Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

RSC Holdings Inc. (NYSE:RRR)

Q2 2009 Earnings Call Transcript

July 30, 2009 5:15 pm ET

Executives

Gerry Gould – VP, IR

Erik Olsson – CEO and President

David Mathieson – SVP and CFO

Analysts

Adrienne Colby – Deutsche Bank

Jason Riehle [ph] – Barclays Capital

Vance Edelson – Morgan Stanley

Henry Kirn – UBS

David Manthey – Robert W. Baird

Manish Somaiya – Citi

Scott Schneeberger – Oppenheimer

Chris Doherty – Oppenheimer

Yilma Abebe – JP Morgan

Joel Tiss – Buckingham

Philip Volpicelli – Cantor Fitzgerald

Operator

Good afternoon. My name is Sara and I will be your conference operator today. At this time, I would like to welcome everyone to the RSC Equipment Rental First [ph] quarter results conference call. (Operator instructions)

Thank you. Mr. Gould, you may begin your conference.

Gerry Gould

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

We published our second quarter 2009 results and updated 2009 guidance in a press release we issued approximately 45 minutes ago. There is also a press release regarding our revolving credit facility and a slide presentation that accompanies this earnings call. These press releases, as well as this webcast and its accompanying slide presentation, and any non-GAAP reconciliation tables that are wanted can all be accessed on our 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, please call me after the call is over.

Please turn to slide 2. 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 forward-looking statements. As such, they are based on certain assumptions of future events and are subject to a number of risks and uncertainties that may not prove to be accurate. Actual future results may vary materially.

In addition, the factors forward looking [ph] 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 our Annual Report on Form 10-K for the year ended December 31, 2008, and our other SEC filings.

I will turn the call over to Erik Olsson.

Erik Olsson

Thank you, Gerry. Good afternoon and welcome, everyone to RSC's second 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 including comments about our recent financing transactions. I will also talk about the outlook for the third quarter and we will end with a Q&A.

Please turn to slide number 3. Over the last several quarters, we have been very clear in communicating what our priorities are, namely customer service, cash flow generation, cost management, and growing our already strong industrial business. I'm very pleased to note that with focus, discipline, and strong execution from every level of RSC, we have once again delivered on these priorities in spite of a tough environment.

First, our $95 million of free cash flow in the second quarter brought us to $207 million for the year-to-date. This was an excellent first half of the year with $158 million improvement over the first half of ’08 and we are right on tract to realize our full-year ’09 guidance of $340 million to $370 million of free cash flow and we are reaffirming that guidance today.

Second, we reduced total debt by another $100 million in the second quarter, bringing our total reduction to $212 million in the first half of ’09 using our entire free cash flow to debt paydown. We also took significant steps to address our capital structure, which we'll address in the next slide and later in the presentation.

Third, we continued executing on our cost reduction efforts with great results. $42 million of lower operating costs in the second quarter as compared with the second quarter of ’08 and $67 million lower in the first half of ’09 versus ’08. Again, we are well on tract to realize our expected cost reductions of over $150 million this year.

Fourth, our industrial, non-construction revenues are 55% of rental revenues as we continue to roll out our unique product offerings, win important contract, and sign up strategic accounts. We are building a solid foundation for growth with these customers when the economy and their businesses eventually turn, which we believe will be sooner and faster than the non-residential construction market.

Lastly, our customer service, which is the true differentiator in the industry. As you all know, cost reduction efforts can be disruptive to the customer if executed badly. I am very pleased to say that thanks to the quality and dedication of our employees and management team, we have managed to make these cost reduction seamless to our customers.

This is evidenced by among other things our safety records, on-time delivery, currency on preventive maintenance, and net promoter customer loyalty scores, which all were sustained at record or very high levels. In a challenging environment, once again we did what we said we were going to do.

We have also very successfully completed two financing transactions in July after the second quarter ended, highlighted on slide number 4, enhancing liquidity and extending maturities, which will provide significant financial and operational flexibility going forward.

First, we issued $400 million face value first lien second priority senior secured notes, which are due in July 2017. We used the net proceeds to repay the $243 million term loan component of our ABL facility and the remainder toward repayment of the revolving credit line component of that ABL.

Second, we and our bank lenders agreed to amendments to our ABL facility that extended the maturity of 75% of the remaining outstanding balance from 2011 to August 2013 while reducing the facility size to $1.1 billion. These are important steps in executing a proactive long-term capital structure strategy.

