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United Rentals Inc. (NYSE:URI)

Q4 2008 Earnings Call

February 26, 2009 11:00 am ET

Executives

Michael Kneeland - President and CEO

William Plummer - EVP and CFO

Jonathan Gottsegen - SVP and General Counsel

Analysts

Manish Somaiya - Citi

Henry Kirn - UBS

Seth Weber - Bank of America

Emily Shanks - Barclays Capital

Chris Doherty - Oppenheimer

Philip Paselli - Cantor Fitzgerald

Christina Woo - Soleil Securities

Yilma Abebe - JPMorgan.

Scott Schneeberger - Oppenheimer

James Ragan - Crowell, Weedon & Co

Operator

Welcome to the United Rentals fourth quarter and full year 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 fourth quarter and full year 2008 earnings release. For a fuller description of these and other possible uncertainties, please refer to the company's Annual Report on the Form 10-K for the year ended December 31, 2008, which has just been filed with the SEC. You can access the company's press releases, as well as all of its SEC filings on the company's website at www.ur.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 free cash flow, pro forma EPS, 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 William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

Thank you, operator. Good morning, everyone, and thank you for joining us today. With me is Bill Plummer, our Chief Financial Officer and other members of our senior management team.

As you know, Bill joined us in December following an executive position with Dow Jones, Alcoa and GE and I want to take this opportunity to officially welcome him in front of the investment community. Bill is a very strong addition to our executive team and we are extremely pleased to have him on board.

He will review our results with you later in the call. I also want to welcome Jonathan Gottsegen, who's with us here today as our new general counsel. Jonathan is the most recent addition to our leadership team, following the appointment of three new directors to our boards in January. There are Jose Alvarez, Bobby Griffin and Filippo Passerini and like Jonathan, they are highly seasoned executives who's expertise will be instrumental in helping us to obtain our strategic goals.

I want to use my time today to address three topics, the current construction environment, and our perspective on 2009, and our long-term goals for the business. But, before I begin, I want to be clear about something, some aspects of our 2008 performance were disappointing to the company, and to me personally.

We did what we could do to forecast results in a very challenging economy, but nevertheless we end up missing the mark. As it turned out, there was almost no visibility as we progressed through the fourth quarter, and there appears to be even less in 2009.

Consequently, we have chosen not to provide a formal outlook. We will rather focus on giving you meaningful information about our strategy and markets, and our financial position.

We have an excellent plan in place, one that keeps our priorities firmly on cash generation, liquidity, cost control, and customer service. We are executing that plan in every area of our business that is within our control. As a result, there are a number of accomplishments that we can point to for 2008.

We generated $3.3 billion of revenue and over a billion dollars of EBITDA despite a construction market that became substantially weaker in the second half of the year. Our rental revenue increased to 76% of total revenue reflecting our strategic re-focus on our core business of equipment rental.

Our gross margin on contractor supplies improved 460 basis points to 23.6% for the year, as we continued to retool our merchandise range. And we held time utilization nearly constant year-over-year at 63.6. However we lost some ground on rates in the process. And I want to talk more about that in a minute.

We closed or consolidated 43 branches in the fourth quarter, that's 13 more than we had originally estimated. In total, we reduced our branch count by 75 locations in 2008, without exiting any state or province. And we reduced our head count by approximately 1,000 employees. But bear in mind, we'd already reduced our workforce by about 1,100 in 2007, so the total over two years comes to more than 21 employees. Bill will discuss some additional improvements, including free cash flow when he reviews our results.

All of this was accomplished within an operating environment that that deteriorated as the year progressed. Commercial and industrial construction took an unprecedented double hit from the economy and the credit crisis.

This contributed to a rapid decline in non-residential construction starts in the fourth quarter. For customers who can't get jobs or finance, it has a domino effect on equipment demand for months to come. When the banks stop lending, jobs started to dry up.

Now that we're in 2009, and with two months under our belt, I can tell you that that scenario that we saw in the fourth quarter is still playing out. The weakness that we saw in Southwest, Southeast and Northwest regions last year, has now extended to all of our operating regions in varying degrees.

California and Florida remain our weakest markets. 20% of the branches we closed or consolidated in 2008 were in those two states alone. There are still some bright spots out there. These tend to be based on a size of the project or the type of construction rather than on geography.

Construction of warehouses, hotels, and retail stores, slowed down considerably in January, while some energy projects and manufacturing plants are moving ahead. As two examples, we have the lion share of assets on rent at a wind turbine plant in Colorado and a power plant in Nebraska.

