United Rentals Inc. Q3 2008 Earnings Call Transcript

Oct.29.08 | About: United Rentals, (URI)

United Rentals Inc. (NYSE:URI)

Q3 2008 Earnings Call

October 29, 2008 11:00 am ET

Executives

Michael Kneeland - CEO

Marty Welch - CFO

Chris Brown - Assistant Controller

Analysts

Alex Blanton - Ingalls & Snyder

Henry Kirn - UBS

Scott Schneeberge - Oppenheimer

Seth Weber - Banc of America Securities

Christina Woo - Soleil Securities

Phillip Paselli - Goldman Sachs

Jason Tuhio - Barclays Capital

Chris Daugherty - Oppenheimer

Joseph Baumeister - Blackstone

Cynthia Marinos - Lloyds TSB Bank

Yvonne Varano - Jefferies

Operator

Good morning, ladies and gentlemen, and welcome to the United Rentals third quarter 2008 investor conference call. Please be advised that this call is being recorded and is copyrighted by United Rentals Inc.

Before we begin, the company has asked me to remind you that many of the comments made on today's call and some of the responses to your questions, will contain forward-looking statements. United Rentals' businesses and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected by any such forward-looking statements.

A summary of these uncertainties is included in the Safe Harbor statement contained in the company's third quarter 2008 earnings release. For a fuller description of these and other possible uncertainties, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2007, as well as to its subsequent filings with the SEC. You can access the company's press releases, as well as its SEC filings on the company's website at www.unitedrentals.com using the link captioned, Access Investor Relations.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. During the conference call, references will be made to pro forma EPS, free cash flow, EBITDA, and pro forma EBITDA, each of which is a non-GAAP term.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, and Marty Welch, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

Good morning, everyone, and thank you for joining us today. With me is Marty Welch, our Chief Financial Officer and other members of our senior management team. In a minute, Marty will review our third quarter results. But first I think it's important to tell you what we're seeing out there in the marketplace and what we expect our operating environment to be as we move in through 2009.

I also want to discuss some of the many operational and financial actions we are taking to navigate through these waters while positioning the company for continued growth in the future. I'm going to give you more detail than we typically provide on these calls, because we know the environment is of paramount concern, and we want to address it as directly as possible.

I will also note that we want to provide as much visibility as we can today regarding our outlook for 2009. Further details and former guidance, we'll have to wait until we complete our planning process.

As you all are aware, we are in the midst of an economy whose volatility has reached historic levels. Many of the contributing factors such as the credit crisis have a direct impact on our end markets. Unquestionably, as we expected at the start of the year, construction activity is slowing, but I wouldn't describe it as universal.

Let me explain what we're seeing out there right now. Business clearly continues to clearly be challenging, particularly in Florida and California, where we have a big presence. These two states together account for more than 60% of the decline in our US. rental revenues for the quarter.

By contrast, business remains steady in a number of markets, particularly the Rocky Mountains, Midwest and Texas, where we're supplying equipment to projects like to Dallas Cowboys Stadium in Texas and at Holcomb, Concrete Plant outside of St. Louis. And Canada continues to be strong.

Looking at the landscape overall, we're most optimistic about the big projects, where funding is already in place and we have a presence onsite. In many cases, we've contracted for the lion's share of the rental needs on these job sites.

The outlook for the smaller jobs is weaker, both residential and nonresidential. A number of these projects are subject to discretionary spending, and we're seeing some delays due to the economy. Some of you may be aware of the latest Architectural Billing Index that came out last week.

It predicts the level of commercial building, 6 to 12 months into the future. The ABI was 47.6 for August, and is down sharply to 41.4 for September. Now, anything below 50 indicates a decrease in billing, so that the trend is down.

Now, whether we see the same degree of weakness in our own markets remains to be seen, but we're well prepared for this, and I will discuss in detail. Specifically we are prepared for our primary end market, nonresidential construction spending to decline for the rest of 2008 and 2009.

As we continue our budget process for 2009, we are planning on the basis of an overall GDP in construction environment that is substantially weaker than 2008. That's obviously not a great scenario, and I would prefer to have the events prove me wrong, but we have been and we are prepared for the challenge.

United Rentals is a very strong company weathering a weak cycle, that requires difficult decisions, and we've repeatedly shown that we're willing to make those decisions and take decisive actions. It helps that we've been there before, and we know what to do. In fact, I personally steered rental companies through more of these cycles than I care to count.

We expect to make steady progress each day, month and quarter until we lead the industry to a recovery. The many actions we've taken this year and continue to take are designed to position our company head the pack in recovery, both from a strategic and financial perspective. And by that, not just the up turn, but the long-term prospects for our industry, which are very good.

Now I want to revisit the strategy that defines our business and where you can see the results of the actions we have taken at every front and while remaining optimistic for the future.

I'll begin with our core operating strategy. First focusing on our core competency of equipment rental, second a greater control of our cost structure and third, a continuous improvement in fleet management. Then I will discuss the financial implications of these strategies and outlook. In particular, cash flow generation, EBITDA margin improvement. That's what we said we would do at the start of the year and we're doing it.

First there is our focus on equipment rental. Our rental revenues are down year-to-date due to the cycle, but revenues are up due as a percent of total revenues, exactly as planned. In the third quarter, rental revenues were 78% of total revenues, up 5 percentage points from last year. Our core business, the focus of driving our EBITDA margin higher up 1.9 percentage points in the third quarter to 36.4%.

