RSC Holdings Inc. Q1 2009 Earnings Call Transcript

May. 7.09 | About: RSC Holdings, (RRR-OLD)

RSC Holdings Inc. (NYSE:RRR-OLD)

Q1 2009 Earnings Call

May 7, 2009 5:15 pm ET

Executives

Gerry Gould – Investor Relations

Erik Olsson – Chief Executive Officer and President

David Mathieson – Senior Vice President and Chief Financial Officer

Analysts

Kyle O’Meara – Robert W. Baird

Adrienne Colby – Deutsche Bank

Tom Klamka – Credit Suisse

Jason Traheo – Barclays Capital

Mike Terwilliger – Bank of America

Scott Schneeberger – Oppenheimer

Christina Woo – Soleil Securities

Chris Doherty – Oppenheimer

Adam Silver – Dobson Capital

Sundar Varadarajan – Deutsche Bank

Yilma Abebe – JP Morgan

Philip Volpicelli – Cantor Fitzgerald

Presentation

Operator

Good afternoon. At this time, I would like to welcome everyone to the RSC first quarter 2009 results conference call. (Operator Instructions) Thank you, Mr. Gould; you may begin your conference.

Gerry Gould

Good evening, everybody, and welcome to the RSC Holdings first quarter '09 results conference call. Joining me today from the company are Erik Olsson, President and CEO, and David Mathieson, Senior Vice President and CFO.

We published our first quarter 2009 results and updated '09 guidance in a press release we issued approximately an hour ago. Results are on a slide presentation that accompanies this earnings call.

The press release, as well as the webcast and its accompanying slide presentation, and any nonGAAP reconciliation tables that are required can all be accessed on the RSC Holdings website at www.rscrental.com in the Investors section under the About Us tab. This conference call is being recorded for replay purposes. If you have any questions after the call, please call me.

Please turn to slide 2 at this point. Before the presentation and the comments begin, RSC would like to alert you that some of the comments such as the company's outlook and responses to your questions include forwardlooking statements. As such, they are based on certain assumptions of future events and are subject to a number of risks and uncertainties and may not prove to be accurate. Actual future results may vary materially.

In addition, the factors underlying the company's outlook are dynamic and subject to change; and, therefore, this outlook and all the other information mentioned today speak only as of today and RSC does not intend to update this information to reflect future events or circumstances. RSC encourages you to read the risks and uncertainties discussed in the company's annual report on Form 10K for the year ended December 31, 2008, and our other SEC filings. I would now like to turn the call over to Erik Olsson.

Erik Olsson

Thank you, Gerry. Good afternoon and welcome everyone to RSC's first quarter 2009 earnings call. As usual, I will go over some highlights of the quarter, and David will then talk in more detail about our financials. I will also talk about our outlook for the second quarter and for 2009, and we will end with a Q and A.

These are unprecedented and uncertain times in the global economy; and we believe they warrant more information on our part, not less. For this reason, we have included more slides with more information than ever before this quarter, and we hope you will find these as useful as we do.

The quarter was difficult as we expected in late February when we had our fourth quarter call and gave guidance on the first quarter. We had already seen that the sharp drop-off of business we experienced in the fourth quarter continued and worsened as the first quarter developed. At that time, we gave you our priorities  customer service, cash flow, cost management, and growing our already strong industrial business.

With focus, discipline, and strong execution that came from every level of RSC, we have managed our business in this tough environment and delivered on all these priorities as listed on slide number 3. First, our $112 million of free cash flow was a great start to the year and $154 million improvement versus a negative $42 million in Q1 2008. Thus, we are able to increase our full year '09 outlook by $20 million; and we now expect $340 million to $370 million of free cash flow for the year.

Second, we reduced total debt by the same $112 million continuing our consistent pay down of debt.

Third, we have executed on our cost reduction efforts with excellent results, $26 million of lower costs in the quarter as compared with the first quarter of 2008. And, accordingly, we have increased our fullyear 2009 target by $50 million and now expect cost reductions in exceed $150 million for this year.

Fourth, our industrial or non-construction revenues reached 55% of total revenues in large part due to the successful roll out of our unique product offerings for these customers.

Our expanding industrial customer base is attracted to our proven ability to simplify processes and reduce their overall equipment rental expenditures through our managed services team.

Lastly, I am especially pleased that our customer service, as evidenced by, among other things, our safety records, on time delivery, preventive maintenance, and net promoter scores, continued to improve from already high levels.

So while the environment was tough, possibly even tougher than expected, we did what we said we were going to do.

On slide number 4, the economic environment, which had been deteriorating for most of 2008 experienced a sharp decline toward the end of the fourth quarter that continued through the first quarter. All our markets and all our geographies were impacted by this.

Non-construction or industrial customers have lower levels of equipment needs as their business activities slowed and, in some cases, they delayed MRO projects. They were all looking at their discretionary spending levels and cut back where possible. However, we do believe that this market will rebound sooner and quicker than the nonresidential markets.

