United Rentals, Inc. (URI)

Investor Day 2011

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Feb 11, 2011

Hello, my name is Fred Bratman, for those of you who I haven't yet met. Welcome to United Rentals Investor and Analyst Day. We're delighted that you can join us. We're very pleased with the turnout. We're just about to get started. Just want to give you a few housekeeping details. We expect to run through all the presentations without a break. It'll be a presentation and then a Q&A. There'll be a microphone that's passed around. Please wait for the microphone, because this event is also being webcast. As a courtesy to those listening on the webcast, use the microphone. We'll end the proceedings with a Q&A with Michael and Bill, and then we invite you to stay for refreshments, as well as a chance to speak with our presenters and other members of senior management who are here today. In addition, you'll have a chance to see firsthand the IT enhancements, we have the screens there in the back, that will be discussed today in various presentations. Again, thank you for joining us, and we hope that you find today's event useful. I'll point out that all of these presentations will be available on our website, as well as the audio, and they'll be archived for 90 days. With that, let me turn the session over to our Chairman, Dr. Jenne Britell. Jenny? Thanks, everybody. I'm Jenne Britell, Chairman of the Board of United Rentals. I'm glad we were able to accommodate so many of you here in person today, and I know that we have many more listening on our webcast. To everyone, welcome. We've invited you here at a pivotal time for United Rentals. That may sound like a reference to the construction cycle, and in some ways it is, but our industry is clearly anticipating a better 2011. My point has more to do with the transformation of United Rentals that we began three years ago. Today, you're going to get an inside look at a company that has brought itself to a more exciting place through sheer force of will and hard work. You saw evidence of that in the numbers we reported last week, and it's reflected in the way the investment community has taken notice of not just our aspirations, but even more, the quality of our execution. I'm referring to the recent awards given to Michael Kneeland, Bill Plummer, and Fred Bratman by Institutional Investor magazine, and my own designation as an Outstanding Director of 2011 by ODX. These things say as much about the company's transformation as they do about individual accomplishment. For me, these awards are concrete evidence that the improvements we've made are recognized as being strategically important for our growth and profitability. That strategy is at the heart of our agenda today. We believe it will provide you with insight not only into our company's immediate goals, but also into our long-term vision. It's been extremely gratifying to me as chairman and to our entire board to help define and guide that strategy. To see this management team right here drive change and truly inspire an equal commitment from the more than 7,000 United Rentals employees. It is appropriate at this time that I introduce the person responsible for leading that team, and I do that with great pleasure and pride, Michael Kneeland, United Rentals President and Chief Executive Officer. Michael. Well, thank you, Jenne. I promise to be brief because as Jenne mentioned, this is about our management team. Hopefully you all have your refreshments currently today, and there will be plenty back there. Fred mentioned about our IT back there, and I am going to talk a little bit about that because it leads into not only where we are today, but where we intend to go in the future. Today is more about meeting our management team. You also have accessibility to members of the board. Afterwards, I wish that you would spend some time having some one-on-ones with the members that are here today. We are a very different company. We started out over three years ago. We think about things completely differently than we did in the past, and we have taken the opportunity of the recession to position ourselves. That was something that I mentioned on the earnings call last week. Now we are shifting our positioning from the past to the future, and our future, and what we stated in our earnings call, is about profitable growth and how we get there. Some of the things that you will see here, some of the technology that is yet to come. As far as we have come in transforming this company, there is more for us to do. We are on a journey, and you will see some cutting-edge technology that will help us get to where we believe that we can take this company in the future. With that, I am going to introduce Vice President of Operations, Matt Flannery. Matt has been with United Rentals for more than 12 years. He started out as a branch manager, district manager, regional vice president, and he was also the vice president of Operations East. His background is similar to mine, where we both started in the aerial business. When we decided to move to all the single leadership under one direction, Matt's name clearly came to the top. Not only does he know the business exceptionally well, both inside and out, but he has the ability to manage for change inside the organization, and he is also very good at articulating our strategy in practical terms. He will overview the field operations, and in particular, our customer service structure. Later, as Fred mentioned, Bill and I will then take your questions, and we look forward to a very productive afternoon. With that, please welcome Matt Flannery. Thanks, Michael, and good afternoon, everybody. I am going to pull out my presentation. Below is our cautionary safe harbor statement related to forward-looking information used in the materials used by presenters or used in response to your questions. It is always great when somebody throws you a curve ball like that when you walk up here, isn't it? Thank you, Fred. Okay. What I would like to discuss with you folks today is a little bit about our history, what we have seen in the recent past, and most importantly, what we see in our future. As Michael stated, I have had the opportunity to operate at different levels in the organization, and you could say that I have come up the United Rentals farm system. With that opportunity, I gained a perspective of not just the dramatic changes that the industry has gone through, but United Rentals as a whole. We are a much different company today than we were in 1998 when I joined it through acquisition. For those of you that do not know the story, our founders of this company in 2007 decided they were going to create the largest rental equipment company in the world. It is a nice task over a good meal and a glass of wine, but there are quite a few people scratching their heads saying, "How are these people going to accomplish this?" Well, within 2 years, their revenues had surpassed the previous 15-year incumbent in the industry. By 2001, our rental revenues or our size was more than double the next largest competitor. As you can imagine, from 1997 to 2001, we were very involved in the integration of over 250 acquisitions and the transition of all the employees and the retention of the revenues that were associated with them. It was quite a hectic and exciting time in our evolution. From 2002 to 2007, we rode the wave of a very robust commercial construction cycle, as much of our industry did, and created great revenue growth year-over-year over year. Then we got a bit of a wake-up call in 2008 with the strong contraction in the end markets. We all knew what we needed to do, what all of our counterparts in the industry needed to do. We needed to retrench and cut costs and lay off people and all the difficult things that candidly, I was not planning for as I stepped up to the plate to come help Michael in Greenwich. But to Michael's benefit and credit, he challenged us to do that in a different way than just cutting costs. We decided we were going to take this opportunity and change the way we do business and change the way our organization thought about our business. That started with our Operation United strategy of superior customer service. Where that leaves us today is we are still the largest rental equipment company in the world with 531 locations throughout the U.S. and 10 provinces of Canada. Although we talked about closures and consolidations as part of our restructuring, that was a network that we built that we can now leverage now that we have the tailwinds of a strong economy, and not one that was just shrinking or cost-cutting. To prove that, we participate in 99 of the top 100 MSAs between the U.S. and Canada. Despite numerous attempts by me, I still have not got Michael to let me run a store in Honolulu. That's the only one we're missing. This footprint has allowed us to have a competitive advantage in serving our target market, strategic and national accounts, as well as what I call the traveling customers, the mechanical contractors, and the steel erectors that go around and build stadiums, airports, car plants, and large projects, steel mills throughout North America. I was visiting with one of those customers just last month, and a gentleman I'd known for a while, and we were reminiscing about projects we'd done in Alabama, Ontario, Texas, and California, all in 2010. If you can imagine the peace of mind that this customer had, that he could pick up the phone, call his single point of contact and say, "Matt, I need 30 booms on this job next week, and they got to be there right, and they got to be there on time." We can deliver throughout this vast network. That's a tremendous competitive advantage, and as I tell our sales reps, especially the new ones, when I get to do some sales training out in the field, we don't just rent equipment. If you think you're just renting equipment, you're commoditizing your efforts. We sell peace of mind, and that's what we are for those contractors. We segregate these 531 locations in a management structure of seven geographical region Vice Presidents. One of which will present to you today, Tony Pleshe, who runs Northeast Canada for us. Two specialty regions, our aerial region and our trench power HVAC region run by Paul McDonnell, who will also present to you folks today. We feel strongly that this vast network of geographic coverage, aligned with strategically placed specialty stores, gives us a unique competitive advantage in the industry. Fortunately, the times that we built this platform for have begun to arrive. We've got some tailwind at our back, and most projections of economist forecasts are in the high single-digit growth for 2011. That's supported by the highest ABI index we've had in over two years, as well as you can see on the chart there, the American Rental Association projections of continued growth in the rental sector for at least the next four years. That, along with the 10% reduction of ARA members, means we're competing in a more robust space with less people, and we feel that's created a tremendous opportunity for us. How are we going to take advantage of that opportunity? We have three major priorities for 2011. First, Operation United, our strategy of superior customer service, our strong commitment to rate management, and our continued goal to improve our operational efficiencies to keep our cost structure at bay as we grow the revenues. This all needs to be supported by a continued investment in our people and the technology to support each of these priorities. I'm going to touch on each one of these briefly, if I may. For the third consecutive year, Operation United remains at the heart of our company strategy. Operation United is a commitment to creating superior customer service from both an operational and a sales point of view. Operationally, we manage every branch in our network daily and by customer on their response time to customer needs, like on-time delivery, response to service calls, and availability of equipment. Sales-wise, Operation United built a multi-tier sales level that we feel strongly it's important for us to not just touch the customer on the street, in the dirt, on the job site where the point of need is, but also to continue to build strategic relationships with our key customers in the main offices and in the corporate offices. We need to continue to support that sales effort through our proprietary systems of URdata and our own sales force automation system. Vice President of Sales and Marketing, Joe Dixon, will come up after me and give you a little more detail about those programs. Secondly, our entire organization is committed to getting rewarded for supplying great customer service. We've made a commitment, put a stake in the ground, that we will get a minimum of 5% year-over-year rate improvement in 2011. That's not going to happen because I say so at this podium. There's been strong infrastructure spent in our CORE technology system, and Vice President of Business Planning and Analysis, Ken Mettel, will come up here, and he'll present to you the details of our CORE program. It's a revolutionary pricing program in our industry, and Ken could tell you a lot more about it. Third, all of our field management, the branch managers, and the district managers that run our stores are committed to not only maintaining the cost efficiencies and the operational improvement that we've made over the last two years, but improving upon them. We do that through, once again, using technology to help improve some of our systems. Many of you can see the screens in the back. One of those examples is something you may have heard about in other investor presentations, is our FAST technology system, which stands for Field Automated Strategy Technology. In layman's term, what that is each one of our drivers are manned with a handheld device, similar to what you'd see with a UPS driver or FedEx delivery man to your home or your office, where we can seamlessly communicate to our back office and our customer's office the transaction with electronic signature capture. Eliminating the burden and the cost that go along with the paperwork while also achieving the goal of helping our sustainability program. We're committed to doing all this while operating in a safe, conscious environment for our employees and for our customers. The construction industry has changed quite a bit in the 20 years I've been involved in it, and I can tell you that a strong safety plan and performance record is now the price of entry into major projects and plants throughout the U.S. and Canada. As you can see from the chart here, we do not lengthen it out to 2001, but our team has made continuous improvement in this area since 2001. We have achieved this goal by a strong commitment and cultural change and a focus on safety. We start every meeting at United Rentals, whether it is a sales meeting or an operational review, with a safety topic. In that safety topic, we will review any incidents that may have occurred in the recent past and also near-miss reporting. We will review the near-miss reporting because we want to make sure we are not just lucky. We want to make sure that we are eliminating problems that cause incidents. I am happy to say that over 80% of our branches in 2010 operated without a safety incident. We are not going to stop until we drive that number to 100% of our branches. All these achievements, accomplishments, and future goals that we are going to lay out for you today are not achievable without our team. The people that are willing to put in the hard work and the dedication and the commitment to achieving these goals. I am happy to say we recently received the results of our 2010 employee engagement survey, and it showed double-digit improvement in just about every category over our previous survey, which was done in 2008. If you could imagine some of the difficult decisions we have had to make over the past two years that touched our field employees, like branch closures and consolidations, pay