We're also making excellent headway in our contractor supplies margin. In the third quarter, we grew our contractor supply gross margin by 5.3 percentage points, to more than 24%. By the end of the year, we will close all the two of our original nine distribution centers.

As we execute our strategy, our customers will remain our top priority, as they have in good times and bad. We recently completed an intense program of customer research that will help guide our sales and service efforts in the coming year.

In addition, over the next year, we expect to see an acceleration of the secular shift toward renting in a way from owning equipment, especially if credit continues to remain an issue. Our customers who were in the past purchased a piece of equipment may now be more likely to rent. This is particularly true in the current downturn, where customers are not only cash-strapped, but also find it difficult to finance capital purchases.

Next is cost control. As I mentioned in January, we entered 2008 having made a number of moves in anticipation of the downturn. We made significant headcount reductions, renegotiated our sourcing agreements and conducted a head-to-toe evaluation of our branch network.

I want to emphasize that we're every bit as stringent now as we were at the start of the year. In the first nine months of the year, we closed 31 branches. In the fourth quarter, we will close or consolidate at least 30 more branches and absorb both the cost savings and the impact on revenue.

The cost of these closings is reflected in our revised 2008 guidance. 61 branches is a significant reduction. It represents nearly 10% of our entire network. Of our 20% branches that we're closing, will be sold off and about 80% will be repurposed, which will help keep our CapEx down in 2009. I want to emphasize that even with these branch closings, our footprint is still significantly larger than any of our competitors.

We are continuing to address SG&A costs. SG&A expense decreased $17 million in the third quarter. We're also running the business more efficiently overall, with more success of leveraging our size. For example, we'll be able to cut administrative costs in many markets where branch density supports a more centralized support. And the actions that we have taken so far this year, translate into a headcount reduction of approximately 12% through the third quarter.

Our entire organization is focused on proactively taking costs out of the business to align our expenses with revenue. We will continue to cut operating costs in ways to protect our customer service standards and without putting any of our long-term growth initiatives at risk.

Fleet management is the third arm of our strategy. We get high marks on this one. In the third quarter, we moved a record amount of equipment among branches where we can expect to get higher returns. $1.5 billion of our fleet, based on OEC was physically transferred from weaker locations to those where we see demand, most typically within the same district. It's a very effective device that no other [equivalent] company can employ on the same scale.

Fleet transfers are one of the key reasons where our condolization stayed constant at 68% in the third quarter. Rental rates is a more complex issue, and I want to keep the rates in perspective. On our last call, we told you that we expected to see rate decline of 1.5 percentage points for the full year. In the third quarter, our rates slipped 3.4%, but sequentially were down less than 1%. The current environmental points to our rates being down about 2.5% for the year overall.

Our rate change isn't happening in a vacuum. Rates are one of the means we use to balance utilization, profitability and market share. Given the current environment, we will do our best to manage rates in a way that is consistent with our goals for long-term EBITDA growth and shareholders value.

Given a chance to sustain utilization and track new business, we made a decision to delay some of our used equipment sales until latter in the year. We expect to see our year-end OEC at about $4 billion with an average age of 39 months to 40 months. Right now, we're down about 6% of our fleet on a unit basis count and more to come.

In 2009, we'll significantly reduce our rental capital spending and continue to defleet. I can tell you that we expect our net rental CapEx, which we defined as purchases of rental equipment, less the proceeds of the sale of rental equipment to be about $100 million dollars in 2009. That's a dramatic drop from this year, when net rental CapEx will come in at about $350 million, and even more of a drop in 2007 when net rental CapEx was $551 million. Our 2009 plan will have an effect of aging our fleet while still cooping within our targeted range.

From our customers' perspective, United Rentals will continue to address the number one need. We offer the best availability on the largest rental fleet in North America, and that won't change in 2009. When we talk about the fleet size and branch footprint and flexibility, we're talking about tangible, competitive advantages derived from size. These competitive strengths of size and scale are meaningful components of long-term value creation.

For example, we're in a strong position to gain industrial market share because of our footprint. Industrial rentals are a multi-billion dollar market that is less cyclical than construction with far less rental penetration. Year-to-date through September, our industrial customers have accounted for 16.2% of our rental revenues this year, up from 14.3% last year. And this market continues to be a strategic focus for us.

As one example, we recently acquired an industrial rental company in Corpus Christi to expand our presence in the sector. We also use our size to expand our national counts in government sales businesses. Our company's ability to serve large accounts is a major competitive advantage, and we haven't taken full advantage of that yet, but that's on the front burner now.

In this context, we expect to continue to deliver strong cash flow to provide ample financial flexibility. Our experience in 2008, clearly demonstrates the cash flow generation potential of this business and the flexibility we have.

Finally, we expect to pursue EBITDA in 2009 with the same single-minded focus that we're showing in 2008. Our branch compensation plans now use EBITDA as a target metric with a focus on profitable growth, and we will continue to do so.

As I mentioned earlier, further details of our coming year will have to wait until we complete our planning and give you our 2009 guidance. That's a quick look under the hood of our strategy that's being applied at every level of our organization. We're making all the right moves, not only for the near term, but for the ongoing financial performance.