Non-residential construction has deteriorated significantly. As existing construction projects were completed, new construction projects were insufficient to replace them. And, as expected, there has been no meaningful impact from the stimulus package nor do we foresee any in the short term. As a result, there was a sharp drop off in rental demand and increase in price pressures.

Some players within our industry are lacking the pricing discipline we would have expected, significantly amplifying the pressure on rental rates. And the public talk about having learned their lessons and how they are better managed today has turned out not to be the case.

We have been surprised to witness how the largest player in the industry has performed on pricing as was reported last week; and there are regional players participating in the race to the bottom, too. But their scope is more geographically contained.

There seems to be widespread misconception that lower rates will stimulate demand. A customer rents equipment when there is a need and with equipment rental being only 2% to 3% of a construction project cost, lower rates won't change a thing in terms of the economics of the project, other than start a race to the bottom for the same slice of the rental pie. Mismanagement of rates puts the credibility of the entire industry at risk.

We are very disappointed to report a 4% rate decline this quarter. We are doing everything we can to hang on to the rates we have achieved using the industry leading value we provide customers as the line of defense. And compared to others, we have done a much better job. However, when the biggest player on the market dropped rates by 12%, following multiple quarters and years of reported decline, and other significant players appear to be following suit, there's only so much we can do.

Having said all this and while visibility remains very low and economic forecasts are changed daily in the news, we do see some positive signs. Granted, yearoveryear comps will continue to deteriorate. There's no growth in the market demands foreseen in the short term and limited seasonality. But, we are encouraged to be seeing some early signs of business stabilization recently on a sequential basis.

By this, I mean that actual business volumes like dollars of fleet rent have stabilized and stopped falling, possibly signaling a bottom.

Turning to the first quarter of 2009 on slide number 5, rental volumes declined 18.7% in the quarter and rental rates under competitive pressure declined 4.1% on a yearoveryear basis. The sharp decline in demand caused our utilization to drop to 57.8% for the quarter as we held back on rates.

We managed to offset parts of the revenue decline with cost reduction actions, and we performed well by industry standards with an adjusted EBITDA margin of 30.6% on a reported basis and 33.2% excluding charges for first quarter actions. We managed net CapEx to a $46 million inflow, and we delivered an impressive $112 million of free cash flow as already noted.

Our recent history of time utilization is graphed on slide number 6, ending with a drop to 58% in the first quarter. The steep decline in rental activity before and during the first quarter of 2009 and our choice of sacrificing volumes to defend rates rather than participating in the race to the bottom have left us below our more ideal utilization of around 70% for the time being.

Our fleet averaged 34 months age at the end of the first quarter, up 1 month sequentially; and we still have lots of runway before we approach the 40s, giving us flexibility going forward.

At the end of last year, Rouse Asset Services estimated the industry average fleet age to be 43 months. So we continue to have a considerable advantage versus the industry as a whole. We could comfortably operate with an average fleet age in the mid to high 40s for several quarters due to our best in class preventive maintenance programs.

While experiencing less than optimal utilization for the time being, the reduction in our fleet size at the original equipment cost from $2.8 billion to $2.6 billion is a result of our recent defleeting and was in line with our plans and what is necessary in these times.

We could have responded by aggressively selling more fleet in the quarter; however, we elected to reduce our fleet in a controlled manner rather than conducting a more rapid defleeting that would have impacted used equipment margins more negatively. It is in times like these when having a young fleet and the ability and runway to age it is a tremendous competitive advantage.

In this environment, we don't need to buy any fleet. And on slide number 7, you can see that we virtually stopped the purchase of new rental equipment, spending only $9 million gross on very specific needs. This is a nearly 90% reduction from peak Q2 2008 levels and compares with $124 million of fleet sold at original equipment cost, more than double what it was in Q1 of 2008.

As a result, net CapEx for fleet was a source of $43 million; and we expect it will remain a source for the next several quarters.

On slide number 8, given the importance of the used equipment market in times like this, one must understand the dynamics of the market. As you see, the used equipment market is estimated to exceed $100 billion annually in size. The industry normally sells closer to 70% of used equipment through retail channels, but that is estimated to have moved considerably lower in the first quarter of 2009 as the industry relied on auctions to a greater extent.

We think this may be a trend that will continue as more auction channels are opened up, not the least by the internet. This also supports the globalization of the used equipment market, and we were pleased to note that foreign buyers continued to be active in auctions during the first quarter.

Buyers of used equipment are, to a large extent, the same categories of customers that rent, such as general contractors, plumbers, electricians, and so on. Many of our used equipment buyers are also renters that complement their rental needs with purchases of highly utilized used equipment.

In the first quarter, excluding auction sales, we sold used equipment to over 4,000 individual retail buyers in businesses across more than 400 SIC codes. We realized $50 million of proceeds from selling used equipment, up 59% over last year's first quarter, so the used equipment markets remain very liquid for us. As expected, the margins realized declined to 8% compared with 23% in the fourth quarter of 2008 and about 30% in the seven quarters prior to that.

