Earnings Call: Q3 2010

Oct 20, 2010

Good morning, and welcome to the United Rentals third quarter earnings investor call. Please be advised this call is being recorded. Before we begin, note that the company's press release, comments by presenters, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2009, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that today's call will include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, and William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Thanks, operator. Good morning, everyone, and welcome. On the call, as the operator stated, is Bill Plummer, our Chief Financial Officer, and other members of our senior management team. I am going to start this morning by summarizing the quarter for you, particularly those metrics that relate to our strategy. I want to focus our discussion on a tie-in between our strategy, our actions, and our results. I will also talk to you about the operating environment and where we see the recovery going next. Bill later in the call will cover all these in detail, all the results in detail. After that, we will take all of your questions. Let's start with the numbers. As you saw from our press release, we had a strong third quarter. We got some help from the environment in terms of demand. For the most part, we generated our performance from the inside out by paying close attention to our strategy. As I shared with you in the past, that strategy is to transform the company for long-term profitability by defining United Rentals according to our core business of equipment rental, achieving customer service leadership in our industry, continuously improving our cost structure and fleet management, and leveraging our size by pivoting our customer base towards large construction and industrial accounts that we service through a single point of contact. We are being very disciplined about how we target these accounts, while at the same time pursuing more profitable rentals from our customer base at large. As a result, we had positive net income of $23 million and an EPS of $0.33 per share. Now you compare that with the third quarter last year when we had a net income and earnings of zero. The change is even more dramatic on an adjusted basis, with an EPS of $0.40 compared with $0.01 in last year's third quarter. We repeatedly said that we are only interested in profitable growth, and here's the evidence. We increased our adjusted EBITDA dollars by 17%, even though total revenues increased by only 2%. Our rental gross margin was up 1.9 percentage points for the quarter versus last year. In short, the numbers clearly show that we are delivering on our strategic priorities, and we are doing it within the context of a choppy recovery. That's true, the cycle is turning, but it's a slow turn. I am happy to say that our performance has outpaced the construction environment for two straight quarters now. We know the construction spending in the U.S. actually took a step backward in July and August compared to last year, but I am happy to report that the ABI numbers that came in last night were actually up for the first time since 2008, and we take that as a piece of positive news. When our rental revenues were up 6%, that includes a same-store growth of 9.7%. These are all good indicators of how well-positioned we are to leverage this recovery. We also continue to be diligent about cost. We took an additional $4 million of SG&A expense out of the business compared to last year. That's a sustainable improvement, and it puts us solidly on target with our projections. The cost of equipment rentals ex depreciation, which is a metric influenced by demand volume, increased by $12 million. Some of that demand is seasonal, some of it's cyclical, and some of it we believe is coming from our end markets opting to rent equipment rather than to purchase it. When you take these external factors into account and combine them with the impact of our strategy, it helps explain the record time utilization we reported last night. Given these market opportunities, we have increased our strategic spend on fleet in the quarter by $113 million. We also sold $74 million of used equipment at more than four times the margin we got last year. Again, another sign that things are stabilizing. We have a lot of discipline invested in both cost control and fleet management, which is why we feel very comfortable reaffirming our free cash flow estimate for the year, even with the projected increase in net rental CapEx. Bill will go over these numbers and elaborate on our full-year outlook after I complete this. Now, before I talk about the environment, I want to be very direct with you on the subject of rental rates. I know rates are a hot topic right now. I also know that there are some mixed signals in terms of the metrics being reported by our industry. As you saw last night, our own numbers showed record time utilization for the third quarter, but our rates were still down 1.4% compared to last year. So what's going on here? Well, for one thing, rates in general are lagging utilization in the recovery as expected. Second, monthly rates are lagging daily and weekly rates, and because our strategy focused on large accounts, about 71% of our transactions are monthly right now. That's up about two points sequentially in year-over-year. Now, the inherent difference in rates is obvious when you break it down in rental term. For example, in the third quarter, our monthly rates improved sequentially 1.7%, while daily rates were up 3%. That's almost twice the pace of monthly. The third factor is fleet mix. Aerial equipment accounts for roughly half our fleet, and we've said before, dirt equipment gets rented first on projects, followed by aerial. We expected aerial rates to be challenging in the short term. To some degree, they match the environment in earthmoving and general rental rates. Overall, our rates have turned a corner. In the third quarter, rates improved 2% sequentially from the second quarter. That's one of the largest sequential improvements we've seen. Since we're focused on achieving a more optimum balance of pricing and time utilization, our dollar utilization is also improving, up 2.9 percentage points year-over-year in the quarter. That's good. We plan to do a lot better. Now at this point, and given current trends, we expect our rates to be flat or slightly positive year-over-year in the fourth quarter. A continued trend upward as we go into the next year in the first quarter of 2011. We would normally be cautious about giving that outlook, but I have a lot of confidence in the