United Rentals Inc. Q2 2009 Earnings Call Transcript

| About: United Rentals, (URI)

United Rentals Inc. (NYSE:URI)

Q2 2009 Earnings Call

July 30, 2009 11:00 am ET


Michael Kneeland – President and Chief Executive Officer

William Plummer – Executive Vice President and Chief Financial Officer


Henry Kirn – UBS

Scott Schneeberger – Oppenheimer & Co

Manish Somaiya – Citi

Emily Shanks – Barclays Capital

Philip Paselli – Cantor Fitzgerald

Chris Doherty – Oppenheimer & Co


Welcome to the United Rentals Second Quarter 2009 investor call. (Operator Instructions). I would now like to turn the call over to Mr. Kneeland.

Michael Kneeland

Thanks, Operator. Good morning everyone, and thank you for joining us today. With me is Bill Plummer, our Chief Financial Officer, and other members of our senior management team. Bill will discuss our current capital structure and review our financial results with you. But first, I want to spend some time on our environment in operations, including the initiatives that led us to increase our targets for free cash flow and SG&A savings for the year.

As we reported last night, we now believe our free cash flow will be about $325 million, instead of the $300 million we had originally projected. We also expect to reduce our SG&A expense by $80 million to $90 million, which is about $40 million more than our original estimate.

Now both of these metrics reflect our ability to manage our business with discipline and purpose in a challenging environment.

Now as you will hear from us today, our second quarter story is one of sequential progress on key operational metrics in a market that is still declining, and that includes rates. But I also want to make it clear right up front that we're not satisfied with our current rate performance, even given the severity of this downturn. There are things that we can do to move our rates in the right direction and we're doing them, and I'll talk more about rates in a minute.

This construction cycle is more severe than any in recent history, but it will run its course. We have made a conscious decision to manage the company through the recession by balancing short-term and long-term goals.

At the corporate level, we are pursuing a strategy of long-term profitability that is based on customer service leadership and shifting our customer mix towards larger, more profitable accounts. At the branch level, our field operations are focused on managing daily performance and protecting key relationships.

Equipment rental is a service business and to some degree, the amount of weight we carry in facilities, fleet, and payroll is a function of the need of our services. Our branch count shrank by 6% in the quarter, which we believe is an appropriate amount of right sizing given the current conditions.

At the same time, we're investing in making our existing operations as competitive as possible. We are bringing discipline to every area of operations. And we believe that it is possible to continuously improve many of our metrics in the event – even in this environment.

The timing of the recovery still has no consensus within our industry. Some of our customers are telling us that they are still working through backlogs of prior commitments, although the pipeline is dwindling.

Commercial starts have taken the biggest hit. Institutional projects are doing better, particularly in medical, education, and energy sectors. Commercial construction will get no direct benefit from stimulus funds. And most analysts are predicting a decline in this sector in 2010. But the degree of decline is a matter for debate.

We've seen projections ranging from nearly flat year-over-year to bearish forecasts with declines in the double digits. Global Insight which tracks market activity for the American Rental Association expects commercial construction to decline 22% in 2010, hitting bottom in the third quarter.

There's still a lot of volatility surrounding all areas of construction. Just as one example, the Architecture Billings Index for June dropped nearly five points to a rating of 37.7, which is disappointing after seeing signs of stability in the ABI for April and May.

Now despite some mixed signals, most construction analysts seem to think that the pace of decline will ease, but it hasn't hit bottom yet. And we agree. We believe that our end markets may stabilize and begin a gradual recovery in the third or fourth quarter of 2010. Now part of this timing has to do with the nature of non-residential construction, which typically trails in economic recovery by six months or more.

There are two exceptions worth mentioning. One is Canada. Global Insight predicts that Canada will show modest gains, both this year and next, in the commercial and manufacturing sectors. As a broad statement, I can tell you that our own experience seems to support this. In general, we are finding the rate of decline to be less severe in our Canadian markets, than in the U.S.

Another bright spot should be the stimulus spending. We haven't seen much impact from this yet, but Washington's beginning to apply pressure on states to spend the money more quickly on infrastructure. Our GSA certification and trench safety expertise make a strong case to use United Rentals for these jobs. In fact, we just got the green light for trench safety work on five miles of pipeline in Utah that's being built with stimulus funds.

So that's a snapshot of our external environment. We're not prepared to say the worst is behind us. But for the first time, the worst seem to be in sight. And so does the other side. Now I'd like to turn the discussion inward to our operations. A few minutes ago, I mentioned that our strategy is helping to drive sequential improvements in key metrics. The other factor at play is that equipment demand always trends upward late in the second quarter, although this time the trend is very modest.

We went into the quarter with our eyes wide open, knowing that any seasonal uptick would be muted by the recession and there would be no magic bullet. Instead, we stayed focused on our strategy of transforming this business to drive sustainable improvement in key metrics over time. As a result, we were able to mitigate the impact of the environment in the second quarter.

Now I want to spend a few minutes reviewing some of those metrics in the areas of rate management, fleet management, cost control, and our proactive approach to right sizing the business, as well as our focus on national accounts through Operation United.