The majority of the decline came as a result of a greater reliance on the auction market. The elevated supply of equipment for sale industrywide through retail channels also contributed to the margin decline, but to a lesser extent.

Turn now to slide number 9 and our footprint. We are disciplined and strategic in everything we do. When it comes to our footprint, we follow a structure and the plan to drive location changes. Back already in early 2008, we started to raise the bar on low performing stores initially evaluating them on returns and recently on cash flow contribution. We took a hard look at certain geographies and exited markets we did not believe would provide a decent return in medium term.

We have also sought to industrialize certain markets with a bleak longterm construction outlook by closing construction-oriented locations and opening industrial oriented locations. All in all, we closed or consolidated 14 stores in the first quarter, bringing the total closures for the last 12 months to 57, or 12% of our locations.

However, at the same time, we remain on the offense in pursuit of growth opportunities. We opened 7 new locations in the first quarter, 29 in the last 12 months, with the majority of them in industrial locations. While there will always be some location closures as markets and conditions change, we believe that our footprint at the end of the first quarter is largely right for the current level of business. We will also continue to open new locations where we see growth opportunities and have, in fact, opened 3 now locations already in the second quarter.

We apply the same rigor and strategic thinking when it comes to our staffing. We take headcount reductions very seriously, applying great discipline and thoughtfulness to these difficult but necessary actions. On slide 10, you can see that we eliminated 422 positions in the first quarter, bringing us to just over 900 in the last 12 months or equal to a 17% headcount reduction.

I would like to point out that less than 20% of our headcount reductions resulted from closing locations. Instead, the vast majority comes from demonstrating the scalability of our business model with reductions taking place at all levels of the company in line with the decline in activity.

We used a decentralized approach to cost and headcount reductions that enables our field organization to maximize efficiency while minimizing the impact on customer service and quality. I have made it clear to the organization that we will not accept any deterioration of service levels to our customers as a result of cost reductions. We watch our key operating performance indicators very closely on a daily basis and, as already mentioned, are extremely pleased to report that we have, in fact, improved on most, if not all, of them, making these cutbacks transparent to our customers.

Just as with our locations, we remain on the offense when it comes to certain staffing categories as well. At the same time as we've gone through these major reductions, we provided additional sales resources to support our ongoing industrial initiatives. Rental revenue per employee is a good measure of efficiency, and we are pleased that we have continued to improve on this metric from an industry comparison point of view already high or leading levels.

Before I turn the call over to David, I want to underline the importance of our performance on the metrics that we have discussed. We deliver on our priorities; and we are firmly managing our business, our fleet, our locations, and our headcount in a very diligent and disciplined manner, following our strategy and operating from a structure or a plan that is consistent. And importantly, we are keeping a close eye on customer service levels.

We do not control the environment around us, but we do control how we respond to it; and our first quarter results are a good testament to how we execute and deliver. With that, I would like to turn the call over to David to review our results and for a few words on our financial statements.

David Mathieson

Thank you, Erik, and good evening everyone. Turning to slide 12, our rental volumes declined 18.7% and yearoveryear rental rates were down 4.1% in the quarter. These declines are consistent with both the guidance we gave in February and the sharp decline that Erik referred to a few minutes ago.

Within these trends, nonresidential construction was hit hardest while industrial revenues declines were less pronounced. Industrial revenues were 55% of total revenues in the first quarter. This is the result of our efforts to grow our industrial business and greater weakness in the construction markets. With construction contractors and industrial customers facing tough market conditions, price reductions are continually sought.

Our objective is to continue to remain disciplined and manage rates tightly on a daily basis to focus on value selling and service as opposed to price competition and thereby protect profit margins as much as possible. We were disappointed that others in our industry panicked and displayed a lack of discipline. We were also pleased to see that a number of our customers who left us for lowball pricing recently returned stating our superior service.

On slide 13, the cost of rental dropped by $26 million or 16%, excluding $8 million of store closing and severance costs on the lower rental volume. We reduced costs, but we were very careful to maintain metrics that are important to our customers.

Our fleet level at original cost was down 8% from its third quarter 2008 peak, a result of lower CapEx and increase due to equipment sales, and depreciation came down $3 million from the prior year.

Continuing to slide 14, SG&A expenses were virtually flat with the prior year and down more than 10% from peak Q3 2008 levels.

Bad debt increase of $4 million, with $3 million for a single customer, masked what would otherwise have been a $4 million reduction in SG&A. And just like rental equipment, we have reduced nonrental purchases and increased the level of their sales. And SG&A expenses as a percent of revenue are holding relatively flat in this time of declining revenues.

On slide 15, we are encouraged by the initial level of cost reduction we realized in the first quarter. Together, the nondepreciation costs of rental plus SG&A expenses excluding first quarter costs of closure and severance came down $26 million from the last year's first quarter level. Our rate of cost reduction enabled us to increase our commitment to full year 2009 to over $150 million in cost reductions.