Unfortunately, for every project that has a green light, I could probably name several that have been postponed or canceled. The immediate climate for commercial building is still very weak, but there will be a recovery, but at this time, it's still off everyone's radar.

In 2009, we're prepared for a year over decline in non-residential construction spending somewhere in the upper teens and possibly more to follow in 2010. You've heard me say many times that we went into this downturn with our eyes wide open to the challenges ahead. And, as you will hear from us today, we are continuing to confront the situation head-on, aggressively, realistically and with discipline.

We're being realistic about the fact that there's very little clarity in our operating environment this time. Internally, however, we have extreme clarity into the business. And as I mentioned earlier, we have a very disciplined plan in place, that allows us to navigate to a softening market in 2009 and 2010, one that keeps our priorities firmly on cash generation, liquidity, cost control, and customer service.

I want to touch on some of these key leaders of that plan. First, I can confirm our earlier estimate that net rental CapEx will be roughly $100 million in 2009. Now, we expect this result, with an average age of our fleet about 43 months, which is still within optimum range.

Our intention is to continue to de-fleet by reducing underperforming categories in older units. We took an aggressive stance with de-fleeting in the last three months of 2008, selling off $209 million of OEC, at lower than historical margins, although these sales are still profitable for us. Our primary goal for used equipment sales in this or any environment is to properly manage the size and age of our fleet and our free cash flow.

I also want to put some detail on SG&A, rates, and fleet management. As reported last night, we achieved a significant decrease of $84 million in SG&A expense in 2008. In 2009 we want to drive down our SG&A number by another $40 million to $50 million.

Our commitment to cost control is not a temporary reaction to the economy. It is a cornerstone of the strategy that we put in place nearly two years ago. Our strategy defines United Rentals first and foremost an equipment rental company. It mandates that we are continuously improving our cost structure and our fleet management.

We've made great strides in rationalizing our cost structure, but there's still a lot more that we can do. This year, we're looking at a number of ways to control the cost, including business process improvements, new efficiencies in our IT infrastructure and sales force productivity tools.

We are continuing to negotiate new supplier agreements through our strategic sourcing initiative. This saved us another $22 million in 2008. And while the incremental benefit of strategic souring will lessen over time, we expect to realize at least $15 million in additional savings this year

Rates are a more complicated issue. Our rates ended down 3.1% year-over-year, which included a 6.4% drop in the fourth quarter. Some of that decline comes from competitive pressure in the marketplace. Our sales -- our salespeople are focused on our most profitable customers, rather than chasing every rock-bottom deal that's out there, but there's still a large area of business that falls in the middle ground and no one in our industry is immune from rate pressure.

In addition, some of the decline is attributable to our emphasis on national account agreements. National accounts typically transact at lower rates but higher volumes and are more efficient to service. As a result, they tend to be more profitable over time. In 2008, the majority of our new national account agreements were added in the second half of the year, which impacted rates without the benefit of volume.

One of our goals in managing rates is to grow our market share with larger accounts and industrial companies. We also want to serve our local customer base as profitably as possible, even though our branches are seeing a lot of pressure on pricing.

Now given the severity in duration of the recession we expect rates to continue to be challenging this year. As I've noted before, rates and time utilization are a complex balancing act, one that is directly related to the positioning of our fleet. In the fourth quarter of 2008, we transferred a record $1.4 billion of fleet among our branches.

That's more than 30% of our total investment in fleet redeployed to areas where we saw potential for greater demand. As we continue to de-fleet in 2009, we see transfers playing an important roll in asset management.

Fleet transfers, are just one example of how the size of our branch footprint gives us a lot of room to leverage of our leadership position. We also have the advantage of size for pursuing national accounts and industrial rentals. These two sectors will help make our business less sensitive to commercial construction cycles in the future.

Our renewed emphasis on national accounts, while still less than a year old has all the hallmarks of a home run. In 2008, we put more than 15 new agreements in place, with customers that are strong, well-respected companies in their own right and our branches understand the importance of earning their loyalty.

This group also includes government sales program where we increased our rental revenues by more than 11% in the fourth quarter. The industrial revenue is another promising target. The industrial market generates an estimated $12 billion of rental activity annually, and we serve about 4% of that right now and we can handle a lot more.

Industrial rental is a highly profitable business for us and over time we will make a strategic shift and a number of branches tailored to serve industrial customers and add more of these companies to our national account program. Externally, the new economic stimulus package should benefit our US operations, although not until the second half of the year at the earliest.