First, rate management, as I said in the past, rates are a complex issue. And there's no common platform for comparison in our industry. That's why one of the metrics that we look at is dolly utilization. The price a company can get for a rental transaction is affected by the overall economy, by fleet mix, customer mix, the duration of the rental and most of all by strategy.

We manage our business for a balance of rates and utilization, taking all these factors into account. Right now our focus is growing our relationships with key customers, while ensuring that we make profit from those transactions.

When we break the quarter down in terms of rate activity, there are some positive signs. We actually saw an improvement in sequential monthly rates in the quarter, when June rates increased 0.3% from May. And July will show an even larger sequential improvement.

Rates are still very much lower than we'd like, but we're moving them in the right direction through intense rate management and a willingness to walk away from unprofitable deals. The challenge will come later this year and early next year when demand is likely to fall off. By then, we will have several months of data from our pilot program for price optimization.

We are currently using additional software to set rates in 92 pilot locations. This is letting us take a more scientific approach to rate management in the field with a goal of capturing business at an optimum price. Now we can make more informed decisions at market level and unprofitable deals will be more obvious to our branches.

Now turning to fleet, the three fleet metrics I want to focus on this morning are used equipment sales, OEC on rent, and time utilization. We have consistently said that de-fleeting is one of the leaders that we can pull if necessary. And we're making good on that promise. In the second quarter we sold 47% more fleet than in the prior three months, based on original equipment cost.

Another metric that showed sequential improvement in the second quarter was OEC on rent. On average, we had about $150 million more of OEC on rent in the second quarter, than we did in the first, despite significant de-fleeting. And we're going to have another sequential increase in July. Now some of this can be attributed to seasonality but it's also an indication that we're doing an effective job of fleet management.

Time utilization is the third key metric related to fleet. Although time utilization is down year to date, we achieved sequential increases in a second quarter at a pace very similar to last year. Time utilization in April was 59.4, in May 61.2, and in June 63.3.

Now turn to cost control. In the second quarter we booked on our SG&A expense by $27 million on a year over year basis. That followed a reduction of $21 million in the first quarter. We closed 38 branches in the quarter which brings our total to 48 closures through June.

We also opened two cold starts in the quarter. Since January of 2008 we have reduced our network by a net 115 branches from 697 to 582. This reduction is a dramatic shift from our company's historic pattern. It shows that we are committed to taking decisive action as difficult as these decisions may be.

As our markets continue to shrink in the early part of the year we made proactive adjustments to our second quarter plan, and as a result we are able to further consolidate our operations with almost no disruption to customer service.

However, reductions of any kind are never easy. There's always a human impact. In the second quarter we lowered our headcount by another 800 employees, with the majority of them at the branch level. And before I leave the subject of cost control I want to emphasize the actions we're taking are proactive rather than reactive.

There is a strategic rationale for every decision we make. For example, in the process of closing branches, we're also optimizing our footprint with an eye toward an eventual recovery. And while we've increased our target for SG&A savings for the year, it's not the end of the story. We will continue to look at ways to take excess costs out of this business now and in the upturn.

And before I turn the call over to Bill I want to spend a minute on Operation United International Accounts Program. For nearly a year we have been acting our decision to shift our customer mix towards larger construction and industrial accounts.

From July of 2008 through June of 2009 we signed 157 accounts, 111 of them came on board since January so our National Accounts Program is making significant progress. As expected many of these larger accounts are proving to be more resilient than our smaller more local customer base which is why we intensified focus on national accounts and should help with future cycles.

We estimate that the new national accounts signed in the past six months represent a total of potential wallet of about $70 million in annual rental revenues even in this economy. We are confident that once these customers do business with us our ability to meet their needs will earn us a significant share of that buy.

Now under the umbrella of National Accounts we are having success in leveraging our size to attract large industrial customers. Twenty-eight of the national accounts signed this year are industrial companies, and we have more on the horizon. Through mid year, industrial rentals contributed about 19% of rental revenues which is about 10 points shy of where we see as an optimum mix.

We're definitely on the right track with our industrial business. Of our top 15 industrial accounts 37 have been on board for at least a year giving us a basis for comparison. For the second quarter more than half of these recent accounts increased their revenues with us even through as the economy declined.

Now as I've mentioned in the past, industrial rentals have a prominent place in our long term strategy for growth both organically and through acquisition. Last week we acquired Leasco Equipment Services an industrial rental company in Ohio, and while we remain open to additional strategic tuck-ins, our current operations are capable of handling much more than our current 4% share of the $12 billion industrial rental market.

All of our customers, large or small, construction or industrial are dealing with the same economic challenges we are. Customers are looking for a partner, not just a rental supplier. Rather than sit back on our heels we're using Operation United to push forward with our customer service improvements that will cement our relationships now and bear fruit in the recovery.

Every United Rentals branch is now using an Operation United scorecard. It tracks performance against bench marks for metrics such as on time delivery and service response time. Having visited dozens of branches I can tell you that our employees are embracing the scorecard and are starting to use it daily in their operations.