freezes, layoffs, budget cuts. For them to come back and say, "We are more engaged now than ever," says a lot about our team and the commitment and our ability to move forward. That does not happen by accident. That happens because we have got a firm commitment through Mike's leadership in investing in our employees through training and development programs, whether it is technical training for the service mechanics that are working on our equipment or sales training for the inside and outside sales teams, so they continue to sell the value that United Rentals brings to the customer. Or leadership and mentorship program for our high-potential candidates to show them that we have a career path here at United Rentals, an organization that they want to be a part of long-term. All that has resulted in record low turnover for the company in 2010. We also believe we achieve this by incentivizing our people properly. Our incentive programs are aligned so that our field employees and corporate employees understand the value of us getting a return on our capital investment. We create this through a program, and we call it EAC, which is basically EBITDA less the 20% cost of capital. It is very similar to an EVA calculation. They are all focused on creating economic value. We also reward them for some of our operational metric performance, like trade area cooperation, making sure we cross-pollinate our customers throughout our branch network and increasing rental rates, obviously, as well as making good capital decisions and holding down the cost that we fought so hard to get a hold of. EAC is a key element for our compensation plan, and we feel strongly that you cannot move large groups in the same direction without an aligned comp program. What does this all mean? Well, hopefully, what I communicate to you folks today, and the rest of the team will communicate as we move on through the day, is that we have the strategy and Operation United to make United Rentals the clear-cut customer service choice for any of their equipment rental needs. That we have the opportunity, not just created by the tailwind, but aided by the tailwind, of creating better financial performance in both revenues and margins. Most importantly, the team is aligned in our goals to making sure we stay the industry leader, not just from the perspective of the customers that need our equipment on the street, but to you folks in this room, we're going to be the rental equipment of choice for years to come, and I hope you're as excited as I am about it. Before I move on and introduce Joe Dixon, our VP of Sales and Marketing, does anybody have any questions? Okay. Well, I'd like to announce or request Joe to come up to the podium. He's been a great addition to our team and part of the reason why our national account program is so successful. Good afternoon and welcome. It's a great opportunity to speak to all of you today. Wait on my presentation comes up here. Okay. I'd like to begin by giving you a little bit of background on me and my history in this industry. I joined United Rentals in 2008. I began my career in the equipment rental industry in 1984, where I held multiple positions throughout the organization. I spent almost 17 years there, and I left there as Vice President of Operations and Sales. Also, during my career, I had the opportunity to work for The Home Depot, where I had the chance to drive their equipment rental business, the tool rental business there, to well over 1,000 stores, and I also was responsible for their pro-business and contractor sales. I spent a few years with JLG Industries over their global aftermarket and services business, and it was still tied very closely with the equipment rental industry, and so it was a chance for me to stay connected. Then in 2008, I had the opportunity to come to work for United Rentals. As we looked at our whole operation, and you've heard the word transformation mentioned quite a bit today. We looked at everything we had in place, and we realized with the market environment the way it was and the economy somewhat depressed at that point in time, we knew that if we could transform our company at that point in time, we could make changes that when the market turned, it would give us the ability to outperform and outpace the industry. A few things we took a look at is we knew we had not leveraged our size. Matt talked about our vast network of branches that we had, but we also knew that we had not really taken care of our customers consistently. Some we had, and some we had not. We worked with a third-party company. We did further analysis of what our customers thought was most important to them. We identified what those were. We began to coordinate and look at all our sales strategies across all the country, and we realized we had to be more consistent and focused on our sales direction. We knew we had a customer care center that had not been fully utilized, and it was a true differentiator in our industry, and I will speak more to that in a few minutes. The other thing that we needed to do was focus on our core rental business. One of the things that I do in my role is I am on the road quite a bit, almost every week out of the month. I spend time visiting with customers, I spend time in our branches and working with our salespeople. After we had taken a survey with this third-party consultant about what we felt the customers' needs were, I also made a trip in early June of 2008. I traveled up to and met with the eighth-largest construction company in North America, construction and industrial. I walked in, and I met with the VP of procurement, and we sat down, and the first thing he did to me was he threw down on the table 16 different business cards of various United Rentals individuals who had been in to meet with him. What he asked me was, "So who is really responsible for my account? Who am I to go to?" It helped confirm everything else that we felt and knew and had analytical data on, but it helped us form what became known as Operation United. Operation United is composed of three key components. Our key account program, which includes our national accounts, our strategic accounts, and our signed account program, and our government sales. It also was about improving our sales force efficiency. We put in place, back in 2008, our version of sales force automation, which is tied to our own win systems in RentalMan. It really helped us enhance and improve the efficiencies and hold our sales reps more accountable. Additionally, and probably one of the most important things we did with Operation United, is we created customer-focused branch operations. I will go through in a little more detail in a few minutes about that. But really what it was about, we took those five key metrics that our customers said were most important to them. We then built processes and put in place in every one of our branches, and we began to measure daily, weekly, monthly, et cetera, how we were performing against those five key metrics. That was in 2009 that we rolled that out. But as we began 2010, the market conditions, as you know, were very difficult. We were facing an extreme difficult pricing environment, and our key account program, while it was making progress, was still in its early infancy. We put together, early last year, different revenue acceleration programs. Because that was one of the things Mike always challenged me on, was, how can you make this happen faster? How can we grow our revenues faster? We put some programs in place. But in addition to that, we rolled out CORE, which is our pricing optimization program, which Ken's going to speak to more in a few minutes. And we also began to gain traction at a much faster pace with our key account program. One of the things we looked at closely was how do we make sure that Operation United, part of it was about growing our single point of contact, and we now have over 50% of our revenues covered by a single point of contact. But we also looked at different customer segments. We wanted to focus on the larger customers, and we focused especially on industrial. And we've made some good progress there. In fact, this past year, one of the major gas and oil companies in the country, it was a new contract for us and has now become our sixth-largest customer in our portfolio. Additionally, Paul will talk more about trench and power and HVAC, but this is a key component of totally capturing everything a customer's potential spend is, and we've made great progress there, and it also helps us further penetrate the industrial sector as well as government. So how did we do last year? We started out pretty bad. It was tough. We met in March. We put our revenue acceleration programs together. We lit a fire under our salespeople and everyone in the organization, and our rental revenues grew significantly to end double-digit growth in 2010. So how did the key account program perform? Each one of the programs did very well. We started out weak on those as well. But all the groundwork that was laid in 2009 began to pay off, and we really began to get loyalty with our customers, which was the most important thing. We wanted to focus on growing share of wallet and further penetrating these large accounts. And I've actually brought two of my regional national account managers with me. They're in the back of the room back there, if they'd stand up. Rob Higginbottom and Scott Owen. I welcome you to ask them questions afterwards about our national account program because they've been a major contributor in our success this past year. So what are those drivers of loyalty? Our customers told us they wanted the equipment delivered on time. They wanted the equipment to be available when they needed it. They wanted us to pick it up in a timely manner, an accurate invoice, and be on time with the response to a service call. What we did, we had the scorecard created for our branches, and it became with a lot of rigor that we put this in place, a lot of discipline, and a lot of hard work by our employees. We took it one step further. We took this scorecard, and we created it down to the individual key account customer. No one else in the industry has done this. The customer I was telling you I visited with in Canada, I go see them once a year to do our annual review. This past spring, I went in there, I took this report, and I showed how we performed against his total company. Right behind it, I had 28 other pieces of paper, which showed all 29 of his buying offices, how each one had performed. While not every metric was perfect, we had improved, and we were willing to put our name on the line that we will stand behind our service. This helps us drive value. It helps us get a little more price sometimes. It helps us create loyalty. Another tool that we have that I am very proud of and has really helped us in the industrial sector is Your Data. This is a tool that the customer can use to go in and manage their account, understand what their payables look like, and really helps us capture that customer for other penetration. It works great in the industrial sector. We have over 22,000 users on it. Our customer care center, best in class. It is the only customer care center in our industry that can take the order off the street. If a customer calls there and they order 20 different pieces of equipment in 20 different branches, they can take that order without making a single phone call. We have made tremendous strides here, and I am very proud of what they have accomplished. We thought we were doing really well, so we decided that we would go back and actually see what our net promoter score was. We hired a third-party firm to validate that for us, and we scored 67%, which was best in our industry. This was a few months back in the early summer. What this means is Operation United is working. It is driving customer loyalty. Where do I see the opportunity for growth? Northeast Canada. Tony, putting a lot of pressure on you here. You see a tremendous opportunity here. We are the strongest player in Northeast Canada. We dominate. We have leading market share in Northeast Canada. Alberta, very positive outlook for us for Alberta in 2011 and beyond. Gulf Coast and Texas, and the Midwest. Some say the Midwest, I am not so sure about that. Where I see it in the Midwest is more so from an industry sector standpoint. If I look at what is going on with power and gas, this past Tuesday, I met with one of the largest power companies in the U.S., and they took me through their backlog for the next three years, and I was very impressed. The purpose of the meeting was to make sure we were prepared for what they saw was coming. I talk a lot about industrial, and as you know, this past fall, we announced our joint venture partnership with AMECO. Now, AMECO is also one of our large customers that we have a great relationship with. We saw an opportunity here to further penetrate the industrial sector that helped us with some core competencies that we didn't have at the moment, and it really helped us align and further grow with existing customers. We're just getting started with it. Our operations are in place, our systems are in place, and our sales organization has been trained, and we've had a few small wins, and we are very excited about what this is going to help us further do in the Gulf Coast states. Lastly, Operation United is succeeding. It is the right strategy, and our people in our branches believe it's the right strategy, and we've been consistent with it for 3 years. We are beginning to gain customer satisfaction, and that's very important to driving loyalty. Our teams are in place and focused on industrial. We have the pricing tools well beyond what anybody else in this industry has to help us manage pricing. Our objective, my objective, one that Mike constantly reminds me of, is I've got to continue to grow our share of wallet with our key accounts. I've got to deliver double-digit growth in our national account program, and we got to raise rental rates. In closing, I appreciate the opportunity to be here today to speak to you. I love customers. I love talking about customers. But we have shown our customers in the last 2 years that we are loyal to them, and that is paying dividends. We have momentum, and I'm very excited about what this year brings and going forward. Thank you. Do you have any questions? Okay, thank you. I'd like to introduce Paul McDonnell, our Senior Vice President of Operations for Trench, Power, and HVAC, our specialty businesses. Paul? Good afternoon. Flannery, Dixon, and McDonnell. Are you sure it's not March 17th or St. Patrick's Day today? It feels that way. As Joe mentioned, I have responsibility for our specialty businesses, specifically our trench safety and power and HVAC business. Like Matt, I came to the company through an acquisition of a specialty rental company in California called D&E Steel Plate Rental back in 1999. I came to United Rentals, as a district manager with responsibility for our trench safety business in Northern California, was promoted to regional vice president in 2005 when the company decided to consolidate all of our specialty businesses into one region. Then was promoted to Senior Vice President of Operations, for our trench safety and power and HVAC business specifically in 2008. I'm excited to be here to talk about these businesses and why we see these businesses as attractive investments for the company. You may know that the Trench Safety and Power and HVAC business is reported as a separate segment. I thought a good place to start would be to give you a quick, high-level overview of our 2010 financial results. It was a very good year for the business. Total rental revenues grew 7.6%. Total revenue grew 6.4%. Operating income grew to $32 million, or 61.8%, with an operating margin of 19.3%, and time utilization grew from 36.1% to 41.8%. The rationale for expansion, why do we want to grow the specialty businesses? As you can see, the business has historically performed well with strong returns, even in a challenging economic