Together, these transactions term out the major portion of our ABL revolver to 2013 and another $400 million to 2017. Importantly, this increases our borrowing availability under our ABL facility from $373 million to $708 million on a pro forma basis as of June 30th, ’09 and dramatically reduces any risk of liquidity or covenant issues.

Turning now to slide number 5, the economic environment continued to decline throughout the first half of ’09. All our markets and geographies were impacted. Non-construction or industrial customers had lower levels of equipment needs as their activity was down in line with the overall economy and non-residential construction deteriorated significantly. As a result, there was a sharp industry-wide year-over-year drop in rental demand and increasing rate pressures.

On the positive side, at the end of the first quarter, we started to see signs of our own business stabilizing on a sequential basis, possibly signaling a bottom. I am pleased to note this trend continued throughout the second quarter and fleet on rents or volume and utilization were trending marginally up towards the end of the quarter on a sequential basis.

However, at the same time, the rental rate decline worsened. Industry-wide rental rates continued down without easing and the lack of rate discipline is evident across the industry. We are very disappointed with our 7.7% year-over-year rate decline in the second quarter. However, there is only so much we can do given continued competitor aggressiveness or lack of discipline on rental rates.

We are doing what we can to hang on to and defend the rates that we have achieved knowing that there will be a very long march back for those participating in the rates to the bottom. We use the industry-leading value we provide customers as the line of defense and compared to others, we have done a much better job and we do get recognized by many customers for providing them the best service at lowest total cost. Continuing to increase our industry-leading service to win and retain customers is a short contrast to our competitors' actions today.

Turning now to some key operating metrics. First, on slide number 6 is the trend on time utilization ending with a drop to 58% in the first and second quarters. The declines in rental activity and demand primarily in late 2008 and early 2009 left us with a larger than optimal fleet size in relation to fleet on rent. However, we have taken the strategic decision to sacrifice some volumes of fleet on rent in order to defend rates rather than participating in a race to the bottom by trying to push fleet out on rent at too low rates.

We have also taken the strategic decision to preserve fleet or capital, as well as margins by not de-fleeting aggressively. We can do this thanks to our well-maintained and relatively young fleet. These strategic decisions will leave us under-utilized for sometime, but we strongly believe that this is the right way to go at this time and as a result, have a higher price level and more fleet available when the market turns.

Our fleet averaged 36 months age at the end of second quarter, up two months sequentially. We still have runway before we approach the 40s, giving us flexibility going forward. In May, Rouse Asset Services estimated the industry average fleet age at 44 months. So our considerable advantage versus the industry as a whole continues.

Due to our best-in-class preventive maintenance programs and well-kept fleet, we could comfortably operate with an average fleet age in the mid to the high-40s for several quarters if need be. In times like these, having a young, well-maintained, high-quality fleet and the ability and runway to age it are tremendous competitive advantages.

In this environment, we don’t need to buy much fleet and on slide number 7 you can see that we spent only $10 million gross on very specific needs in the second quarter. We sold $107 million of fleet at original equipment cost, more than doubling the second quarter 2008 level. As a result, net CapEx for fleet was a source of cash of $34 million in the quarter and we expect it will remain a source for the next several quarters.

Turning to slide number 8, the used equipment market is vitally important in times like these. This is a liquid and large market, estimated to exceed $100 billion annually in size. The industry normally sells closer to 70% of used equipment through retail channels, but Rouse Asset Services reported in May that retail channel size in the industry moved considerably lower to 58% in the first quarter of '09 and we think this shift from retail to auction maybe a trend that will continue in the industry.

Buyers of our used equipment are largely the same categories of customers that rent from us, general contractors, electricians, and so on. Many of our used equipment buyers are renters who complement their rental needs with purchases of highly utilized used equipment.

In the first half, excluding auction sales, we sold used equipment to over 7,200 individual retail buyers in businesses across more than 500 SIC codes. That is to say a very large and diversified set of customers.

Turn now to slide number 9 and our footprint. We remain very disciplined and strategic when it comes to our footprint. We follow a structure and a plan to drive location changes that includes raising the bar on low-performing stores, evaluating geographies and markets on potential medium-term returns and seeking to industrialize certain markets with a long-term construction outlook by closing constructed oriented locations and opening industrial oriented locations.

