United Rentals Inc. Q1 2009 Earnings Call Transcript

| About: United Rentals, (URI)

United Rentals Inc. (NYSE:URI)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Michael Kneeland – President and Chief Executive Officer

William Plummer – Executive Vice President and Chief Financial Officer

Analysts

Manish Somaiya – Citi

Henry Kirn – UBS

David Raso – Isi Group

Chris Doherty – Oppenheimer

Seth Weber – BAS-ML

Tom Klamka – Credit Suisse

Scott Schneeberger – Oppenheimer

Philip Paselli – Cantor Fitzgerald

Operator

Good morning, and welcome to the United Rental's first quarter of 2009 investor conference call. Please be advised that this call is being recorded. Before we begin, note that many of the comments made on today's call, and some of the responses to your questions, will contain forward-looking statements.

United Rental's 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 statement. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's first quarter earnings release.

For a fuller description of these, and other possible uncertainties, please refer to the company's annual report on foreign 10-K for the year ended December 31, 2008, as well as to its subsequent filing with the SEC. You can access the company's press release, as well as all of its SEC filings, on the company's website at www.ur.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information that are subsequent to the circumstances or changes in expectations.

During the conference call, references may be made to pre-cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, and William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

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. Let me start by looking back to our last call about nine weeks ago. At that time, I spoke frankly about our expectations that 2009 would be a difficult year for the equipment rental. A year in which there is little or no real visibility.

Nevertheless, as I said in February, there are many areas of the business within our control. As you will hear from us today, we have our hands firmly on the steering wheel. We're taking action and our actions are having the intended results. We are meeting our customer needs. We are maintaining a healthy liquidity. We are shifting our revenue base towards larger customers and we are positioning the company to benefit significantly when the recovery begins.

Now, I want to address all of these topics today. Our goal is to provide as much transparency as possible within the realities of the current environment. If we cannot state something with certainty, given the environment, we'll be forthright about that too. As you will see, we have two stories to tell. Our company has taken all of the right actions to remain financially solid in the current economic storm. We are also a company that is looking ahead to where we see enormous opportunity. In short, we remain very confident about our long-term vision for profitable growth.

In a minute, Bill will go over the numbers with you, including the $129 million of free cash flow we generated in the quarter and the decision we made to reduce our debt by $113 million. Given the depth and potential duration of the downturn, liquidity is of paramount importance of our plan. We are still comfortable with our estimate of $300 million of free cash flow this year. Both our capital structure and our liquidity are in a very good place as Bill will discuss.

But first, I want to give our thoughts on the macro environment and where we're seeing some mixed signals. I will also put some operational details to our first quarter performance, which as you know from our earnings release, resulted in a loss and I want to spend some time on rental rates because I think it's important for you to see the rate environment through our eyes, then, I will give you a progress report on Operation United, which is our customer service call to arms.

We feel very strongly that Operation United is one of the keys to staying resilient in this economy. Even more exciting, we are using it to leverage our broad footprint and build a road that leads directly to market share and profitable growth.

First, the macro environment, here's what we're seeing out there. Since December, there's been a rapid decline in construction activity, largely due to the lack of credit. From what I can see, the credit markets are still frozen despite some optimistic press reports predicting a thaw.

The slowdown in construction appears to be universal, affecting all geographic regions, and it isn't just construction starts that are problematic, although that's the bulk of it. We are also seeing some projects stop before completion because funding has dried up. Fortunately, we have a presence on a number of large projects that are still going strong, particularly in the energy sector.

We are also beginning to see a seasonal uptick, although at a lower level than last year, and while the local economies are holding their own, we're finding municipal and infrastructure work. However, none of these upsides are strong enough to offset the overall decline in construction industry indicators, which seem to support our observations. The McGraw-Hill forecast estimates that commercial construction starts dropped by 21% – will drop by 21%, in 2009 and industrial starts will slide by 35%.

This is close to Global Insight's forecast, which is the rental industry's touchstone and for the most part industry experts think that construction spending could erode further going into 2010, although at a more modest rate. On the bright side, the Architectural Billings Index or ABI came in at 43.7 for March, up more than eight points in February, but still weak. The March reading is the highest since August of 2008 and ends a four-month streak of sub-40 readings.

Another metric, the Project Inquiries Index, which was 49.5 in February, climbed to 56.6 in March, the ABI reflects demand for architectural design services. The approximate lag time between Architectural Billings and construction spending is nine to twelve months, so it takes a while for any uptick to flow through to our industry. So, we're very happy to see the Index go up and hopefully that it will continue.

While it's too early to determine any trends, we are cautiously optimistic about these numbers. We'd like to see the cycle turn more quickly, perhaps aided by the stimulus package, but, right now, we're basing our expectations on the industry consensus, which is for a turnaround in late 2010 and then a slow climb to 2011.