There is similar legislation on a drawing board in Canada. The stimulus package includes a total of $135 billion of new infrastructure spending, which is good news to most of our end markets. A lot of it is earmarked for projects that will require underground construction, such as $7.2 billion to expand broadband networks and $4 billion for sewer work.

As a leading trench safety rental company in North America, we could expect to benefit at the leading edge of these expenditures. Every lever I just described to you, the branch network, headcount, CapEx, cost control, fleet management and customer mix has the ability to be a stabilizing force in these turbulent times, as well as a trigger for future growth.

We are definitely focused on navigating the recession with every lever at our disposal. But we're also focused on our longer-term objectives of EBITDA growth, market share, and customer service leadership.

I'm happy to say, that there's huge energy around customer service this year at United Rentals. We recently launched operation United, a massive company wide program designed to earn and retain customer loyalty. Independent research shows that no equipment rental company in North America has succeeded in differentiating itself on the basis of customer service. And we are committed to capturing that advantage.

Our branches have adopted a no excuses attitude toward each transaction. They understand that this opportunity is entirely within their control. Customers are going to experience a higher level of service and greater consistency of service whether you rent from us from Miami or Vancouver.

Now as part of operation United, we are changing our sales compensation system, our account service structure, and benchmarking to reflect our goals. We have a plan in place to leverage our scale, win new accounts, increase our share of wallet with existing accounts, and entrench our brand as the first choice for equipment rental.

This is an exciting mission and it received an incredible reaction from our branch managers in January. They are really fired up and to see that kind of enthusiasm for customer service made me very proud to be part of this company.

Now before I hand over the microphone to Bill, I want to make you aware of a new investor presentation that can be downloaded from our website. It covers many of the topics you'll hear today from us, and provides further detail about our strategy and business model.

Now, in closing, I want to return to the statement I made earlier in this call. We are continuing to confront an extremely challenging situation head on; aggressively, realistically and with discipline. There are no rose colored glasses here. We know what we're up against and we're advancing to it with a strong, well formulated plan of action.

We have ample liquidity, as Bill will review with you in a moment. We expect to generate significant free cash flow in a challenging year just as we did in 2008. And we're continuing to bring down our costs, and we have a clearly defined strategy for long-term growth.

Furthermore, our company is guided by a leadership team that brings a powerful mix of rental industry experience and business expertise to every strategic decision we make. We will continue to build on this dynamic, bringing the best people on board to make sure that United Rentals continues to capitalize on every opportunity.

And with that, I’ll ask Bill to review our balance sheet and our 2008 results and then we'll go to Q&A and take your questions. Bill?

William Plummer

Thank you Michael, and good morning to everyone. Michael has provided an overview of our 2008 performance, the current construction market, and our long-term goals for the business.

I plan on reviewing our 2008 performance in greater detail including the progress that we're making on cost savings initiatives. I'll also give some more detail to our objectives for 2009. But first, I'd like to take a few minutes to focus on our liquidity and capital structure.

Before I joined the company last December, I spent a good deal of time analyzing the company's strength and its capacity to weather this economic downturn. I looked at the company's free cash flow, liquidity, debt structure and financial covenants. After this review, I asked myself one simple question: Can this company survive a prolonged economic downturn? Obviously, my answer was yes, and here's why.

First, the company generates significant free cash flow. Over the past two years for example, we've generated about $575 million of free cash flow, including $335 million in 2008. And looking ahead to 2009 we expect to expect to generate another roughly $300 million of free cash flow.

That means that over a three-year period, we would expect to generate just under $1 billion of free cash flow. This is not surprising, because this business is counter cyclical from a cash perspective.

Second, the company is in a strong liquidity position. At the end of December, we had over $600 million of liquidity, including availability under our ABL, and our accounts receivable facilities.

The third factor I considered was the company's financial flexibility. Regarding our covenants, the most restrictive covenants we face are in our ABL. There we have two financial covenants, a fixed charge coverage ratio and a senior secured leverage ratio. At the end of the year, our fixed charge coverage covered ratio was at 2.62 times and that's significantly more than the minimum threshold ratio of 1.1 times.

Meanwhile the senior leverage ratio was at 0.95 times at the end of the year and that's significantly less than the maximum threshold ratio of 1.75 times. So as you can see, we had significant cushion in both these covenants at the year-end.

Looking ahead, we expect these covenants to become even less restrictive since the terms of the facility allowed them to spring off in June of this year if we maintain availability in the facility of at least 20%. And that's a level we expect to easily exceed.

Debt maturities also figure in our financial flexibility. The company has no significant debt maturities until 2012, when our 6.5% senior notes mature. And even though investors have a put right where they could put up to $144 million of our 1.875 convertible debentures back to us in 2010.