On slide 16, used equipment sales were up 59% from the prior year level as we continued to defleet given lower demand. Used equipment margins of 8% were down sequentially from 23% in the fourth quarter of 2008. We saw a greater reduction in auction prices than at retail and a greater mix towards the use of auctions which contributed to the lower margin. Margin reductions were evident in all used equipment categories.

You can see the results. 71% of our used equipment through the retail channel in 2008 but only 55% in the first quarter of 2009 as we turn more to the auction market to sell used equipment.

The used equipment market remains liquid and we expect it to continue to realize single digit percentage margins on used equipment sales in the second quarter.

On slide 17, merchandise revenues were down 24%, attributable to the market place declines and also to stores we've consolidated or closed.

On slide 18, adjusted EBITDA was $108 million, down from $183 million in the first quarter of 2008, a decline that was largely due to lower rental volumes. On a positive side, on the strength of cost reductions we were able to report a very respectable 30.6% EBITDA margin, actually 33.2% excluding the closure and severance costs, in a very tough quarter.

We thought it would be helpful to show you a bridge from last year's EBITDA to this year's, both for the first quarters. The main contributors to the EBITDA decline were the lower rental volumes and rates, costs incurred to close locations, and for severance and included in other, the lower margins on the sale of used equipment. The lower cost of rental and SG&A partially offset those declines.

Slide 19. Operating income followed a reduction in EBITDA [even though] $9 million of location closure and severance costs are included in the EBITDA and operating income.

Slide 20. Our first quarter net loss of $14 million compared to the net profit of $22 million in 2008. Diluted earnings per share are a $0.13 loss compares with $0.22 profit last year. The closure and severance costs had a $0.05 negative impact on the EPS. Interest expense was down $15 million as we have lowered our debt using our strong free cash flows, and we have better rates than at this time last year.

Income taxes were a benefit due to the loss, and the tax rate declined marginally due to state taxes and permanent items.

On slide 21, free cash flow of $112 million represents an improvement of $154 million over the first quarter last year and is a really strong start to 2009. This business has countercyclical cash flows. As the business slows, we need less CapEx and generate strong cash flows. We spent only $10 million on gross CapEx, down from $85 million last year and net CapEx was an inflow of $46 million compared with a $52 million net cash outlay in the prior year.

We used the $112 million free cash flow to reduce debt by the same amount. You can see from the chart that the last four quarters' free cash flow have been very strong, and we're off to a strong start to generate the $340 million to $370 million projected for 2009.

On slide 22, this was our balance sheet for the last 3 years and the current first quarter. You can see that we brought net rental equipment down by 14% or $279 million from December 2007 as we've been aging our fleet and defleeting. We are also bringing down our nonrental fleet, included in the PP&E numbers. And you can see debt at the lowest level at March 2009.

Of particular note this quarter is a $69 million or 24% decline in accounts receivable during the first quarter. Now this reflects lower rental volumes. We also benefited from improved collection efforts by our field personnel and a revenue mix shift towards used equipment sales whose collection terms are more favorable.

Slide 23 details our debt at the end of the first quarter. Note that we have no material refinancing needs until November 30, 2011, when our revolving credit facility matures. 64% of our debt is fixed, leaving 36% variable. So we're accessing variable monthly LIBOR rates right now on the variable bank debt that we have.

We have available ABL borrowings of $434 million at March 2009. Note at the bottom that covenants are only tested for ABL availability of debt below $170 million.

We have the fleet independently valued on an OLV basis twice each year. This year, that will occur as of the end of April and September. The availability of $434 million is adequate for our business needs as we will continue to generate cash this year, and we'll use it further to pay down this facility.

Now, I would like to turn the call back to Erik.

Erik Olsson

Thank you, David. I will update you on our outlook and then we'll proceed to Q and A. You will recall that our current practice is to provide quarterly outlooks on revenues, adjusted EBITDA, and free cash flow, as well as an outlook range for annual free cash flow as we believe this is a key metric for understanding and evaluating our performance.

As already noted, business activity in our markets has been down sharply on a yearoveryear basis in the first quarter and has been declining moderately since the beginning of the year on a sequential basis. New project startups have been insufficient to offset project completions, and we have not experienced the usual seasonal increase in business activity although some early indicators of the possible bottoming out process are becoming visible.

Further, industrywide rental rates have declined significantly in recent quarters. We expect this trend to continue into the second quarter and as a result yearoveryear comparisons will continue to worsen.

Please go to slide number 25 and for the second quarter, we expect rental revenues to be in the range of $250 million to $265 million. Demand for used equipment is expected to remain good due to the young age and high quality of our fleet, although margins will remain low as supply is greater than demand and higherthannormal reliance on auctions will continue.

We expect $310 million to $325 million of total revenues resulting adjusted EBITDA of $100 million to $115 million. We expect free cash flow to be in the $80 million to $90 million range for the second quarter. In the past 12 months, we have taken decisive actions to reduce locations, headcount, SG&A expenses, and capital expenditures.

Recent cost reduction efforts are working as evidenced by a $26 million cost reduction in the first quarter, and we are now expecting the annual reduction to exceed $150 million. As I mentioned, we have increased our free cash flow range for the year and are now targeting 2009 free cash flow between $340 million and $370 million; and we expect to use it to reduce debt.

With that, I would like to turn the call over to the operator for instructions on the Q and A.

QuestionandAnswer Session

Operator

(Operator Instructions) Our first question comes from Kyle O'Meara from Robert W. Baird.

Kyle O'Meara Robert W. Baird

Wondering if you could comment on rental rates. Do you feel like they're stabilizing or that they could deteriorate further? And I guess maybe if you could comment on just what you're seeing quarter to date?

Erik Olsson

What we're seeing so far is pretty much a continuation of what we saw in the first quarter. So we expect to see a further deterioration on rates in the second quarter.

Kyle O'Meara Robert W. Baird

Increased your cost savings started for 2009 by over $50 million. As far as that, how does that break out between cost of sales and SG&A? Is that similar to the original $100 million you guys talked about on the last call?

David Mathieson

There’s a lot more cost of rental added in that count.

Kyle O'Meara Robert W. Baird

So a lot more would be more towards in the cost of rental side and can you just talk about, is that primarily headcount? Is that?

David Mathieson

It's everything. It's every line in the P&L. We are very focused. We have what's called our selfhelp list. We have that by region. We have that by district. And we have that by line item. Everybody is reducing their costs very successfully. We're very pleased with the way people are taking costs out.

Kyle O'Meara Robert W. Baird

You commented opening you had opened 3 new industrial locations. Are there any plans to further consolidate locations in the second quarter? If you can just talk about that.

Erik Olsson

There will be some consolidation, but not to the level that we've seen in previous quarters. As I said, by and large, our footprint is right for the current level of business. There may always be certain markets or locations that we will close, but the big reduction is locations are behind us unless the market deteriorates further.

Operator

Thank you, our next question comes from the line of Adrienne Colby from Deutsche Bank Securities.

Adrienne Colby – Deutsche Bank

The margin that you saw on your used equipment sales was slightly lower than what some other peers have been reporting. I was wondering if you could update us on maybe the mix of the items being sold, if that was coming into play?

Erik Olsson

It wasn't really the mix of items sold as the channels that we sold through. We sold significantly more through auction channels than we normally do and that impacted our margins.

David Mathieson

And margins here can be a function of the depreciation policy which can be different in each of the companies.

Adrienne Colby – Deutsche Bank

And if I could ask another, for your upcoming fleet valuation, are you expecting any major changes in the appraisal?

David Mathieson

We're expecting it to come down somewhat, that's to be expected. But not hugely significant.

Adrienne Colby – Deutsche Bank

Can you comment if it would be on the order of your prior appraisal, in that order of magnitude?

David Mathieson

We don't like to give numbers on that. We expect it to fall, but not significantly.

Operator

Our next question comes from the line of Tom Klamka of Credit Suisse.

Tom Klamka – Credit Suisse

Can you talk about the fleet? I guess, first of all, what you are targeting for your net fleet CapEx for the year and is the used market deep enough to allow you to continue, not just you, but everybody, continue selling into it?

Erik Olsson

We haven't given a specific CapEx number for the year. We’ve said that CapEx will be a source, certainly, of funds for the year, as we will buy very, very little fleet as you saw now in the first quarter. We expect the used market to continue to be deep enough to sell the equipment that we want to sell. And granted, as I said earlier, we’ll continue to underperform, if you like, on utilization.

We don’t think it’s the appropriate use of our capital to sell too much fleet at this point only to have to turn around and buy it back when the market improves. Here’s where we can take advantage of having a young fleet age and well conditioned, so we can sit on a little bit more fleet than we normally would have, I suppose, selling more aggressively into the market.

Tom Klamka – Credit Suisse

With the utilizations where they are and volumes down, I think almost 19%, do you need to reduce your fleet or your OEC about the same as your volume? Volumes are going to be down 19% to 20% for the year, does that mean that you need to reduce your fleet by that same amount?

David Mathieson

No, because we are not expecting to get back to 70% utilization anytime soon.

Tom Klamka – Credit Suisse

So you can run at the utilization level and obviously it sounds like the market will continue to decline at least on the construction side going forward.

Erik Olsson

Right. But we have to think about our cash flow a little bit in the longer perspective that, when we sell used equipment, we typically recoup 40% to 50% of the initial investment. So if we sell too much young fleet that we have now and just turn around and buy when the market improves, it’s a $0.50 to $0.60 loss on every dollar in terms of cash flow.

Tom Klamka – Credit Suisse

Can you talk about in general, you talk about rates a lot, but between your industrial business and the construction business, can you give us some color as far as the relative declines and volumes and relative declines in pricing between those two sectors?

Erik Olsson

The construction market, non-residential markets, are significantly harder hit, both in terms of volume reduction as well as price pressure. On the industrial markets, we do have less volume and there are price declines as well, but to a much lesser extent.

Operator

Our next question comes from the line of Emily Shanks of Barclays Capital.