What we do know is that the next two or three quarters will be difficult, but the situation will turn and we will come out the other side in a much stronger position. Until that happens, our response will continue to be swift and disciplined as it was in the first quarter.

We closed 10 locations in the quarter, nine of which were consolidations. The majority of these assets were transferred to branches within 20 miles of the closed locations. In the second quarter we plan to close another 39 locations and also temporarily suspend operations at four additional branches and reopen for business when those markets recover. If you recall, we closed or consolidated 75 branches in 2008, so we're not hesitating to prune our network when warranted, although the second quarter closures should complete the heavy lifting.

We reduced our headcount by another 500, bringing our base to about 9,400 employees. Some of this reduction came from closed locations and some came from process improvements within the organization. We also exceeded our first quarter target for used equipment sales. As a result, proceeds from used equipment were $15 million greater than the rental CapEx spent in the quarter. We now expect net rental CapEx for the year to be near zero or even at a net positive inflow.

Bill will discuss some additional complements, including our success in reducing SG&A expenses by $21 million for the quarter and looking at the full year, we expect to reduce SG&A expenses by $50 million to $60 million, which is an improvement over our earlier estimate.

All of these areas of business are within our control. By contrast, the story on rates is somewhat different. There are many things that we can do to manage rates, but there's also an external element that we must contend with despite our best efforts. As we reported last night, our rates for the first quarter were down more than 11%. That was disappointing. We are dealing with a very challenging pricing environment this year and we expect our rates will decline further before they turn around.

Nevertheless, we couldn't have done a better job at pushing back pricing pressure and we're addressing that now. Given our scale, we have more options than most when it comes to managing supply and demand and here's some of the actions we're taking.

First, we're making sure to communicate a balanced perspective on rates to our branch managers, one that will help guide them when pricing comes under pressure. We are taking care of our core customers when we have to and we are vigorously protecting those relationships and we're walking away from unprofitable deals or deals that would set the wrong precedent. For example, we were bidding a stadium in Kentucky, but we walked away when the rate got to a place where it no longer made economic sense. This is just one of many examples that we refuse to commit to unprofitable business. In addition to these ground floor tactics, ground level tactics, we are making systematic improvements surrounding rates.

In the short term we are enforcing strict guidelines that tighten our oversight of rates by our district mangers while improving branch level accountability. District managers are reviewing variances from book rate on a daily basis.

They also advise our branches on situations where customer loyalty, market share and buy-in negotiations come into play. We've also set the wheels in motion for some longer term initiatives. In the next month or so, we'll pilot a new price optimization soft ware and by the end of the year we expect to be using price optimization in all branches.

This will provide our mangers with dynamic pricing tools and will allow us to take a much more scientific approach to rental rates, and we will continue to be very focused on fleet management. We are continuing a program of aggressive used implement sales and transferring equipment among our branches the top end of pockets of demand, which is another way of managing the rates and elevate revenues.

In the first quarter we transferred $1.3 billion of equipment among our branches based on original equipment costs. I can assure you that every level of management at United Rentals branch, district, region and corporate, understands the importance of managing rates in the short term and the long term health of our business.

Now I would like to step back from the numbers for a minute and bring you up to date on Operation United. For those of you who weren't on our last call, Operation United is the result of market research we commissioned in 2008.

We discovered that no rental company has succeeded in truly differentiating itself in the eyes of the customer on a basis of customer service, particularly with larger accounts, and we see this as a huge opportunity on two fronts.

First, the idea of providing a consistent and superior customer service dovetails with our renewed focus on national and industrial accounts. National accounts need to know that their business will be recognized as a top priority even when they send a crew out on one of our markets for the first time after getting those same levels of service through us through Operation United.

Industrial accounts as I've mentioned on prior calls, is also a key part of our strategic plan. Industrial markets tend to be more stable than construction. These customers use many of the same types of equipment as contractors although for different purposes such as periodic plant shutdowns and facility maintenance. We are pursuing share in the $12 million industrial rental market primarily through targeted sales efforts and branch specialization.

In the first quarter we signed 12 new industrial companies to our national accounts program, increasing our presence in sectors ranging from wind energy and refrigeration to distribution and mining. We estimate that in total these 12 customers represent a potential rental wallet of over $28 million annually, and that pace is accelerating.

We've already signed another eight large industrial companies as national accounts in April including a leading chemical manufacturer and a Fortune 500 company. We estimate that our April signings represent a potential rental wallet of about $40 million annually, and while we may not capture 100% of that business we certainly intend to try.