As you can see on the graph, we started in – early in 2008 closing locations and we noted at the end of the first quarter that our footprint was largely arrived for the current level of business. Consequently, we closed only one location in the second quarter. At the same time, we remain on the offense in pursuit of growth opportunities. We opened seven new locations in the second quarter, 14 so far this year, and 41 locations since the beginning of 2008, with the majority of them in the industrial locations.

As a result, we will emerge stronger and better positioned when the economy turns. Our execution on location openings continue to be very strong as well with 14 locations we have opened so far this year already being accretive to company EBITDA.

Similarly, on slide number 10, you can see that we continued to reduce headcounts and scale back costs with a net of 79 positions eliminated in the second quarter. We started reducing headcount already in early 2008 and have eliminated over 1,000 positions or 19% in the past 18 months, demonstrating the scalability of our business model. Note that only 20% of the reductions come from closed locations, while the majority comes from adjusting headcount to business conditions across the entire company.

We take these actions very seriously and apply great discipline and thoughtfulness to these difficult, but necessary decisions and have, as already noted, made these changes without any impact to our customers or service levels.

Before I turn over to David, I want to stress the fact that we are delivering on our priorities and doing what we say we are going to do. We are managing our business, our fleet, our locations, and our headcount in a very diligent and disciplined manner, following a strategy and operating from a structure and a plan that is consistent, and importantly, keeping a close eye on our industry-leading customer service levels. We do not control the environment around us, but we do control how we respond to it and our second quarter results are another 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 results and recent financing transactions.

David Mathieson

Thank you, Erik, and good afternoon, everyone. Turning to slide 12, the rental volumes declined 25.5% and year-over-year rental rates were down 7.7% in the second quarter. 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 trace competition and thereby protect profit margins as much as possible.

This becomes much more difficult when others in our industry show such a lack of discipline and chase utilization at almost any trade. The good news is that we have many examples where customers come back to us when they discover what they are paying for does not work.

On slide 13, the cost of rental dropped by $37 million or 21% in the second quarter. We reduced costs while being careful to maintain metrics that are important to our customers. Our fleet is down 11% from its third quarter 2008 peak as a result of lower CapEx and increased used equipment sales. So depreciation came down $7 million in the second quarter versus the second quarter last year.

Continuing to slide 14, second quarter SG&A expenses were down $5 million versus prior year and down 20% from peak quarter three 2008 level. Excluding bad debt, SG&A is down $10 million from the first half of 2009. You can also see that as with rental equipment, we have reduced our non-rental processes and increased the level of their sales, so our non-rental depreciation is declining.

On slide 15, operating costs, as we define them here, came down by $42 million from last year's second quarter level and $67 million exclusive of costs incurred for closures and severance from last year's first half level. That rate of cost reduction means we are on track to exceed our commitment for fiscal 2009 operating cost savings of $150 million.

On slide 16, used equipment sales were up 68% over the prior year level as we continued to de-fleet given lower market demand. Used equipment margins of 7% were down sequentially from 8% in the first quarter of 2009 and 23% in the fourth quarter of 2008.

Again, for the second consecutive quarter, we saw a greater reduction in auction prices than our retail and a greater mix towards the use of auctions contributing to the lower margins. You can the results, 71% for used equipment through the retail channel in 2008, but only 59% in the second quarter of 2009 as we relied more on the auction market. The used equipment market remains liquid and we expect to continue to realize single-digit margins on used equipment sales in the third quarter.

On slide 17, merchandise revenues were down 28%, attributable to the marketplace decline and also (inaudible). Our adjusted EBITDA on slide 18 was $108 million, down from $207 million in the second quarter of 2008, a decline that was largely due to lower rental volumes and rates. On the positive side, on the strength of cost reductions we were able to report a very respectable 33.1% EBITDA margin in a very tough quarter.

On this slide, we show you a bridge from last year's EBITDA to this year's. The main contributors to the EBITDA decline were the lower rental volumes and rates and included in other, the lower margins on the sale of used equipment. The lower cost of rental and SG&A partially offset these declines.

Operating income on slide 19 followed the reduction in EBITDA. Operating income was $24 million or 7% of total revenues in the second quarter of 2009 versus $114 million or 26% of total revenues in the second quarter of 2008. One positive change in operating income was an $8 million decrease in depreciation and amortization.