We have stress-tested our financial model well beyond the expectations of this cycle, and we feel very confident with the results. The key point I want you to leave with is this, we are in choppy waters, but we are navigating the waters with a powerful strategy for profitable growth and rock solid liquidity. These strengths are serving us well in 2008, just as they will in 2009 and for the foreseeable future.

With that, I'll ask Marty to go into more detail on our balance sheet and third quarter numbers, and then we'll go into Q&A, and we'll take your questions. Marty?

Marty Welch

Thank you, Michael. And let me add my welcome to everyone joining us on the call this morning. Michael has discussed some of our highlights for the quarter, and the actions we're taking to execute our strategy. I plan on reviewing our third quarter performance in greater detail, including the progress we're making on cost-saving initiatives, as well as our outlook for the year.

Before I review the quarter, though, I'd like to spend a few minutes on our capital structure and liquidity position. We have one of the strongest balance sheets in the industry. This means that in a softer market, we will focused not only on the cost cutting and fleet management initiatives that Michael discussed, but also on generating significant free cash flow, which will allow us to delever when appropriate.

Turning to our capital structure, as many of you are aware in the second and third quarters of this year, we repurchased all of our outstanding series C and D preferred stock, as well as 27.2 million shares of common stock, in a series of transactions that were accretive for the quarter, and will continue to be accretive next year.

These stock repurchases, which will reduce our 2009 share count by about 39%, were funded with existing cash balances, borrowings under our accounts receivable facility, the issuance of HoldCo notes, and borrowings under our new and recently up sized 1.285 billion ABL facility.

At September 30th, following the completion of the share repurchases, our debt to EBITDA ratio was 3.2 times, an amount that is well within our comfort zone. Further we expect this amount, which is both below our historic average of 3.4 times, and significantly below our historic high of five times to be about 3.0 times by year end.

The overall economic environment also provides important context for these actions. As we have discussed in the past, and as our results reflect, our business is counter cyclical from a cash perspective. Therefore, in a softer environment, the one we're experiencing now, we have the ability to generate even more free cash flow.

Last year, we generated over $150 million of free cash flow, and this year we expect to generate about $375 million, including $240 million in the fourth quarter. And you can expect more free cash flow next year as we further reduce our CapEx, and defleet.

In terms of liquidity, at the end of the third quarter, which marks the seasonally high point of our working capital usage, we had over $450 million of liquidity based on availability under our ABL and accounts receivable facilities, as well as cash on hand. Another measure of our financial health is our DSO. Our day sales outstanding, which improved from 53.6 days in the prior period to 52.9 days currently.

Looking forward, if the market continues to remain soft, which we expect that it will, we will use this free cash flow to further delever. And when the cycle turns up, which it will do, we will redirect this cash to growing our fleet and further increasing share.

Now normally I wouldn't do this, but given the current economic environment, I think it would be useful if we review the covenants underlying our new ABL facility. I'll focus on the ABL, because the covenants underlying our existing high yield indentures are in current space.

There are two financial covenants associated with the ABL, a fixed charge coverage ratio and a senior secured leverage ratio. At the end of the third quarter, our fixed charge ratio was about 3.1 times, which is significantly more than the minimum threshold of 1.1 times. In terms of the senior debt ratio, it was about 0.9 times at the end of the quarter, which is significantly less than the maximum threshold of 1.75 times.

So as you can see we had significant cushion in both of these covenants and looking ahead we're very comfortable, even under increasingly challenging economic conditions that we will be in compliance. In other words, we've stressed our models, and we were comfortable and confident that we have the flexibility and liquidity to manage through the downturn.

It's also important to point out that these covenants will spring off next June on the one year anniversary of the ABL, provided our availability exceeds $257 million, or 20% of the facility, which is fully our expectation. That gives you an overview of our capital structure and liquidity and now let's turn to the third quarter performance.

First our revenues. Our rental revenue decreased 6%, reflecting a 3.4% decline in rental rates, as well as particular softness as Michael mentioned in California and Florida. Although rates were down slightly more than we liked, our time utilization of 68% was flat year-over-year, driven by fleet transfers and a greater proportion of monthly rentals.

In terms of contractor supplies, our revenues were down about 44%, but our gross margin improved 530 basis points versus the prior year. In line with our strategy of repositioning this business.

Second, our SG&A of $133 million decreased $17 million dollars, reflecting our continued focus and disciplined approach to right sizing our cost structure. Third, our EPS for the quarter was $0.98 cents on a share count of 77 million shares, compared with $0.97 cents on a share count of 115 million shares in 2007. As I mentioned earlier, the share repurchases will reduce our 2009 share count by about 39%, so we expect continued accretion from the transactions next year.

And finally EBITDA. Our EBITDA margin increased 190 basis points to 36.4%, also reflecting the success of our cost initiatives. While we were especially pleased that we generated this margin expansion when total revenue was down 12%, we are not complacent. There is much more work to be done, and savings to be realized.

In terms of our cost saving initiatives, we believe we can generate about $200 million of savings over the next five years from the execution of these plans. During the quarter, where we saw our EBITDA margin improve 190 basis points, we realizes $39 million in cost savings.

These savings come from a number of initiatives including our strategic sourcing initiative and headcount reductions. To put it in perspective, our workforce, at September 30, 2008 is lower by about 1,400 FTEs year-over-year. This is the equivalent of about 12% of our workforce.