A second opportunity has to do with becoming the first choice for rental customers of all types and sizes. By capturing the loyalty of our customers we can lock in their business through good times and bad. Since we launched Operation United in January all of our branches have started using customer service scorecards which measures performance at key points during the rental process.

The scorecards are the first of many steps we're taking to distinguish our service from the rest of the industry. Our branches have really stepped up to the plate with Operation United, which in turn has helped grow our national accounts program.

In the nine months since we launched our strategic push for national accounts we have signed about a 100 of these large customers with more under negotiation, 45 of them responded in the first three months of this year.

When we sign a new national account there's a good chance that customer has rented from us at some point in the past and this gives us a valuable basis for comparison. I can tell you that the 45 national account customers who came onboard in the first quarter generated nearly two times the revenue in total compared to the same three months last year.

The difference is that last year we were merely a local supplier to their job sites and now we're relating to them as a true partner on a national level. But one of the things we look for when we sign a national account is their growth potential in terms of share of wallet.

National agreements have a slightly negative effect on rates in the short term but these large accounts are also more efficient to service with fewer touches and are therefore more profitable for us, particularly given their volume over time.

So as you can see we are taking many steps to weather the economic storm. It's fair to say this is the most severe downturn I've seen in my thirty years in the industry. We've been presented with historic challenges.

Nevertheless we as a team at the helm have seen cycles before, and we put a plan in place before the headwinds hit. We also know what to expect as we come out the other side and now we move and prepare for that as well.

Now despite a rocky quarter, employee morale remains high, even in the current environment. Our senior management team has continued to hold town hall meetings with employees in the U.S. and Canada. We sit down face-to-face with our employees. We see concerns about the economy, but we also see the strong belief that the company is headed in the right direction.

As the year progresses I can promise you I will continue to do everything within our power to take command of the circumstances. Our hand is firmly on the levers of cost control, CapEx management and fleet management, and we are effectively working to reduce the impact of further rate declines, and to generate free cash flow. And we are continuing to shape our revenue base to be more resilient to cycles with an increasing emphasis on industrial customers and large geographically diversified national accounts.

As for the balance of 2009 it's impossible to say whether the worst is behind us at this point, but what I can tell you is this. We have the most horsepower of any company in our industry in the form of seasoned management, an expert board, the benefits of scale, and a rock solid plan that serves both our short term needs and our long term vision for profitable growth.

We're not just riding out the cycle. We're managing our way through it with the help of more than 9,000 talented employees who go to work each day determined to win, when we are doing our job to make sure we meet this challenge.

With that I'll ask Bill to review the first quarter results and our capital structure and then we'll go to Q&A and take your questions, Bill?

William Plummer

Thank you, Michael, and good morning to everyone. Today I'd like to spend some time reviewing our capital structure and liquidity, our fleet management strategy, and our first quarter performance. Before we get started though, I'd like to review where we stand on the objectives we established at the beginning of the year.

With respect to SG&A we committed to reducing the absolute level of our 2009 SG&A spend by $40 million to $50 million. I'm pleased to report that in the first quarter we achieved a $21 million reduction by focusing on all areas of our spend.

This includes salaries, benefits, advertising and professional fees. Given this performance we are now expecting a full year reduction of $50 million to $60 million in SG&A, and we're still looking for more. Looking at CapEx, as Michael mentioned, we're now expecting net rental CapEx for the year to be near zero and perhaps even producing a positive cash inflow.

This represents an improvement versus $100 million of net rental CapEx that we forecast earlier, and perhaps more importantly it illustrates our capacity to adjust fleet management plans in real time as market conditions change.

The third objective we laid out related to free cash flow. At the end of February we indicated that we would generate about $300 million of free cash flow and that we would use this cash to reduce debt. I'm pleased to report that in the first quarter we reduced our debt by $113 million including $22 million related to open market repurchases of our 6.5% senior notes.

Additionally despite the challenges of the current environment we believe our $300 million target for free cash flow is still achievable and will create opportunities for further debt reductions. The reason we identified these objectives and made them the cornerstone of our 2009 strategy is because in this environment liquidity and a flexible capital structure are of paramount importance.

Let's take a moment to review where we stand. First liquidity, at the end of March we had over $650 million of available liquidity. This includes both availability under our ABL and cash on hand. Turning to our capital structure the most restrictive relevant 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 quarter our fixed charge coverage ratio was 2.59 times which is significantly more than the minimum threshold ratio of 1.1 times.

Meanwhile the senior leverage ratio was 0.95 times at the end of the quarter, and that was significantly less than the maximum threshold for that ratio of 1.75 times. So as you can see we continue to maintain substantial cushion in both these covenants at the quarter end. And looking ahead we expect these covenants to become even less restrictive since the terms of our ABL facility allow them to spring off in June of this year if we maintain availability in the facility of at least 20%.