discipline that we're creating around rental rates. For example, our price optimization software called CORE is now in place in all of our branches except Trench. CORE is giving us customer-centric pricing, which essentially means that our sales team now has a better understanding of optimal pricing. They know how far they can negotiate, and more importantly, they know when to walk away. Price optimization is an example of how we're continuing to invest in technology, again, to support our strategy. Another one is our mobile website, which we announced last month. When I look at all these initiatives, I see our strategy at work, but I also see a marketplace that is ready to move away from the downturn. Now I want to share some information that we're making available for the first time this morning. It supports what we hear from analysts and what our own employees report back to us in the field. There's three good reasons to expect that rates will continue to trend upwards. In September, we surveyed over 1,600 of our customers with a wide range of rental spend. To get their outlook on 2011. It excludes the Gulf, where the survey is being conducted this month. The results come from contractors out there in the trenches where they live in a reality every day. 43% of those surveyed expect business to increase in 2011. 38% indicated the status quo or are uncertain. Only 19% think things will continue to go downhill. The greatest uncertainty appears to be in the West, particularly the Southwest. The greatest optimism comes from customers in our Northeast Canada and Midwest regions. So we're staying very close to our customers and listening to their input. Now let me tell you what our own branches are seeing out in the field. All nine of our regions show year-over-year growth in rental revenues in the third quarter, with the strongest being Northeast Canada and the weakest being the East and the Southwest. At a macro level, the picture's equally as encouraging. In the third quarter, our rental revenues were up year-over-year in 33 of our 48 states and all Canadian provinces. 22 states and provinces now show year-over-year growth for 2010 through September. Our Trench, Power & HVAC business had a good third quarter, up 6.8% in revenues and a 7.2% improvement in operating margin. We're seeing demand from several directions. For one thing, the stimulus money is still in play, and we have Trench Safety systems out on about 150 stimulus jobs right now. Both Trench and Power & HVAC are servicing more infrastructure projects. The public sectors, together with growth in industrial, are driving the results in this business. I also want to mention the joint venture with AMECO that we announced in August. This is initially focused on oil and gas customers in the Gulf region. At this point, all the pieces are in place and both partners are moving forward. We'll keep you posted as things progress. I think we've made it clear how excited we are to be able to pilot with this industrial venture with AMECO. Even without the joint venture, our industrial business contributed an additional $5 million of revenue in the third quarter versus last year. Industrial rentals is just one example of how we're training our salespeople to look beyond the traditional boundaries of the construction industry and pursue any market that fits our strategy for profitable growth. As we identify these opportunities, we are seeking out large customers where our scale has the most appeal, particularly our ability to share fleet across our North American footprint. In the third quarter, national accounts accounted for about 29% of rental revenue, which is an increase both year-over-year and sequentially. It's worth noting that the increasing amount of our industrial business is coming from our national accounts. As we grow our presence in the industrial sector, we're being guided by our customer segmentation strategy. The concept of staying true to our strategy informs every decision we make as we steer our company into the recovery. It's not going to be a smooth ride, but when we look out at the markets, we see customers choosing to rent more of equipment they need. Demand is a part of the strong momentum that we're experiencing as we move into the two slowest quarters, and it should help soften the effect of seasonality. We've begun the process of putting our plans in place for 2011, and to the degree that we can comment on that, we'll share our thoughts. On that note, I will now ask Bill Plummer to review the results, and then after that, we'll take your questions. Over to you, Bill. Thanks, Mike, and good morning to everyone. As has become our tradition, I'll give some more detail on the quarter revenues, our cost performance, a little bit on the fleet liquidity, update our outlook for 2010, and then, as Mike said, touch on 2011. On the revenue front, it was a good quarter almost anywhere you slice it. Rental revenue, in particular, was up 6% year-over-year. That's the first year-over-year increase we've had in a quarter since the first quarter of 2008, so it's been a long time coming. Within that, Mike mentioned the time utilization increase that we saw, 71.3% time for the quarter. That's up 7.1 percentage points year-over-year. And I think it's legitimate to say that we didn't get it by shrinking the size of the fleet. Overall, the size of the fleet averaged slightly smaller this year compared to last year. The time really came out of stronger demand. OEC on rent was up 11% year-over-year. Rates were working against us, so I think that makes that 6% revenue increase in rental revenue even more impressive. As Mike said, rates were down 1.4% year-over-year, although they were up 2 percentage points sequentially for the quarter. And when you look within the quarter, in fact, if you look over the last couple of quarters, on a sequential basis, rates have been sequentially positive for six consecutive months. Starting in April, they've been up every month on a sequential basis. Mike highlighted some of the internals going on within rate. For example, daily and weekly rates are clearly outperforming our monthly rates overall. When you look at equipment type, earthmoving and other general rentals categories are clearly outperforming aerial and forklifts. But overall, the trend is established in the right direction, and we certainly, as always, will continue to drive for better rate realization just across the board. The other area of revenue that I wanted to focus a little bit of time on is used equipment sales. We sold $32 million in proceeds of used equipment during the third