On slide 20, our second quarter net loss was $11 million versus a net profit of $40 million in 2008. Diluted earnings per share at $0.11 loss compares with $0.39 profit last year. Interest expense was $39 million as we rolled up 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 to the state taxing and permanent items.

On slide 21, our free cash flow for the second quarter of $95 million represents an improvement of $4 million over the second quarter last year. For the first half, our free cash flow of $207 million is an improvement of $158 million over last year and is really strong. Our business has (inaudible) cash flows. As the business grows we need less CapEx and we generate strong cash flows.

You can see that the sale of our used and non-rental fleet of $101 million in the first half exceeded our gross CapEx of rental and non-rental by $81 million, demonstrating the cash efficiency that the relatively young fleet provides. Free cash flow of $207 million in the first half of 2009 has enabled us to reduced total debt by $212 million and support achievement of our fiscal 2009 free cash flow targets.

On slide 22, shows our balance sheet for the last three years and the current second quarter. There are several items I'd like to note. Our accounts receivable declined by $76 million, reflecting lower revenues and good collection efforts and ending the quarter with a DSO of 45 days. These results are also a testament to the high credit quality of our customer base.

We have brought down our net rental equipment by 20% of $377 million since the beginning of 2008 as we have been aging our fleet and de-fleeting. We have brought down our non-rental fleet as the PP&E decreased by $48 million since the beginning of 2008. Accounts payable are down to only $49 million as we are managing asset purchases and expenditures through a down economy and I believe it's really notable that we have reduced our debt by $649 million in the past two-and-a-half years since the end of 2006.

Going to slide 23, in this and the next couple of slides, we will describe what we have achieved in the last month in accessing the capital markets and then pushing maturities in our debt structure and at the same time, significantly improving our availability for credit.

We start with ABL facility including term loan of $1,693 million. Then in our first amendment, we issued $400 million of senior secured notes payable in 2017, it's our first lien second priority. To facilitate this, we reduced our ABL dollar for dollar to get to $1,293 million.

From there, we have now successfully renegotiated terms of the existing lenders and reduced the commitment to $1.1 billion where precisely 74.5% of the existing base will existing extend to August 2015, giving us very reasonable refinancing challenges in the years to come. We expect our interest expense to be around $53 million in the third quarter, which includes $2 million of a write-down of deferred fees [ph] due to this transaction.

On slide 24, you can see the resulting pro forma impact on the capital structure from the debt transaction. We issued $400 million notes, refinancing the ABL, 74.5% of the reduced ABL extending maturities to August 2015 and the 25.55 non-extending maturing in November of 2011. You can also see the maturity of a new senior secured notes maturing in 2017.

Another highlight of these transactions is that we have significantly improved our availability and have $708 million available, which is $568 million above the new lower minimum requirement of $140 million.

As you can see on slide 25 also, clearly we have substantially increased borrowing availability while extending maturities on significant elements of debt to 2013 and 2017. We are very pleased that we completed the debt transaction in the last month.

Now, I'd like to turn the call back to Erik.

Erik Olsson

Thank you, David. I will update you on our outlook and then we will proceed to Q&A. Our 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 market has been down sharply on a year-over-year basis in the first half of 2009. While these declines seems to have moderated on a sequential basis and we have seen sequential stability in our fleet on rent and utilization trending up during the second quarter and in July. Year-over-year comparisons however will remain tough.

We are still burdened by the impact of pricing from significant industry-wide rental rate declines. We expect these trends to continue into the third quarter and as a result, year-over-year comparisons will continue to be negative. However, in this unique environment and recession that we are in, the sequential developments, whether price or volume, are much more relevant than year-over-year comparisons and there are early signs of at least sequential stabilization of rates when we look at the month of July.

Please turn to slid number 27. For the third quarter, we expect rental revenues to be in the range of $255 million to $270 million. Demand for used equipment is expected to remain steady due to the young age and high quality of our fleet although margins will remain low as supply is greater than demand and higher than normal reliance on auctions will continue.

We expect $310 million to $325 million of total revenues, resulting in adjusted EBITDA range of $100 million to $115 million. And we expect free cash flow to be in the $90 million to $100 million range for the quarter. Recent cost reduction efforts are working as planned and we expect full-year cost reductions in excess of $150 million. We are reaffirming our free cash flow range for the year at between $340 million to $370 million and we expect to use it to further reduce debt.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Adrienne Colby.