That's the threshold we expect to easily exceed given that our availability was 44% at the end of March and it's up to 46% as we sit today.

Now let's take a few minutes to review our fleet management strategy which provides important context for our first quarter results. Our fleet strategy, which is a priority in any environment is even more important when construction activity is weak and a healthy balance sheet is critical. Our strategy involves three principal objectives, satisfying customer demand, managing utilization levels and preserving cash.

Here are some of the ways that we executed our strategy in the quarter. On an OEC basis we sold $184 million of fleet and that generated proceeds of $67 million. The average age of the fleet we sold was 78 months, consistent with our strategy for managing our fleet. As expected we did age the fleet slightly during the quarter from 39.2 months at the end of the year to 40.2 months at the end of March.

In terms of our used equipment margins, although they were down this quarter this was expected given that 40% of those sales were at auction, more than double the percentage in the prior year. Looking at fleet levels, our OEC decreased by over $100 million since year-end and our unit count decreased by approximately 10,000 units or 4% over that same period.

Our net rental CapEx, which included $52 million of purchases produced positive cash flow of $15 million for the quarter. Turning to our first quarter results, first revenues. Rental revenue decreased 23% in the quarter reflecting an 11.5% decline in rental rates and a 2.4 percentage point decline in time utilization.

In our contract to supplies business, revenue was down 43%, consistent with the softer operating environment and our continued emphasis on only the most profitable supply sales. Our gross margins, however, improved 670 basis points to 28.1%, again reflecting the ongoing repositioning.

Second on costs, as I had discussed earlier, reducing our cost base, including both the cost of rentals and SG&A is a key part of our strategy. And one of the levers we can pull to mitigate the impact of rate to call.

Already we discussed SG&A, but let turn to our cost of rentals, excluding depreciation. We reduced these costs by $43 million during the quarter. Now part of this improvement relates to lower utilization levels, but the bulk of the reduction related to cost that are more fixed in nature, such as labor, benefits, facilities and insurance. We will continue to focus intensely on these areas as we believe there more saves to be had.

And finally EBITDA, our adjusted EBITDA margin was 24.4% for the quarter, compared to 29.7% in 2008. As expected our EBITDA margins came under pressure as we were able to only partially offset the impact of rapid rate declines with cost saves.

Before we open up the call to Q&A I want to spend a few moments on the announcement we made last evening related to the additional branch closures.

As Michael mentioned, we plan to close another 39 locations and temporarily suspend operations at an additional four. The process we went through to identify these branches was intense. Among other factors we considered recent and historic branch profitability, proximity to other United Rentals locations, the quality of the real estate and future earnings potential.

By way of example, of the 39 planned close branches, 38 were within 20 miles of another location. And even after these closures we expect to have retained the market presence which is necessary to serve our customers. In terms of the fleet at these branches we expect to redeploy approximately 65% of this fleet or $80 million of OE fee to nearby branches. The balance of the fleet will be sold. This branches were strategically selected and importantly will allow us to improve our long term-returns while retaining our leadership position in key trade areas.

That summarizes my comments on the first quarter results. Now I would like to turn it over to the operator to begin Q&A. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Henry Kirn – UBS.

Henry Kirn - UBS

Wondering if you could talk a little about the historical experience when you closed branches that are within 20 miles of another, how much have you been able to keep in house and how much has leaked out?

Michael Kneeland

Actually when you go through the analysis, by the way I just want to quantify by we go into a very deep, deep analysis process that involves not only finance, but the operators, all the way down to the local level. And we annualized our deliver-to radius and as a result we would expect to retain somewhere around two thirds to 60% of the revenue. Some of the other business which is walk in and the cash business, will go away, but it should have a high retention level. Each branch is really determined on its market and where it's position, but on balance that's where it falls out.

Henry Kirn - UBS

Okay, and is it possible to talk a little about, maybe as we go a couple quarters out what the potential recurring tailwind from not having those branches around anymore would be?

William Plummer

Without going into specifics, we do expect that there will be a incremental impact to EBITDA positive. It's not going to make the year for us but it certainly will be a positive. We do expect that we will improve margins as a result of the closures. Again, at the scale of what we're closing, it will be there, but it may not move the needle on our overall corporate margin. But certainly it's headed in the right direction.

And certainly we expect that some of the other key metrics that we look like, that we look at, in terms of performance, per-branch performance, per employee, other measures, such like, will be improved as well.

Michael Kneeland

Henry, I also wanted to and kind of dropped back to the other question, which may help you, as well, when you take a look at this. We look at not only where we are today, but where we expect this branch to perform over the next three to five years, using some projects and, whether it's be the population shift, whether it be some of the McGraw-Hill projections.