quarter. While it's down versus last year, you'll all recall that we were selling at record levels of used equipment sales last year. So it should be no surprise that the proceeds came down. On an OEC basis, we sold $74 million of OEC in the quarter, and that was down as well versus $100 million or so that we sold last year. The good news is that we achieved a margin on our used sales this quarter of 31.3%. As has been the case for the prior two quarters of this year, the margin story is really heavily driven by the distribution channel. We sold 57% of what we sold in the third quarter through retail and supported by used equipment pricing. The trends in used equipment pricing continue to be positive, that by the Rouse data that we receive, but also by our own individual experience in selling into the market. So the used equipment market continues to be robust, and we'll continue to use it very effectively to manage our fleet. On the cost side, cost of rentals were actually up year-over-year in the quarter, $237 million, up $12 million compared to last year. And really, that cost performance is the tale of two cities. When you look into the fixed cost of our cost of rentals, we continue to deliver good cost performance on the fixed cost component of our cost structure. When you look at salaries and benefits, you look at facilities costs, other structural fixed cost components, we continue to deliver reductions in those components. It is just being outstripped by the variable cost components that are flowing with the increased rental volume. When you look at repair and maintenance, delivery, fuel costs, those kinds of cost components that really are driven by how many transactions you do, they are up, and they have offset the saves that we have realized on the fixed cost side. That has prompted us to reevaluate our outlook for cost performance over the remainder of 2010, and we are now saying that we expect cost of rent ex depreciation to be a save of $5 million-$15 million compared to last year. Longer term, we are still very comfortable that we have improved significantly the cost structure of this business and still feel very good about our work against the fixed cost components of our business. The story on SG&A is better. SG&A was down $4 million year-over-year, and the benefits are still coming out of the same places that we have been talking about. Salaries and benefits, those are really driven by headcount, and the headcount reductions have continued, albeit at a somewhat smaller pace than in the prior quarters. Professional fees are still a very nice source of save for us as we continue to be disciplined about our spend there. The bad debt experience in the quarter was higher. We actually had year-over-year about a $6 million negative in bad debt, and that reflects primarily the larger size of accounts receivable as we have driven higher revenue. We also had a slight deterioration in the aging of our portfolio, but the real driver was the size of the AR balance, causing that $6 million negative year-over-year comparison for SG&A. All in all, we feel very good about SG&A, and in fact, we are reaffirming our target for a full-year SG&A reduction of $40 million-$50 million. Obviously, we have got $37 million of that in our pocket already year-to-date, so we feel very comfortable that we will be able to achieve the target that we gave of 40 to 50. Looking at the profit lines, adjusted EBITDA came in at $216 million for the quarter, and that is at a 35.7% adjusted EBITDA margin, 460 basis points better than last year. To Mike's point, obviously, we are taking full advantage of the increased operating leverage that we have built into the business from lower costs. A great story there. That in spite of a decline year-over-year in rental rates, I think is very encouraging. EPS, similar story there. Adjusted EPS of $0.40 for the quarter, and the drivers are the same as the EBITDA drivers I talked about. It is worth noting that in calculating EPS, we used a tax rate for the quarter of 39.5%, and I point that out simply because in the second quarter, we talked about a 54% tax rate as what we were thinking about going forward. That change in tax rate, we can talk about in Q&A if anybody wants to get into it. We think something like the low 40s to mid 40s is the right way to think about the tax rate to apply to the fourth quarter income, and we'll continue to update, obviously, if anything major changes there. Just a couple of quick words on our fleet management in the quarter. We have continued to drive optimal use of our fleet. One of the ways we talk about that is the amount of fleet that we transfer within our system, and the transfers were strong again in the third quarter. $1.6 billion of fleet transfer during the quarter. It's about 42% of our fleet overall moving during the quarter. We've talked about how we believe that helps us more effectively utilize the investment that we've made in fleet. In managing our used equipment sales for the quarter, we continue to execute our strategy of selling the older equipment first. Our used sales for the quarter came in at an average age of 78 months, consistent with where we've been over the last couple of years, and again, consistent with the strategy. Our net rental CapEx investment for the quarter was $81 million. That comprised of $113 million of gross capital spend and the $32 million of used sales proceeds that I mentioned previously. Year-to-date, we've spent $287 million of gross CapEx, and that spend has been, as we've talked about before, it's been directed towards supporting the growth that we're seeing with large accounts, supporting the reshaping the mix of our fleet, and making sure that we're making good decisions about the components that we have that need to be addressed and need to provide the maximum rental experience for our customers. Where we're buying is in earthmoving equipment, a heavy proportion of the spend there. We're obviously replacing aerial. When aerial is nearly half your fleet, you're certainly going to spend to replace there. We're also disproportionately spending on other general rentals categories like light towers, compressors, supporting in areas water trucks, pickup trucks, and other important general rental categories. Given our spending in the quarter and what we've done year-to-date, we feel very comfortable with spending more to support the environment that we're managing in. As we look at 2010, we now believe that we'll spend net rental CapEx in the range of $180 million-$200 million. That's up from the $160 million-$180 million that we had guided to last