were able to get a robust tool of pricing data so they could take a look at it and harmonize it locally. As Bill accurately stated, it's different in each market. We're both leaders in the industry independently, and we continue to see that trend and that opportunity on a go-forward basis. Got it. If we tie that back to slide 13 in your deck, the standalone guidance on pricing was +5%, which you commented you've reaffirmed pro forma is +6%, which integrates RSC. Not to lead you in a certain direction and kind of talking out loud, but I'm guessing that you didn't have the benefit of thinking about migrating towards call it the more optimized pricing. Would that be a likely source of upside to the pricing that you might achieve this year? Or just how should we think about that dynamic? Well, certainly, Ted, we thought about what we might get out of sort of optimizing our pricing, applying Core across the RSC pricing methodology, for example. As well as what we're seeing in the market right here and now, and that's what led us to move to 6% on a pro forma basis year-over-year. We'll continue to look at it and continue to look for opportunities to drive pricing higher, and that certainly will involve looking at where we have significant differences in pricing between the two companies, and figuring out the path to reconcile that so that we could realize higher pricing, or at worst case, neutral to what we had previous to the close. Ted, this is Mike. We're going to continue to drive. If there's opportunities, we're going to take it. But to me, it's always been about the services that you provide, and if you're exemplary in the services, you can demand a premium. As Bill mentioned, we do see a premium to localized markets, and we're going to continue to drive the levels of service to our customers. To the extent that we do that and we can demand more pricing, we're going to go for it. Got it. The last thing I'll ask on pricing before I get back in queue, just in terms of the logistics of rolling Core out to the RSC side of the family, can you just quickly walk through what that process and timing might look like? We'll have that completed probably by the third quarter, maybe even the end of the second quarter. We've built out a timeline already. The tool will be ready. It's the training that we want to make sure the logistics of getting everybody trained. We feel very comfortable that by the beginning of the third quarter, everybody will be on the system. Thank you. Again, ladies and gentlemen, in the interest of time, please limit yourself to one question. If you have additional questions, you may press star one to be placed back into the queue. Our next question is from Peter Chan of Credit Suisse. Your question, please. Hi. Good morning, gentlemen. Right here. And congrats on getting this deal done. My first question, and forgive me if I missed this, did you guys give a number for revenue synergies? In a similar vein, have you seen much or any revenue attrition due to customers maybe looking for additional vendors now that one of the major ones is gone for them? Yeah, Peter, this is Mike. I basically stated that it's too early. We just jumped into it. It's been two weeks since we had the close. We're diving into the data. However, we're confident to see a net revenue gain. We do have— I also mentioned that our team with the Power & HVAC has been working very closely with RSC, and we see that as, again, a positive. As we go through the closures, we'll be more specific on any leakage that we have. But you can look forward to our updating the investment community as we make progress. But right here and now, as we see it, we see it as a net gain. Great. That is helpful. Thank you. As a quick follow-up, the gross CapEx as a standalone company, you had it growing up 29% before, and now it is up about 12%. How much of that difference is it because now you have got a larger fleet that you can share amongst yourselves versus maybe longer lead times for equipment versus maybe similar to what happened in Q1 when you spent a lot but you kept the overall number the same? It sounds like where that was more just because you guys were being conservative, and if the opportunity is there to increase your fleet to get business, you will take it. To the percent increase question, the gross CapEx that we expect now on an, I do not know if you did your calculation on an as-reported basis. Pro forma. It was pro forma. Pro forma. The 1.5 as a midpoint. But the percent increase is basically just the average of the increase of the two companies, right? I think URI was going to increase a little bit more than RSC on a percentage basis year-over-year. The $1.5 billion to $1.6 billion number that we give pro forma is basically adding the two companies together. We have not adjusted our view of gross capital spend in any fundamental way as a result of the combination. We will certainly evaluate that, and to the extent that we find synergies in the capital spend that might have us spend a little bit less, we will call that out. But right now, I would be surprised if we went that way. The demand that we are seeing is pretty robust in the marketplace. I think that we are likely to spend what we have said here, and if the market continues to be robust, we will look for opportunities to increase it if and when it makes sense. Great. Well, thank you for taking my questions. You are welcome, Peter. You are welcome. Thank you. Our next question is from Emily Shanks of Barclays. Your question, please. Good morning. Hi. Good morning. Hi. Thank you very much for all this terrific transparency for the pro forma