We've had a better understanding of where the market is, and so all of those go into that equation when we look at these branches. And it's part of our longer-term strategy that we will emerge as a lender, stronger, more-efficient company, as we come out of this.

Henry Kirn – UBS

Okay, and if I could squeeze in one more. Is it possible to talk a little about what you're seeing for prices in the used market, maybe by fleet type?

Michael Kneeland

Sure. You know, let me just kind of give you a little bit of a history. Based on the fourth quarter call that we had nine weeks ago the lowest point that we saw was in December. The auction prices that came in in February did better than we expected.

We have seen a further decline in pricing, and it's kind of broken up into different categories. Obviously, larger earth moving equipment is still being compressed. We are seeing also some compression on aerial equipment, in particular scissor lifts, things that are related to retail.

On the flipside, you're still seeing things that are small in numbers like some of the reach forklifts are still doing okay in material handling. And also lighting equipment and some of the other light-style equipment related to general rentals is doing fairly well. But it's down.

Operator

Our next question comes from David Raso – Isi Group.

David Raso – Isi Group

Hi, good morning. Just a real simple question, a little help with the interest expense for the rest of the year. How are you thinking about that figure, because we started with 50 this year?

William Plummer

David, it's Bill. You know, I don't see any dramatic change to the interest expense over the remainder of the year, absent of course any repurchases that we might do later in the year. And so the first quarter run rate is a fairly valid run rate for the rest of the year.

David Raso – Isi Group

And, when I think about the full year of free cash flow being maintained at $300 million, but it took $100 million of net CapEx reduction to keep it, and obviously that more than offsets the roughly, say, $25 million of cash from the new restructuring in 2Q.

That difference is it – I know you don't give net income guidance for the year, but is that difference essentially an internal lowering of what you thought net income was going to be, and now where you think it's going to be? Or, is there a working capital change in your thoughts, as well?

William Plummer

It's the rate environment we have seen is very aggressively down, and that flows through our operating results pretty significantly. And, o we certainly have seen a more challenging operating environment. Pressure on cash from ops, and we've got the ability to respond in the form of how we generate cash from our used equipment sales.

The good news is that the environment will allow us to ramp up used equipment sales, to respond and to offset somewhat, given the softness in utilization that we've been seeing.

David Raso – Isi Group

Regarding the EPS, obviously the loss this quarter, do we expect each of the remaining quarters of the year to be positive?

William Plummer

We're not offering a specific number for the remaining quarter. So, tune in, and you'll see as they unfold.

Operator

Our next question comes from Chris Doherty – Oppenheimer.

Chris Doherty – Oppenheimer

Just a question on, I guess, one, maintenance CapEx. What is your maintenance CapEx?

William Plummer

What is our maintenance CapEx? That's sort of the challenging question to ask. If you're talking about the amount of CapEx that we would need to spend to maintain our fleet, at a given level of OEC and a given level of age, it's a pretty significant number. It's something just south of $600 million.

If you're talking about the amount of CapEx that we would need to spend merely to keep the current equipment that we have operating, it's a materially lower number. I don't have one here, sort of at the top of my head, but it's significantly lower.

Chris Doherty – Oppenheimer

I guess the question is where do you think that your gross CapEx is going to be for the year? I mean, you discussed that on net basis over the year. I'm just wondering from a gross CapEx?

William Plummer

Yes, again, we talk about it as a net and we think about managing it as a net. And so we will continue to focus on the net number, more so than the gross.

Chris Doherty – Oppenheimer

And, I believe you actually should have had your appraisal done recently. Can you talk about that in terms of what values were down, and what your excess borrowing base is right now, versus the commitment?

William Plummer

We did. Rouse completed their semi-annual assessment of our fleet in March. The net result was that our values were down, roughly 20%, versus the September number. And it left us with – still left us with very significant suppressed availability, i.e. borrowing base above the max size of the facility. We have suppressed availability of somewhere north of $0.5 billion still.

Chris Doherty – Oppenheimer

And then just in terms of repurchases you talked about maybe buying some more debt back. I mean I thought on the last call you said your RP basket was negative, given the goodwill charge that you took in Q4. How are you buying back these [monies]? Where's the ability to buy these back, given a negative RP balance?

William Plummer

Chris, you've picked probably the most complicated question you could have possibly asked, but let me try it here. The RP basket that is negative is the basket that arises out of our 6.5% senior unsecured note. That negative balance in the basket restricts the operating company, URNA, from buying subordinated issues. It does not restrict the operating company, URNA, from buying the 6.5% note. So, we can still buy the 6.5s, which is what we did in the first quarter.