Our capital structure provides us with a great deal of flexibility. Because of this flexibility and because of our strong free cash flow generation, we're able to retire $125 million of the 14% HoldCo notes in the third quarter. And we're also able to repurchase a $130 million principal amount of our high yield notes in the fourth quarter.

Looking at all these metrics and recognizing our ability to reduce CapEx, de-fleet and optimize our branch network and headcount, I'm very confident that we will weather these turbulent times. Having said that and recognizing the current construction environment and the seasonal nature of our business, we are expecting a net loss in the first quarter.

Now let's turn to your 2008 performance. First our revenues; our rental revenue decreased 6% in 2008. And that reflects a 3.1% decline in rental rates. Although rates were down significantly, our time utilization is 53.6% was basically flat year-over-year, reflecting our focus on fleet transfers, targeted used equipment sales and a greater proportion of monthly rentals.

In our contractor supplies business, although our revenues were down 44%, our gross margin improved 460 basis points versus the prior year. And that was in line with our strategy of repositioning the business.

Second, SG&A. In 2008, our SG&A decreased by $84 million as Michael mentioned. And our SG&A as a percent of revenue improved by 40 basis points. This improvement which directly relates to headcount actions as Michael mentioned as well as the success of our SSI strategic sourcing initiative includes $65 million of savings from salaries, benefits and P&E.

Third EPS; our pro forma EPS for the year was $2.62 on a share count of 85 million shares. That's compared to $2.67 on a share count of 114 million shares in 2007.

And finally EBITDA, our pro forma EBITDA margin increased by 120 basis points to 32.4% also reflecting the success of our cost initiatives. While we were especially pleased that we generated that we generated this margin expansion in the face of revenue being down 12%, we are not complacent. There is much more work to be done and savings to be realized.

Now let's take a moment to review our objectives for 2009. As Michael mentioned, given our lack of visibility into the operating environment, we will not be providing a formal outlook. Having said that, what I can talk about are certain aspects of our business that are firmly within our control.

For example with respect to SG&A, although SG&A as a percent of revenue will be under pressure this year, we do expect to reduce the absolute level of SG&A spends by $40 million to $50 million.

Looking at our CapEx as Michael mentioned we're forecasting net rental CapEx for 2009 of about $100 million. This represents a significant reduction versus the $360 million for 2008. And it illustrates the capacity of this business to generate significant free cash in challenging markets. And although reducing CapEx will cause our fleet to age in 2009, we believe it is the right decision for the business as it will lead to stronger free cash generation.

As I mentioned earlier, we expect to generate about $300 million in free cash flow for the year and if the environment continues to be remain challenged, which we expect it will at least for the balance of 2009, this cash will likely be used to further reduce our debt levels.

In terms of whether we look at repurchasing additional high yield debt as we did in the fourth quarter, or retiring more of the 14% HoldCo notes as we did in the third quarter or simply paying down the ABL, these are the decisions that we'll make throughout the course of the year in consultation with our Board of Directors.

That summarizes my comments on 2009 objectives. Now, I would like to turn it over to the operator to begin the question and answers. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Manish Somaiya from Citi.

Manish Somaiya – Citi

Yes, hi, good morning. A couple questions. Michael, can you give us a sense for the used equipment market? I think we've heard from a few sources that used equipment market was off about 5 to 8% in the fourth quarter. Can you give us a sense for where we have been over the last 12 months, and where do you it see that going?

Michael Kneeland

Okay. Manish, how are you? Thanks for the question. The used prices, I mean, there's two dynamics, one of which is, what goes to auction and what goes to retail. What we do on a retail basis, where we have over 70% of our sales is retail, we're still seeing relatively healthy margins.

However, in the auction, we have seen prices come down about 10% year- over-year, part of that is mix, Manish. I was just recently at the large auction in Orlando with Ritchie Bros. Both myself and other members of our management team, went through there and I will tell you that some of the prices that I saw there were actually up slightly from what they -- were the results that we saw in December.

Manish Somaiya - Citi

And Michael, just as a follow-up to that question then, can you give us a sense for where earth’s moving is vis-à-vis Aerials, what's the difference in used equipment prices?

Michael Kneeland

Used equipment prices at that auction were specifically -- were actually down. They were down, again, probably in the vicinity of 15% to 20% on a year-over-year basis, but again it comes down to model the year and brand, and the amount that was in this auction.

By the way, this auction was the largest auction in the world, and it was up significantly on a year-over-year basis. With inside of Aerial, again its product mix, booms better than scissors, small scissors which are more related towards retail and that type of construction. We saw prices come down on year-over-year basis.