While we're pleased with our progress on these initiatives, we realize there is more opportunity. That's why we have taken action to close an additional 30 branches in the fourth quarter, bringing our full-year count to about 60 branches or around 10% of our total. Besides these anticipated closures, we've also recently completed the outsourcing of our accounts payable function, which will not only improve cost, but also controls.

Now, let's take a moment to review our revised expectations for full year 2008. Our pro forma EPS guidance has been revised to a range of $2.55 to $2.65 per share from a previous range of $3.15 to 3.25 per share. This outlook, which reflects the acceleration of softness in our end markets includes an estimated fourth quarter charge of about $0.13 per share, principally related to the closing of approximately 30 branches.

Our revenue, EBITDA and free cash-flow guidance is as follows: We expect total revenue of between $3.3 billion and $3.4 billion including rental revenue of about $2.5 billion. Our pro forma EBITDA guidance, which excludes the impact of the SEC settlement is $1.07 billion to $1.1 billion and represents a pro forma EBITDA margin of 32.6 %, which is up 110 basis points year-over-year. We're forecasting a full-year tax rate of about 37.7% before discrete items, and approximately $350 million to 400 million of free cash flow after total CapEx of about $715 million.

That summarizes our outlook, and now I think we'll turn it over to the operator to begin the Q&A. Chris, if you can start the Q&A session?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question or comment is from the line of Alex Blanton with Ingalls & Snyder. Your line is open.

Alex Blanton - Ingalls & Snyder

Just a question on your rental CapEx for this year and next year, which is down 33%, by the way, for the nine months, according to the cash flow statement. This is the gross, not the net. You gave the net figures earlier, but we haven't talked, and I don't think about the gross rental CapEx for this year or next year. What's forecast?

Michael Kneeland

I'm going to ask [Chris Brown] to answer that question. He's our Assistant Controller.

Chris Brown

Hi. How are you? In terms of 2009, I think Michael mentioned directionally it would be down, but we wait until the first quarter to give additional guidance. In terms of 2008, our full-year outlook for rental CapEx is $630 million, which contemplates no growth capital, and that will be down from the $770 million of gross rental CapEx last year.

Alex Blanton - Ingalls & Snyder

Okay. So that's only $40 million then in the quarter because you did 590 through the nine months?

Chris Brown

That's correct. We do substantially all of our CapEx purchases by the second quarter to get them ready for the traditionally busy third quarter.

Alex Blanton - Ingalls & Snyder

Well, now you forecast a decline in the net for next year, so you must have a forecast of the gross rental CapEx. You're just not sharing them with us? I mean, you said $100 million would be the net figure for 2009. So you don't want to share the gross figure with us?

Chris Brown

I think as Michael mentioned right now we're going through the planning process. I think the message we were trying to deliver is that from a net perspective, our net rental CapEx will be down significantly from a level in 2007 of $550 million to an '08 level of about $350 million.

Alex Blanton - Ingalls & Snyder

For next year, you said $100 million.

Chris Brown

The net figure, that's correct.

Alex Blanton - Ingalls & Snyder

So that's a decline of 250. Can we look for a similar 250 decline in the gross, or are the sales of rental equipment going to change?

Michael Kneeland

This is Mike, Alex. Basically the message is we're going be defleeting next year, and we're going to be taking, one of the levers that we've always talked about is our capital spending, and we will be aging our fleet out, as we go into what we believe. And all industry resources are telling us that next year will be a much softer year. So are going to be defleeting. It's too early to tell. We do plan to give guidance in early 2009.

Alex Blanton - Ingalls & Snyder

Okay. Any idea how much you're going to age the fleet?

Michael Kneeland

It's too early until we go through. Our range has always been 35and 45 months, and we'll still been within that range.

Alex Blanton - Ingalls & Snyder

Okay. In that range and then finally AWPs, versus in the dirt equipment, would you comment on that for '09, both going down the same amount, or one less than the other?

Michael Kneeland

I think that one is market-driven. Our plan process is very much all the way down to the branch level. They build it up. It's too early to tell if you're asking for my professional opinion, we will probably continue to hold some of our dirt. We've defleeted a lot of dirt this year, and we'll probably defleet some of our aerial business as we go through '09.

Operator

Thank you. Our next question in queue is from the line of [Henry Kirn] with UBS. Your line is open.

Henry Kirn - UBS

If you look at prices in the used equipment today, you held off on some of the sales in the quarter. Looking at the fleet, what are you seeing in the market today? How are used equipment prices trend?

Michael Kneeland

Let me break that down into several buckets. First and foremost, our utilization was high. It was 68%. That's one of the reasons why we kept it. On the top of that, the used prices specifically, we reported 32% margins. The vast majority of our sales are retail, but if you're talking specifically about the auction, some of the auction prices, we have seen some softness, particularly in the area of the dirt equipment.

Henry Kirn - UBS

Okay. And as you look at the runway on SG&A going forward, how much more do you think you can take that down overtime to offset some of the negative cyclicality right now?

Michael Kneeland

Again, we're going through our planned process. We made a commitment to reduce our SG&A and our cost overall. That's something that we started out in 2008. Very happy to report that we continue the focus on that $17 million, as we still want to knock our range down, and we have a lot more to go.

Henry Kirn - UBS

Okay. One last one. Have you seen any changes in the pricing of new equipment from OEMs to you to get you to buy a little more than you otherwise would?

Michael Kneeland

No. We don't buy based on the pricing they give us. We have a history of being very aggressive of negotiating, partnering up with our vendors. We are going through that process. It's too early to tell. We do work with them over the course of the year to find ways in which we can both take cost out of the business.