On top of that, there is cash available to us up in the holding company, URI, the parent, which could also be used to buy issues, either of the holding company or the operating company. It has its own separate, restricted payments limitation basket which is significantly positive. And so if we decided we wanted to buy subordinated issues, we could do it, using the cash that is held up at the URI holding level.

Chris Doherty – Oppenheimer

Now, if I'm not mistaken, the last call, you said there was no cash up there, at that point. Did you move cash up there?

William Plummer

No. There was cash at the last call. There was about $260 million, if I remember correctly, up at the holding company level at the last call. It's a little bit more now and we had moved cash over the course of the last year to get us there.

We also have ongoing relationships between the holding company and the operating company that are defined as trademark license agreements and service agreements that flow cash up on an ongoing basis, sufficient to support the debt service at the holding company level, URI.

Chris Doherty – Oppenheimer

Of that $260 million, that can still be used to basically take out the 1-7/8 converts when those become [portable] on 2010, correct?

William Plummer

That is correct, although it wouldn't need to be used to respond to the put of the 1-7/8. It would need to be used to buy them in the open market, but responding the put of the 1-7/8 is a scheduled event in the indenture of the operating company. And we can respond to that, regardless of what the RP basket status is.

Chris Doherty – Oppenheimer

And then just one last question related to the trench business, I look at that business and you have some pretty good dollar utilization on that, but yet time utilization is down. And I wonder whether there's an ability to liquidate some of that equipment and get better time utilization and hence better ROIs on that? Is there a market for used equipment for that sector?

Michael Kneeland

Yes, you're right it does give a substantial return on investment capital. In that business the ROI is extremely attractive. And most of the assets they have it is not serialized. A lot of it is steel plate and more commodity than anything else. We believe that with the infrastructure and the stimulus package that's well-positioned to improve over time. And I think I would hesitate before de-fleeting that area of the business at this point. Again it will benefit quicker than any one of our segments with the stimulus package infrastructure spending.

Operator

(Operator Instructions) Your next question comes from Manish Somaiya – Citi.

Manish Somaiya – Citi

I have a question. One of your peers announced earnings yesterday. Their pricing was off 4%, yours was off 11.5% and I'm just trying to reconcile the difference.

Michael Kneeland

Well, I mean the differences are, one, I don't know how they measure rates. I can only tell you how we measure rates as far as the difference. Rates is a balancing act. As you know we're transforming our business away from smaller customers to national accounts and industrial. Part of that is inflicted that we're doing intentionally. The rest of it there's a very challenging market out there.

And sometimes we have seen some irrational pricing we've actually walked away. But my comment in my opening statement, Manish, is we can do a better job. We're really going to dive in and we're going to make sure that we are really managing these rates effectively. I think that's the prudent thing for us to do. But I can't measure the delta between us and them; different companies, and I'll leave it at that.

Manish Somaiya – Citi

My follow-up is if I look at the rental fleet OEC it was only down about $100 million sequentially and I guess realizing that the environment was weak and getting weaker, what was sort of the decision not to aggressively bring that down?

Michael Kneeland

Well one of which is that it's the winter; it's the lowest part of the seasonal structure of our industry. We have aggressively taken our inventory down. If you go back we took $100 million out in the fourth quarter, to your point, sequentially down another $100 million. We'll continue to de-fleet as we go through the year. And we're just doing it on an orderly process. We are also selling our oldest fleet at 78 months which is part of our lifecycle. But it's safe to say, Manish, that we will continue to de-fleet through the balance of this year.

Manish Somaiya – Citi

And in regards to the gross margin on sale of used equipment, I think you pointed out that they declined pretty substantially and part of that related to the mix shift from retail sales to auctions. Do you expect that to continue? And I guess with the weaker markets would you be willing to sell equipment even if margins turned negative?

Michael Kneeland

Well in fact we have been selling some fleet that has been negative. As I just mentioned some of the results that we're seeing, we have seen some excavators, earth-moving equipment has been negative. When you take a look at our rates it's a balance of what we do on retail versus auctions. This last quarter 40% of our sales were actually at auctions, which is much higher than we've had in the past. We'll continue to de-fleet, and to your point, the margins will come out where they fit. But I would expect the margins to continue to decline for some period.

Operator

(Operator Instructions) Our next question comes from Seth Weber – BAS-ML.

Seth Weber – BAS-ML

Mike, I know you're not giving quarterly guidance specifically but can you comment on April how that came in relative to say March? I mean I know there's a seasonal uptick but can you give us any color on what April looked like?

Michael Kneeland

Well we can't give you specific numbers. What I can tell you is that we've seen a slight seasonal uptick albeit at a lower volume than it was on a year-over-year basis. And I think that is consistent with the current macro environment. Everyone inside the industry I think is – all of us are de-fleeting and taking as much cost out of our structure. We'll continue that as well. We're not going to give quarterly guidance you're right, Seth. It's too early in the game.