environment. We also see significant opportunities for growth, both in Trench Safety and in Power and HVAC. I'm going to talk to that as I go through the presentation. We have the ability to leverage, Matt talked, and Joe talked a lot about our focus on Operation United and our ability to leverage our specialty businesses as a competitive differentiator. We're the only construction equipment rental company in North America that has general rental, aerial, trench safety, and power and HVAC. While I see a significant benefit to growing the specialty businesses, maybe I even have a bit of a bias because that's what I do. Believe me when I say I see a much bigger benefit to the entire organization as we leverage our specialty as a competitive differentiator. Joe mentioned we also are focused on industrial. We've announced our intention to claim leadership in the industrial markets, and we pursued acquisitions like Leasco and partnerships like AMECO to do so. The Trench Safety and Power and HVAC businesses are very much part of our industrial strategy. What is trench safety? High margin, high return business. In 2010, we ended the year with an operating margin in trench, full year of 23%. The reason why we're able to drive a high return and strong margins is that we're a solution-based sale. It's a solution-based sale that's combined both with employee protection on the one side and productivity advancements with the introduction of new and innovative technologies. OSHA requires that contractors provide protection for workers when working in excavations deeper than 5 feet. What we do is we provide the products, the services, and the solutions that keep contractors safe when they're working underground. Unfortunately, not all contractors adhere to what's required, and it's estimated that somewhere in the range of 50-100 contractors die every year in the U.S. alone, it's an amazing statistic, in trench cave-ins. Actually, there was a fatality just this week in Los Angeles when a laborer was buried in an 8-foot-deep trench and unfortunately, died. I will highlight, however, that when contractors use our products and services, they keep their employees safe. Contractors are also required to have a dedicated competent person on the job site. To be a competent person, the contractor needs to go through excavation safety and awareness training. We are the industry leader in this type of training. We offer it the first Friday of each of our 52 trench safety locations nationwide. Since we've rolled the program back out in 2005, we've trained over 55,000 contractors. We trained 11,500 contractors alone just in 2010, which was a 30% increase over prior year. In addition to worker safety, productivity advancements and new technologies are revolutionizing how contractors perceive and use protective systems as a cost-effective alternative to self-performing. Our strategy is to be first to market with these new technologies. This type of example here, for instance, the Groundforce hydraulic bracing shoring system, we were first to bring this product to the U.S. It is used extensively in Europe. It eliminates the need for welding structural steel, it reduces labor costs, and is much more productive than self-performing or using more conventional shoring systems. In this particular application, the contractor was required to install concrete drainage structures over a 1.2-mile line in support of the widening of I-44 in Oklahoma. What we did was we met with the contractor very early on in the planning stages, and we were able to sell him on why this solution was much more cost-effective than what he had historically used for shoring in these types of applications. This resulted in the contractor finishing the project six months ahead of schedule. It was a 24-month schedule. He ended the job in just 18 months. I can tell you, on a $42 million project, that contractor was extremely happy at the end of that job. This was a much more cost-effective alternative than what he historically used. We were also happy because we generated $1.8 million in rental revenue on the project. Another example of a new product solution that we are bringing to market is the E&S slide rail shoring system. This particular system is modular. Again, it is much more cost-effective. It saves time, labor, materials. It is used a lot in Europe, where space is more restrictive. In this particular tank installation, the contractor was able to excavate, install the shoring system, install the tank, and backfill the excavation in just five days, which again, was much more productive than what he has typically taken in this type of situation, which is nearly twice that much time. These systems are definitely working for us today. I wanted to take a moment to show you our footprint of trench safety branches, and these flags represent a point of presence for our business. With the opening of our Madison, Wisconsin, trench safety location in 2010, we now have 52 locations covering the entire continental United States and one location in Western Canada. I will also point out that we are the only national trench shoring company that is doing business across the entire continental United States, and we are much larger than our nearest competitor. The darker the shade of orange reflects where we have the greatest concentration of business, and the gray area highlights an opportunity for us to do more business. I can see that Eastern Canada is a little too gray for Michael's liking and for my own, and I can guarantee you that we plan to change that and turn Eastern Canada a darker shade of orange with the opening of a trench safety cold start in 2011. We also plan to open three more trench safety branches in the U.S., which will bring our total network of trench safety branches up to 56 by the end of 2011. I mentioned that it is a high-margin, strong return. Because we're a solution-based sale, you can see some of the dollar utilizations that we drive in the business. These are full-year 2010 results. Shoring and sheeting, a nice dollar return at 120%. Our steel trench boxes, we generate 106% dollar utilization. Steel road plates, not a very complicated product. A steel road plate is what we use to cover the excavations at the end of the workday so that the traffic flow can open up on a highway or on a street. Not a lot of oil changes go into a road plate, and if it gets damaged, we just cut it in two, and now we have two road plates. With dollar utilizations of 127%, I can tell you we get a very warm and fuzzy every time we drive over our steel road plates. Now I want to talk about the size of the market. I've talked about some of the drivers of growth in our business, which is production and protection and a focus on safety. We estimate that the market today is just shy of $300 million, and we represent a third of the defined market. While we are small, comparatively speaking to the rest of our company, we are the leader in trench safety. We do have relevant scale in the markets that we do business in. As a result, we're setting the standards, and we're creating the requirement for solution-based sales while taking advantage of our existing scale of operations. We believe that given our national footprint and our focus on innovative solutions, that this gives us the right to continue to grab share for some of the other local and regional competitors in a market that's still with a fragmented assortment of players. But we're very enthusiastic about the material opportunity that exists in the non-compliant market, and these markets that I showed earlier, where contractors are self-performing. The trench safety business is still very much in the early stages of development, and through programs like our education and contractor training and partnerships with OSHA and our continued focus on demonstrating the economic value and safety benefits of trench solutions, we are continuing to grow the overall market. Now I want to shift gears a little bit and talk about our other specialty segment, another business that we're very excited to be growing, and that's our power and HVAC business. Similar to trench safety, it's a solution-based sale that has historically performed well with strong returns for the business. It's a solution-based sale that specializes in turnkey services and solutions, including, among other products, temporary power generators, air handlers, industrial air conditioners, and large electrical and fuel-fired heaters. We provide custom-engineered products and services to industrial, commercial, government, and emergency response markets. A typical example of a customer application in this business would be one of our national accounts specializes in the management of turnkey base camps. These camps provide temporary life support facilities and related equipment to military and disaster relief. What we do is we provide the temporary power, the comfort cooling, the technical support, and the 24/7 on-site management. In 2010, we delivered turnkey solutions to 13 military base camps in 10 different states, which generated revenue of $1.8 million, just with one account. Also in 2010, we responded to the widespread flooding in Nashville, Tennessee. As many of you know, the damage was extensive and required our support with technical equipment that included desiccant dehumidification, drying, environmental heating, cooling, and power generation for distribution. We ended up setting up camp or setting up equipment on 20 different projects with one national account and generated over $1 million in revenue. As I mentioned earlier, the power and HVAC business is very much part of our industrial strategy. An example would be periodically, plants require the shutdown for routine maintenance. In the industrial power example here, the refinery had one of the largest ever shutdowns in the history and required more than 2.5 megawatts of power. We delivered 58 diesel generators over a 12-week period in support of the shutdown. Another example is the large power plant scrubber repair. As you can imagine, downtime is carefully calculated to minimize production loss. In this situation, we designed a turnkey solution based on the customer's requirement and delivered 12 million BTUs of industrial heat and 1.4 megawatts of power. We're continuing to expand our footprint in the power and HVAC business from just eight locations in 2005 to up to 22 locations today. We opened four new locations in 2010: Tacoma, Washington, Charlotte, North Carolina, Beaumont, Texas, and we just recently expanded our business into Eastern Canada with the opening of a power and HVAC branch in Toronto. What's powerful about this slide, if you'll excuse the pun, powerful, is that while we just have 22 locations today, very similar to trench safety, the power and HVAC business covers a much larger geographic footprint. So while the dollar utilizations in this business are not as high as that in the trench safety business, they are still attractive. Our HVAC business in 2010 generated 40% of this specialty business's revenue and generated a dollar utilization of 78%. Our power business ended the year with a dollar utilization of 53%. In combination, we estimate that the power and HVAC markets total close to a $1 billion opportunity for our company. These markets are served today by a combination of larger national players and some small regional competitors. Today, we're the third-largest player in this market, and we are growing. We've identified three different ways that we're going to continue to grow into this market. The first is to grow organically through support and incremental business, internal lead generation, and penetration of industrial accounts through Operation United. Secondly is the opening of new cold starts, in particular, in markets where we can leverage our leadership in General Rentals and Aerial. Matt mentioned earlier, we're very strategic in how we identify which markets we want to synergize and use the specialty businesses as a competitive differentiator where we already have leadership in Gen Rentals and Aerial. It's a point worth noting. All of the locations that we've opened up are in shared facilities where we already have existing real estate, so there's a cost benefit as well. Third is through acquisitions that we would see accretive to our overall growth strategy. We're confident that the value proposition that we bring to market will continue to allow us to grow in the business. In summary, I want you to take away from the presentation that the specialty markets are attractive returns for the business, and that while we're the clear leader in the trench safety business, the markets are very much in the early stages of development and largely under-penetrated. We know that the power and HVAC businesses are large, and we know that we can grab share. As we continue to leverage all of our business units, we can have a true competitive differentiator as a company. I can tell you with the utmost confidence this afternoon that we have the ability and the desire to grow the specialty business. Thank you very much. Any questions? Okay. One question. Have you been any timeline given for any capital commitment of money on how quickly you can grow business? Yeah. Mike has certainly tasked me with accelerating the growth in the business. I can tell you that on the power and HVAC business in 2010, we had north of 20% growth for the year, and I expect that we'll continue to drive strong growth in 2011. Also, given the returns that I've been able to generate in the business, capital hasn't been as much of an issue as far as supporting the growth. As I said in my closing comments, certainly the company has the commitment, the desire, and the ability to continue to move it forward. What's the element of the business that got you growing more quickly than you expected? Yeah, I think that's a great question. Obviously, in a solution-based sale environment, it's very important that we have the right intellectual capital in support of the product, that we don't just open up locations and markets where we don't have those relationships, particularly on the specialty side. I think the biggest barrier to entry is people. However, I will say that we have had great success in building our bench strength in specialty with some very strategic hires in both sectors of the business in 2010, and particularly as we open these new locations, which is going to help us to gain more traction. Okay, thank you. Now I'd like to invite up another Irishman, Kenny Mettel. Kenny, come on up. Thanks, Paul, and good afternoon, everyone. I am the Vice President of Strategy and Planning. I have financial planning and analysis as part of my responsibility, as well as field finance, and recently took on in 2010, our pricing program and our new CORE initiative, which is what I will talk about over the next few minutes. I joined the company 10 years ago after working at a number of companies. My first job out of business school was at Mattel Toys. My last name is Mettel. For those of you who actually played with a Barbie doll, Ken Mettel, five years of my life, I never lived that one down. Last week, and you heard Matt, Joe, everyone has talked about we're going to get at least 5% rental rate improvement in 2011, while also taking time utilization up one point. What I will show you today is how our new system, CORE, is going to help that. As I heard Matt describe FAST, I said, "CORE." No one probably knows what CORE stands for. It stands for Customer Oriented Rates Excellence, and the first word is customer, supporting Operation United. CORE is built around also supporting Operation United while taking rental rates up, but also improving our customer service. CORE has given us a consistent pricing program. It's using state-of-the-art technology. It's giving our sales reps better information for improved negotiations and discussions with customers, and it is built around driving profitable growth. CORE is a very technical project. There is a lot of software, algorithms, big computers where all the data is being run