They see customer service leadership as an attainable goal, one that will set us apart from the competition. We plan to share more of these metrics with you on our third quarter call. So as you can see, we're acting on a realistic and achievable blueprint that raises the bar on rental operations, customer service, and national accounts.

All of these things are within our control and largely unrelated to the economy. We've given you an unusual amount of operational detail this morning because we want you to understand the depth of our commitment to continuous improvement. We are hitting our marks on cost control, cash flow and fleet management.

And our revenue mix is responding to our focus on larger accounts, even though our total revenues and EBITDA remain lower than we would like. We remain committed to improving our margins and taking disciplined actions to do so.

The depth of the construction cycle is testing our entire industry, and while we've had to take some unprecedented actions we also refuse to be distracted from our goals. With a strong strategy in place, and plenty of levers at our disposal, we are prepared to manage the remainder of this downturn regardless of its duration.

When the cycle turns you will see us capitalize on the same strengths that we're cultivating this year, weight management, operational efficiency, fleet management, financial agility, and the pursuit of customer service leadership. These are the qualities of a company focused on industry leadership, long term growth as well.

With that I'll ask Bill to review our second quarter results and the recent positive changes to our capital structure and then we'll go to Q&A and take your questions. Over to you, Bill.

William Plummer

I do want to touch on the second quarter financial results, but before I get there I'd like to go back and update everyone on where we are against the outlook that we've been updating throughout the course of the year. I'd also like to spend a little time on our capital structure and liquidity position. Maybe I can add a little bit more detail on the fleet management activities over the quarter and then we will end up with the financial results.

So on the outlook, we gave three targets, SG&A reduction, net rental CapEx, and free cash flow at the beginning of the year and we've been updating them as we've gone along. Mike noted that we've actually raised the target on SG&A up to $80 to $90 million reduction from our previous target of $50 to $60 million reduction, and that was up from the initial target we gave at the beginning of the year of $40 to $50 million reduction.

We raised this target because we put a lot of effort into identifying ways to save on SG&A, and we're starting to see benefits of all that effort. We're seeing it in just about every line of SG&A, salaries, benefits, T&E, professional fees, advertising, anything that is part of that total SG&A we are looking at and we've got initiatives around to try and drive further reductions as we go forward. And as I said we've got more visibility, and we've got more confidence and that led us to raise the target to that $80 to $90 million level.

On net rental CapEx, we're sticking with the target that we laid out originally for net zero for net rental CapEx over the course of the year. We are about zero in the quarter, $84 million of proceeds from used sales against $86 million of purchases for rental equipment.

If you look at the first half, we are actually at a net inflow of about $13 million over the first half, and as we've looked at our activities in the fleet, looked at our customer needs, and looked at our used sales opportunities throughout the course of the first half, we become more and more convinced that we've got the ability to manage our capital spend in a disciplined way, to manage our used sales in a disciplined way, and therefore you should be able to hit that net zero target for the year consistent with all the other targets we've laid out for ourselves, so we're sticking with net zero for rental CapEx.

On free cash flow, we initially had a $300 million target for free cash flow. We've raised that to $325 million. That reflects some greater performance that we're expecting on cost, as you've seen in our target adjustments there, but we've got a little bit better sense of where rates are and where they're headed in the near term at least.

And we've got some other cash flow levers that we haven't' pulled yet that we still have the ability to resort to. So we think that we've got enough visibility and confidence to be able to raise that target to $325 million.

We made a good down payment on it in the first half, close to $200 million of free cash flow generated in the first half, so we're well on our way, and again we've got confidence on the 325 target. So those are the comments I wanted to make on the three previous outlook targets. I do note that, as Mike noted, we have added a target on cost of rent. I'll touch on that a little bit more later in my comments.

As to our capital structure, a couple of major events with regard to the capital structure it happened in the quarter, the big one that you all know about I'm sure is that we issued $500 million of new senior unsecured debt.

We issued a 10-7/8 note maturing in 2016. We issued that note as part of our strategy for managing the maturity profile of our debt portfolio. The notion is that we'll use the proceeds to manage our ABL balance but also other senior debt maturities, in particular the six and a halves, which mature in 2012.

As we go forward, we'll employ those proceeds in open market transactions and if necessary in other ways to address the overall maturity profile that we're managing. In the first, excuse me, in the second quarter, we put about $200 million of those proceeds to work. We bought back just over $200 million of face of the six and a halves using the proceeds of that debt issue. The remainder pays down the balance of the ABL.

Going forward, we'll look at opportunities as they're presented in the marketplace and make decisions about where to deploy those proceeds. In addition to using the proceeds from the new debt issue, we've also used other cash to buy back other debt positions in our capital structure.

And if you want more detail on that, we've provided a table in the Q that we filed last night breaking out the debt tranches that we bought and giving some more detail about the purchases there, so I refer you to that table.

But in total we purchased about $125 million of face of other debt issues other than the six and a halves. And that was part of our focus on paying down debt with free cash flow. In the quarter, we reduced our face amount of debt by about $57 million. And as you look at the first half, we're now down $170 million in face amount of debt over that first half.

And if you include the cash buildup, the net debt position is now down $218 million in the first half, so making good progress on paying down our total debt balance and we'll continue to do so as we go forward.

The other significant item that we had on our capital structure in the quarter was the springing off of our financial covenants under the ABL. Recall that we had a test under the ABL that allowed the financial covenants to spring off if we maintained 20% or more availability in that ABL. The test date was June 9 and we passed that test with flying colors if you will. And so those covenants went away.

And they'll stay gone unless and until availability under the ABL drops to below 10%. Needless to say, we don't foresee that happening in any reasonable economic scenario. And so we feel very comfortable that we won't have to worry about the financial covenants of the ABL for any time soon. It's not an immediate impact for us because obviously we had lots of cushion relative to the covenant levels in the ABL but it gives us a little bit more flexibility to have those covenants gone.

On liquidity, we ended the quarter with $915 million of total liquidity, that being the sum of cash on hand plus availability under our ABL, plus availability under our accounts receivable securitization facility.

Our view is that $915 million of liquidity in this point in the cycle is a very, very strong position to have. We feel very comfortable that that's an appropriate level of liquidity for us today and we'll continue to manage that as we go through the remainder of this year and into the next year.

Let me just offer a few words on fleet management. Mike gave some good insight into some of the activities around fleet, maybe I can add just a little bit more. We transferred a record amount of fleet in the quarter, $1.6 billion in fleet. Ended the quarter at a different, excuse me, ended the month during the quarter at a different home than it began the month, that's how we account for transfers in our overall fleet metrics.

That has been a tremendous lever for us to be able to satisfy customer demand without putting more capital into the business. So we're looking more and more at ways to leverage the total fleet and do so in a way that many of our competitors can't given the breadth of our equipment portfolio, given the geographic footprint that we have and the range of customers that we serve, we see fleet transfers as a real competitive lever for us, so we're going to continue to manage that.

We already touched on used equipment sales and the role it plays in our fleet management. Just to add a little bit more flavor there, we sold $271 million worth of OEC in used equipment this quarter, that's a record. And we did it very consciously as part of managing our overall used equipment sales strategy but also as part of our fleet management strategy.

Within that $271 million of OEC sold, the average month of the equipment sold was 78 months and so that played a very key role in helping us manage the age of the fleet overall throughout the quarter. We ended the quarter with a fleet age of just over 40 months, down just a touch from where it was in the first quarter and very consistent with the target that we have for the full year. We're still targeting just north of 43 months of fleet age at the end of 2009.

Looking at our overall fleet levels, fleet OEC came down by $170 million during the quarter. Unit count came down by about 16,000 during the quarter. And then if you look year over year, OEC was down just about half a billion dollars, 13%. And year-over-year, the unit count was down about 40,000 units or 16%, so positioning the fleet, managing it well within the context of the market that we're dealing.

Let me add a few comments on our financials for the quarter. First on revenues, our rent revenue in the quarter was down 28%, that reflects a 14% year-over-year decline in rate and a 2.4 percentage point decline in time utilization, obviously a challenging environment. We continue to manage it effectively and will continue to do so.

We feel like we're doing a reasonable job in the context of the environment. If you look at our dollar utilization as Mike touched on, it's holding up although it's challenged versus prior years. We ended the quarter – dollar utilization for the quarter of 44.9%, that was up 2 percentage points from the first quarter, reflecting seasonal impacts but down versus the prior year.

In our contractor supplies line of business, revenue was down 44%, that reflects a soft environment but it also reflects our strategy of repositioning contractor supplies to make it complementary of our rental business rather than a standalone business.

The supplies decline in revenue is the bad news. The good news is that we're getting a little bit more in margin out of that business. Gross margins for contractor supplies improved 50 basis points versus the same quarter last year. And if you look year to date, gross margins in supplies was up 360 basis points versus the same period last year.

Used equipment sales again, we already touched on with $84 million of proceeds that was up 24% of last year's proceeds but that reflects the increased level of sales. The down side is that those sales in this quarter right along a loss of about $8 million.

When we look at the cost side of things, we already touched on SG&A, so I won't spend any more time there. But with our cost of rent, we see that as a real opportunity for further cost reductions. Last year, we spent $1.1 billion on the cost of rental – cost of rent when you exclude depreciation.

A little bit on that goes a long way and so we've been focused in a wide variety of areas on ways to drive down cost of rent. In the second quarter, we delivered a [save] versus prior year of $69 million. That came in a wide range of areas including labor, benefits, facilities cost, insurance again on down the line, it's across the spectrum.

We're continuing to look for other opportunities by streamlining, simplifying, automating wherever we can and we'll continue to drive those kinds of ideas to realize even greater savings. In fact, so far through this year, we've got enough confidence and visibility on our ability to save cost of rent that we set out the new target that we've touched on already.

Cost of rent this year we expect to be down between $190 million and $210 million for the year. That's all I wanted to say on cost. Just real briefly on EBITDA, when you put it all together, EBITDA, adjusted EBITDA for the quarter came in at $150 million, that's at a margin of 24.4%.

Obviously down significantly from last year. Last year in the second quarter, EBITDA on our same basis was 32.4%. Not where we want to be in the least. We're driving a number of initiatives to address that. Mike's touched on a lot of them. I've touched on a lot of them. And we're going to continue to do so in service of driving better performance at EBITDA.

Last thing before I wrap up, wanted to offer a few thoughts on the shelf registration that we filed last night. If you noticed, you saw that we filed a $1 billion shelf registration covering a wide variety of securities that might be issued from the shelf, including debt, warrants, convertible issues, and equity. We put that shelf in place as part of our overall capital structure management strategy. I put it in the category of good financial housekeeping.

As you think about managing your capital structure having the ability to execute a transaction, do so quickly off of a shelf is just prudent management and so we put it in place for that purpose. We don't currently have any plans to draw anything under the shelf. We will continue to evaluate that as we go forward and let you know as we make decisions on that front.

So those are my comments. I'd like to turn it back now to the operator for questions and answers. Operator?

Question-and-Answer session


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

Henry Kirn – UBS

Wondering if you could chat a little bit about your ability to age the fleet from here? How far would you be willing to age it and what categories could you age further than others?

Michael Kneeland

That's a great question Henry. We've always said the optimum range would be 35 to 45 months. Clearly right now, we're at 40.1. We could conceivably go beyond 45; it's not beyond the realm. If you look at the current average age today of the industry, it's currently at 44 and a few points above and beyond that.

And as you know, we continue to refurb our equipment and as we refurb we don't re-purpose our asset, we keep it at the original age. But if you were to do that, obviously our age would come down about three months.

William Plummer

If I could add, the equipment age is not physics. It's not like there's a step age at which the equipment – the average portfolio age starts to really negatively impact us. It does have an impact on our R&M expense. That's something that we watch and manage actively.

But we feel very comfortable that we've got flexibility to manage age to significantly longer ages than we set at right now. And indeed we can go beyond the 45 months that we've talked about as sort of an optimal top end of the range, as Mike said. How much further beyond, we'd have to trade that off against what are the pressures driving us to age the equipment further.

Michael Kneeland

And Henry, one other point on that I think as the industry goes forward you'll continue to see the age of the fleets inside our industry continue to age out.

Henry Kirn – UBS

That's helpful. And as you look at the pockets of relative strength could you talk a little more about where within your portfolio you're stating the pockets? And maybe aside from Canada, which regions are stronger than others?

Michael Kneeland

Sure. If you take a look at the Gulf area, Texas is a large state for us. We're seeing continuous – let me just step back for a moment and say that the economy's touching all of our regions. But where we're seeing lesser amount of decline and some pockets of opportunity would be in Texas, eastern Canada as well, still within the Northeast corridor there's still a volume of work that's on the books that still needs to be yet closed out.

Where we're seeing the weakness obviously remains in California, Arizona, Nevada and also in Florida. By the way, if you take California and Florida that's where we have a large population and a large portion of our business as well.


Our next question comes from Scott Schneeberger – Oppenheimer & Co.

Scott Schneeberger – Oppenheimer & Co

Could we start out on the seasonality of the business? We saw the uptake but obviously macro is a strong driver as well. How should we think about third quarter? Should we anticipate the typically seasonal up tick or is it going to be offset by macro this year?

Michael Kneeland

Well right now we're seeing the seasonal up tick. I think it's too early to tell with the macro, it'll play out towards the tail end of the quarter. If you take a look at the ABI index a year ago clearly towards the tail end of the third quarter you start to see it decline. We haven't seen that play out yet so it's yet to be determined. And that's the best scenario that we could just lay out between now and then.

Scott Schneeberger – Oppenheimer & Co

Okay, fair enough. On pricing – I'm back a page on my notes I don't recall what you had said. But I heard something about pilots with the new software. Can you just take us a little deeper into the progress there as well of the timeline as when you hope to finish?

Michael Kneeland

Sure. As you know, at the last quarterly call I talked about that we've engaged a company to work with us to put a software program in to manage rates – to effectively manage rates and we're going to shift away from just setting rates to more dynamic pricing.

As part of that progress in the second quarter we rolled out 92 locations or pilot throughout North America where we have automated the setting of rates based on logic that we have built. It'll take a lot of different things into consideration like asset, time and achievable rates that are in the marketplace.

So we're rolling that pilot forward. As we go into the fourth quarter we would then start shifting towards piloting the dynamic pricing with the opportunity to – our objective is by the first quarter of next year, in January to roll out a more dynamic pricing model.

And then the last phase would play out to more the national accounts and industrial accounts for just doing price fitting. So that we can take and look at these prices, long-term contracts and look at how we can determine the profitability in yield on those.

So that's kind of the timeline. We do have the 92 out there;; it's marching forward, too early to give you the results. As we go into the third quarter – the third quarter call we'll be deep into it so I'll be able to give you more details.

Scott Schneeberger – Oppenheimer & Co

And then with the margin on used equipment sales swinging negative – and you do have a big chunk of your free cash flow guidance already satisfied through half the year. But how should we think about your aggressiveness with selling used fleet now, given the fact that it looks like pricing is pretty tough in that market?

Michael Kneeland

Sure. Let me just say that when we went into this year, we had a basis of what we thought we wanted to sell full year. As we went through the second quarter and I've mentioned on previous calls that there are specific products that we saw weakness in, in particular, 19-foot scissors and some aerial equipment. They're related more towards retail where I think there's an overcapacity.

When we take a look and march that out against the work that we see and the age of the equipment we determined that we wanted to de-fleet specific categories of equipment inside of our aerial fleet. We also do a financial analysis as well on those assets to look at the return in cash flow that we would get.

When we started to see – as we went through first and second quarter we didn't see our pricing in those products improve. In fact, we saw them weaken. So we took the liberty of and consciously moved those forward. So we moved those sales forward in the second quarter.

It was a record sales for us. To give you the order of magnitude, we sold roughly 5,000 aerial pieces in the second quarter, which is a record and a large number by any stretch of the imagination. As a result we had to go through the auctions but it was a conscious decision that we made. We didn't see the pricing improving as time went on, on these older assets.

Scott Schneeberger – Oppenheimer & Co

So should we anticipate big lump sales again? Obviously through the auction channel where you're going to get lesser economics or was that a one-time deal and you think it's going to be a little more steady through the end of the year?

Michael Kneeland

I think it's yet to be determined. I think that as we go through and determine what the primary market will tell us, and what our customer demand will be, we'll make those decision as we go forward. We're not prepared to say right today that we've got something that we're going to put out to auction or to extend our auction the order of magnitude that we did before. But it's one of the levers that we have at our disposal. And we're not afraid to use it.

William Plummer

Yes, Scott, I'd only add the fact that we accelerated into the first half, gives us some more flexibility as we look at whatever the market delivers to us in the second half. So that's good to have in our pocket, but as Mike said, were going to continue to monitor and make decisions based on where the market is, where pricing is, what we see the volume capacity for the market as being and what we think might happen as the end of the year comes closer.


Thank you, our next question comes from Manish Somaiya – Citi.

Manish Somaiya – Citi

Good morning everyone. A couple of questions, one just the state on the used equipment market. I guess one think I'm trying to figure out is, do you get the sense that the used equipment market will remain liquid as it has been for the last two or three quarters, or with all the excess capacity what is your likelihood that the used equipment market freezes up?

Michael Kneeland

Well, I think it's very liquid. I think it really comes down to price, Manish. The auction market is a lever we can pull and, obviously, I just explained we are not afraid to use it. But there is still a retail sector that we do retail fleet, and we are retailing our fleet and prices there have been resilient in comparison but just not to the order of magnitude.

You're right. There is an overcapacity within our industry, and it really determines how much is pushed through at one given moment. It's fair to say that prices have come down because of the overcapacity and the willingness for companies to put more into the auction arena. But the auctions itself, to me, is still, and has been, and I see as the foreseeable future, a conduit that will still remain open.

Manish Somaiya – Citi

Okay, and secondly as a follow-up, how do you guys think about balancing between selling more equipment versus just parking the equipment for the next upturn?

William Plummer

We've been actually discussing that notion quite a lot over the last month or two among ourselves and with our board, and we've done some analysis to try to get at what the right strategy for a piece of equipment. Do you rent it? Do you sell it? We haven't gone through as detailed analysis the notion of, you just sit on it for some period of time, but that's the next iteration.

In looking at rent versus sell, we've modeled scenarios over various time periods, under various assumptions about what you realize from sale and what you'd be able to rent it out for in a rent scenario, and that's guided thinking about how we're selling equipment and how we might sell equipment in the second half. We'll continue to do that analysis.

As I said, we haven't gotten to that level of detail on the notion of, I'm going to sit on it and wait until things get better at some point in the future. That strategy introduces even more variables around when might the market come back and what might rental rates look like at that time? And we just haven't gotten to that point in analysis.

Manish Somaiya – Citi

Okay, and then just lastly, Bill, since I have you, how much did you guys end up paying for Leasco?

William Plummer

We haven't disclosed that. That amount. It's a $14 million revenue company. We're going to stay away from disclosing the price right now.


Our next question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

Hi. Good morning guys. Thanks for all the detail around the aerial equipment that you sold. Just as a follow up question. If you had excluded those 5,000 pieces, would the margins still have been negative?

Michael Kneeland

We didn't do the math that way. We can certainly take it offline and take a look at it, but we didn't break it apart that way. We'll have to come back to you on that.

Emily Shanks – Barclays Capital

Okay, great and then maybe as a follow-up, and if we have to take that offline that's fine as well, but I was just curious what the average age of that aerial fleet that was sold was?

Michael Kneeland

The average age of the fleet that we sold in general was 78 months. So it is safe to say that aerial is one of the oldest assets.

Emily Shanks – Barclays Capital

But that's no different than any point during the cycle, correct?

Michael Kneeland

Well, we have been attempting, actually been very good from a fleet management standpoint, of selling our oldest assets first as opposed to the newer assets, so we didn't break down the average age by categories of sold. We just take it as an average overall.

Emily Shanks – Barclays Capital

And then just generally, I know that obviously pricing is down and you're implementing this new software, I was just curious how you view your competitors on pricing? Do you view them as being rational, or are you seeing aggressive strategies? What's your take on that environment?

Michael Kneeland

I always get that question and it's a difficult one to answer because there are some companies that are doing some good things and some companies that are rational. We always try not to point fingers, but the reality of it is the industry, there's companies that are landlocked, that are desperate. There are companies that are trying to enter new markets, and as a result the only way they do that is lower rates.

I think there is still some irrational pricing going on out there. In particular companies that are striving to try to find a way, or carve a way, to make it through this down cycle. The larger companies have the ability to sell fleet, move fleet and go to other markets.

One of the things that we do do, because we always get the question on rental rates, as I stated in my opening comments, our rates – there are no comparable for rates with inside the industry and it's been an open discussion with the American Rental Association. But one of the things that we do do is we kind of go out and we do some online shopping and try and do some comparisons, based on certain categories of equipment to kind of get a market check to where things are.

And on balance we are either at or on balance with most of the competitors out there. So we use that as a check and balance. Again, I am not happy where we are. And we have – we need definitive actions, ideas, process management discussions to improve rental rates. And this industry needs to know, we've got to get an ample return for the capital that we have, whether you're large or small.


Our next question comes from Philip Paselli – Cantor Fitzgerald.

Philip Paselli – Cantor Fitzgerald

I am trying to figure out the actual cash movement with regard to the refinancing and the debt pay down you did. If we kind of draw a line below the senior notes, because I understand the 6.5 have a very large negative restrictive payments basket. There was about $129 million paid down some notes, converts, 14 and [inaudible]. Where did that cash come from? And second question would be how much cash is sitting at URI, Inc. versus URI,NA?

William Plummer

The where did the cash come from is that we have, because of the negative restricted payments basket, we have to use cash that is available to URI, United Rentals, Inc. That cash capacity, let's call it, sits up at URI and it is available to us to do essentially anything that we want or need to do with and that's the cash that we used to repurchase the 7.75 QIPs and other subordinated pieces.

At the end of the second quarter, that cash capacity was $116 million of that the URI level. So that's the capacity that we have up there after the second quarter after those purchases. And we continue to manage that cash capacity with the notion that it is the way that we have for buying pieces of debt below the senior level in our capital structure. Does that make sense?

Philip Paselli – Cantor Fitzgerald

That makes total sense. So when I am looking at the balance sheet, the 125 number, that's the cash United Rentals, North America or is it only the difference between the 116 and the 125, at North America?

William Plummer

It's the consolidated cash position. It is primarily cash that is held by URNA, the operating entity, and actually most of that cash is resident in Canada, for more detail than you asked for, but it's primarily URNA cash.

The one thing I should add Phil, as you think about URI's cash capacity, don't think about it as cash that's sitting on the balance sheet. URI's cash when URI has cash, what we do is we take that cash and make an inter-company loan down to URNA so that URNA can then reduce its ABL balance.

That's allowed and pulling that cash back up to URI, when URI needs it, is also allowed even with the negative restricted payments basket.

Philip Paselli – Cantor Fitzgerald

And then when you guys were talking about the June and July sequential I guess is month over month increases of rental rates, do you have a sense for the rates in the utilization, what those numbers would be year over year?

Are we still down 14% year over year or is that percentage year over year declining with the monthly increase in rental rates in June and July?

William Plummer

I would still be down on a year over year basis but you know we're measuring it sequentially from month to month, kind of showing the progress of where we started after the first quarter going into April, May, and June, and then into July taking the actions that we've taken.

Yes it'll still be on year over year, looking at a month versus the prior year's same month. It's still going to be down in the 12%, 13% area. I don't have the exact numbers Phil, but it's still going to be done year over year, but up sequentially as we said.

Philip Paselli – Cantor Fitzgerald

And is that showing an improvement that year over year month versus month comparison is that showing an improvement?

William Plummer

It is, a slight improvement, and hopefully as we get later in the year the comps will get easier, right, as you start to see some declines last year on rates through each month, so hopefully it'll get a little better, but it's a little bit better in July than it was in the second quarter months.

Philip Paselli – Cantor Fitzgerald

Great, and in terms of your industrial business versus your I guess regular commercial or non residential construction business, the rates of decline that you saw there are in terms of total revenue, do you see a material out performance of the industrial business? Can you give us some numbers around that?

William Plummer

We're not talking about that level of detail with numbers. I think it's fair to say that we still believe industrial represents a good opportunity for us. That's why we're focused on that customer group. That's why we made the acquisition, and we'll continue to drive to invest in the areas that offer us the best opportunities.

Philip Paselli – Cantor Fitzgerald

Okay, so is it safe to say Bill, that there's less volatility in that business than there is in just normal non [industry]?

William Plummer

Yes, that's a part of why we're attracted to it.

Michael Kneeland

Yes, absolutely it's a longer term play typically to contracts Phil, anywhere between one to three years in duration, and you know there's less volatility in the pricing but that being said our industrial customers are feeling it just like everybody else and they're putting off projects but they will have to come back on line.

Philip Paselli – Cantor Fitzgerald

A last question, if I calculate correctly, your OEC at the end of the quarter was 3.795, is that correct?

William Plummer

I don't have the exact number at the quarter.

Michael Kneeland

Chris, can you answer that question?

Christopher M. Brown

At 3.794.


Our next question comes from Chris Doherty – Oppenheimer & Co

Chris Doherty – Oppenheimer & Co

Following up on two themes, one, just the used equipment market, if you look at the realized price versus the OEC sold, it looks like prices realization went to 31% from 36.4% last quarter. Is that a change in market prices or is it a change in mix, i.e. the fact that the average age of the fleet that you sold is 78 months.

William Plummer

Chris it would be both. It would be both, the mix that you put out there, the type of products that you have, and also the amount that we put through, and also having more at auction versus any other format that we have available to us.

Chris Doherty – Oppenheimer & Co

You think that used equipment prices in general are declining?

William Plummer

I think that used prices are yes, under pressure to decline as I mentioned earlier it would have been niche, you still have a lot of companies that are trying to de-fleet, and are going to go through this.

So I think for some period of time they will be under pressure. Having said that, I think that as we start seeing some of the sting less, you may see some categories begin to improve such as earthmoving equipment first, and then we'll progress forward.

Chris Doherty – Oppenheimer & Co

And Bill, define, I guess, could you talk a little bit about your philosophy in terms of optimizing the balance sheet. I mean one, I just want to clarify, you said that you had $116 million of availability. I wonder if that's sort of an inter-quarter period, because if you look at your balance sheet there was actually the amount due to the parent was $170 million.

What's the difference between the $170 million and the $116 million?

William Plummer

Okay, my apologies so I'll correct my previous number. If you look in our guarantor statements on note eight in the queue that we filed under the parent column you'll see the intercompany receivable and that number is $170, not $116 – shouldn't do this on the fly, so again, my apologies. So, $170 million is the amount of cash capacity that we have available at URI, at the end of the second quarter.

Chris ask me your question again, or did that answer it?

Chris Doherty – Oppenheimer & Co

No, that was sort of – I wanted clarifying goes to sort of your philosophy in terms of managing the balance sheet with possible re-purchases. If you look at your liquidity just under the revolver you have about $760 million of availability, which if you look at the largest your fleet has been recently, it's like $4.4 billion, just under, and now you're at $3.8 billion, $3.9 billion.

That tells you that you probably have enough liquidity to ramp back up when the market comes down.

So would your philosophy be to use whatever excess capacity or whatever excess cash flow you have right now to pay down debt at a discount?

William Plummer

Certainly our philosophy is using pre-cash flow currently to pay down debt. Whether we do it at a discount or not will just depend on the ebb and flow of what's available, where's the liquidity, what are the yields available to us.

Certainly we'd prefer buying components of our capital structure at a discount. In order to do that, as I described with Phil's question, we have to use the discounted pieces of our capital structure are primarily the subordinated pieces, and so in order to buy those we would have to use part of that $170 million of cash capacity at URI.

We want to manage that prudently. We want to make sure that we've got the ability to have some dry powder to buy subordinated pieces of our capital structure over time. So we've got to keep an eye on that cash capacity number as we buy discounted pieces, but certainly buying discounted or buying even pieces of our capital structure that are near par is part of our strategy for deploying free cash flow.

Chris Doherty – Oppenheimer & Co

Basically what you're saying – not to put words in your mouth, but as a former treasurer type person, you would be looking at possibly calling 14 versus maybe buying 7.75 if the yield was sort of more on the 14 just because it makes sense to buy higher cost debt.

William Plummer

That would be the mind set. You know the question then would be, does doing either make sense relative to other opportunities that we have. I know I'm not giving you a hard and fast answer but that's really how we think about it is, what is the range of opportunities that we have, what do we get when we buy a given piece, and what do we give to do it.

So we may decide you know what, I'd love to buy either 7, or 7.75, or 14s, but I still want to knock down that 2012 maturity of 6.50. I may want to buy some of those, or you know what, I want to build a little bit more liquidity because I think there's a roaring recovery coming so I want to pay down some ABL.

We've got to factor in all of those business considerations as well as just sort of the pure market/treasury considerations that may be natural for myself or [Irene], our treasurer.


Thank you. This does conclude the question and answer session for today's program. I'd like to turn the program back to Michael Kneeland.

Michael Kneeland

Thanks operator, and I want to thank all of you for joining us this morning and participating in the call. As always we are available to speak with you from Greenwich and to continue the dialog. I also encourage all of you to look at our updated investor relations presentation which can be downloaded from our site. So this concludes our remarks for today and operator you can now end the call. Thank you and have a great day.


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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!