Henry Kirn - UBS

That makes sense. Thanks a lot.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of Scott Schneeberge with Oppenheimer. Your line is open.

Michael Kneeland

Hi, Scott.

Scott Schneeberge - Oppenheimer

Could we focus a little bit on the pricing? Was it just a matter of the high exposure to California and Florida? Obviously you had a great quarter of moving fleet around, but could you just delve in a little bit deeper on what you think impacted you versus your expectation there?

Marty Welch

That's a great analogy. When you take away California and California, they are depressed. As I mentioned 60% of our revenue in the third quarter, the decline we saw in rental revenue was attributable to those two states.

When you look at the rental revenue, the rental rates specifically, they accounted for about 25% of the decline, as we went through. We are defleeting in both of those areas. As a matter of fact, we have done a very good job. We're down almost $80 million on a year-over-year basis of defleeting and repurposing that capital, but there is still good customers there that we need to wrap our arms around and focus.

Scott Schneeberge - Oppenheimer

Great, thanks. Shifting gears a little bit, contract supply sales, a nice year-over-year margin move there. You mentioned on the call, you're down to two distribution centers left. Are you going to go to a pure outsourcing model? Are you going keep the two DC's into '09, just strategic thoughts there.

Michael Kneeland

I would say right now we are very comfortable where they stand today. We reserve the right to always focus on them and to the extent that they're not performing or we can find an alternative. We will look at that, but we will continue to focus on improving our margins. We've made progress, we're not done yet.

Marty Welch

Scott this is Marty. The two DCs that we have are outsourced. So we can change our mind on those on very short notice.

Scott Schneeberge - Oppenheimer

Okay. Great thanks for the (inaudible). Marty, just real quick. The leverage at the end of the year, I believe you said on this call 3.0. I realize I'm being nit-picky; because it's a good level, but I think the company line before was 2.9. Is there anything that we should read into that? Just a little bit of less that reduction. Just if you could elaborate there, even if that is if I am even accurate on that?

Marty Welch

You are accurate. It's just really rounding the EBITDAs down a little bit. And I don't think we've changed our mind at all about the cash generation that the company is going to have.

Scott Schneeberge - Oppenheimer

Okay. Thanks so much.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of Seth Weber from Banc Of America Securities. Your line is open.

Seth Weber - Banc of America Securities

Just going back to the rental pricing discussion for a minute. One of your competitors, I think, this week announced a pretty robust increase in floor pricing, which contradicts the number you have put up. Can you just talk about what you're seeing in the marketplace? Is it rational out there? Are you seeing anybody, off the reservation at this point?

Michael Kneeland

That's a great question; I am going to address it this way. One of which is, we proactively manage our rates and we will continue to do so. 25% of our rate decline occurred in two areas of the country we were having a strong presence are down significantly.

With regards to our competitor's one, I don't know how they calculate rates. We're seeing good discipline out there, obviously there are regional areas where we do bump into things, but if you want to quantify it for national level, we're not seeing anything that is dramatic, and I think that the industry overall is being very responsive.

Seth Weber - Banc of America Securities

Okay, thank you. A separate question . On just the math here, you kept your revenue guidance I think intact, and lowered your EBITDA forecast a little bit, which implicitly brings your EBITDA margin forecast down. Is there something we should be thinking about that's kind of just a temporary pressure on the EBITDA margin, or is there something that I'm missing here?

Michael Kneeland

I'll try to answer it, and if I don't answer it we can probably take it offline. But our focus has been on improving our EBITDA margins. Our EBITDA margin is actually up, but one of the biggest impacts that we're having currently going into the fourth quarter is obviously closing our locations. But we think that is the prudent thing to do for the long-term value of our shareholders. We will continue to focus on EBITDA and even to our improvement.

Seth Weber - Banc of America Securities

Okay. Maybe we can take it offline. And just like last clarification, was the $0.03 charge in the quarter, was that in your previous guidance for the, I think it was what 3.25.

Michael Kneeland

Chris is going to answer that question.

Chris Brown

Yes. I think what you're referring to is the charge. It was a non-cash charge that we took at the end of September.

Seth Weber - Banc of America Securities

Right.

Chris Brown

In anticipation of paying down an additional $125 million of the HoldCo. So when we gave our guidance at the end of the second quarter, the 3.15 to the 3.25, it did contemplate that charge.

Seth Weber - Banc of America Securities

It did, okay.

Chris Brown

Yes.

Seth Weber - Banc of America Securities

Actually just lastly, is there a dollar utilization for the quarter?

Michael Kneeland

It was 60%.

Seth Weber - Banc of America Securities

Sixty?

Michael Kneeland

Yes.

Seth Weber - Banc of America Securities

Okay. Thanks very much, guys.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of Christina Woo with Soleil Securities. Ms. Woo your line is open.

Michael Kneeland

Hi, Christina.

Christina Woo - Soleil Securities

I was hoping that you could provide some color on your acquisition during the quarter, the Corpus Christi industrials acquisition, may be providing us with some information on the number of locations you acquired. The age of the equipment, value of the equipment, [multiple] paid?

Michael Kneeland

Well, we don't give that level of detail other than the fact it was a small acquisition of $11 million. Had three branch locations, located in Corpus Christi. One of the advantages that we have is being able to bring that into our organization. These are independents that have a good line of business in the industrial. 60% of their business was industrial related, and we wanted to leverage our size with our fleet to grow that business.