Seth Weber – BAS-ML

Have you started to see any improvement in Florida or California?

Michael Kneeland

In California we have seen it somewhat hit bottom. It appears to be leveling off. We are seeing some of our time utilization slightly improve there. Florida is a different story, still a mixed bag with regards to the markets. And by the way those two states are the two states that we've had the most of our consolidations and closures.

Seth Weber – BAS-ML

Maybe, Bill, can you talk about if you're seeing anything on the bad debt side? Have there been any tick ups there that you're taking notice of?

William Plummer

Yes, bad debt expense for us did tick up a little bit versus last year as you might expect in the current environment. But it's nothing major, nothing that we're overly concerned about. We ended the quarter with DSO of about 55.1 days and that was only up about a half a day versus last year at this time. So we're watching it very carefully. Our credit and collections people are calling earlier, calling more frequently.

We're leaning more jobs. We're doing all the things that you would expect and hope that we'd be doing in this environment. And I think it's playing to our benefit, but obviously you have to continue to watch it very closely in an environment that is as soft as what we are.

Seth Weber – BAS-ML

And then just last question, if your net CapEx is approaching zero this year do you have an idea where you expect to end in the year as far as number of fleet months, number of age in fleet months?

Michael Kneeland

This is Mike. We're comfortable coming in around 43 months and that's what we said on the last call and we're still holding to it. Keep in mind we're selling the oldest assets first which is a key takeaway. And if you go to our investor presentation on the Web you'll see it on page 32.

Operator

(Operator Instructions) Your next question comes from Tom Klamka – Credit Suisse.

Tom Klamka – Credit Suisse

On the fleet side it sounds like you're going to be somewhat more aggressive on selling fleet. And I guess my question is you're taking a lot out of CapEx, I'm sorry, out of SG&A you took out, I guess, $20 million and you're targeting $50 million to $60 million. As the environment continues to decline, what other levers can you push to take the fixed cost out of the business to try to keep profitability where it is at least?

Michael Kneeland.

Obviously you're right, we reduced our CapEx. We'll also increase our used sales. We've adjusted our headcount. We'll continue to look at that as the market continues. We transfer our fleet and we've optimized our branch network and that will play out over the second quarter. But I will tell you that we are still pursuing several areas, one of which is trying to build our business in that's industrial, that's one.

So we're trying to put revenue stream in place. But we haven't – there's more to come and more for us to focus on and cost control. We're not done yet. And that's a commitment by me and the management team to continue to focus on. So I would expect more to come.

Tom Klamka – Credit Suisse

And what's the timing on the branch closures? And did you quantify the cost savings that you expect to come out of that?

William Plummer

We certainly expect the closures to happen during the course of the second quarter. We haven't quantified really any of the impact in the P&L. We'll address that as the quarter unfolds.

Tom Klamka – Credit Suisse

And it looks like your availability on the ABL is somewhere around $550 million. Can you give us the balance on that as the end of the quarter?

William Plummer

At the end of the quarter ABL balance – I have today's. But hang on one second and I'll get you the quarter end. We had $561 million at the end of the quarter.

Tom Klamka – Credit Suisse

And your availability of roughly $550 million it looks like, that's after the appraisal?

William Plummer

The availability after the appraisal, I'm sorry, the $561 number was the combined availability as of the end of the quarter. So is your question about availability or is it about –

Tom Klamka – Credit Suisse

Well two questions, is that availability number under the ABL does that reflect the decline in OLVs for the Rouse appraisal?

William Plummer

Yes, it does. As I said earlier the borrowing base which underlies the overall facility is more than half a billion dollars in excess of the $1.285 billion max size of the facility. I always have to be careful with these things because the bankers have their own language so I try to state it in plain English. But sometimes the terms get confusing.

Operator

(Operator Instructions) Our next question comes from Scott Schneeberger – Oppenheimer.

Scott Schneeberger – Oppenheimer

Could we talk a minute on industrial? I didn't catch if you guys mentioned what the mix was now, sounds like some good opportunity there. Could we go just a little deeper? Particularly I think I missed the detail, too, on was it eight new opportunities in April that you've closed or were they looking to be signed in the $40 million opportunity?

Michael Kneeland

No, we had 12 up going into the quarter and we had an additional eight in this past month in April so that makes the total 20. The total share of the wallet spend as estimated with our team and with our partner gives us color as to how much they would spend altogether. What was the other part of your question?

Scott Schneeberger – Oppenheimer

Just what is your mix now of industrial given that you're actively pursuing it?