quarter. Free cash flow for the quarter was solid. $37 million in the quarter, and that brings us to $144 million for the year-to-date. Again, that's very well in line with the guidance that we've previously given of full-year free cash flow in the $200 million-$225 million range. That, obviously, in spite of the lower cost saves on cost of rent and in spite of the higher spend on net rental CapEx. We feel very good about being able to preserve that kind of free cash flow. Our liquidity position ended the quarter strong again. We ended with roughly $860 million of total liquidity, and we feel very comfortable with the position of the capital structure currently and how it supports our business. As it relates to the capital structure, I will just touch real briefly on the bond deal that we issued a press release around this morning. Many of you saw that, I am sure. We are announcing that we expect to issue 10 years of senior subordinated notes. The notion there is to use the proceeds to redeem our 7.75% notes that are maturing in 2013. This is consistent with our ongoing strategy of making sure that the maturity within our debt is well managed and pushed out far enough so that we do not have any undue concerns about refinancing needs in the near terms. We will be in the market today. We expect the issue to go well, and we expect that we will price and finalize terms over the next couple of days. Just real quickly, on our 2010 outlook, I think I touched on most of the components of our outlook, but just to reaffirm, our SG&A guidance for the 2010 full year is still expected to be a reduction of $40 million to $50 million, so no change there. Our cost of equipment rentals, we now expect a reduction of between $5 million and $15 million for the full year. That is down from the $30 million to $50 million that we had previously guided to. Net rental CapEx, we expect to spend between $180 million and $200 million. That is up from the previous range of $160 million to $180 million, and then free cash flow, no change there, between $200 million and $225 million. Real briefly on 2011, as we look down the road, we have started making some high-level decisions, but we are deep into our budgeting process as we speak. Still, we thought it was appropriate to give you some highlights as we are thinking about 2011. On the rate front, Mike said that we expect, if trends continue, that the fourth quarter of this year will finish out with rates flat to up slightly year over year. If we achieve that, then going into 2011, we will have nice momentum. In fact, if we achieve that fourth quarter performance and then just kept those rates flat throughout 2011, we would experience carryover in 2011 of about two percentage points year over year. Obviously, we will drive for more than that, but I just wanted to give that data point that there is a couple of points of carryover in 2011 as we think about it today. On the CapEx front for 2011, we have said this in one-on-ones, but wanted to say it here more specifically. Our gross and net rental CapEx spend next year will be more in 2011 than it is this year. In fact, I think we would say now that it will be significantly more. Somebody is going to ask me what I mean by significant in Q&A, and I will tell you that we do not have that number yet. But what we're thinking for 2011, based on the good momentum that we've seen with key relationships from 2010, we're going to need to spend to support those relationships as well as to continue to position the fleet for where we want it to be over the long haul. That said, we still expect that we will deliver positive free cash flow in 2011. And again, somebody's going to ask me, "Well, what does positive free cash flow mean?" It's somewhere between zero and infinity. So we can talk about that in more detail as we go forward as well. Those are the comments I wanted to make. Maybe I'll stop there and open it up for Q&A, and we can take it from there. So operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Henry Kirn from UBS. Your question, please. Hey, good morning, guys. Hi, Henry. Henry. Could you dive a little deeper into the increase you saw in time utilization this quarter? Is there any way to attribute the improvement between the secular shift to rental, the underlying demand improvement, and what you're doing on the fleet management and mix side, and maybe any other bucket I'm missing? I'll take a first stab at it, Henry. It's really hard to decompose it into those kind of buckets. I do think that it's fair to say that the seasonal pattern was stronger this year, and so that certainly helped. We've argued earlier in the year that this year's seasonal pattern seemed to be stronger than where it's been over the last several years, certainly stronger than last year. If you think about 7.1 percentage points of year-over-year time utilization improvement, I'd hate to put a number on how much of that is just seasonal. Excuse me, that year-over-year won't have a seasonal component. I'd hate to put a number on how much of that is broken out into the other buckets. That said, we've got nice growth in our key account relationships year-over-year in the quarter. Clearly, a portion of it is just growing those key account relationships. Mike, I'll let you put a number on how much of it might be the secular shift to rental versus owning. I'd say that that's a smaller component of that year-over-year change. It's just really hard to put numbers on it. Yeah, Henry, it's Mike. It is. It's very difficult. What we can say is that when you look at a year-over-year basis, last year, it's safe to say that we really didn't see any kind of seasonal uptick at all. It was very lackluster, I think, because of where the economy was and the lack of any kind of visibility and the uncertainty in the financial markets. Seasonality has returned. The one thing I can tell you is that we look at, and is on a year-over-year basis, our new accounts are up. That means people are looking at ways to rent. They're up about 15% year to date on a year-over-year basis. But as Bill mentioned, it's very difficult to quantify the numbers specifically. That's helpful. As a follow-up, given your increased focus on sharing of fleet, how high do you think you could get time utilization over the course of the cycle when demand picks up? Henry, we've talked about, over the course of the year, getting time up into the high 70s. As we sit here, I think 67% over the course of an entire year would be a very high level of time utilization for this company. Could we do better than that? Yeah, we probably could. But as we're