So we think it was a smart move, and gets us in the door towards the industrial side of the business.

Christina Woo - Soleil Securities

That's great. I also noticed, in the quarter, that your new equipment sales continue to be quite robust, particularly in light of the weakening macro environment. Can you give us some information on what type of equipment you're selling, if it's more aerial or dirt and who is buying this equipment?

Michael Kneeland

Well, it's a De minimis portion of our business, as far as the way we track it. But what I will tell you is that there is still a market out there where people want to own equipment. There is a market, and some of our customers, some of our largest rental customers will also buy equipment. But it's a little bit of everything, from aerial equipment to material handling devices, to some small dirt equipment. There is no one area that sticks out.

Christina Woo - Soleil Securities

Okay, last question. I was hoping you could give us some rule of thumb that maybe you use with regard to pricing. We have talked about pricing quite a bit, but an increase in pricing by 1% would lead to what sort of EBITDA impact?

Michael Kneeland

It's $23 million, EBITDA impact.

Christina Woo - Soleil Securities

Perfect. Thanks so much.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of [Phillip Paselli] with Goldman Sachs. Your line is open.

Phillip Paselli - Goldman Sachs

I just wanted to get some more clarification on the OEC. Can you give us some more decimal points than 4.3 billion.

Chris Brown

Phil this is Chris. At the end of the second quarter it was 4340, at the end of the third quarter it was 4348.

Phillip Paselli - Goldman Sachs

Okay. And do you expect that to come down?. Obviously as you guys defleet do you have a target for the end of the year?

Michael Kneeland

Yeah. I mentioned we're going to come back down about 4.1 billion.

Phillip Paselli - Goldman Sachs

Okay, flat 4.100.

Michael Kneeland

Yeah. Somewhere in that range. We have to go to the back half of the fourth quarter, and we'll give that number out. But that's our target.

Phillip Paselli - Goldman Sachs

Great. And when I look at the cost savings, I think Marty you mentioned $39 million in the quarter. If I look back at my notes, about $23 million was supposed to be strategic sourcing initiative. So the rest is headcount, but it sounds like you have cut more heads than originally thought.

So can you give us the 200 million number, sounds like it might be a little low, considering you've done more action. Are we going to come above that. Is that something you're holding back for 2009 to give us some more guidance on how much cost savings you can come out?

Marty Welch

Right. One of the things that happens with strategic sourcing obviously is if the business is a little smaller, than we buy less things, and so we have less savings from SSI. The headcount is a little bit ahead of where we thought we would be as well. So it's a mix. We said before, we have a five-year goal of $500 million of incremental annual EBITDA. I still think that's a good goal.

We said $200 million of that comes out of the cost cutting. We're sticking with that. And then the rest of it will come as we grow top-line and hold our cost in [bailout]. So, all of that is still part of our master plan. The individual mix of items does move around a little bit, but all of these initiatives are moving forward.

Phillip Paselli - Goldman Sachs

Okay. That's great. Then you repurchased 125 million of the 14% notes in the third quarter. You're going to generate $240 million of cash in the fourth quarter. Will you give us any guidance as to how much of the 14% notes you plan the buyback in the fourth quarter? What the restricted payments basket is before and after any such transaction.

Marty Welch

Sure. We look at all of the options for the use of our cash opportunistically. In the last year, we bought back HoldCo notes, we bought back stock, we bought in the preferred, we've done an acquisition. So as we look at all of our alternatives and consult with our board, we'll continue to hopefully make smart choices.

We've set a goal that will never let the restricted payments basket go much below $100 million dollars. And I think that's a good goal. So, whatever actions we take that impact the basket, we would try the keep it in. I think to bailout in restricted payments basket right now is around 200.

Phillip Paselli - Goldman Sachs

Okay. So you are not willing yet to tell us if you're going to or not going to buyback 14% in the fourth quarter.

Marty Welch

Most people talk about that after they do the actions, so I think we'll leave it at that.

Phillip Paselli - Goldman Sachs

Okay. In terms of the acquisition outlook, clearly this was a nice acquisition for you. Are there many more in the [hopper] or was this a kind of one-off for you?

Michael Kneeland

This is Mike. We're going to be opportunistic; we are going to take a look at what's out there. I think that given the current business environment may provide us some opportunities, and we want to make sure that we review those and analyze them and see how they would fit in.

This one we did in Corpus Christi fit everything that we were looking for and directionally goes after the business that we want to focus on. So, we will continue to look at the horizon with our eyes wide open. We don't have anything we're going to announce.

Phillip Paselli - Goldman Sachs

Okay. And then just last question. In the past you've given us your 2008 outlook for time utilization and rates. I believe you mentioned that rates are going to be down; I think it's 1.2% if I'm not mistaken. And then what's your estimate for time utilization for the 2008?

Michael Kneeland

Go ahead, Chris. You want to answer that?

Chris Brown

Just to confirm in terms of the rate, I think what Michael had mentioned, we forecasted to be down about 4% in the fourth quarter, which will be 2.5% for the full year. I think in terms of time utilization, full year they will be down slightly year-over-year.

Phillip Paselli - Goldman Sachs

Great, thanks guys. Good luck.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of [Emily Shanks] with Barclays Capital. Your line is open.