Michael Kneeland

Right now it's roughly 19%, our objective – is that what you're asking me – is to go towards 30%.

Scott Schneeberger – Oppenheimer

Switching up on pricing, you mentioned the new systems and looking to have more centralized control and standardization for the branches. How far out is achieving that? Is it something where you may not be able to properly communicate this for the next quarter or two, or is this something that's going to happen instantly?

Michael Kneeland

Well it's a phase-in process. That's a great question and to be quite candid with you, I'm very excited about this because I think the industry is ready for something like this. Starting in this quarter, we will pilot and then we will roll out the base going into the third quarter which will effectively automate a lot of the processes that we have today so it will be real time information available.

As we go through into the fourth quarter we will roll out a dynamic pricing model which takes into account a lot of different things like the customer, the type of customer, the type of equipment, how they pay, the return, the ROI on the customer, just a lot of different things that are a little more scientific and that will be very, very robust, and I think cutting edge I know for this company and certainly I think for the industry.

And it will have a hard stop that will require approval process. And so you can look forward to us rolling that out starting in the second quarter, this quarter today, to the third quarter. But it's not going to stop us from doing all the other fundamentals that we're doing. It's just going to speed up the process.

Scott Schneeberger – Oppenheimer

And finally a two-pronged question, auction percentage of used equipment sales went up in the first quarter. Can you give us an indication of do you think that will tick up or down in the second quarter? And then also to the extent you can answer, used equipment margins continuing to trend down in the second quarter?

Michael Kneeland

The answer to both is yes because of all the closures we will probably be pursuing, some of that will go retail that we're not using for the closures but will push out the remainders auctions. With regards to, as a percentage of our total sales auctions will increase as we go forward. And what was the other part of the question?

Scott Schneeberger – Oppenheimer

Intuitively I think you already covered it, not a surprise, margins in used equipments probably continue to decline 2Q from 1Q?

Michael Kneeland

Yes, it will be balanced, the auction prices will be balanced against our retail prices because we still are retailing equipment to our sales force.

Operator

(Operator Instructions) Your next question comes from Philip Paselli – Cantor Fitzgerald.

Philip Paselli – Cantor Fitzgerald

I was wondering about the timing of the free cash flow. Is it correct to assume that the bulk of the free cash flow will come in the first and fourth quarters with very little in the second and third?

William Plummer

I think the timing really will depend how the timing of the used sales flow throughout the course of the years and so we'll have to see how that plays. Again the watchword for us is flexibility and being able to respond as the market unfolds. And we'll ramp up or ramp down used sales, new CapEx in response to what we see in the operating environment.

Philip Paselli – Cantor Fitzgerald

And then for the year do you have an estimate of cash taxes?

William Plummer

For the full year, 12.

Philip Paselli – Cantor Fitzgerald

And working capital do we expect that to be a source or used as we go through the year when you're contracting the business?

William Plummer

That one's going to be a source for the year, probably a decent size and just responding primarily to the decline in accounts receivable.

Philip Paselli – Cantor Fitzgerald

And then as we look at the one-time cost associated with the cost savings you guys have implemented, I think you made it very clear in the second quarter it's $11 million to $16 million of cash costs. What's the total year expectation for the cash costs associated with cost saving programs?

William Plummer

Most of it will be cash. Honestly I don't have a number right off the top of my head, so let me hold off on offering a specific cash target there.

Philip Paselli – Cantor Fitzgerald

I guess what I'm trying to do is I'm trying to build back to an EBITDA number going from the bottom up. And if you have $300 million of free cash flow, let's say $200 million of interest expense, zero on CapEx, roughly $12 million on cash taxes, let's say $20 million on one-time costs, the number is more in the $500 million of EBITDA. That sounds a little low based on what you're seeing. Am I wrong or is the free cash flow number very conservative?

William Plummer

I certainly won't offer an opinion on whether you're right or wrong. We believe the free cash flow number is achievable and that's what we're going to manage to.

Philip Paselli – Cantor Fitzgerald

Last question the annual trademark licenses and services agreement that go from URNA to URI, do you have a – how big is that? What is the number?

William Plummer

Roughly $75 million between the two of them.

Operator

I would like to hand the program back to our presenters for any further remarks.

Michael Kneeland

Thank you, everyone, I want to thank you for joining us today. You can see that we are looking at the year very realistically but at the same time we're refusing to concede in any area that was within our control. We're steering the ship accordingly to a clear, defined strategy for long-term growth, and we're taking all of the necessary steps to strengthen our current course which is meeting our customer demand, a healthy liquidity, shifting our base towards longer accounts, larger accounts, and positioning the company to benefit significantly when the recovery begins.

This concludes our remarks for the day and I want to thank everybody. Thank you.

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