guidance for fiscal year 2012. My question really centers around free cash flow and is three-pronged. The first, just two housekeeping. Can you just indicate to us what cash taxes are expected to be, or should we just use that tax rate of low to mid 30% range? Yes. Secondly, what the timing of the working capital one-time $200 million cash outflow will be. Then just finally, what the priority for the overall free cash, once you become free cash flow positive would be, please. Sure, Emily. Your phone was breaking up, so hopefully I got them all. Cash taxes, we expect to be in the range of $40 million to $50 million this year. So that's what's underneath our outlook for free cash flow. Your second question was around Help me. Just the timing of the working capital one-time $200 million outflow. The impact there is of all the payments that RSC standalone would have been making in 2013 that we accelerated into 2012. The timing of that impact is going to be primarily third quarter. The purchasing usually is dried up by November. It is going to be August, September, October, that timeframe that you will see the bulk of that impact within 2012. Great. Then just a bigger picture, once you do become free cash flow positive, just what your priorities would be for that free cash. Sure. I think it will be very similar to where we have been in the past. We will use that cash flow to pay down debt. The difference now is that we have got now $125 million share repurchase authorization still available to us. We will probably intersperse the share repurchases with debt pay down. But we expect the share repurchase activity to happen reasonably quickly, right? We gave a maximum time limit in our announcement of 18 months. My guess is that we will probably do it a little bit sooner than that. So the share repurchases will probably happen a little bit more front-end weighted, but it will be interspersed with debt pay down to the extent that we have free cash flow available. Thank you. You're welcome. Thank you. Thank you again, ladies and gentlemen. In the interest of time, please limit yourself to one question. If you have additional questions, you may press star then one to reenter the queue. Our next question is from Nick Coppola of Thompson Research. Your question, please. Hi. What are you doing with the combined sales force? I am wondering how important those existing relationships are and what you are doing to maintain those in light of branch consolidations. Yeah, Nick, great question. It is something that we have been focused on very early on, even before pre-close, so that we could send the right message out. We have been meeting with the sales force regularly. The district managers in each area have already had up to two sales meetings to talk about two key issues. Territory optimization, right? Because we had some overlap here between legacy URI and legacy RSC sales reps. So we have harmonized those folks, got them together to split up the territories, work on it with their local managers. More importantly, we have got them focused and put together a comp plan to achieve that. We have got them focused on converting and stabilizing their relationships in our employee base. I mean, in our customer base versus any internal competition. So that has been a number one priority for us, and I am very encouraged about how it is being received. Yeah, Nick, this is Mike. I would only add that the fact that we have had a clean team working on a lot of the customer data. So that enabled Matt and the integration team to run real hard, real quick, and give that information right down to the branch and district management to make those decisions. So you will see the consolidation happen very quickly with regards to the sales force. That is ongoing and we should have that completed within the next two to three weeks. Okay. I just have one follow-up. Thinking about the example you gave earlier about United and RSC sharing equipment, so longer term, have your utilization expectations changed across the cycle? So I am thinking about your ability to share fleet. Does that move the needle on utilization for you longer term? Yes. Nick, it probably biases us upward in utilization. We modeled a little bit of that as we thought about the acquisition, and certainly the early experience suggests that this is going to be an opportunity that we should be able to take advantage of. How do you quantify that and how much of it is the real question. But certainly, I would expect that there would be an upward bias to our utilization from the demand that we can now generate between the two companies. Yeah. Nick, I would also add to that, part of the customer diversification with the industrial sector, which is what the RSC team brings to the table, is usually a first responder when it comes to the economy coming back online. The construction aspect and the civil side, usually is a lagger. So to Bill's point, that supports the URI utilization standalone as being higher going forward. Yeah. The one thing that we will have to judge as a leadership team is, though, do we allow utilizations to drift higher? Is there that much benefit there, or does that suggest there is an opportunity to invest a little bit more and operate with a larger fleet? So that is the balance that we will be trying to strike on a continual basis, and I think the good news is that it is all good news, right? Unless we totally screw it up, I think we have an opportunity that is better now as a combined company than either company previous. Operator, next question. Thank you. Our next question is from Joe Box of KeyBanc Capital Markets. Your question, please. Hey, Joe. Hey, good morning, guys. Morning. Obviously, the end markets are very strong. I guess in this context, I am just curious, how are you prioritizing free cash flow and debt paydown versus continued fleet growth? I guess, does a leverage ratio north of 4.5 times change the way that you are looking at future growth? It doesn't, Nick. Excuse me, Joe. Sorry. Still on Nick's question. It doesn't. We think that there is a market opportunity that we need to be positioned to serve. That's why our capital spend on the URI side is what it is this year. That's why RSC's was what it was last year and still with a robust level of spend this year. We are always looking at the market opportunity to position ourselves better strategically. When you look at the trade-off between capital investment and, say, debt paydown, we try to be prudent in judging what's the right level Of capital to use to invest versus paying down debt. As we look at our profile over the next several years, we feel very comfortable that we can support a robust level of capital spend and still reduce the leverage of the company overall. The leverage slide that we included, I think, shows that. So, 4.5, 4.6 times, on a pro forma basis, is higher than we would be in normal times, but we get down so rapidly to more reasonable levels of leverage ratio that we're not at all concerned about the level of leverage. That's why we're continuing to target a robust level of capital spend in 2012, and indeed, again in 2013. We haven't disclosed those numbers, but there's still a decent level of capital spend in 2013 going on in our longer term outlooks. We feel pretty comfortable about where we are and where we're headed. Obviously, if the market changes, then we'll change, and that's one of the great things about our business, is that we can change. We have the flexibility to shift the balance in that trade-off if things get softer from CapEx to debt pay down. That help? Yeah, absolutely. Understood. I'll hop back in queue. Thank you. Thank you. Thanks, Joe. Thank you. Our next question is from Scott. Schneeberger. Thank you, sir, from Oppenheimer. Your question, please? Scott. Yeah, good morning, guys. Morning. I got two. First one, Bill, I guess with going with the URI accounts payable schedule, I am guessing that that probably, and with a bigger combined entity, you probably have strengthened purchasing power. Could you speak to the involvement or going out to your suppliers and the discussions you had in thinking about how you would make these changes and just some discussions. Is it still going to be about October timeframe each year where you preset what you are thinking for the future years? Just a little bit more feel about how you are going to be procuring. Thanks. Sure. We certainly expect to have the same basic framework for how we approach the suppliers. I certainly am not expecting any dramatic change there. And we expect to continue to talk about all the terms of our purchases to make what we think is the best decision for United Rentals, the new United Rentals, the combined United Rentals, going forward. I should go back and say that we are not willy-nilly just saying, "Hey, we are going to apply the same uniform blanket policy across all purchases that we do at the combined company." There are a couple of suppliers that we have talked through who have been able to make the case, and we have been able to make the case, that the payment terms should be something other than the URI standard, because the all-in value that we receive is more attractive. We will continue to make those decisions on an individual basis with each supplier, but I think we will do it in the overall framework of how URI has approached procurement. Great. Thanks. And then my follow-up is, just looking at slide 12 at the bottom, I see that is the April update, standalone URI, standalone RSC, combined $141 million of EBITDA. That is tracking exactly where my second quarter was tracking. Could you just give us a feel, as we are all going to have to go out now and model second quarter? Should we expect a May, June build on seasonality? How should we think about cost savings? I am guessing more in the second half and not really affecting the quarter, but just a little touch and feel around there. Thanks so much, guys. Yes, you certainly should continue to model a build as we go through the second quarter and through the bulk of the third quarter. The seasonal impact of RSC, while not as significant as URI, there is still a level of seasonality in their business. Yes, there should still be a build as you go through May and June, and indeed, as you get into July and August and September as well. Thank you. At this time, I would like to turn the conference back over to Mr. Michael Kneeland for any further remarks. Thanks, operator. For everyone on the phone, I apologize for the technical difficulties we had with the slide. It is posted out there. If you have any additional questions, please reach out to Fred Bratman, he will be more than happy to answer whatever questions we can. I just would recap by saying that it is a positive environment, both internal and external. We have a well-thought-out, world-class integration team and effort underway, where we are going to be going live here in June on our IT systems. We have also raised the cost saving to at least $230 million and increased our rates. So very pleased with the progress we have made to date. We will keep everybody updated as we go forward. Thank you very much for joining us today. Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect. Have a wonderful day.