seeing right now, operating at these levels of time utilization involves some operational challenges based on how we've run the business historically. We're going to have to figure out better ways, new ways, and different ways of operating in order to be able to sustain these kinds of time utilization levels at reasonable costs. We're going through that right now. We're learning those processes, but we, as an executive team, are convinced that we can operate in the high 60s. I think we put 67% as the target in our normalized EBITDA analysis last quarter, and I think that's a good indication of where we think we can drive it to on a sustainable basis. One final one, if I could. How should we think about the cadence of the repricing by customer type across your book of business? I'm sorry. Ask that question again. Yeah, you were breaking up. Oh, sorry. How should we think about the cadence of repricing by customer type across your book of business? Does industrial take longer to get repriced than the contractor fleet, et cetera? Yeah. Henry, it's Mike. The way in which we set up our contracts are, there's kind of a range in which we work within. The range would be, from a global perspective, a not to exceed pricing. So you have a bandwidth in which you can work within the current markets. In other areas, we have regional differences because of cost structures and where they're located. I think each one is priced accordingly. Typically, these are one year to three year in duration. So we do have flexibility within the contract itself. That's helpful. Thanks a lot. Nice quarter. Yeah. Thank you. Appreciate it. Thank you. Our next question comes from the line of Manish Somaiya from Citi. Your question, please. Manish. Hi, Mike. Congratulations, and good morning to everyone. A couple of quick questions. Bill, on CapEx, when you said significantly higher CapEx, I'm not asking for the amount, but I'm just asking for, is it going to be more concentrated in earthmoving or aerials? Yeah. We haven't definitively laid out that level of detail in the CapEx spend for 2011. I do think it's fair to say that I would be shocked if we don't end up spending sort of relative to the breakdown of our fleet, the mix of our fleet today. I'd be shocked if we didn't spend more than the current earthmoving share of our fleet on earthmoving, less than the current share of aerial on aerial, more than the current share on Trench and other gen rent categories on those categories, and probably not dramatically different on forklifts. I know that's high level and just directional, but we want to continue that trend, right? We want to continue to focus on reshaping the fleet away from aerial toward earthmoving, and then supporting the growth that we're seeing in gen rent categories, especially driven by industrial relationships, as well as growth in Trench, Power & HVAC. So that's where our spend is going to end up. Okay. Thank you. Michael, two questions for you on AMECO JV. Do you have revenue or EBITDA or industrial penetration type targets that we should benchmark against? It's too early. Both AMECO and ourselves have gotten together, and they're putting a plan together. As Bill mentioned, we're going through our planning process. They are as well. As things start to develop, we will be open to share those with you. It's too early to tell at this time, Manish. Okay. Then just on the bigger picture of the industry, obviously, with the ABI index, it indicates at least, hopefully, an initial step in the recovery process. The question really is on how impactful will the regionals be in the future. Is that a model that can exist? Is it sustainable, or do you think that they might just need to consolidate? It's a great question. It's one I often get, and it's somewhat complicated to answer it back, but let me just give you a try. I think, yes, there's always going to be an area for regionals. I do think that regionals have been severely punished and pressured in this downturn. The question is accessibility to the capital markets and whether they can, like anyone else, be able to sustain their capital structure and maintain their growth and their profitability to exist. So I do think that they will continue. There'll be pockets. But I do think that they will always be pressured. It's one of those things where you're not small enough, and you're not big enough on the same coin. I will tell you that historically, there's been a lot of growth through regionals. I do believe that there will be further consolidation in our industry. Our industry is still immature, and it's still very fragmented. So it wouldn't surprise me to see a continuation of consolidation. Okay. Then just lastly, for Bill. Bill, you mentioned the gross margin on the used equipment. You said that the mix helped with the higher margins. But compared to some of the peers in the industry, your margins have been running quite strong. I guess the one question I have is I just want to make sure that the book basis of used equipment sold, was it ever impaired? In the current quarter, there might have been some. I cannot remember whether we had any impairment impact flowing through what we sold in the current quarter. Chris is shaking his head no. I am just trying to remember the timing of when we sold the Mexico assets, which we may have impaired previously, but that was in the second quarter, or was it third quarter? Regardless, even if it was third quarter, it would be a small portion of the overall sales. So there is nothing unusual going on in the book basis of what we are selling, either in the third quarter or across the entirety of this year. Okay. If that is your question. Yes. I just wanted to make sure. Thank you again, and best of luck. Thank you. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Hey, good morning, guys. Going back to the CapEx discussion, is that number that you're kind of thinking about, is that designed to bring the age of the fleet down? You've talked about in the past kind of a maintenance CapEx level. Should we think about plus or minus that maintenance level is what you're thinking? Seth, the thought process is not specifically that we need to bring the age of the fleet down. Our view is that we can operate very comfortably at or above where we think we'll end the year on fleet age. That's not the driving consideration for our thoughts about how much CapEx to spend next year. It's a factor, but it's not the driving factor. We're really more focused on what do we need to spend to support the relationships that we've deemed strategically to be the most important, and then how do we remix the fleet, and then how do we make sure that we're addressing the replacement of the units across our portfolio that we think could interfere with the customer's rental experience. Those are the prime thoughts that will lead us to a CapEx number. It's just become very clear to us so far through our planning process that that number's going to be significantly higher than it is this year. I don't know that I can say much more than that at this point. I wish I could. Well, let me ask you a different way then. Do you expect the age of the fleet to come down next year? Haven't definitively decided. What I can promise you is that we will make sure that wherever the age of the fleet goes next year, that it's not getting in the way of our ability to generate revenue. If we operated next year in the low 50s, I don't think that would be a problem. Obviously, that's higher in fleet age than where we are today, and so that would suggest that we could spend less than sort of the level that we talked about needing to keep the age constant. Sure. I wish there was a more definitive answer that we can give you right now, but we're still thinking a lot of these issues through. Sorry. Seth, this is Mike. We're going through our planning process. The way in which we look at the world is based on demand and returns and our customers. Those are going to be some of the driving forces that we'll be looking at very closely. As Bill mentioned, I think we've proven, the industry will prove that time utilization can go back up, and age is not the deciding factor on that. It's how well you maintain it. To us, it's about discipline and demand and where we're going to put our money to get our returns. Yes. Just don't lose track of the fact that we did say free cash flow positive next year. Right. That's a constraint, a constraint quite honestly, that will flex based on how active the market is next year. If we get better rate performance than we're thinking about right now, if we get that better volume demand than we're thinking about right now, then we may flex the amount of spend up. If we don't get it, we may flex the amount of spend down. That's why it's so important for us to get through this planning process to have a better sense from our regions of where we think we're going to end up on the cash from op side. Then we'll nail a CapEx number coming out of that. Right. Do you think that used equipment sales will be about flat next year? I think they'll go up as well. They'll go up? Again, don't have a definitive view of how much they'll go up. But if we're going to spend more, we're going to make sure that we're taking out, as part of that greater spend, taking out the units that need to be taken out, and we won't be shy about doing that. I'd say used sales will go up next year. Will it go up proportionately? Yet to be decided. Okay. Just a follow-up question on the fourth quarter pricing commentary. You're talking about pricing up year-over-year. Can you give us what that would equate to on a sequential basis? Sequential basis, I think it's like 0.75%, 1%. I think for the quarter, if we got what we are thinking about for the quarter, it would be a little less than that. It would be sequentially, the quarter would be flat to up just a little bit. Flat. So from Q3 to Q4, flat to up a little bit? Exactly. Okay. Which you know the seasonal pattern of our industry is we get into November and things start coming off rent. That tends to put a little bit of downward pressure on pricing late in the year, and early in the year for the winter months as well. So that is not a shock that we might be around flat in the fourth quarter, maybe up just a touch. Right. So that was the spirit of my question was how good is your visibility there? Is that being driven by longer-term contracts that you have signed recently that you can definitively say that you have that in the bag, or do you think that the market is just getting better? We certainly have some longer-term relationships that we have signed this year that gives us some more visibility. I would say, though, it is mainly just reasoning from where we are standing right now in terms of the amount of equipment that is on rent. We are at a high level of OEC on rent and on-time utilization of our fleet, as you can tell. Fourth quarter started out with good momentum coming in from the third quarter. We are starting from a pretty high level of overall demand, and we think that it will fall off seasonally, but it will fall off less severely than it has over the last couple of years. The momentum on rates has been positive enough so that the seasonal impact won't be as negative as maybe it is usually. Right. That is the reasoning that we apply to say that we could get flat year-over-year and flattish kind of sequentially. Was pricing up in September year-over-year? We haven't addressed that explicitly. I guess in the past, we have given the month year-over-year. In for a penny, in for a pound. September was not up year-over-year for the month. It was down. Half a point. Yeah, half a percent. Half a point. Yeah. Half a point. Okay, great. Thanks very much, guys. Thank you. Okay. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Thanks. Good morning, guys. Just following up on that last question. Bill, you've broached it in the past. Could you give us a little color on the month-by-month pricing sequentially through the third quarter, please? Mike, you want to do it? Yeah, I'll do it. In the month of July, it was down negative 2.3%. August was down negative 1.4%. As I just mentioned, September was down 0.5%. Those are year-over-year. Those are year-over-year numbers. Those are year-over-years by month. I would only add that the down in July reflected what was a very strong comparison month last year. The July comp was through the roof last year, so I think that was the key driver for that down 2% and change for that month. We've reestablished the trend that we expected here in August and especially in September. What we're seeing so far in November gives us confidence in the statement we've made about rates. If I want to give you the sequential, it's 0.8 for July, up 0.7 for August, and 1.4 for September. Great. Thanks a lot, guys. Could you speak to pricing overall out in the industry? What are you seeing from the national players, the regional players, the level of discipline? Where is it now that we're into the fourth quarter, to the extent you can comment on that? Thanks. Well, I think that everyone is being good stewards of the industry and doing their best to get rates up. That's a general comment I'm getting