Adrienne Colby – Deutsche Bank

Thanks for taking my question. I was wondering if you could give us an update on your national account initiative. How quickly it’s growing? And I'm also wondering if you are seeing increasing competition and maybe some pressure price given that some of your peers are also actively pursuing growing their national accounts.

Erik Olsson

We have – we are making a big push on national accounts and we have been quite successful, specifically on industrial national accounts. We don’t like to release any specific numbers. We think that's competitive sensitive information, but we are doing I'd say very, very well on that side, especially signing up customers for the use of our proprietary software product to go with that.

We hear a lot about other competitors focusing on specifically the industrial market, but we don’t really see many new entrants there or see the presence of lot more players. It's usually – it's the same old competitors that we have always seen.

Adrienne Colby – Deutsche Bank

Okay, great. And if I could quickly ask a housekeeping question, could you tell me what the stock comp expense was for the quarter? I think it was close to $1 million both year-ago quarter and also in the first quarter.

David Mathieson

It's $1.2 million.

Adrienne Colby – Deutsche Bank

Great. Thank you very much.

Operator

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

Jason Riehle – Barclays Capital

Hi, good afternoon guys. This is Jason Riehle [ph] in for Emily.

Erik Olsson

Hi, how are you?

Jason Riehle – Barclays Capital

Good. Just a question around your de-fleeting plan. So given the plan not to de-fleet aggressively going forward, what do you expect with used equipment sales going into the fourth quarter and then in 2010? Do we see those drop off significantly from the recent quarters, maybe third quarter as well?

Erik Olsson

Yes. I think we made a push these last couple of quarters to move out fleet. We would expect to see a little bit less in the coming quarters, but still on a relatively high level compared to 2008, but somewhat less than the last couple of quarters.

Jason Riehle – Barclays Capital

All right, great. That's helpful. And then just lastly, with the shift towards more auction sales, where do you think used equipment margins can go? Can they stay positive or could they possibly go negative as we finish de-fleeting and as the industry still tries to right size for the current environment?

Erik Olsson

Anything is possible of course, but we are certainly trying to manage this very closely and make some matches best as we can and obviously try to maximize our retail channels where do we get much better pricing. So we don’t anticipate them going negative at this point in time, but anything is possible obviously.

Jason Riehle – Barclays Capital

Understood. Thank you very much for the details. I appreciate it.

Erik Olsson

Thank you.

Operator

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, thanks a lot. Just want to make sure I'm clear on the recent utilization trends with the utilization trending higher toward the end of the quarter. Was that strictly because the amount of fleet went down or was there any real uptick in demand, in other words, the amount of fleet on upside?

Erik Olsson

There is a marginal uptick in demand, but – and it's obviously a combination of selling off fleets.

Vance Edelson – Morgan Stanley

Okay.

Erik Olsson

It’s not a dramatic change in any way, but we have to look for every positive sign that we can find.

Vance Edelson – Morgan Stanley

I'm with you. And then, could you tell us anything on a more granular basis about the growth of the non-construction, industrial services business? You mentioned that you had important contract wins, but that business is still 55% of the total and since total revenues shrink, we would have to assume that this business has declined a bit too during the quarter. Am I thinking about that right?

Erik Olsson

Yes, yes. Overall industrial activity is down, of course in the general economy and as a result, most of these customers rent less equipment at this point in time, but the important thing is that we are signing up accounts, we are winning contracts, we are taking away accounts from competition, we are implementing more and more sites with our proprietary software. So, there is no question that we are building a very solid, large foundation for future growth. Once the economy turns and these companies swing back into full production of their businesses, I think we are going to see a – lots of rentals coming our way.

Vance Edelson – Morgan Stanley

Okay, great. And just one more for you. It seems to be a sign of optimism, maybe I'm reading too much into it, that you are opening more locations than you are closing and the decision not to de-fleet as aggressively although still de-fleeting, but at the same time you are talking about possibly having to age the fleet to the mid-40s, which sounds quite pessimistic in comparison. So could you just reconcile the two for me?

Erik Olsson

Sure. The footprint is of course a medium, long-term decision that we look at markets and see if there are markets we want to enter, markets we want to stay and be in, and we evaluate our store performances now on cash flow generation and so forth and we have very few stores that don’t generate positive cash flow today. So what we are doing is we are looking – we are opening mainly industrial locations that position us really well for the market – market turn when that comes.