through. So it's highly technical. Let me try to simplify it with this one slide. Behind on the screen is a simple example. There's five customers, all who are willing to pay different amounts, all willing to pay amounts that are profitable. Without distinguishing between the customers, if you just give your sales reps a price of $120, there's going to be, in this example, certain customers that would've paid more. But by pricing at $120, we leave money on the table. In addition, there are customers that are profitable but will pay less. By giving the sales reps too high a number, you lose business. That is what our CORE system is built around. It's built around optimizing the rate that we get on every transaction. We started CORE early last year, actually late 2009, but really in earnest early last year, and we laid it out in phases. We took our time. When we started CORE, we did pilots in every region of the U.S. and also in Canada. Every region was touched with a pilot. A pilot was not something that was just very quick. We went into every market, touched every single salesperson in those markets, both inside sales reps and outside sales reps, spent a week in that market gathering feedback, asking questions. We then would leave them for a week to two and come back into that market, gather more feedback, ride with a sales rep, see how they interact with the customer, take their feedback. We continued to improve. One of the things that we noticed from CORE is our pilots made the program better when we did full rollout. Given the importance of rental rates, we really had to mitigate our risk, and those pilots did that. Just in our last month, we had our management meeting in St. Louis, and this is where I felt the benefit of those pilots. When our branch managers told me that our sales reps believed in the rates the system was generating and trusted the system, I knew the pilots paid off because it was the sales reps in those pilots that really gave us feedback to make the system better. We rolled out customer-centric. We were fully rolled out in the summer of 2010. We will talk about that more right next. We are now rolling out the next phase, which is Deal Manager, which is our program to support our growth with our larger and our national accounts, which Joe just talked about. We are going to go through both of those programs right now. Let us talk about customer-centric. This goes back to that $120 example. This is a picture of how we did rates in the old days. We had three rates, a start, which we called contractor rate, a target, which we called manager rate, and a forum, which we called maximum discount rate. There was no distinguishing between customers. When you look at the screen, you can see the wide variation that we had and the large spreads we were giving our salespeople. If you think about that $120 example, when you give a large spread, if they price too high, they are going to lose business. If they price too low, they may be pricing below a level of profitability. We were not given great direction in the old days. What happened when we went on CORE? This is just a simple illustration. Now we segment our customers. In this example, it is only three segments. In reality, we have 13 segments. But in this example, there is three. So on the same cat class, in the same market as the prior example, now, when the sales rep goes to talk to a customer in segment 1, the customer is getting, in this example, a much higher starting point and a much narrower band of rates. They still have a contractor, manager, and maximum discount rate, but they are much more targeted to that customer so we can attain that optimal price. Then with segment 2, which is priced a little bit more aggressively, once again, you will notice it is priced given profitability measures, but it is now a narrower band, a little bit lower. So that we know it is profitable, but we do not want to lose the deal because we price segment 2 like we price segment 1. And in the third example is segment 3, which is a little bit more varied, a little bit bigger spread, but once again, much narrower than it used to be before we had no segmentation of our customers. This is all delivered to our sales reps every day as needed. Let me put some words to it, and it's not just about the system. It's about the process changes. It's about how the management team is focused, how we help the management team get focused. One of the feedbacks we've heard is that we now have more consistent pricing. We are not giving our customers different pricing within the same market. Our branches are working better together because now the pricing is set consistently. In the old days, prior to CORE, our district managers were responsible to change rental rates and RentalMan, manually going into a system to change rates. They did that on an ad hoc, as-needed basis as they were feeling input from their sales reps. Today, the rates are changed by our system, and they're changed every single month. So every month, the rates change based on what we're seeing in the marketplace. So now it's much more consistent, much more controlled. I mentioned maximum discount rate. We always had a maximum discount rate. Now, when a sales rep wants to price below the maximum discount rate, there is a hard stop in the system. They are required to get approval from either their district manager or one of the region teams. That approval is done through a BlackBerry device. The district manager will get an email, pops on his or her BlackBerry, will be given information on why the deal is important, what the rates are, and that district manager can then approve it so that the reservation can be taken, using technology. The last big change was for our sales reps. You can imagine going from one rate on thousands of cat classes to now 13 different possible rates, the complication. Our sales reps used to walk around with an 8.5 by 11 piece of paper with their rates on it. Today, they get their rates through either a laptop or a BlackBerry. Every sales rep in United Rentals has a BlackBerry. That BlackBerry allows a sales rep to, if they're talking to a customer, type the customer's name, search a cat class, and the BlackBerry will deliver the sales rep a recommended rate of a contractor rate, a manager rate, and a maximum discount rate right there through the BlackBerry. It does more than that, though. The customer is also able to search availability. The sales rep, excuse me, is able to search availability. The sales rep can actually tell the customer that where we have one, how many we have, if it's not in that local market, how far away it is, so we can do a good promise delivery point. The sales rep is also able to search the customer's history in case there's other products or cat classes or types of equipment we want to rent that they may need. The sales rep can take a quote, email the branch to have a reservation put onto the system using that BlackBerry so the deal can be taken off the street. We have heard from our customers that the most important trait of a salesperson is to have decision-making capability. We are now giving our sales reps a tremendous amount of knowledge and information with their BlackBerrys, so when they make that decision, they can make it with real-time information, make it quickly, and get the information back to the branch so the reservation is taken. Let's talk about Deal Manager. Deal Manager is new. I don't think we'll ever stop innovating on CORE. When we finish customer-centric, we still have the IT guys in the back. I joke that I'm a big consumer of IT resources, but with rental rates, it's worth it. We must have 10 to 15 enhancements for customer-centric lined up and ready to go. We're also now in the middle of our rollout of Deal Manager. As I said, Deal Manager is built around supporting our larger accounts, our national accounts and our large strategic accounts, our large local accounts. It's a system that when a customer wants a price agreement, this system allows us to look at a customer's mix of equipment, put in rental rates for each piece of equipment, and then determine how does this deal make sense. The sales rep or the national account manager can actually pop in and do what-if scenarios right on the system before they actually make a final bid to the customer. I have a screenshot, not a beautiful screenshot. In fact, the screenshot doesn't even tell the story. But I'll focus on the two red areas on the screen. In the upper left-hand corner, when a national account manager or a strategic account manager has entered in the volume by cat class, that's customer specs, and the rates, by clicking a button called Calculate, the system calculates the return on investment for that price agreement. The other thing it does on the upper right is it compares that customer's rates to peer customers that are in similar industries, similar size, similar markets. So one of the things we heard when we rolled this out from some of our district managers was, "I sometimes didn't know where to start. Now you're giving me a place to start." But the best thing, in fact, one of the national account managers told me this morning verbatim what a district manager told me during one of the roll-outs. This is a game-changer. Our managers are telling us that this is a game-changer for our largest and our target large accounts that Joe Dixon talked about. I'm a finance guy. I like numbers. What does it mean? As we said last week, we had rental rates up. Up feels good, 1.2% year-over-year in the fourth quarter, and up sequentially, fourth quarter to Q3, over 2%. You've heard my peers and my fellow team members mention that we will outperform. We are outperforming our competitors on rental rates. But we also did it with a record time utilization in the fourth quarter. We are moving forward. We have tremendous momentum towards that at least 5%, while getting time utilization up. Let me go a little more granular so you can get a sense of how CORE helps. I mentioned we segment our customers. One of our segments is cash. Cash is our most costly type of business. It takes more cost to service a cash customer. You can see with the way we've used CORE, look at how much of an increase in rates we got on our cash customers versus our charge customers, just by segmenting them differently, and in this case, giving our inside sales reps better rental rates to service that cash business. Huge opportunity on the credit. That's where that at least 5% is going to come from. This shows us that CORE is working along with the feedback we're getting from our salespeople and our district managers and branch managers. We have state-of-the-art technology. Our sales reps believe in the rates. We have great feedback. They have better information to make better decisions. This is a system that will lead us towards profitable growth long term. We continue to innovate, and it will lead us to at least 5% rental rate improvement in 2011. With that, I'll ask if there's any questions. Yes. How do you determine the segmentation of the customer? Who does that? How often are you looking to make any changes to the segmentation? The segmentation is determined by the system. It's done by the system. It's based on data. I'm not going to go into all the different segments. Some of it is proprietary. I'll give you some insight. Size of customer does drive segmentation. The other items that drive segmentation, without getting into specifics, are related to a lot of things are decision-making that goes on in the field, as well as which customers are more profitable than others. I don't want to go into too much detail given the amount of work we did to get that segmentation right. It changes based on how a customer changes. If a customer's volume changes, for example, their segment may move. It can move every night, by the way, in the segmentation. It's done by a system. We do have an override if we needed to. For a certain targeted customer, we could override their segment. Yes. What analysis does your system track in terms of business that you've lost? Do you go and have a post-negotiation audit to try to determine what the major drivers are? Clearly, price is going to be something that comes up. Do you have a similar system for tracking opportunities lost? Is that going to be difficult to track? Does that help you actually answer those price constraints? We do not have a great lost tracking. We more go off of feedback from our salespeople because we'll use that with the system. They'll come back, and we'll look at certain cat classes. We have an email called rates@ur.com, where there's a team of people. If a salesperson loses a deal, they can send an email to rates so we know which cat class, so that we can go look at the data, look at the transaction, and start to understand why we may have lost that business. From an analytical standpoint, there's no set report on lost deals. One of the things, with time utilization as high as it is, we're not losing that many deals. Ken? Yes. Did you just ask about lost accounts or lost revenue? Yes. We didn't hear the question. The other option that we have in the field is that we actually track lost availability due to availability of equipment. That is logged in our RentalMan system. And what we review at the regional level with our fleet managers is when we go through the transactions, what are the reason why we lost that transaction? It was recorded in RentalMan. So it could be a case of OEC not being available at the branch level, or it could be a case of rates. That is recorded and reviewed at the region level. I'm not sure if that answers your question. Yes. How do you know what your competitors are charging? Does that go into it? The question was, how do we know what our competitors are charging, and does that go into it? The second question, what competitors are charging does not go into the system. The system, the technology, it does factor in where we're seeing lost deals without us tracking the way you do, but it does not factor in what's going on with the competition. But it does look at where we're closing transactions to get a sense for where the market is. And how do we know what the competitors are charging is from feedback from our field operations. I could help answer that question. Just remember that this system does not kick out a finite number. This is the number that you have to charge. As Kenny Mettel accurately stated, we need to have the decision-making be available to the sales force. It gives them a range and a bandwidth for them to operate in. And through our dormant account program and loss account tracking, locally, we'll find out if the system is missing the target too high or too low. But we feel pretty comfortable that the range that it gives is within the bandwidth we need to operate in. And candidly, there's always going to be predatory pricing activities in any industry. We're not going to chase those folks off the cliff, and we've seen an uplift and without any loss in mind. Thanks, Matt. With that, I will turn the podium over to Tony Pleshe, our Vice President of the Northeast Canada region. Good afternoon. Welcome. Thank you for being here. I appreciate the opportunity to share some of our highlights of the operations we have in Canada, and I really appreciate the fact that we've mentioned Canada so often today. In terms of background, my background's a little different than Michael's. I started my professional career as, believe it or not, an electrical engineer working for IBM, both in Canada and the U.S. Then I went back to business school, got an MBA, and decided to open up a consulting company. My first mandate was Wajax Industries, a publicly traded equipment distributor across Canada. 17 years later, I'm managing 6 out of the 10 provinces for United Rentals. It's a different spin than the rest of the group, but 17 years later, I'm still enjoying it. For those of you in the group that are maybe less familiar with Canada, I just want to go a quick review. Our economy is really based on natural resources, hydro energy projects across the board. We also went through the same recession as the U.S. did, but in a very much lower scale. We're out of the recession in a lot of the pockets in Canada. In addition to this, our employment is fully engaged as it was back in peak periods in 2008, which is good news for us. Federal stimulus project, why did I put that on there? There was concern that the government was going to cap down our stimulus spending in Q1 this year. They've now extended it for the full construction season for the remainder of the year. Again, positive news. Construction growth in Canada, aside from residential spending, will be positive next year. What does that mean for myself managing Canadian operations? One is our international firms, which have humongous projects in Canada, remain committed to the landscape. Positive growth momentum continues as it did in 2010 and in 2011. We've seen growth in both our industrial accounts and national accounts I'll talk to later. At the same time, now with Paul joining the group up in Canada with some trench location and power, which we welcome, they'll give us another product offering for our customer base in Canada. Again, positive growth is projected in Canada for 2011. The other tidbit of interest is I look at my region alone. We've had 10 sequential months of rate improvement. Again, we're seeing the same pattern continue in 2011. Our footprint. We started off in Canada in 1998. We've acquired 22 locations. We are now the only rental competitor that covers every single province and major MSA. A huge competitive advantage to us, and the customers are taking advantage of that as well. If I give you a best example, Newfoundland CEO, prominent head office in Newfoundland, besides he now becomes one of my national accounts. He leverages that relationship through me, a single point of contact. Joe Dixon's team, that account grows to about $1.7 million in trailing 12 months. Why? We leverage our offices with his field offices. The two together create the partnership of loyalty. Great advantage. If we look at today, I am presenting here some of the big job sites that we have going on in the marketplace, Western Canada, tar sands. We physically have a job site, 475 pieces of gear being rented, ranging from aerial, air compressors, pumps, forklifts. We shift gear and go to the other spectrum of Newfoundland. Newfoundland, we have a nickel smelter, 270 pieces of gear being rented today. There is a huge potential that we see and that our customers are finally believing in us in terms of servicing their accounts. We are structured in Canada, three regions, 10 districts, not provincially aligned, and we have over 85 branches. The 85 branches do not include the laydown yards. In selective markets, originally were potash in Canada. It has made the news up here, too. When we did not have a branch in place, we left the branch in Saint John as is. We developed a laydown yard, basically temporary unit, fenced it. Put the technicians in place to service that account and be closer to their facilities. It is just examples, so that is not included in the 85. Why is this exciting for me? Growth in Canada. I reach out to Bill, who I have nicknamed our famous banker. He has been supporting Canada, great supporter of Canada last year. Growth again, positive for 2011. We are going to maximize that market share. We are estimating our market share to be 12%. Huge opportunities for us to raise market share. Year-over-year, we grew our industrial business in Canada 9.5%, which represents 28% of our total revenue. In parallel, we grew the national sales account business 8.7% year-over-year, which that represents 29% of our business, almost the same as industrial. The beauty of this is as we keep growing the industrial and the national account business in Canada, it lessens the impact that we have to harsh climate. Our customers are less affected by harsh climates being at the industrial and national account versus the gen rent cash accounts, for example. It is a huge win for us, and we are already seeing it. This is a chart that without my employees in Canada would never have occurred. We go back three years ago, as Matt and Michael alluded to, we are definitely a different company than we were three years ago. Operation United is greatly engaged in every single location in Canada. Top-line revenue focus has gone away. It is really bottom line, EBITDA focus, rental revenue growth. We grew our rental revenues by 6.5% in Western Canada, over 12 percentage points in Eastern Canada. We grew our EBITDA dollars by almost 26%, and we improved our EBITDA margin by seven percentage points. Huge win in terms of our operating entity up in Canada. That being said, I still believe we have the best employees in the marketplace in our company in Canada. We've attracted a huge momentum in terms of hiring people from the outside. A-list players have joined our ranks as making us make a difference. On top of that, when we look at this, we have great employees. Financial metrics are falling. Our recordable rate has improved in Canada. My region alone last year in 2009, ended the year at 2.07. We ended this year at 1.77. Again, a key component of our success. Some quick highlights. In Canada, rental revenue represents 77%. My target was 80% of our total revenue should be rental revenue, direct impact on EBITDA improvement. We improved this from 73% the year prior, so 4% improvement. We spoke about employees Matt alluded to, or Joe alluded to the engagement score. Our employees are clearly committed to the transformation we're going through. Not only has their engagement scores reaffirmed that, in addition, we now have the highest productivity per employee that we've had in Canada for the history since 1998. A good news story. Just to give the room a flavor of what we see in fleet, 53% of our fleet is aerial. It's a little higher than the rest of the company. I believe the company is at 49% aerial. We have a smaller footprint of fleet. The aging combined overall Canadian fleet is 46.8 months. Aerial is closer to 52.8, 52.9. So our aerial is somewhat aged a little differently. Good news. Used equipment sales. When the recession hit, ourselves and our competitors, without the market demand, had to liquidate fleet. One of the vehicles we exhausted at retail, one of the vehicles left was auction houses. In 2009, auction houses were used to liquidate our fleet close to 50% in Canada. We just did not have the market absorption for our fleet. Margins dropped down to 17%. Good news is in 2010 in Canada, less than 18% of our fleet was sent over to auction. Our margins jumped back up to 37%. Great trend for us. In conclusion, one is I love the fact that we're mentioning Canada today. Two, positive construction growth will remain in 2011. Our branch is perfectly positioned to take advantage of market opportunities. We've got the support from corporate in terms of additional capital for our marketplace where required. National accounts that Joe's helped us with, and industrial account business is growing in Canada, again, lessening the impact of our harsh climate and our shorter rental season. Operation United clearly engaged every single location in Canada. Whether I'm sitting in Calgary, Toronto, Langley, B.C., or Saint John's, Newfoundland, it's the same technology, same screens. The only difference would be if I go over to Quebec, some of the Quebec locations screens are in French, so we operate in dual languages. All software transparent to the customer and the employee. EBITDA is clearly going to improve with the rest of the company, as Michael alluded to. That's all I have. I appreciate your time. Any questions? Oh, by the way, before the questions, I agreed with some of you when we first walked in, I'll gladly have anyone visit our Canadian locations. If you want to visit our Canadian locations, just coordinate those visits with Fred Bratman, and I'll be happy to host a visit. You said you are at 12% market share and have potential growth above that. Where would you like to take market share, and who do you think you would be taking from? When we look at I know where I would like to take market share. I think Michael and Matt keep receiving my emails for growth capital. Realistically, to double the market share would take a lot of fleet. What we have been doing is selectively growing our business with key accounts. At the same time, we have been taking market share off the street off our main competitors. When we look at the footprint that we have in Canada, Herc has locations in several of the provinces, but no one has the footprint we have. When we look at the Cat Rental Store, consolidate everyone together, they have locations in all of Canada, but as one, no one does as we do. We are biting at it. I hope that answers your question. Okay. Thank you. I would like to present to you Dale Asplund, our VP of Business Services. Thanks, Tony. Good afternoon. Oops. As Tony said, my name is Dale Asplund. I have been with United Rentals since 1998 when I joined the company. At that time, I joined the company working in several positions of our IT group in the early years of the company, including leading many of the integration efforts that we did in the early years, as Matt mentioned earlier. Subsequent to that, I have taken over the position of Vice President of Business Services, responsible for fleet management, procurement, as well as many of our shared service functions. Prior to joining United Rentals, I was with a company called United Waste. For those of you who may be familiar with the history of United Rentals, it was the company owned by our founders prior to the start of United Rentals. Okay, briefly, let's talk about fleet management. We have heard a lot today about many of the things that we plan to do over the next couple of years. There are no bigger items that we can control as we move forward into 2011 to support our commitment to growing rental rates over 5% next year than managing our fleet effectively. There are two areas that we need to drive for that. As you can see, from 2007 to 2009, we went through a very hard time in the economy that forced us to de-fleet. We believe today we have done the right level of de-fleeting to get us to a level of $3.8 billion. We saw in 2010 a strong rebound as we saw our time utilization rebound to 65.6% from a low in 2009. That 65.6% is a record time utilization for our company as we exit 2010. This statistic is the key item that is going to give Ken Mettel, Matt Flannery, and all of our operations people the ability to manage that rental rate as we move forward. Our fleet today is made up primarily of aerial equipment, which is booms and scissors. That is still 49% of our fleet, and we still have large buckets on forklifts and dirt equipment. But as we continue to invest in our fleet, and we right-size our fleet, and we look at products that our customers are demanding, whether it is for Paul's cold starts in pump and power or trench, or whether we need to repurpose some of the fleet that we have into new categories like dirt, we plan to remix our fleet over the next several years to get the fleet the customers are asking for that we can service them as we move forward. How are we going to do that? We do that with many levers. First, we have used equipment sales that we target, and we target it based on age and fleet mix that we have out there, and I will talk about this in detail in a minute. Secondly, we look at our capital, and we put very much rigor into our capital spend. We put it in two buckets. Number one, we look at replacement capital, which we do allocate down to our regions. As we ask them to sell specific assets, we ask them to replace those assets to make sure we can service the customer, and two, we look at growth capital. Growth capital is held top side, and we only allocate that, Matt and myself, through a rigorous process to make sure it is based on customer demand that we are chasing with Operation United. A change that we've made is when a branch requests fleet, that is what he's doing as we've entered this new era of United Rentals. They request fleet. In the past, they would request capital. Every level of our company, as we review a request for fleet, reviews that request to make sure it's a logical purchase, and we don't have fleet available somewhere that we can move prior to buying the asset. A branch manager will request it. The district manager will make sure that that investment would be logical in that market using his market knowledge. He will then escalate that if he can't find available fleet up to his regional fleet manager, who will then review the order to make sure it ties into what his target is to manage that fleet at the regional level. As we move that up to our corporate level, Matt makes sure that this investment is supporting the right customers that we want. We want that fleet investment that we're making to make sure it ties into our corporate strategy of Operation United. Used sales. How do we target what items we want to sell? This changes on an annual basis because we take many things into consideration. When we look at our asset list, we look at what items we should replace that year. We look at many factors. We look at the revenue being generated from those assets. We look at what we're seeing with repair data and how much it's costing us to maintain that asset. We look at the time utilization we're seeing on this category. Is it something in high demand for our customers? Maybe we have a specific breakdown with any one specific asset because you can get a lemon, like many of us know, so we might accelerate the depreciation on that asset. Most important that we've seen over the last few years is what we see in resale value. As everybody knows, the resale value dropped drastically in 2009. That took away our ability probably to sell a lot of the assets, so we aged them longer, as we know with our fleet age. Our regional managers have set up a list of assets that we distribute out to our field for review to make sure we have a targeted list of assets to sell. We want to control what the branches sell to make sure we're selling the oldest fleet that we have targeted to sell. As you can see, as Tony mentioned, 2009 was a very challenging year. You saw our drastic change in fleet from $4.2 billion down to $3.8 billion over a 2-year period, and it was not a good year to liquidate fleet. We right-sized the fleet we need. We stabilized our rates, and we started the rate trend back in the right direction, as Ken Mettel showed you. Might I add, that in 2010, we rebounded very well with that right-sized fleet as we targeted the items we planned to sell through retail channel. We take that list of assets, we distribute it to Joe's sales organization, and those salespeople go out trying to sell the asset long before it ever goes to an auction. This is very important because the retail channel will always be our best way to sell an asset. And then if we have to work with one of our OEMs who is looking for specific volume, they may be interested in working on a trade package, similar to trading in a car that you may be familiar with. Okay, so let's talk about when it is time to buy. As you can imagine, over the last several years, we have seen a drastic decrease in our spend, majorly in the equipment side, but also in our contractor supplies businesses, we de-emphasize that. But parts have stayed relatively consistent over the last several years. Okay, when we sit down with a vendor, we want to talk about what it is that we plan to buy from them and what is important to us. As you guys can imagine, the first topic that always comes up is price. They want more price, I want less price. That is part of the negotiations. But there is so much more. We talk about lead times. Even if they offer us a great price and they cannot deliver the product, it does us no good, so we need them to commit to lead times and then deliver on those lead times. Are they willing to use our freight company or are they stuck shipping it themselves? We do a lot of freight from a lot of suppliers to a lot of locations. If we can consolidate those loads across the country, it helps us lower our freight bills across the country. What are they willing to give us for a warranty? And probably more importantly, how much do they reimburse us when we have to repair their assets under the warranty? Do they have the ability to send us EDI billing? This is a major opportunity for us and our suppliers to take cost out of the purchasing process. What are the payment terms they give us? This is obviously very important, and Irene Moshouris, who is coming up next, will remind us of that. Technical support. You heard Matt Flannery talk about our employee engagement survey. How willing are our OEMs willing to work with us to get technical training for our mechanics to make sure they know the equipment they are working on? Parts discounts and pricing. The unfortunate part of having $4 billion on most of equipment is you need to maintain it. And in order to do that, you have to have availability and an accurate price on your parts so you can make sure you can service that equipment at a low cost. Are they on our eProcurement system? Which I will talk about in a minute. I will show you how that technology works. Can we retail the product or is it something that they have their own dealer network? And of course, will they give us training support? When you look at all those factors, that is what makes up our strategic supplier list. It is a magnitude of items. It is not one item. It is not who is going to price something the lowest to us. We see our relationships with our suppliers much greater than just in who will give us a product for the lowest price. Like our customers expect service from us, we expect that same level of service from our suppliers. Okay, ePro powered by SmartEquip. What is this system? This is a system that sits between us and our suppliers. And the beauty of this system is it takes out cost for both us and for the OEMs. It is an electronic bridge that systematically links us and the OEM together. What does it do? It has schematics that are built-in online, that when our mechanics need to go order a part, they can bring up the actual schematic of the unit. This unit schematic is linked all the way down to the serial number. If they need to know what engine is in that unit, the schematic will tell them which engine so they order the right parts for it. They also get real-time availability of inventory, not just across our branch network, but also at the OEM so they can see, "Is the part there so I can get it as quick as I can and service the product for our customer?" Of course, something very important, the prices are pre-populated and accurate based on what we've negotiated. This is extremely important because it creates backside problems if we create inaccurate purchase orders. Of course, if you've ever been in a shop of one of our branches, it is amazing how many technical manuals we can get. A benefit of this system is the OEMs now put all those online, and we can get up-to-date technical manuals. No more large shelf areas that put manuals where mechanics have to go look things up. They get all the technical data right online. This is a huge win for our branches as we move forward into 2011. We make fleet decisions. We make it to support our profitable growth model that wants to go after Operation United customers. Our used equipment sales are based off a litany of information, including the age of the fleet. Capital is provided based on replacement and growth, but the growth is held corporately. Vendor negotiations encompass a full list of items, and ePro helps us improve all the items we process with our OEMs to drive cost out for us and our OEMs. With that, I'll open it up for questions. Yes. How would you characterize the lead times in your discussions with suppliers today? If you could break that out between dirt and lifting. That's a great question. We have our vendor negotiations in October, and our vendors, because of the size customer we are with all of them, they go to us and try to give us lead time estimates then, and we actually will forecast what fleet we need. As far as us getting fleet, they have given us schedules of when they think that they can deliver any fleet that we have currently requested, and I don't see it as a major problem right now. I will tell you, the biggest challenge in our industry is going to be the shift with Tier 4 engines coming for some of the large equipment. That's going to drive the dirt products or some of the large air compressors and power products that need to change that engine. As the manufacturers change that this year, that's probably going to drive the biggest gap. The dirt suppliers, we have for all product lines, two suppliers for every group that we do. For our dirt suppliers, we use Case and we use John Deere, two wonderful suppliers. As of today, both of them have availability. We placed numerous orders to get some product in because this is an area we're going to grow in Q1 and Q2, but we have not seen any delays. Right now the OEMs have stocked up. The aerial manufacturers probably saw the largest decline in products, but they are ready to react to orders as they've come in. Regarding the optimal age to sell, how is the Tier 4 implementation affecting that decision? Well, Tier 4, I've had discussions with the OEMs because the biggest challenge with Tier 4 engines is going to be not all markets are going to support that engine. A lot of the products we sell today can go overseas. If those overseas markets won't support the new Tier 4 engine model, then we can't send that product. What we can do is on a lot of the products, and Tier 4 may be one of the items that we're going to have to consider, we can remanufacture or refurbish the product. We do that today with a lot of our large aerial products, and perhaps with some of the newer Tier 4 engines, we're going to have to consider that as an option as we go forward in the future. We have aged our fleet a little greater because we do not want to replace some of the existing fleet. Really, to be fair, the area that we have that fleet is areas we are growing today. So it is not an area we are trying to de-emphasize. The biggest thing driving that is the time utilization on those assets. How does that optimal sales age change if you are heading into a recession? Would you rather it be younger? Is there an age that is too old? Well, the major driver in that age of sales is going to be time utilization, because time utilization will drive what is happening to rates. Sometimes as you are going into a recession, you need to make sure you right-size your fleet as much as you need to make sure that you are selling the asset at a profit. I think the biggest driver of that is time utilization. If our yards are full, the branches have a tendency to react by putting out on rent for less money, and that is the worst thing that we can see happen. Does that answer your question? Is there an age that is too old before you are able to sell it? I don't believe that there's an age that's too old for us to sell. I think we leave the assets on the books with the original age we acquire it. If we get to an age where we feel that it doesn't make sense to sell the asset, we can always send it in to remanufacture it. Okay, I think we had another question right here. Thanks. What percent of your pricing with your suppliers is done on an annual basis? And I assume it was October last time this was done. What type of increases did you see from that? The increases, you could bucket them. We saw much more aggressive pricing from the aerial manufacturers, which their business is yet to rebound. It's usually the dirt manufacturers that rebound first as we exit the recession. Some of the dirt manufacturers on the smaller items weren't aggressive on pricing, but when you get up into the big, large assets that need Tier 4 engines, they got a little more aggressive. But we actually had a pretty good negotiation with both suppliers in that area. So our prices are only up about 1% in the dirt area. Forklifts, we did very well on the forklift side. That was pretty flat, actually down a percent from forklifts. And then the general construction products were actually relatively flat, if you take out all the large assets that are driven off Tier 4 engines. We believe that as we go into this year, we're seeing about a 1% weighted increase if we spend the lower end of our capital. A lot of our pricing agreements are based off volume rebates. If we spend towards the upper end of our capital expectations that Bill set forth, then we'll probably see pricing being flat for this year. Thanks, and that is mostly repriced annually, correct? Yes. We do all of our pricing agreements starting January 1st until the following December. We meet in October because as many of you can imagine, it is not usually a quick conversation. It usually takes a lot of follow-up conversations. John, there are a couple of We have a question right there, Don. Don, thank you. There was a comment on the call about the greater use of remanufacturing, and I think it was in the context of aerials. Can we get some more color? How much you did in 2010, how that compared to 2009, and how we might think about that in 2011? Sure. The remanufacturing process allows us to take an asset, and although it doesn't make it new, it makes it in like-new condition. We send it to the manufacturer. They go through the whole unit, tear it apart, put in a new engine, go through all the hydraulics, repaint the unit, and make it in like-new. They don't re-tag it with a new equipment age. We keep the asset in our system as the original age. We saw a drastic decline from where we were at in 2009, going into 2010, for the amount we spent on remanufacturing. In fact, '08 was our peak year, and we had planned to have a big '09. What can drive what you want to remanufacture sometimes can be the lead times from the aerial suppliers. If they get a lot of those products that stretch out where the availability becomes six, seven months out, it is better to send it in and have it remanufactured for 30 days so you get a new product that we can then add a life expectancy to. Does that answer your question? How might it influence going forward, the amount of aerials, kind of like Yeah, the question was, I guess, how is it going to influence us going forward? The biggest thing that's going to drive what we're going to remanufacture versus what we're going to end up liquidating and repurchase will be right now the residual values we see. We saw auction results, and we're seeing stronger retail for all products across the used equipment channel. If we see those used equipment sales continue to rebound with our current pricing that we saw given to us by our aerial suppliers, it may make sense for us to actually do less remanufacturing, because there is a cost to that, and actually buy some aerial product versus, and sell the used equipment. You're welcome. Can you talk about the optimal mix of aerial equipment within your fleet that you're targeting over the next few years? Yeah. What I would say is we are the dominant player in the aerial market. Just in the New York area, you may have saw some of the bigger jobs with Citi Field, Giants Stadium, even Yankee Stadium. We were the major aerial provider to all those jobs in the New York area. We have been across the country, and we will continue to be. Our focus will be, can we repurpose our fleet and perhaps shift it over to some of that dirt product? Our aerial fleet today is 49%. We expect that a healthy level is probably 45%, but by no means are we willing to sacrifice the market dominance that we've created in that market. Dale, if you don't mind, if I can add. That's as much a reflection of what our customer demands are and our changing customer profile more than any other dynamic, and that's why we're changing that mix. It's not simply a problem with the aerial business. We were just so heavily aerial-weighted in customer penetration. Now with Joe and the improvements that we've made in our national account team, we've brought a much more diverse customer mix, and that's really what's driving that change. Yeah, and if Paul continues to grow our pump and power business like he wants to, that will obviously add value to our fleet in those areas. Other questions? Well, with that, I do thank you, and it is my pleasure now to get to introduce to you our Treasurer and my friend, Ms. Irene Moshouris. Thank you. I know that Paul thought that he had an interesting background. I bet you can't say that you came from a cosmetics company. It was Tony, actually, that said that. So I am the Treasurer of United Rentals, as Dale mentioned, and I started my career 25 years ago as a tax attorney working for different firms and companies, including Arthur Andersen, Sterling Winthrop, and Avon Products, most recently. At Avon, I joined in the tax department and then later moved on to the Treasury department, where I became Deputy Treasurer. I joined United Rentals in 2006 as the Treasurer, and then now have responsibility for tax and credit and collections as well. Irene. Have Joe. Okay. As Dale mentioned, and as you all know, we buy and sell a lot of fleet. This is a capital-intensive industry, and we tend to be highly levered. As such, a strong, flexible capital structure is critical in supporting the business at any stage of the business cycle. Listed on the slide are some of the principles or guidelines that we think about when we're thinking about our capital structure. And one of the most important ones is the fact that we believe that we can sustain a reasonable amount of debt because we believe that we can monetize our fleet to generate free cash flow. In fact, we proved this in 2009 when in the depths of the recession, we sold off $650 million in OEC in helping to generate $367 million of free cash flow. That's an important factor in showing you how flexible we think our capital structure is, not only our capital structure, but our business model is to withstand any part of the cycle. Another important principle that we look to when we're looking at our capital structure is to manage the debt maturity profile of our debt. We want to make sure that we don't have any excessive refinancing in any one year. I'll talk about that a little more on the next slide. Diversification of our investor base so that we can promote access to alternative sources of funding is another principle. And finally, sustaining sufficient liquidity to cover net CapEx needs in any one year. We believe that these principles are the foundation for a flexible, strong capital structure which will help us to drive our business. Now, over the past two years, we've accessed the bond market three times on three separate occasions to refinance our debt and to extend our maturities. As you can see from the graph, our debt maturities span from 2011 through 2028, with the most significant maturity being the ABL, which is expiring in June of 2013. Now, while the ABL is expiring in two and a half years from now, we still look at our capital structure all the time and evaluate opportunities. I can tell you that based on speaking to our bankers as well as some recent transactions, the ABL market is back to pre-crisis levels. So we feel very comfortable that we won't have any issues in refinancing this facility. Also, in 2011, later on this year, we have a small accounts receivable securitization facility that's coming due, and we'll begin renegotiations on that facility next month. We do not believe we will have any issues in refinancing that facility. All in all, we are very comfortable that our current debt maturity profile leaves us properly positioned to respond to the growth. This slide is really a listing of our debt, the components of our debt. What does it show us? It shows us that we are structured in a fashion that allows us to tap into a variety of sources of funding. We have senior secured bank debt, we have senior unsecured debt, subordinated debt, and convertible debt as well. We believe that this diverse pool of funding provides us with flexibility needed to support the growth as we enter the recovery. Looking to our senior secured bank facilities, the ABL, and the accounts receivable securitization facility, both of these facilities provide us with our short-term liquidity. On December 31, we had $625 million of availability between these two facilities, and we also, when you add cash on-hand, we had over $830 million of availability at the end of the year. The ABL is a very important source of liquidity, so I just wanted to spend a few moments just talking about some of the features of this particular facility. It is a $1.36 billion facility, and it is supported by the value of our rental assets. At the end of last year, we had $275 million of suppressed availability. Said another way, we were over-collateralized at the end of the year by $275 million. Why is that important? Well, in the depths of the recession and the down cycle, as the value of the equipment was declining, we had enough support in our rental equipment to support our ABL, which we are obviously very keen on and very happy that that occurred. We were not faced with refinancing issues in the middle of the cycle. So great value in having enough support underneath the ABL facility. The average borrowing cost on the ABL is a low cost of, this is 2010, low cost of 340 basis points. While there are some financial maintenance covenants, those covenants sprung off in 2009, and those covenants will not apply again unless our availability dips below 10%, which we do not see. If you put this all together, what do we have? We have ample liquidity, low-cost financing, and flexibility for our working capital needs. I just wanted to spend a few moments just to talk about our 4% convertible notes. If you recall, in November of 2009, we issued $172 million worth of 4% converts. We used the proceeds from these notes to pay down a 14% note that was outstanding at that time. The 4% note had a conversion price of $11.11. Simultaneous to the issuance of that note, we entered into a hedge transaction, and that conversion price is economically and effectively $15.56. As of the trading price of our stock the last quarter, these note holders now have the right to convert. As of today, we have not received any notice for an intention to convert. I mentioned before that we had been in the market a few times over the last couple of years. These are just a listing of some of the actions that we have taken proactively to manage our capital structure starting in June of 2008 when we refinanced our ABL. What is ahead for us in terms of our capital structure? We, as I mentioned, are focused now on renegotiating the accounts receivable facility that is expiring at the end of this year, and that we will also keep a close watch on the ABL market for any opportunities. In addition to my responsibilities for treasury, I also have tax and credit and collections. Was trying to think of a good segue from capital structure into these. I cannot think of one, so we are just going to dive right in. Credit and collections department went through a significant amount of streamlining, just like the rest of the company did over the last couple of years. Over the past few years, we have focused on standardizing our processes and consolidating our operations. We are also investing in systems, and later on this year, we will be implementing a software that automates the workflow of the 100-plus collectors we have out there. We expect this system will also yield more efficiencies. As you can see from the slide, even during challenging economic times, our bad debt write-off as a percent of revenue is below 1%, and we attribute this small amount not only to the good work of our collectors but also our ability to lien jobs. We have an ability to lien jobs, and it is an effective deterrent, as you can imagine, to delinquencies, and we use that ability whenever it is necessary. Regarding tax, we have said previously on our call that we expect the tax rate to be in the mid 30 range. This is a little more of a normalized rate than what we have seen in the past, in the recent past, when we had some losses in the U.S. and income in Canada, and that had created some anomalies in our tax rate. But for 2011, we are expecting in the mid-30s. Switching back to the capital structure, I think we feel very comfortable with our current capital structure and the flexibility that it provides us, not only now as we head into the recovery, but all throughout the business cycle. We feel that we have a strong, flexible structure that can support the business. With that, I will ask if there are any questions. See, 2 years ago, capital structure would have been a big As long as you mentioned selling fleet, I am sorry, I will ask the same question I asked before. If you sell fleet going into a recession to pay down debt, is there an average age of the fleet that you do not want to be at because it will be too old to sell going into a recession? I'll kick that over to. Thanks. Mr. Plummer. We're going to Q&A quickly, so I might as well. We don't have a fixed age that we think about as what would trigger us to sell going into a recession. I think the way we would think about it is as we see the cycle erode, we would say, okay, what do we think we need to do to support that capital structure that Irene just walked you through? Where do we need to be? Whether it's a debt to EBITDA measure that we expect to see or whether it's a cash flow number that we think we need to hit. We would consider all of those things and then ask ourselves, how much do we need to sell? Then we'll run real hard to try and sell that amount in the context of what we're seeing from the cash flow from operations. It's not as simple as saying, okay, fine, we need to have an age of X, and we need to sell Y amount in order to get to that age. It would be a consideration of all the different factors that we think are important as we look at what we expect the environment to be. Keep in mind that as the environment does play out, we're going to flex and respond to what we're seeing. At the beginning of 2009, we all knew that it was going to be a tough year. It turned out to be a lot worse than we expected in 2009. I remember I joined in December 2008. Our board challenged us to come back with a downside scenario. We did. We came back with down, I think it was 15% rental revenue. We had one director in particular said, "That's not nearly down enough." We went back, we looked at scenarios that were down 30%, and we said, "If it gets that bad, we're going to have to be very aggressive in our used sales." It turned out that it came pretty doggone close, so we ended up, as Irene or Dale or someone mentioned, selling $650 million plus of OEC in that environment. We had a plan. The world looked worse. We responded by flexing that plan to greater sales. That's, I think, the right way to manage it, rather than saying, "Here's a level of age that we want to maintain or try to hit in the future. When you started that, you had an average age that was in the 30s somewhere. Yep. Also, your leverage was, I think, in the twos. Now you're, I forget what your leverage is. High threes, I think? Low fours. Yep. Low 4s. Low 4s. That is okay. Your age of the fleet is in the mid to high 40s. Nobody is looking at a double dip right now, but where do you want to be just in case? Go ahead. I was just going to say, as we go into the, we're going to go into a cycle that's uptick. We all believe that, at least us in the industry. The leading indicators would suggest that the market is a little bit of instead of headwind, we're going to get a little tailwind. As we go forward, our age of equipment will come down because we will be buying more and having some growth opportunity. As you put growth capital in, our average age comes down. I think the important point is to take a look at the average age of what we've been selling didn't change significantly. It's the oldest assets. It's in the 77, 78 month range. That's not going to change our pattern. The question is, how much do you sell and when do you sell that? At what given point in that cycle do you want to do that? As we go forward, we're going to change the age of our fleet. It'll come down over time as we go through this next cycle before we enter into the new one. Where it ends, I don't know because we don't know how long that cycle is going to be. To your point, we don't know if there'll be a double dip. I think the other key takeaway is we're not afraid to pull that lever if need be. Is the concern behind your question that with an older fleet, we won't have the ability to sell enough in the event of a downturn? Well, that's part of it. The other part is when you and your competitors all came to market before the recession, you boasted about how young your fleet was. Now you seem to be boasting about how well you're doing with an older fleet. Yeah. Let me say, I've been in the industry for going on 32 years. I owned my own equipment company, and the average age of my fleet was significantly higher than anything you've seen here or anything that's been reported by any publicly held company. Typically, we hold our assets for as long as we possibly can. Now, I was in the aerial business, and I could do that. Earthmoving is a little bit different, but it has not changed our ability to put stuff on our rent. I think that's true not only for United Rentals, it's true for the industry as a whole. I think it's more in line of how well you maintain that equipment. We also talked about the ability of refurbishment if need be, and we have done that over the past several years. That's another level that we can pull, which will then also further age out the fleet. So I, as an operator background, don't get worried about that personally. When I look at it from the operational standpoint: Are our customers taking it? Are they accepting it? Is the frequency of breakdowns, and how well we're getting rates improvement and we're also getting time utilization improvement. Those are the things that I balance that against. Again, do we want to enter the next recession when we get there at the age we are today? No, probably not. We are going to age our fleet down as we go through the next cycle. But I think we can all debate how long this cycle will be and how much of an uptick it'll be in the future. We look at the world as a more elongated U as opposed to a V recovery. Yes, David. Given how high your tax rate is, how does tax planning play into your decision to expand globally or not? The tax rate that we've experienced in 2010 and 2009 was, as Irene just said, we think unusually high, and that was the result of the fact that we were making pre-tax losses in the U.S. while still making money in Canada. If you sit down with Excel for a few minutes, you can demonstrate to yourself that if you're recognizing a tax impact from a loss in one country and a gain in another, the mix of those effective rates will be higher than what we're saying now is a more normal rate of in the mid-30s. As we look forward, we think the mid-30s is the right kind of tax rate for us, going forward. And we think about planning our business in that kind of an environment. It'll come out of the mix of income in the U.S. and Canada, and it'll be what it'll be. Our view is that we need to make the right strategic decisions about where our business is going and what's the right footprint, and whether or not perhaps there's a growth opportunity in other markets around the world, and then the tax rate will fall out of that. Is that responsive? Well, I was just wondering a little more thought around that decision and obviously the benefit from a lower tax rate. Yeah. Obviously, the international exposure could be another outlet for your used equipment. There's a lot of that. I'm just curious if there was something about the tax structure that makes it more challenging than I realize, or is it actually more an opportunity with the tax rates down? Yeah. I don't think there's anything either unusually attractive or unusually challenging as it relates to the tax aspect of growth internationally. I think I tried to make the point before. It's going to be the strategy of how do we position ourselves with customers in those markets? How do we position ourselves against our entire supply chain in other markets? What are the growth opportunities and profitability and cash flow that's available? And taxes will just be one part of all of those considerations. I don't see anything prominent, either positive or negative, related to tax in other markets that might lead us there. That's an answer in itself. I appreciate it. Okay, great. Henry. Hey, Glenn. I think it works back into how about the opportunity going forward. As we go into the next cycle, could you talk about the competitive dynamics and how the market looks as it's historically been a very fragmented market. Are you seeing the mid-tier guys potentially become less impactful in rates, and do you expect consolidation in the market as we go through the next few years? Well, it's a great question, and it's one I often get, and I answer it by yes, I think that there'll be further consolidation. It's a very fragmented marketplace. One of the gentlemen over here mentioned about the reduction in the American Rental Association membership. It's down 8%-10%, which is significant. When I'm talking to them, it's more of the smaller players. I think the availability of capital has been a high hurdle for a lot of companies, to think about where they are going and how they're going to maintain their business going forward. That's to provide opportunities for United Rentals, and for some of the larger players overall. I do think that some of the regional players are also being capital constrained because some have accessibility to the capital markets and some don't. I think that when we go through this, I think banks, I am not going to speak on behalf of Irene or Bill, but typically banks are going to be more risk-averse, I think, going forward, and as a result of that will provide us opportunities. In conclusion, I would say, yes, that is going to promote further consolidation. I think over time, our industry will continue down that path. When you think about CapEx plans for 2011, obviously you are $625 million. Is there any point if the market accelerates faster than you think, you consider a free cash flow negative, or is the company just staying free cash flow neutral as a possible go through? I think we said 625, so don't migrate me up just yet. Are you one of the operating guys that are out in our branches? I think what we have said again and again is that we will respond to the market. We believe in the discipline benefit that saying we are going to be free cash flow brings. It is a very important part of how we make sure that we are making good, strong, long-term investments over the company. If the market is so strong that we are getting the rate performance that we expect or better, that we are seeing the utilization drivers that we expect are better, and that we are continuing to address all of that and still seeing demand from our customers, then yeah, we consider going free cash flow negative. Don't tell Matt I said that, but yeah, we think about it. But it is going to depend on seeing how the market develops and responding to that, rather than just saying right here and now we think it is the right time to go hugely negative. $625 million is a lot of spend. My view is let us see how that goes, and if that is going well, then let us talk about going free cash flow negative. Oh, by the way, we may not have to. If the market is doing so well, cash from ops goes up very nicely in this business, and we may be able to spend even more without going negative. But going negative is one of those things that will have to come out of the market and not come out of, in my humble opinion, not come out of us saying, "Okay, now is the time to really go big. If you were to go negative, is there a limit that you conceptually have talked about? We haven't. I think it really would depend on what the opportunity that we see presented to us by going negative. If it's something that we think is sustainable over a number of years, then we could go relatively more negative. The beauty of having the capital structure positioned the way we have is that we have ready access to be able to do that in a very significant way if the market justifies it. What's the peak capital spend for this company in its history? Did we get $1 billion of spend in any one year? 600. 600. That's where we've been historically. Could we do that again? Sure, we could. I don't know what the cash from operations looks like in that kind of environment, but that's another $350 or so million over what we've said we're going to do already. I guess if you really wanted an outer bound of how negative we could go, it's 350 minus whatever the cash from ops would be that led us to go negative in the first place. Phil, I think that Bill's exactly right. If you look at the history of the company, and I know you've followed this for many years, this company has spent a lot more than $625 million, and we have been free cash flow through significant periods. I don't see that changing, but we don't know. I will tell you that there's a lot of rigor around making sure that we ample return for our investment. The easiest thing we could have done in the fourth quarter, quite honestly in the first quarter, is throw more capital. Matt's looking for more. With high record time utilization, I can guarantee you our branches are looking for more capital. Not going to do that until we get our rates up. So we need a better return. Seth? The $500 million in cost cuts that you've taken out of the business, how much of that is permanent, and how should we think of that coming back as the cycle gets stronger? That's a great question, and we get that frequently, too. I'll take the first part and I'll pass it over to Bill. What we have said is about 55% of that is the fixed cost that will be out of the business. There's a variable component that will come up, i.e., in sales that relates to volume as we go forward. Time utilization as it goes up. As we add more fleet to the organization. Those variables will add cost. What you will see is the percentages improve on margin and on SG&A. He took the easy part. All right. The variable components, I think, are a real challenge to talk about in this market, right? Because on the cost of rent side, it is delivery, it is repair and maintenance, and it is some other less direct, but still variable components that are going to drive. Quite honestly, where those end up year-over-year will depend on transaction volumes. We have got a model, we have got a forecast. We think we will manage very effectively, but those costs will be there. We think we are going to get leverage in those variable rental costs to a very significant extent. We are also going to get very nice leverage in our SG&A expense, but it has got the S part in there. So commissions are going up. All of the selling-related costs are going up, and it has got incentive comp in there, so that is going to go up as well. He said, knocking on wood. Rather than talk about those in specific dollar amounts like we have for the last couple of years, we said, "Let us talk about them in terms of the impact on profitability." That is why we gave the flow-through outlook that we did this year instead of dollar cost reductions. Mike is right. The mix of permanent versus temporary costs in that roughly $500 million that we took out, we think is about 55%, and we think that is going to be a legitimate number at a high level for 2011 as well. Sort of that total time period, including 2011. But we think it is much more useful to say, we think every incremental dollar of revenue is going to equate to $0.65-$0.70 of EBITDA. That is a more useful direct statement about how profitability will flow with revenue, and we will keep updating as we go through the year. Seth, one more point on that is that, we are not stopping. We are not saying that we have actually achieved where we want to be. You heard us talk about technology. If you spend some time in the back of the room, you will see one of the levers that we can pull on technology and further drive efficiencies in this organization. We see a lot of opportunity in the future of this company to drive those efficiencies. That is something that excites me. That is something we want to drive towards, and we are all dedicated to making sure that we achieve those levels. Question on pricing. Yes. You went through the technology with the CORE, and you went through some of the process changes. Now, realizing there are a lot of variables that will influence pricing, including the market, would you be willing to handicap what the impact of the internal changes might be? If you average 3-4 points of pricing in the last up cycle, internally, how might you think the benefits would accrue to you in this cycle? How much is Kenny Mettel worth is what you are asking, right? Exactly. Yeah. A lot. But not as much as you think. That's right. We haven't quantified the impact. I think as far as we've gone externally, actually today's presentation was as far as we've gone externally to date. That cash versus credit account spread that he showed you there, I don't know that I'd say I'd attribute all of that delta to CORE, but a significant chunk of it, I would, and Kenny Mettel, please disagree if you do. A significant chunk of it, I think, is the result not only of the new system that we implemented, but all the work processes that we did and the management focus that we put around rate. All of that came together in generating that difference between the credit rate increases and the cash rate increases. I'll duck the specific question of how much came out of CORE versus other stuff, but I think CORE was a very important direct contributor as well as an indirect contributor because it allowed us to make all of the other management changes that we made around how we approach rate in the market. CORE is not just about price either, as Kenny Mettel mentioned. It is through driving profitable growth. Because in some instances, on the old model, we actually walked away from profitable customers. This system enables us to make that judgment call in real time that we did not have before. Do you have the ability to look at competitors' pricing historically? Through any people you hire or other means, and so you could look back and say, "All right, well, X, Y, and Z were up 3 points in the last up cycle, and we were up 2." There are a lot of, again, variables, mix, whatnot. At least anecdotally, you could look at? Not in a systematic way. It is not like we have got that information captured in one of our systems. But the experience of people like Matt Flannery and Joe Dixon and the salespeople, Scott Owen and Rob Higginbottom and the other 1,100 salespeople across the company, that accumulated experience is there, and people have that knowledge, and we share it amongst each other in trying to understand what might happen in the markets going forward. Now we have got an analytical framework for capturing what is happening in the market right here and now, where we are winning deals, where we are losing deals through CORE, and that is going to help us apply that experience even more effectively. Thank you. Sure. Nish. Hi. Hi. First question is for Michael and Matt. Michael, over the past couple of years, you have reduced the number of store counts, I think it has gone from 700 to under 550. If you can just talk about what that means in terms of geographic coverage, where do you want to end up eventually? If you can just elaborate on that. Yeah. As Matt mentioned, we are in 99 of the top 100 MSA markets. We did not exit any large markets, and that is an important factor. What we were looking at is how can we optimize our footprint when we went through this process of where we were located and were we capable of capturing that business and still holding onto that revenue and being able to service it through a larger location or a reduction in locations? The answer was yes. When we went through and we took a look at—in our investor presentation, in Sacramento, we show we have five locations. We went down to three. In fact, not only did time utilization go up, our profitability went up significantly year over year. I think where we are today, as I mentioned on the call, that I see us going to a more normalized environment. Will we have some that will go away? They will go away just because of maybe market demand and changes. Then we will add more to our overall footprint. I think it is more going to be, to me, focused around customer demand in the future as we go forward, particularly with Paul and how we can cross-pollinate all of our locations. Matt, do you want to add anything more to that? Yeah. Operationally, as I talked about with traveling customers, there is not anywhere in the U.S. or Canada where a project lands that we cannot supply. Literally nowhere. If a potash mine pops up in the peninsula of Minnesota or if something comes up at the northern ends of British Columbia, we can go there. We can put up a satellite facility and service it. We do not have anywhere that is not within a couple of hours to service on a regular basis. I think most, if not all of the growth opportunities will continue to come out of trench power and HVAC because their footprint is not as built up. If you think about how we built the company with all the different acquisitions, necessity was a little bit the mother of invention here. We had a lot of overlap that during the downturn we were able to eliminate, and it's worked out very well for us. I don't see any gaps in our distribution network. Just as a follow-up for Bill, I guess. I guess there's been initiatives over the last year and a half to stand up several metrics for the industry. I'd be interested in an update on that. Secondly, when I talk to investors, they tend typically to focus on EBITDA, but I think you could also provide some color as to what might be an effective measure perhaps another way. If you could just give some color to that, I would appreciate it. Sure. Actually, Chris Brown is here. Chris is our Assistant Controller, and he's been leading the charge on your first question around the industry metric standardization project. He's been working with Rouse and with the ARA to try and come up with some common definitions for the key metrics like, how do you do fleet age? How do you do dollar utilization? How do you do time utilization? I think there's been a lot of good progress made. Chris, help me on the timeline. I think late in the first quarter, we will with ARA finalize their white paper, and then we will begin reporting to a number of participants that we've mentioned the national model metrics beginning in the first quarter. Late in the first quarter, we should have a white paper out of ARA, and Rouse will shortly thereafter start reporting on some of those common metrics. It raises some interesting questions about the differences that are out there in metrics. I think we've gotten generally good engagement on the part of some of our other rental companies to try and get to a set of metrics, at least an initial set of metrics that will be useful as we go forward. We'll continue to work on that. In terms of financial measures, and I'm going to focus just on financial measures that investors use. You're right, our conversation tends to begin and end with EBITDA and EBITDA margin. This is sort of a philosophical question almost. I think that's probably as good a measure as any in terms of being able to understand the operating profitability of the business. I do think that there's a legitimate question about keeping depreciation out of the discussion and what do you miss by taking depreciation out? My personal view is that you don't miss a lot by taking EBITDA instead of operating profitability. I think that the way you should think about this business is to look at the cash from operations and how that compares to your ability to finance that cash flow and to finance the investment that you need to make. I don't have a problem with EBITDA as being a focus of how people think about the business. I don't think, though, that you can focus on any one measure. That's why we talk a lot about return on capital. That's why we talk a lot about how much cash flow we generated, and that's why we talk about how much investment that we're making and when we're making it, and how we're thinking about making investment decisions. All of those are vital to consider when you're considering whether a business like ours is being well run or not. Yes, you can start with EBITDA, but to me, you've got to include all of those other financial measures. That doesn't even touch on the operating stuff around time utilization. How well are you leveraging the fleet that you've got? Or a whole host of other operating measures. EBITDA is a good starting point, but we're always going to talk about all the other stuff as well. David. As you grow your niche businesses and develop a separate branch network, is that an effective cost headwind from supporting those additional branches that you could fulfill that same demand through your existing branch structure? Actually, we are. A lot of the locations that he talked about are co-locating with current locations. So clearly we first focus on, do we have a location that's capable of taking that, the capacity, first and foremost, and without a doubt. And most of them, if not all of them, are recent. Paul? Yeah. Pretty much all of the locations that we opened in 2010 were in existing either GenRental, Aerial, or Trench locations. So there's a cost benefit, certainly by sharing the synergies around the cost savings by sharing a location. But there's also the customer benefit where we have leadership in the other markets. So we're very strategic in how we look at locating those cold starts. Fred's giving me the wave to say we have one more question available. Any more? Yes, sir. You guys are guiding for 65%-70% incremental EBITDA margins in 2011. I'm just wondering if you could talk about how sustainable those incrementals are, and maybe how we should think about them over the course of the cycle. Shelly? Go ahead. My view is that 65%-70% is quite a very sustainable, I can't talk, sustainable level of flow-through. It will flex depending on the environment that we are seeing. If we get a little bit more rate performance than the 5% minimum that we have talked about, then it will be higher in that range. If you get a little less rate, then it is going to be towards the lower end of that range. But absent a pretty significant downturn, I think that is probably not a bad range to think about over an extended period of time. I am going to wrap this up. Thank you very much for coming here today. We do have some refreshments. Please stay. We have management staff here that you can mingle with and ask questions. I will also point out, and it is very important, that one of the things that we have been striving for is to always look for improvement inside not only our industry but us as a company. Our IT over here has a display, several of them, one of which is FAST. It is more than a GPS program. It is, to me, a game changer. It puts us in a very high quartile of logistic companies. We have a team over there that is willing to demonstrate that to you as well as some of the other functions that we have. Thank you very much. I hope this was very useful. Also, if any of you would like to ever go to one of our locations to visit and actually be able to meet with local management to get a better understanding of all the things that we talked about that we have implemented inside this organization, please get with Fred Bratman, and we will be happy to accommodate you. Thank you very much.

Data Source: Quartr Last updated: Feb 11, 2011

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