across all of my regions and my branches as I go out on visits. Is there pockets? Yeah. There's always going to be pockets. Is there going to be one where we see competitive pricing? I think the area that we see the most competitive pricing is in aerial. The aerial players are scattered across North America, and you can take that from small to medium. But I think overall, the industry is waking up and responding to the need to improve on prices. By the way, the industry overall is healing. As I mentioned before, it's going out into the second quarter, used prices improving, continue. We are seeing time utilization improve. My sense is that'll be across the industry as a whole, and as a result of that, pricing will follow. Thanks. One more if I could, Bill, probably more targeted towards you. With the positive momentum on SG&A relative to your guidance and obviously with the strong revenue on cost of service a little bit with the variable in the different direction. For us building out our models in 2011 and into the out years, where should we anticipate grabbing the majority of the leverage of those two line items, and just a little bit more on how you're thinking about that. Thanks. I'm sorry, you're strictly focused on the selling and G&A components of SG&A. Is that your question? No, cost of services. Of rent. Yeah, cost of rental versus SG&A, and yes, with a little bit of itemization of sales versus G&A, if you could. Yeah. I'll plead the planning process to some extent, but if you'd asked me that question a couple of months ago, I might've had a slightly different answer on the cost of rent components than I have today. Given the momentum we're seeing on volume demand and the variable cost drivers there, I'm probably less optimistic about a dramatic reduction in cost of rent next year. I know that we've got some initiatives that will help us address some of the fixed cost components. I just think that the variable cost components could be a pretty strong headwind if the kind of volume demand that we're seeing continues into next year. So that one's a harder one to say that we'll have absolute dollar saves year-over-year next year or how much those dollar saves might be. SG&A, I think I'm more optimistic that while we should have selling cost increase next year, that there's some other initiatives on the G&A cost components that we could use to offset those. I'm not ready to put a number on the page just yet. I'm hopeful that we'll be able, though, to target further SG&A reductions next year. But I'd want to get through my planning process before I can say that with any conviction. Fair enough, and thanks for that color. Yep. Thank you. Our next question comes from the line of David Wells from Thompson Research Group. Your question please. Hey everyone. Hi, how are you? Hey, David. Doing well. I guess first off appreciate the color regarding the difference between the daily and the monthly rates. Just to get a sense of the elasticity, are you finding that when you have a monthly rate that comes off if a customer is renewing, are you being able to push that pricing up? Or are you finding some pushback from customers as you try to move the rate needle? Yeah, this is Mike. The way in which we measure that would be sequence one, which would be the first sequence as they come out. To your point, we're seeing the monthly rates improve as they come off rent and they go back out on rent. That's on a global site of all of our assets collectively. So it's a fair comment. Yep. If I can say exactly what you said in maybe a few different words. Sequence one is the first billing cycle of a new rental. So that gives you an indication of the new rate that's being established with that new rental. When you just look at those transactions, the monthly rate is up, as Mike said. When you look at the monthly revenue components that are from the mix of new transactions plus outstanding transactions that bill on a monthly cycle, the monthly rate is not as attractive. Sure. Okay. That's helpful, though. Then just looking at the location count in the quarter, continuing to find locations to close. As you look at the store count going into next year, what are your thoughts on that? Is there room for additional cost takeout just from a consolidation of locations? This is Michael. We've said that we're always looking at optimizing our footprint. We will continue to look at where we can optimize overall. As we said before, we continue to look at this, and we make sure that the idea is to not lose any market share or to capture the revenue in which we leave. A lot of these are consolidations, and some take longer to think them through than others. We're going to continue this process. Going back to even one of the earlier comments on cost overall, this is a dedicated team that's focused on cost reductions. We're not going to let up just because we got a couple of good quarters behind us. We're going to continue to focus on trying to drive efficiencies. So it is still an area that we will focus on. I would also point out that we also have some cold starts as well in our branch count, and we're focusing on growing the areas of profitable growth. So we're going to do both going forward. Yeah. That's helpful as well. I guess an additional question regarding the cost savings that you've seen. Just looking at, I guess, second quarter to third quarter, you saw almost 350 basis points of adjusted EBITDA margin improvement. Is there anything from a one-time perspective that would have been a benefit in the quarter? Or is that just more a function of the cost takeout being leveraged as you get additional rental revenues through the door? There's nothing that would have been a significant one-time benefit. No individual action. I might add that I called out the $6 million year-over-year change in bad debt. So on a year-over-year basis, that hurts us. Sequentially, it's probably not a dramatic change in bad debt. So I'm not thinking of anything on a second quarter to third quarter comparison basis that was unique or significant in that improvement in margin. Great. Thank you so much. Yep. Thank you. Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please. Good afternoon. Hi. The first question is the bond offering that you guys have in the market today. Would you consider upsizing that to also take out your 7% notes, or do you prefer to have two sub-tranches in your cap structure? Philip, it's Bill. We'll continue to evaluate the strategy as we see how the demand develops. The notion going in was, as we said, 500 to take out the seven and three-quarters. If it's blowout demand, we'll give full consideration to upsizing and acting on the sevens. That would be sort of a logical thought process, if we had more money. Go out and tell your folks to buy and we'll see if we can face that question. Sounds good. On the one and seven-eighths, I saw you had $93 million put back to you. The $22 million that remain outstanding, are they still putable to you, or did that expire? It was a one-time put. At this point, there is another put in three years that they have available to them. Okay. Last question, and probably more philosophical. Clearly, some of the regional players out there are, I guess, in more difficulty than you guys are at this point in the cycle. What is the thought process in terms of do you prefer greenfield starts, or do you prefer to make a larger acquisition? This is Mike. The reality of it is that, as I mentioned, we have five cold starts that we put out there. We're not afraid to do both. But to be clear, it has to be strategic. It has to fit with our strategic vision of where we want to take this company that we've articulated to everybody. But we'll always be interested in looking and seeing if they do fit strategically. But we'll take it as it goes. Okay, so you're not actively looking out there at acquisitions. It's more, if something comes along, you'll take a look at it. Yeah. We're always scouring to see what opportunities exist out there. We're not going to be sitting idle. It's a matter of making sure that if we can find something, we're interested in it. And that's what my team does, and we'll continue to focus. Great. Thank you. Thank you. Our next question comes from the line of Emily Shanks from Barclays Capital. Your question, please. Hi, Emily. Hi. Hi. Hi, how are you guys? Good. Just two quick ones for you. The first one is more housekeeping. On the AR securitization, if I have it right, it actually matures, I think, a year from today. When will you start looking at renewing that? Is that within the year or just much closer to the actual maturity? Yeah. Emily, we will look at it on an ongoing basis. We haven't set a definitive time at which we want to renew it. I guess I'm a little bit relaxed about it just because those facilities have been so readily available. Even through the turmoil last year, they were readily available. Our lenders were coming in saying, "Hey, do you want more money, basically?" We'll look at it on an ongoing basis, and I think we'll pull the trigger as we line up a set of banks and a set of conditions that we think look favorable. So stay tuned. Okay, great. My last and final one is just more of a bigger picture one. Clearly, before the consumer-driven recession, you guys have worked leverage down quite nicely. What is your larger picture view on what the appropriate leverage target is for URI? I know obviously you will have some growth in there, but how are you thinking about leverage over the next couple of years? Yeah. I think what we've talked about internally, and I probably have said it externally as well, is there's two ways to approach that. One is to flip the question around and say, how do I feel about the level of leverage that I'm at today or that I got to last year in the most severe downturn that we've seen in a long time? The answer was we felt comfortable with the level of debt that we carried, even in the depths of last year. You can kind of back into what a debt to EBITDA ratio in that environment was and infer that we would be comfortable there. Let's say that we got up to something in the 4.5x to 5x debt to EBITDA range at the depths of last year on a trailing 12 basis. That probably defines the upper side of that leverage measure that we would look at. To peg a number, I would just say 4.5 if we had a choice of actively managing it on the high side. On the low side, we have thought about the philosophy of the capitalization of this company quite a lot, actually, over the last year and a half. We feel comfortable operating at levels of leverage that imply being a high yield issuer. At the low end of the range, 3.5x debt to EBITDA is something that we think is probably a good place to look for the minimum of leverage. You go much beyond that, and you start to lose some of the cost of capital benefits that we see from being a highly leveraged company. That is the range that I talk about generally, 3.5 to 4.5, and I would say we will operate that way unless there is something really extreme one way or the other. Just as a follow-up, I really appreciate that color, Bill. As you look at, you are obviously throwing off some pretty nice cash this year, and as you indicated, you are expecting to be free cash flow positive next year. Your leverage could naturally work down below that 3.5x. As you think about that priority for free cash, what are you targeting? Well, on the surface, we will certainly continue to drive down debt until we get to that lower end of the range. We are not going to be religious about 3.5. If sort of the natural momentum of our business, making the operating decisions that we want to make takes us to a slightly lower number than that, okay, fine, we can do that for a while. I do not know that we would go out of our way, at the point we reach 3.5 to say, "Oh my goodness, now I have got to do something differently." But at the same time, we do think that we have got operating objectives, and some of those we might address more aggressively if we are getting toward the lower end of the range. For example, spending a little bit more on rental CapEx, if it makes sense from an investment perspective. So we will balance all of those things as we go forward. But it would be a high-class problem to have to figure out how to manage a leverage ratio that is too low. Okay. Thank you. Okay. Thank you. This does conclude the question and answer session in today's program. I would like to turn the program back to Mr. Kneeland for any further remarks. Thank you, operator, and I want to thank everybody for joining us today. Please feel free to join us anytime or call us up here in Greenwich. And if you would like to go see one of our facilities, please get a hold of Fred Bratman. And if you go to our website, you can download the investor presentation, which has updates from last night. Also, I would like to point out that we also have a new page out there on our call center, which explains how the service is growing and the importance it is as a competitive advantage. So with that concludes today's call. Thank you very much, and looking forward to our next earnings call. Goodbye. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.