The fleet size is more the fact that we have 58% utilization at the end of the quarter or for the second quarter. That means that we have a lot of growth that we can get from the existing fleet. That's why we don’t need to buy more fleet at this point in time. It's also very well maintained and relatively young, which means that the replacement need is low and that means that we can sit on this fleet, age it, and use it to – for growth, again when the market turns.

Vance Edelson – Morgan Stanley

Okay, that will make sense. Thanks a lot.

Operator

Your next question comes from the line of Henry Kirn with UBS.

Henry Kirn – UBS

Hi guys.

Erik Olsson

Hi, Henry.

Henry Kirn – UBS

I’m going to glue a couple of similar ones together first. If you could talk a little about – on a like for like basis, how much of a premium do you charge compared to your national competitors and then, maybe any details you can give about rental rate changes for the industrial and the non-construction market? I know you said that industrial wasn’t down much, but is there any way you could quantify it a little better?

Erik Olsson

Right. The premium to competition is hard to nail down as each rental transaction is a new transaction. We certainly as – our strategy is to be the highest price or is to get paid for what we believe is a superior service. When we do our secret shopper calls and other analysis of the marketplace, we do come out higher than our competitors, but it’s a moving target as I said.

The – on the industrial versus the construction side, we do see price pressure on both markets, much less though on the industrial market as opposed to the non-residential construction market.

Henry Kirn – UBS

Is there any way you can quantify that a little better?

Erik Olsson

I don’t know if we have those numbers.

David Mathieson

Well, I think industrial declined in the late half.

Erik Olsson

Yes. I think it's – one is low-single digits and the other one is high-single digits.

David Mathieson

Yes.

Henry Kirn – UBS

Okay, that's helpful. And I guess if you were to take the fleet up to the mid-40s, could you talk a little about the extra maintenance costs on a quarterly or monthly basis that would be required to do that?

Erik Olsson

Yes. First of all, we – in the last downturn, we were in the mid-40s with our fleet. So we know quite well what that means. We don’t expect it to have any major impact on our repair and maintenance costs. There will be some, but the key is to understand that our focus on preventive maintenance means that we will have less major repairs or less catastrophic breakdowns, et cetera as the fleet ages. So there will be some impact on the maintenance and repair costs, but really quite marginal.

Henry Kirn – UBS

Okay, that's helpful. Thanks a lot.

Operator

Your next question comes from the line of David Manthey with Robert W. Baird.

David Manthey – Robert W. Baird

Thanks, good afternoon. I was wondering if you could remind the margin characteristics of industrial versus construction. I know they tend to have longer engagements, but how profitable is industrial relative to construction?

David Mathieson

Industrial tends to be actually lower gross margin than non-residential construction, but we need less SG&A to service in our most industrialized region. We can almost double the fleet on rent from the sales force. So we are dealing with a very sophisticated buyer obviously, in oil and gas, in chemical, and manufacturing and so on, but the cost to service is less, David

David Manthey – Robert W. Baird

Does that mean that at the operating income line, it washes out it fairly equal?

David Mathieson

Yes.

Erik Olsson

Yes, fairly equal to marginally higher, I would say, for the industrial side.

David Manthey – Robert W. Baird

Okay. And then, when we look at closed location and fleet sales and headcount reductions and utilization, a lot of these factors seem to have slowed or stabilized from the first quarter to second quarter and I'm wondering is that a reflection of a dropping here or are there seasonal factors that play that we might see a reacceleration or reversal on those trends by the time we get to the end of this year?

Erik Olsson

Well, it certainly is a stabilization that I think the – that we have found the bottom here in the market at this point in time. That doesn’t mean that there won’t be seasonality. Still, we have a fourth quarter and a first quarter coming up where I think we will see the normal seasonal slowdowns. So that's something we will have to get through at that point in time, but from a demand point of view, I think we are seeing a bottom here.

David Manthey – Robert W. Baird

Okay. And then, the last question as it relates to SG&A coming down pretty nicely from first quarter to second quarter, can you talk about the key areas that drove that reduction and then, should we expect a further decline in SG&A dollars in the third quarter relative to the second?

David Mathieson

Yes. It's everywhere in the P&L, it's in corporate, there is less sales force, so every single line in the P&L is being registered and again, just tied as well on the industrial side, one of our real big benefit for us is it's not seasonal, industrial business and that’s really helpful as the run rate is very seasonal in terms of our regions.