Jason Tuhio - Barclays Capital

Hi good morning. This is actually [Jason Tuhio] in for Emily.

Michael Kneeland

Hi, Jason

Marty Welch

Hey. You don't sound much like Emily.

Jason Tuhio - Barclays Capital (representing Emily)

My first question relates to your revised full-year guidance. Specifically which end markets are the biggest drivers for the guidance cut? Was it Florida and California?

Michael Kneeland

This is Mike. That's part of it. There was also a delay. We are seeing some delays in some of our smaller-end projects that we're looking at, but we go through a process of looking at all of our branches and our districts to put forward a quarterly review that we go through. It was a collection of things. It was also looking at the branch reductions and taking down our fleet. Although our fleet is relatively flat. It's important to note that our unit count is down by 6%. So, all those things go into our numbers, our calculation.

Jason Tuhio - Barclays Capital

All right, great. That's very helpful. And then secondly, what percent of the fleet at quarter end was earthmoving, and what percent was aerial, if you can provide that?

Marty Welch

Just aerial specifically is about 51%, and dirt is about 13, and then forklifts is 18%. Those are the big buckets.

Jason Tuhio - Barclays Capital

All right, Great. And then, just lastly, is the plan around the 14% Hold Co notes, still to pay those down within four years?

Marty Welch

Yes. We will work those off as we think it's economic to do that.

Jason Tuhio - Barclays Capital

All right. Great. Thank you very much.

Operator

Thank you. Our next question or comment is from the line of Chris Daugherty with on Oppenheimer. Your line is open.

Chris Daugherty - Oppenheimer

Just talking about the rates a little bit and your dollar utilization, I mean it looks like your dollar utilization was down roughly over 4%, but your time utilization was flat and your build rate was down only 3.4%. Can you just describe the way you calculate the change in rental rates? Is that a mix-adjusted number? Is it a build number? Is it just a new contract rate? How is that calculated?

Marty Welch

It's a weighted average between day, week and month, and everything is calculated accordingly, and that's how we put it forward.

Chris Daugherty - Oppenheimer

And then can you just talk about your philosophy on time utilization versus rental rates? I mean, is your priority to hold a target utilization rate, and then sort of how the rental rates move around or is it to hold rates.

Marty Welch

It's a combination of things depending upon the market that you're serving and the type of equipment. We try to maximize and get the highest rate we possibly can in any given market, and we have a robust system that we put in place and to go after that. The biggest areas that we saw weakness and that was challenging was in Florida and California. And then we have some other markets that were also like that, but then we had some offsetting. It's market-by-market and it's product-by-product. And we go through an evaluation.

We look at the returns that we're getting collectively across the company; and to the extent you can get something at a higher rate or higher return in one market and they have demand for it, and we've got another market that may have high demand, but not getting the return. Then we're more prone to move that asset over to where we can get a better return. And now that we've changed our compensation system to more of an EBITDA driven, our branches are the result of our fleet movement is moving in that direction.

Chris Daugherty - Oppenheimer

Michael, I know you said that there are differences in rates geographically. Can you tell us what the rates were down in Florida and California, or just relatively how much more they were done?

Michael Kneeland

We don't have that, but we can do that offline and give you that data.

Marty Welch

Let me just add that, when rates are down severely, then we respond by significant defleeting. So, I mean, one of the real advantage of a national network is the ability to move fleet around.

Chris Daugherty - Oppenheimer

All right. Thank you, gentlemen.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of [Joseph Baumeister with Blackstone]. Your line is open.

Joseph Baumeister - Blackstone

Hi, guys.

Michael Kneeland

Hi, Joseph.

Joseph Baumeister - Blackstone

The game plan for next year, is being driven by an outlook for the operating environment. Can you give us a sense of what you're seeing and what you're most worried about?

Michael Kneeland

At the beginning of the year, I stated that we were anticipating a downturn in the back half. I don't think anyone could have forecast, the current course of events that's happened over the last 90 days and also the credit crisis.

Having said that, the industry resources that are put out there kind of give you two goal posts. They go from 4% down to all the way down to 9% down. Global insight, which works closely with ARA, is projecting roughly around 5.5%-5.6% down on a year-over-year.

So we look at that level, that's at a macro level, and then we go through our planning process and we build everything up from the branches. As Marty mentioned, there are different markets. There are markets where we have, even in California, that are very strong. But, you know, we have a strong presence there.

So everything's from a grassroots. We build it up, and that's how we'll analyze the market going into next year. What worries me the most is, the question on everyone's mind is what happens to the credit. The credit crisis, how long and how deep will it be?

Marty Welch

I think we definitely have a bias to our conservatism when it comes to the fleet for '09.

Joseph Baumeister - Blackstone

What cost reductions are currently in place, and what do you expect to accomplish for the rest of this year and next year?

Marty Welch

I think the branch closing program is one of our bigger cost initiatives, because it takes overhead out, allows us the ability to move fleet around more aggressively. We've talked about headcount. We've talked about strategic sourcing. We really are looking there as we talked about on previous calls literally over a hundred line items that we track. We have a meeting every couple of weeks. There's a name next to every initiative, and we're trying to execute on all of them as we go forward.

Michael Kneeland

To expand on that a little bit, there is a laundry list that we go through. We started out with a 122 items. Some fall off as we successfully complete those and some we add back on. The list is still in a 100 range, and we still focus on that. And the point is that there's nothing that we're not looking at. We're looking at everything inside the organization from the executives all the way down to the field.

Joseph Baumeister - Blackstone

But SG&A is still high as a percentage of sales relative to some industry benchmarks?

Michael Kneeland

That's correct. And we are focused on that. We are continuing to take costs out of the business and as I stated we're not done yet. We're going to continue to focus on that as we go forward.

Joseph Baumeister - Blackstone

Do you have a goal?

Marty Welch

Joe on previous calls, I've said that I think something in the 13 range, SG&A as percent of revenue is achievable here. I think that's going to require some recovery on the top line, but certainly I think we can look to that over a multi-year period.

Joseph Baumeister - Blackstone

RSC is currently below 10. Is there a reason why you don't think you can't get there?

Marty Welch

I think we're they're moving in our direction. As they experience being a public company and what that means and other costs, I think we're both working hard on our costs and they are certainly a well run company.

Joseph Baumeister - Blackstone

Do you expect to be able to offset the impact of the economic decline on your business with cost cuts more or less?

Michael Kneeland

Not entirely. I think it's unrealistic to think that you can take cuts in the top line that are severe, particularly on rates. The flow through on rates to the bottom line is virtually 100%. The only thing we don't pay on a rate decline is the commission. I think we're going continue to work hard on this; but it's not entirely within our control to offset big declines.

Michael Kneeland

I also want to point out that we don't have a high concentration of our business in industrial and we do know that's profitable. So we will focus on that, until we go through the planning process, it's too early to determine what '09 will actually look like.

Joseph Baumeister - Blackstone

Thank you.

Michael Kneeland

Operator

We have a follow-up question or comment from the line of [Cynthia Marinos] with Lloyds TSB Bank. Your line is open

Cynthia Marinos - Lloyds TSB Bank

Hi, good morning.

Michael Kneeland

Good morning.

Cynthia Marinos - Lloyds TSB Bank

I actually have two questions. My first question is, can we expect liquidity to tighten in the form of increased utilization under the revolver given this softness?

Marty Welch

No. It's actually the opposite. As long as we're continuing to be in a defleeting mode, liquidity will continue to increase significantly. The stress point in this industry comes at the point in time when the economy turns, and we want to [pour] back a lot of the fleet into the field.

Cynthia Marinos - Lloyds TSB Bank

I see. Okay. My second question is, the 60 branches that you're going to look to have closed by the end of the year, what will be the impact on EBITDA?

Marty Welch

30 branches were closed in the first quarter, Cynthia, and the other 30 we plan to close in the fourth quarter here. We've said it's a charge of about 0.13 per share. A lot of that is reserved for future rent payments. Chris, do you have anything to add to that?

Chris Brown

That's correct. As Marty mentioned, 30 branch closers hit in the first half of the year. So that's already been absorbed into the first half EBITDA. The additional charge associated with the fourth quarter closings is about $0.13 on a pro forma share count.

Cynthia Marinos - Lloyds TSB Bank

Okay. Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question or comment is from the line of Yvonne Varano with Jefferies. Your line is open.

Yvonne Varano - Jefferies

Thanks. I just want to clarify what you said earlier in regard to the gross capital spending. The 630 that you gave for '08, is that purely rental, or does that include other property equipment as well?

Marty Welch

If you'll recall it is total rental. Our CapEx guidance that we reaffirmed was $715 million that includes $630 million of rental CapEx, all of which is maintenance, and then $85 million of non-rental CapEx.

Yvonne Varano - Jefferies

Okay. And then, when you gave the net, that includes the other outside of rental as well.

Marty Welch

No. That was a pure net rental CapEx.

Yvonne Varano - Jefferies

That's net rental CapEx because if you do the math, then you're implying a pretty significant jump in sales of used equipment in 4Q?

Marty Welch

That's correct. I mean, we'll have to see what the pricing we actually realize in the fourth quarter, but that does imply $280 million used equipment sales for the full year?

Michael Kneeland

This is, Mike. It's important to note that it's not unlike any other year; it's typically in the fourth quarter when we have most of our used sales. With 68% time utilization, which is all-time high for us in comparison to last year, the best use of our fleet is on rent. That's where we get the highest profitability and typically as we go through the fourth quarter and into the first quarter is when we do most of our sales.

Yvonne Varano - Jefferies

Okay. It's just $90 million 4Q number, and it just sounded a bit high. I see that includes some of the sales of the equipment out at the branches as well?

Michael Kneeland

As I said, we're closing locations, and a portion of those assets will be sold off.

Yvonne Varano - Jefferies

Okay. Great. Thanks.

Michael Kneeland

Operator, I think this is a good time to wrap up the Q&A. I want to thank everyone for joining us today. We've covered a lot of important ground. I'm glad we had the opportunity to see while our confidence in United Rentals is [rooted] in a company that is rock solid, both financially and operationally. I can point to a lot of reasons for that. The determination of our people, particularly in the field, our proven ability to generate free cash flow, the groundwork that we've laid in advance of the cycle, willingness to pull all of the levers at our disposal, and the all important loyalty of our customers. When our end markets recover, we expect that more equipment will be rented more than ever before, and United Rentals will continue to be on the leading edge of that opportunity.

This concludes our remarks for today, and operator you can now end the call. Thank you.

Operator

Ladies and gentlemen, again this does conclude today's conference. We do thank you for your participation.

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