Manish Somaiya - Citigroup

Okay. So I guess that at a call, I think in the last cycle we were off about 15% to 20% and we're just entering the downturn and we're off 15% to 20%. So, would you say that we are likely to reach the trends we saw in the last cycle for used equipment.

Michael Kneeland

I think it's too early to tell Manish, the world today is far different than it was in the last downturn. I will tell you that at this auction, I was impressed with the amount of foreign bidders coming in due to the new channels that they have out there.

So I think it's yet to be determined. My sense is that, typically what you see happens out of this auction, in Orlando, kind of sets the base for the year, but, again, the year has to play out.

Manish Somaiya - Citigroup

Okay. And then just one last thing, on the similar topic, of the things that we'd seen in the last cycle was that some of the old retirees came back to the industry with the availability of secondary equipment.

Are you seeing that this cycle and obviously in the last cycle when the retirees came back, it had a pretty negative implication for pricing, so can you just give us a sense of what's going on, on that front?

Michael Kneeland

Well. I will tell you that I did see some old faces that I haven't seen for a long time at the auction. That being said, not all of them were buying. Some of them were just – they are – its part of their DNA they want to see what's happening in the industry. But today's industry is far different, again, than it was in the past, so to get any kind of scale, customers demand, newer equipment.

I shouldn't say newer equipment but equipment that is useful, for the life, and, again, the changes that happened between people trying to enter into market today is far different, and the services that we provide, not only ourselves but other national companies are very hard to duplicate just by having someone entering into the marketplace.

Manish Somaiya - Citigroup

Okay. Well thank you so much.

Operator

Thank you. Our next question comes from Henry Kirn from UBS.

Michael Kneeland

Hi Henry.

Henry Kirn - UBS

A quick question on utilization and pricing, is it possible to give a little more granularity either by equipment type or by geography?

Michael Kneeland

Well, I can tell you more by equipment type. And by the way, Henry and for everyone on the call, there's a lot of detail in our presentation that we put out there, based on our type of equipment, and it's broken down into several categories, but you'll see that the Aerial and also the rough terrain or forklifts, material handling devices, our time for the full year was in the 70's. The one area that you saw time decrease was in earth moving, in particular larger earth moving devices.

Those are areas that as people aren't developing large tracks of tracks of lands any more and our trench and our other, was actually flat on a year- over-year basis, but it's a different type of business, its more system oriented, high return business.

Geography wise, it's a mixed bag out there. Obviously, as I mentioned, what we saw, a continuation in Florida and California, we saw, decreases there. As a result of that, we moved the fleet around outside of those regions.

Henry Kirn - UBS

Well that's helpful, and in terms of your cost cutting initiatives. How much further do you think you have in terms of being able to cut back before you could impact the operations?

William Plummer

Henry, its Bill Plummer, I don't have a specific number that I can give you on that, what I would say is that, I think everyone here feels, I certainly feel that, there is plenty more runway ahead of us on cost reductions. Across SG&A, across our branch activities, we can identify a number of initiatives yet to be played out, and, we'll describe them as we go forward.

Henry Kirn - UBS

Okay. That's helpful. Thanks a lot.

Operator

Thank you. Our next question comes from Seth Weber from Bank of America.

Michael Kneeland

Hi, Seth.

Seth Weber - Bank of America

Hi, thanks. Good morning, everybody. Just first a quick clarification on the SG&A expense reduction. Is that based off with just the absolute '08 versus absolute '09 or is that using the fourth quarter as a run rate?

William Plummer

It's absolute year versus year.

Seth Weber - Bank of America

Okay. And, thank you. Can you talk about whether you're seeing any liquidity issues from any of your customers, or is anybody having, making requests to extend payments or fulfilling contractual obligations or anything like that?

William Plummer

Seth, we don't, we don't have any specific liquidity issues from particular clients. Our overall portfolio, as you might imagine has seen some extension of our receivables, days, over the last several months It's not dramatic, but it's in line with what you might expect given the challenges of the operating environment.

We ended the year at a DSO of something like, just under 52 days, 51.6 days, and that actually was fairly flat versus the prior year. So, we had been focused on managing our exposure in receivables. We think we've got a lot of the right things going on. We've been able to manage the metrics pretty well, but we're starting to feel a little bit of pressure in the early part of '09 and we're going to keep very close tabs on it.

Michael Kneeland

Seth, this is Mike. I just want to mention one other thing. That is a lot of our jobs we can lien, we have lien rights. So we feel very comfortable with, what we have out there and as Bill mentioned we keep a keen eye on our receivables, particularly in this environment.

Seth Weber - Bank of America

Okay. Fair enough. Just going, going back to the pricing question and kind of the discipline in the market. Would you characterize that competitive pressures is coming more from kind of the mom and pop’s, the local guys or is it pretty much across the board at this point?

Michael Kneeland

I would say that, that would be a fair assessment, obviously for smaller companies they are somewhat land locked, and they have no really any room to relocate their assets in any other given market. So we're seeing more of a competitive pressure in that arena, in that mid to lower size, and I think the rest of the industry is being responsive.

Seth Weber - Bank of America

Okay. And then just one last question, is there a, a number we should think about for interest expense for 2009?

William Plummer

It will be up from 2008 reflecting the higher debt balance that we'll carry through the full year. I'd rather not provide a specific number.

Seth Weber - Bank of America

Okay. Thanks very much.

Operator

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

Michael Kneeland

Hi, Emily.

Emily Shanks - Barclays Capital

Hi, how are you all?

William Plummer

Good.

Emily Shanks - Barclays Capital

I want to ask of the question on interest expense. Can you give us a sense of what we should expect for cash taxes for '09, please?

William Plummer

Again, we're trying not to get into a lot of detail on the exact numbers, so why don't I hold off on responding to that. It will be comparable to 2008. I'll leave it at that.

Emily Shanks - Barclays Capital

That works. Thank you. And then as we think about what the minimum cash balance is that you guys need to run the business, what is that? Is it around $50 million?

William Plummer

We, we have historically preserved something like $60 million as cash, so that's probably a fair balance to use.

Emily Shanks - Barclays Capital

Okay, great. And, then do you anticipate having to pay a dividend to the HoldCo to pay the coupons during fiscal year '09 for the HoldCo note or do you already have sufficient cash up there?

William Plummer

We have sufficient cash up there.

Emily Shanks - Barclays Capital

Okay. And then could you please let us know also what the remaining capacity is, underneath your baskets for future bond for purchases both by the senior tranche as well as the sub-tranche.

William Plummer

Sure. In fact may be I'll expand a little bit on this topic. The RP basket currently is significantly negative. You can imagine after taking a $1.1 billion impairment charge that that would drive a negative, and it has. We do have cash up in the HoldCo sufficient to not only service its debt, but also to retire issues at the HoldCo level if we chose.

And we, as you might expect, also have various inter company arrangements between HoldCo and OpCo that continue to flow some levels of cash up to the HoldCo without having to flow through the RP basket calculation.

So we feel that we're well positioned to be able to manage to service all of the debt at the HoldCo level as well as the debt at the OpCo level, and preserve some flexibility to how we might manage those debt balances as we go through the year.

Emily Shanks - Barclays Capital

Okay, and if I could, that's very helpful. One just quick follow-up question that in case I missed it. What is the amount of cash for the HoldCo?

William Plummer

I don't know. Do we put anything in the, take a look through the K and the guarantor statements, I don't know if it will explicitly describe it as cash, because we have inter company arrangements that HoldCo uses to then downstream its cash into the OpCo level. So take a look through the guarantor statements in the 10-K.

Emily Shanks - Barclays Capital

Okay. Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from Chris Doherty from Oppenheimer.

Michael Kneeland

Hi Chris.

Chris Doherty - Oppenheimer

Hi Mike and Bill. Bill, just a quick question on the borrowing base, when was the last appraisal and when is the next appraisal?

William Plummer

It was in September. And its semi annually so the next time it will come in is toward the end of March.

Chris Doherty – Oppenheimer

And just expanding on the previous statement if we can get a little bit more clarity. When you talked, you mentioned that there's the quote on the 1.875 converts. Would you have enough cash, I mean, seemingly you don't -- well would you have enough cash right now at the HoldCo to take care of that, given that the RP basket is significantly negative?

William Plummer

Well the answer is yes. We have enough cash to take care of that. I'd add that our view is that the put, execution of the put is a scheduled payment and therefore is excluded from the RP basket calculation. So, even if we didn't have the cash, we feel comfortable that we'd be able to address that put if it happened.

Chris Doherty – Oppenheimer

Thank you.

Michael Kneeland

Next question operator?

Operator

Thank you. Our next question comes from Philip Paselli from Cantor Fitzgerald. Your, question please.

Michael Kneeland

Hi, Phillip.

Philip Paselli - Cantor Fitzgerald

Good morning, gentlemen, how are you?

Michael Kneeland

Doing well.

Philip Paselli - Cantor Fitzgerald

Good. So, adding onto Chris's question you could use the revolver to pay should put of the converts come true in March?

William Plummer

I'm sorry you were breaking up, can you repeat that?

Philip Paselli - Cantor Fitzgerald

Yes, I'm sorry. You could use the revolver to fund the put of the converts, the 1.875 convert of the HoldCo, if you wanted to because they're a scheduled payment?

William Plummer

Yes, we believe that we could use the, the OpCo facilities to service that put.

Philip Paselli - Cantor Fitzgerald

Great. And, then when you look at what you plan to repurchase this year, what's the decision matrix that you're using, is it the ability to buy debt at a discount, are you able to buy the 14% notes at a discount, because they don't trade as often. How do you guys think about what you might want to retire this year?

William Plummer

Sure. I'm an old treasury guy, so my mind is pretty easy to read. It's about what's the cheapest debt that we can retire in the capital structure. So we look at current pricing for the 6.5, the 7, the 7.75 and compare those yields to each others and to the 14% coupon that we're paying on the HoldCo notes.

Our mechanism for retiring the HoldCo notes is a par call, and so that's the yield there. We compare the yields of the other instruments and we make a call as to which one we find most attractive, and then from there, we overlay a decision about what kind of liquidity we can find in the given issue at the time that we are looking.

So that's sort of the mechanism that we go through. Obviously, all of that flows from a decision to, to repurchase, and that decision will depend on how things unfold through the year.

Philip Paselli - Cantor Fitzgerald

Okay. Great, that's very helpful. And then on the original cost of the fleet. I think in the presentation you mentioned that $4.1 billion, are you guys willing to give us a little bit more granularity on that, maybe a couple more [decimal] ones?

William Plummer

On the absolute level of OEC?

Philip Paselli - Cantor Fitzgerald

Yes.

William Plummer

It’s $4.118 billion.

Philip Paselli - Cantor Fitzgerald

Perfect. Great thank you very much and good luck.

Mike Kneeland

Thank you.

William Plummer

Thank you.

Operator

Thank you. Our next question comes from Christina Woo from Soleil Securities.

Mike Kneeland

Hi Christina.

Christina Woo - Soleil Securities

Hi. Michael, you made a comment during the prepared remarks that there was a study, which concluded that no equipment rental company had successfully differentiated itself in terms of customer service.

I'm wondering if you could provide us with some background on the study like who conducted it. How many were surveyed, when it was conducted and also what specific the customers are seeking that you plan to provide?

Mike Kneeland

Well, I'm not going to give the information on who we use because it's proprietary to that company. It is a national company that is very large in this space. They did an independent survey that we asked them to do, as part of this process. For we consider operation united and there is a lot of things that the customers who came back and part of that is -- the way in which we're structuring ourselves.

We look at one point of contact, and we also developed a compensation program to drive some of the levers, consistency of services, and we'll layoff those matrix. I don't want to give a lot of detail because that's competitive information, but I would suffice to say that the information that came back was compelling.

Christina Woo - Soleil Securities

Okay. Could you just let me know when that study was commissioned?

Mike Kneeland

That study was commissioned. It started in April of last year. It was ongoing through the balance of 2008.

Christina Woo - Soleil Securities

Okay. And turning to the slide presentation that you posted online, slide 12 gives us a fleet snapshot which is really helpful. I was hoping you might give us a sense of how much you feel of aging the equipment by the type, by the four categories that you've outlined?

Mike Kneeland

Well. Obviously, the larger booms, you can always age out much farther. The aerial can go out, far and beyond, 15 months if need be or 60 months. Keep in mind that we do, do a refurbishing program and we don't change the age of the asset. So you can get a full year additional useful life. You can do similar rebuilding to our larger forklifts.

Earthmoving is, is a different beast, so to say, because quite honestly, it beats itself up. I mean, when you look about dealing with dirt, it has a very has a very hazardous environment. So we would want to keep that within the range of where we have it today, maybe up a few months.

Overall when you blend everything together, we're very comfortable between 35 months and 45 months. As I said, in my opening comment we'll come in about 43 months. We're very comfortable with that.

Christina Woo - Soleil Securities

And, approximately what percentage of your fleets is refurbished?

Mike Kneeland

It's a small amount. If you recall going back to two years ago, we started doing a refurbishing program in 2007, waited for the results, we expanded it in 2008. And a good portion of our capital that we'll be spending this year will go toward refurbishing.

Christina Woo - Soleil Securities

Okay. So it's low single digits percentage?

Mike Kneeland

Yes.

Christina Woo - Soleil Securities

Of the fleet? Okay, perfect, thanks so much.

Mike Kneeland

Thank you.

Operator

Thank you. Our next question from you Yilma Abebe from JPMorgan.

Mike Kneeland

Hi, Yilma.

Yilma Abebe - JPMorgan.

Hi thank you. Good morning. If you look out in the volume trends in the last couple months in 2008, I guess -- with the evolving trend in a first couple of months this year. What are you seeing, what's the volume doing, a flat, up, down?

Mike Kneeland

Well, I think, you know, if you take a look at our fourth quarter, our volume came down in the back half of the year, and more significantly in the fourth quarter. we haven’t given any kind of volume guidance as to what volume will do in 2009 other than the fact we’re in a challenging environment. And that our primary end market of non-res, we expect to be in their higher teens as far as down in a year-over-year basis.

Yilma Abebe - JPMorgan.

Can you say as you started 2009 generally is the environment getting worse than kind of how 2008 ended or no material differences?

Mike Kneeland

I would say that the trend that we saw in, in the fourth quarter of 2008 is continuing in 2009.

Yilma Abebe - JPMorgan.

Thank you. That's it for me.

Mike Kneeland

Thank you.

Operator

Thank you. Our next question is a follow-up question from Seth Weber from Bank of America.

Mike Kneeland

Hi Seth.

Seth Weber - Bank of America

Hey, sorry just real quick question going back to interest expense. Was your response based on the $15 million number for the fourth quarter, or should we add back to 45 and use 60 and to get the year-over-year, when you're talking about '09 being up from '08 -- is that?

William Plummer

Seth, it's Bill, add back the gain that we flowed through interest expense. So I think when you added back, the interest expense in '08 was 228, after the add back, it will be a little higher than that in '09.

Seth Weber - Bank of America

Okay. Perfect. Thanks very much.

William Plummer

Okay.

Operator

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

Michael Kneeland

Hi, Scott.

Scott Schneeberger - Oppenheimer

Hi, it is actually Elegy for Scott. You mentioned that you expect to occur loss in 1Q '09. I just wonder, at this point what do you anticipate for the season now to pick up as we move through 2009, just any colors on there?

William Plummer

I wouldn't want to offer a lot more. The seasonal connectors are certainly driving our comments about 1Q of '09, and the seasonal factors should help as we get later in the year, whether or not and adding any more specifics to what that looks like, I'd hold off.

What we tried to do was to give you sitting here nearly two months into the year for '09 a sense of what we're seeing for the first quarter, but we still face the same challenge that we faced in thinking about an outlook for the full year, visibility is just very difficult for us to have right now. And so we're very reluctant to add much more texture to what we said.

Scott Schneeberger - Oppenheimer

Okay. Thank you. And just another question now, you plan to use your free cash flow to pay down that debt, just how aggressive do you plan to work on that and do you plan to pay down like in terms of the absolutely amount would that be higher than 2008 or would that be at the same level of 2008? Thanks.

William Plummer

Again, we'll make that decision as we go through the year, but I think it's fair to say that managing our capital structure through this difficult period is a key objective, and that means making sure that we've got the debt balances commensurate with the amount of cash flow that we're able to generate.

That also means position ourselves for the future. It means making sure that we've got facilities available to us when the turn comes that we could use to make more investments in the capital structure.

So we'll make those decisions and balance them as we go through the year. I think its fair to say though that we're very focused on making sure that we manage the capital structure aggressively.

Scott Schneeberger - Oppenheimer

Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our final question comes from James Ragan from Crowell.

James Ragan - Crowell, Weedon & Co

Yes good morning. Just a quick question regarding the, the debt coverage ratios, given the outlook for a loss in Q1, could you say what the range might be as of March 31st for your fixed charged and senior leverage ratios?

William Plummer

I'll hold off on adding any more detail. We can talk to you about it in April. How's that?

James Ragan - Crowell, Weedon & Co

Okay. Thank you.

Michael Kneeland

Okay. Operator, I think this is a good time to wrap up the Q&A. I want to thank all of you for joining us today. Our goal has been to give you some meaningful insights into operation for 2009 as a way of combating the unprecedented lack of visibility in our marketplace.

And as you heard here today our plan is our compass. No matter how murky things get, we have the ability to stay firmly on track as we move towards our strategic goals. We remain excited and energized, by the long-term prospects for our company, and for the equipment rental market in general. Our industry has a lot of growth ahead of it, and we want to be in the forefront of that opportunity and will be.

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

Operator

Thank you. Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.

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Source: United Rentals Inc. Q4 2008 Earnings Call Transcript

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