Operator

Your next question comes from the line of Manish Somaiya with Citi.

Manish Somaiya – Citi

Good afternoon and congratulations to everyone executing the transactions.

Erik Olsson

Thank you.

Manish Somaiya – Citi

Lot of my questions have been answered, but I do have two questions. One is on cost savings. How much of these cost savings are permanent?

David Mathieson

That's a great question. We've challenged our regions on that very topic and what they have done is they've come back to us and said, I would say a range of 20% to 25% of what we are thinking will stay at and I want you to hold this to that Manish.

Manish Somaiya – Citi

And just a follow-up, Erik, you mentioned several times that data seems to be pointing to a stability in the business, but how much of the actions that you have taken on the operational front take into account a potential double dip in the economy? Clearly, your capital structure actions take into account a worst case scenario for the economy, but I just wanted to get a sense of how you have planned for the operational changes.

Erik Olsson

Well, if there would be a second leg down here in the economy, we would just keep doing what we have been doing and thus do further store cancellations or headcount reductions in line with that. It's nothing that we see coming, but if it does, we can continue to reduce costs in line with the business environment around us.

David Mathieson

But you are also right to point out, Manish, that these transactions have really helped improving – in pushing back maturities and improving availability.

Manish Somaiya – Citi

Okay, great. Thank you so much.

David Mathieson

Thank you.

Operator

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

Scott Schneeberger – Oppenheimer

Thanks. Good afternoon. Guys, the last few questions have focused on the stability and we just how a retrenchment in architectural billings. So the chance of a double dip down is certainly out there. Your guidance – revenue guidance – rental revenue guidance for third quarter versus second if flat to up. You said there is – you weren’t seeing any seasonality indications in second quarter. Could you address the seasonality versus macro question, especially in the near term?

Erik Olsson

I think – I mean, we haven’t – obviously we haven’t seen the seasonal part that we usually see in the second quarter or – and we don’t except to see much of them. I think we – like I said, we have seen there is a bottom here at the low level, but I'm talking about what we see for RSC. That obviously has to do with our mix of industrial revenues versus non-residential construction revenues.

I think the ABI, as you referred to, is – the most recent ratings are quite low and I think non-residential construction will continue to be depressed for quite sometime to come and specifically, the commercial construction, which will in all likelihood will be down for most of 2010 as well. But importantly, the non-residential construction is now the smaller piece of our revenue generation. So we are offsetting that as much as we can with the industrial growth.

Scott Schneeberger – Oppenheimer

Thanks, it’s helpful. And just following up on that, the seven new location adds, I presume since most of your new adds of recent have been in industrial locations, I guess the first part of question is, is that in fact true here and since the mix was 55% industrial last quarter and remains there, maybe that's not the truth, but what is your target mix going out a few quarters from here?

Erik Olsson

Yes, the seven locations are mainly industrial locations. The target mix is to move the industrial up as much as we can. We like to grow both legs of our business of course, but we like to be viewed as mainly as an industrial services rental company.

Operator

Your next question comes from the line of Chris Doherty with Oppenheimer.

Chris Doherty – Oppenheimer

Good evening. Couple of questions. One, I guess on Q3 guidance. Could you bridge that from Q2 a little bit? I mean, you talk about rates stabilizing in June and July, but yet the guidance is at the high end where you came in for Q2 on a rental revenue basis. Can you just talk about – maybe bridge that a little bit?

David Mathieson

There is a range of expectations in there, Chris. We certainly don’t want to get into too much detail in rates and so on.

Erik Olsson

But the other answer is of course that rates continued to drop during the second quarter, so we enter Q3 with lower rates than we entered Q2. And that –

Chris Doherty – Oppenheimer

That’s what I was trying to get to. Another question and I guess in trying to understand what I believe your philosophy is in terms of holding margin. What is the transparency in market pricing? Do you – your various customers – does that become public information, I mean do they understand where other – where their competitors are being priced from you?

Erik Olsson

It's different. Some contracts or projects go out for bid and they shop around. Other are contracts or business that we have where a competitor knocks on the door and says that, "I'll do this for 20% lower rates," or a sales person visiting a job site and ask the job supervisor, "how much are you paying RSC for that forklift and I'm willing to rent it for you for 25% less." So it's – the absolute price transparency is relatively low, but low prices spread like wildfire through – thanks to or due to sales people.