Jason Traheo – Barclays Capital

This is actually Jason Traheo in for Emily. First, regarding fleet in the industry overall, do you think that currently the industry is being rational with fleet size or are some players still carrying too much fleet?

Erik Olsson

I think if you would take a snapshot of the fleet in the industry today, the whole industry has too much fleet. There's no question. The reduction in demand has been so sharp and so quick. So nobody has been able to adjust to where they should be. Although the good news is that everybody started to reduce CapEx and manage CapEx already last year. So we're less overfleeted than we could have been but it's clear that the industry is still overfleeted.

Jason Traheo – Barclays Capital

On used equipment sales, what's the margin differential between the retail channel and the auction channel?

David Mathieson

It's pretty significant, though we don't want to disclose too much detail in our view.

Jason Traheo – Barclays Capital

I understand. Then just lastly, when calculating fleet age, how is a refurbished piece of equipment treated? Is it considered a brand new, basically at 0 months or is it considered to be aged somewhat?

Erik Olsson

It's considered to be 0 amount because it's a remanufactured piece of equipment. It's much more than, refurbish can sound like a simple paint job or so forth. We send them back to the original manufacturer, and they change out virtually all moving parts or critical parts, and the equipment that we get back is virtually new, and we treat it as such from an age calculation point of view.

Operator

Your next question comes from the line of Mike Terwilliger of Bank of America.

Mike Terwilliger – Bank of America

Sort of drilling in again on these used equipment margins. You obviously seemed to have ushered a lot of volume down that. I guess my question would be sort of a simple why? Given your free cash flow trajectory, you don't seem to have an immediate need to defleet through the auction. It would seem as though you might have sacrificed some margin by going that route as opposed to just holding it. I just want to get your perspective on it.

Erik Olsson

It's really a balancing act or trying to keep track of several moving parts because you can say that we didn't need to sell as much as we did in the first quarter, but on the other hand, we manufacture used equipment every day. Every day the fleet gets one day older and we need to keep this moving so that we avoid having huge needs to sell say in a year or two years.

So it's about managing the process with an eye on what does our fleet age look like two quarters from now? A year from now? Or a year and a half from now?

Mike Terwilliger – Bank of America

Should I take it then as a sign that you expect used equipment prices to get markedly worse and you'd rather get involved early rather than later in the auction process?

Erik Olsson

Not necessarily. I think it's more of a volume issue that we need to be able to move. You know the volumes that we like. And we can't choke any one channel in any one quarter so we'd rather keep a stream of used equipment sales going.

Mike Terwilliger – Bank of America

And presumably, your volumes should decline going forward, so you should potentially not have to go back to the auction quite on the same percentage going forward, correct?

Erik Olsson

We will still use auction sales. We try to maximize our retail channels and then use auctions on top of that to get to the plans that we have. So there will be auction sales also here in the second quarter.

David Mathieson

But I would say there's more in the first half than in the second half.

Mike Terwilliger – Bank of America

So then we should look for, we shouldn't look at 1Q margins as being representative for what we'll see in the rest of 2009 and perhaps into 2010 or do you think this more one age as you were suggesting, David?

David Mathieson

As I said on the call, we expect low single digit margins in the second quarter.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Scott Schneeberger – Oppenheimer

Could we speak a bit about the seasonal build? You mentioned that you're seeing more coming back than going out. Can you talk about that as kind of how it's moved through the months and into April and what this means more importantly for the second half if you don't get a seasonal build in the second quarter?

Erik Olsson

Like we said, we have not seen the normal seasonal build here in Q2 and it may be that there is a seasonal build, but there is the drop-off in overall demand is offsetting that. The business is relatively flat here in the beginning of Q2 as compared to end of Q1. I don't think that we can draw any conclusions from what we're seeing right now on what will happen in the second half. It's really, visibility is low and there are so many moving parts.

David Mathieson

There's a reason we're not giving full year guidance because visibility is very low.

Scott Schneeberger – Oppenheimer

Could you just speak a bit to the geographic spread of what is hot and what is not at the moment?

David Mathieson

There's nothing hot.

Erik Olsson

I think it's like David says. It's cooling off everywhere. The last fortresses that were standing are feeling the pain, too. Texas is feeling the downturn now as do the Midwest that held out quite long. But we're feeling the recession in all geographies, really.

Scott Schneeberger – Oppenheimer

Just curious. Something mentioned in the presentation. You mentioned some folks that had departed on price are returning. Can you just address the price and service dynamic in construction as well as in industrial?

Erik Olsson

We have the price competition, and our choice to defend rates by sacrificing some volumes has meant that we have lost some customers. We have competitors that come in and undercut us by 25% or more in order to get the business.

There's been several or numerous examples of where we have let the customer go to a competitor for that reason where we will not play that game and the customer has come back to us couple of weeks later or a month later and said that we can't work with competitor X, their service level is just so bad. So, we would like you to come back to us.

We're comfortable in that we're focusing on the right things, and we're taking the right decision prioritizing rental rates over volumes and letting our service be the differentiator to our competitors.

Scott Schneeberger – Oppenheimer

One more housekeeping, if I can slide it in. David, what do you think for tax rate for the full year, and is there a quarterly shift throughout?

David Mathieson

I would expect the tax rate to normalize at [39%] for the full year.

Operator

Our next question comes from the line of Christina Woo of Soleil Securities.

Christina Woo – Soleil Securities

I was hoping that you could comment a bit more on the guidance that you've given for the second quarter. In your prepared comments, you had said that the industry seems to be stabilizing, and I know that you're not seeing a seasonal bump in the second quarter like you normally would.

Yet your guidance actual suggests the second quarter will be weaker than the first quarter on a revenue basis. I am wondering if this is because you're walking away from some low margin business or is there something else driving the discrepancy between the color you provided on the industry and your outlook?

Erik Olsson

I think two things. The first quarter, January on a relative basis, was stronger than February and March. So we saw sort of a continued deterioration in demand in the first quarter. Now we're saying that we're seeing a stabilization from the March levels into April. That's one factor impacting it.

And the other one sadly is, of course, also that we expect rates to be lower in Q2 than in Q1.

Christina Woo – Soleil Securities

So it's sequentially lower in the second quarter than Q1? Okay. And you had commented about letting some customers go. I was wondering if you could focus in on the industrial segment and speak to your customer retention there, whether it's been the same as relatively new entrants to the industrials market you have commented undercut you on pricing, so you're losing customers there, or are you holding on to your customers better?

Erik Olsson

Overall, we're holding on to our customers much better. In fact, we signed up lots of accounts on the industrial side in the first quarter and we are building a very solid industrial base on a go forward basis. There's been you know, a couple of examples where the other entrants that are trying to get into this market, like I said, have undercut us significantly on price and, like I said, I'm talking 25% or more in order to get in. Those are very few examples and far in between.

Operator

Our next question comes from the line of Chris Doherty from Oppenheimer.

Chris Doherty  Oppenheimer

Can you talk a little bit more about the cost cuts in terms of whether they're just volume related or whether there's stuff that when the market does come back that you'll be able to recoup those costs on a normalized basis?

David Mathieson

We spent $22 million in the last 12 months on taking out headcount for example, closing stores. Looking at the current run rate, we're very confident that we'll generate the cost savings. As well as I mentioned before, we have this approach which was given to us by our chairman on self-help lists, where we have an active program. People go through every line item in the P&, L and we're saving in every single line item.

Chris Doherty  Oppenheimer

I guess what I'm looking at, it's a significant number and it's a great number relative to where you are right now. But it seems that Erik was talking a little bit more that it was in relation to volume declines. I just wanted to see when you come back and the market does rebound, are all those costs going to come back or are there some that you are going to be able to keep and just basically have a much better cost structure going forward?

Erik Olsson

Some of these cost reductions are clearly process changes and process improvements and things that will not come back. Some of them obviously are volume related also. That part of the headcount reductions are drivers or mechanics that have a direct relationship to the amount of fleet that we move or service. But a good portion of these cost savings are also longterm oriented savings that will not come back in an upturn.

Chris Doherty Oppenheimer

David, did I hear correctly? Did you say the next appraisal will be in April and then September?

David Mathieson

Yes. Is that a switch from what you thought the last time? I thought in the last call you thought it was going to be June and the next one was going to be in June.

David Mathieson

Yes. We asked for it to be changed especially getting away from a December valuation.

Chris Doherty – Oppenheimer

So basically the April one will be effective for June?

David Mathieson

It will be effective for May.

Operator

Our next question comes from the line of the Adam Silver from Dobson Capital Management.

Adam Silver Dobson Capital

All my questions have been answered. I have no further questions.

Operator

Our next question comes from the line of Sundar Varadarajan – Deutsche Bank.

Sundar Varadarajan – Deutsche Bank

Follow up on the cost savings question. You're targeting about $150 million of savings. How much of that was kind of reflected on an annualized basis in Q1?

David Mathieson

Probably $100 million.

Sundar Varadarajan – Deutsche Bank

And again, that's why I wanted to build on it a little bit on the volume versus what's going to be represented from an operating leverage perspective? So when I look at your various line items yearoveryear, seems like SG&A is still kind of flat on a yearover year basis. Your cost of equipment rentals, excluding depreciation is down about 10% on a yearoveryear basis, although your revenue is down much higher than that.

So how do we back into this $100 million of savings? And is it, in fact, as you just said some is profit related so that we will only actually see when revenue grows again? So if you could just drill down a little bit into how we should look into that savings.

David Mathieson

If you look at the first quarter, we saved, excluding the onetime, the closure costs and severance costs, we saved $26 million in cost of rental. We had one significant bad debt in the quarter which was one customer was $3 million. If you take that out of SG&A, then SG&A came down excluding that particular event. Now you are at $29 million times four. So we made a great start to the year and we continue to adjust costs.

Erik Olsson

And of course in the first quarter numbers we still carried a lot of the actual costs for the headcount reductions and the store closures. They did not happen on the first of January. They happened throughout the quarter. So the impact on those actions are not fully visible in Q1 but will be visible here in Q2 and onwards.

Sundar Varadarajan Deutsche Bank

And just on the equipment pricing given that there seems to be a lot of the equipment rental companies that are defleeting and selling equipment. Has it had any impact on new equipment pricing yet or are the OEMs still maintaining their pricing discipline?

David Mathieson

We don't know because we're not buying anything. Seriously, we bought $9 million of CapEx in Q1. A lot of that was very specialized equipment for very specific needs. I'm sure if we would place a large order today, we would get significant discounts. But we're not in the market at the moment.

Operator

Our next question comes from the line of Yilma Abebe from JP Morgan.

Yilma Abebe – JP Morgan

In one of your slides, you say here, I think it's slide 12, lack of discipline in the marketplace on the pricing front. Can you talk about that a little bit more? Is lack of discipline coming from small regional mom and pop type players or from the large, nationals?

Erik Olsson

We see it across the board from the largest players down to the regionals. What the mom and pops do don't really effect us. It's what the medium to large sized competitors do, and it's across the board there.

Yilma Abebe – JP Morgan

And the customer loss, I guess related to pricing. What kind of magnitude are we talking about? Are we seeing is significant shift in market share and the marketplace?

Erik Olsson

Not at all. These are just a handful of unique examples. We felt it was warranted to call out here that we may walk away from a customer here and there, but many of them have returned to us for service reasons. Like I said, it gives us comfort that we are managing this in the right way. It’s not at all any stream of customers leaving us or we're losing.

Yilma Abebe – JP Morgan

How about away from you? Are you seeing shifts in market share from other participants?

Erik Olsson

In the first quarter, it's very difficult to say. It's impossible to figure out what is market share and what's market demand and, it's too short of a period. If you would look over the last 23 years, we have taken market share from all major players. But in this one quarter, it's too short of a period to have an opinion about.

Yilma Abebe – JP Morgan

My second question is related to liquidity and then the used equipment market. I think you said if you continue to find that the market is in a fairly liquid in terms of ability to dispose of equipment. If you look at I guess the trend in terms of their liquidity in the marketplace in 4Q versus 1Q or even into this current quarter, is there any significant change of note or is it just fairly consistent?

Erik Olsson

It's fairly consistent or there's no change as far as we can tell.

Operator

Our last question comes from the line of Philip Volpicelli from Cantor Fitzgerald.

Philip Volpicelli – Cantor Fitzgerald

Is there any suppressed availability on your borrowing base versus the actual size of the facility?

David Mathieson

No.

Philip Volpicelli – Cantor Fitzgerald

Then, philosophically, let's assume hypothetically that the market continues to weaken in terms of used equipment prices and that the margin that you're able to sell that equipment as would turn negative.

And I realize that's just an accounting negative in terms of the book value that you've depreciated down to, would you continue to sell the equipment if you had negative margins there to get the cash out of it or would you just hold on to the equipment and wait for market to turn? How do you think about that?

David Mathieson

That's a good question. It depends.

Philip Volpicelli – Cantor Fitzgerald

I saved the hardest one for last. Sorry.

Erik Olsson

That depends. Obviously, we look at margins by individual product category, by age group, we look at OLVs by age group, etc., and the impact on borrowing base, etc. So there are a lot of variables that would go into a decision like that. But we have all of them in front of us and we would do whatever was the right thing to do at the time.

Philip Volpicelli – Cantor Fitzgerald

Let's look at it a different way. The 8% margin you had in the first quarter, does that mean that you were selling some types of equipment at a loss in terms versus the book value maybe earth moving or something along those lines?

David Mathieson

Yes. It definitely did. Especially through auction. And we don't look at these things separately. That is a blended rate and we do things, as Erik talked about, we make used equipment. We have to sell used equipment. It's part of our business model.

Erik Olsson

To be clear, there's not one equipment category that we're losing money on. There were certain product batches that moved through auctions where we lost money, but there's in the one category or so that is underwater.

Philip Volpicelli – Cantor Fitzgerald

So it's more dependent on the auction at the time as opposed to the type of equipment?

Erik Olsson

Exactly.

Philip Volpicelli – Cantor Fitzgerald

Was it age related also? Were you trying to get rid of some very old fleet? Maybe that hurt you?

Erik Olsson

Yes.

Operator

Mr. Olsson, any closing comments?

Erik Olsson

Yes. Thank you. As you have heard during this call, and can see in our first quarter results, we are managing our business tightly, executing very well on the things that are within our control, and delivering on our priorities. We will continue to do so as we move forward in what will remain a tough environment, but one in which leadership really matters. That's where I believe we have a significant advantage in this industry.

We have attached our business model and priorities to the appendix of our webcast for those of you who are interested. We believe that our flexible business model and strategy will deliver industry leading results at any point in the cycle and create shareholder value. We appreciate your interest and support. So, thank you very much and have a great evening.

Operator, that concludes today's call.

Operator

Thank you, this concludes today's conference call. You may now disconnect.

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