Operator

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

Yilma Abebe – JP Morgan

Thank you. Good afternoon. If I can go to a comment about a sequential improvement and stability, can you talk about that in the reports, I guess firstly, can you point to any drivers that would explain, I guess, the sequential stability and improvement? And secondly, is there any part of your business that's outperforming as it relates to this uptick?

David Mathieson

Any parts of our business outperforming? Yes. We do have regions that do better than other regions and mainly to do with our market share. So there are some regions that do better than others. Drivers to sequential improvement would be that gradually the industry would get its utilization up basically. That is what we are waiting to see. If utilization improves, then pricing should improve. And our utilization is beginning to inch up somewhat. So we would expect that in others as well.

Operator

Your next question comes from the line of Joel Tiss with Buckingham.

Joel Tiss – Buckingham

Hi guys, how is it going?

Erik Olsson

Hi, Joe.

David Mathieson

Hi, Joe.

Joel Tiss – Buckingham

Just a couple of – you've done a great job of answering, thank you. Is there any way to get a sense of what the volumes declines would have been on a same-store sales basis?

David Mathieson

I think we quote that Joel, it's down 32.4%.

Joel Tiss – Buckingham

Okay, okay. And then, just probably a little too nuance to whatever, but do you think that push into the industrial market so hard sort of takes you out of the – it dilutes your ability to really get a lot of benefit if we finally do see some stimulus money coming through?

Erik Olsson

No, not at all. We are ready for whatever comes our way there as well. So – we haven’t given up on the non-residential side as a whole, but we believe shifting our business over to more non-construction is good, it's good right now, it's good for the long term, but we are certainly tracking and following the stimulus money as much as we can.

Operator

Your next question comes from the line of Philip Volpicelli with Cantor Fitzgerald.

Philip Volpicelli – Cantor Fitzgerald

Thank you very much. Good afternoon.

David Mathieson

Hi, Phil. I was just wondering, with the amendment you've done now to the credit agreement, did you by chance increase the RP basket to buyback, some of your subordinated debt as a discount?

David Mathieson

No, I don’t believe we did that at all.

Philip Volpicelli – Cantor Fitzgerald

Okay. So, it's about $20 million is what you could potentially buy back?

David Mathieson

I believe that's correct, but I can get back to you separately.

Philip Volpicelli – Cantor Fitzgerald

Okay, that’s great. And then in terms of the industrial versus the construction, you gave us very good color in terms of rates, one being down in the high-single digits, the other being down in the low-single digits. Is the volume differential the same, the whole business is down about 25%, is it 5 percentage point plus or minus for industrial versus construction?

David Mathieson

I think it's probably a 10% actually.

Operator

And your last question comes from the line of Manish Somaiya with Citi.

Manish Somaiya – Citi

Again, one follow-up, Erik. I guess in an environment where I'm sure most of your customers are hurting, how do you manage pricing discipline versus keeping your largest and best customers?

Erik Olsson

Well, obviously our pricing is down 7.7% year-over-year. So we have been forced to take some price cuts to defend the fort if you like or defend some critical or key customer rollouts. We – good news is though that we find that we don’t have to stoop down to the competitors' price levels to maintain those accounts. The customers do recognize that there is a big service or quality differential in dealing with us.

For the rest, we have since years – long, long time have software discipline, training, tools, follow-up reports, et cetera, et cetera for our people in the field to take the right price decision and not lose discipline. So – and that's how we manage this and that’s why we are only down 7% year-over-year whereas the industry as a whole is down somewhere in the mid-teens.

Manish Somaiya – Citi

Just one last point. The 7% is an average; would you have any regions in your portfolio where you would be seeing pricing declines in line with the industry?

Erik Olsson

Not as bad as – I think we may have some areas with double-digit declines, but not as bad. And obviously, since it's an average that means that we have some regions that are better than the 7% also.

Operator

And at this time, there are no further questions. Mr. Olsson, do you have any closing remarks?

Erik Olsson

Well, thank you, operator. As you have heard during this call and can see in our results, we are managing our business tight, 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, strategy, and execution really matters and that is where we believe we had 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. And we believe 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.

Sara, that concludes the call.

Operator

And this does conclude the call. Ladies and gentlemen, you may now disconnect.

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.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: RSC Holdings Inc. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts