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Executives

Michael Kneeland – CEO and President

William Plummer – EVP and CFO

Analysts

Henry Kirn – UBS

Manish Somaiya – Citi

Seth Weber – RBC Capital Markets

Scott Schneeberger – Oppenheimer

David Wells – Thompson Research Group

Philip Volpicelli – Deutsche Bank

Emily Shanks – Barclays Capital

United Rentals, Inc. (URI) Q3 2010 Earnings Conference Call October 20, 2010 11:00 AM ET

Operator

Good morning, and welcome to the United Rentals Third Quarter Earnings Investor Conference Call. Please be advised this call is being recorded. Before we begin, note that the company’s press release, comments by presenters and responses to your questions contain forward-looking statements. The company’s business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release.

For a more complete description of these and other possible risks, please refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2009, as well as to subsequent filings with the SEC. You can access these filings on the company’s website at www.ur.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that today’s call will include references to free cash flow, adjusted EPS, EBITDA and adjusted EBITDA, each of which is a non-GAAP term.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; and William Plummer, Chief Financial Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

Thanks operator and good morning everyone and welcome. On the call as the operator stated is Bill Plummer, our Chief Financial Officer and other members of our senior management team.

I’m going to start this morning by summarizing the quarter for you particularly those metrics that relate to our strategy. I want to focus our discussion on the tie end between our strategy, our actions and our results. And I’ll also talk to you about the operating environment and where we see the recovery going next. And then Bill later in the call will discuss – will cover all these in detail, all the results in detail and then after that, we’ll take all of your questions.

And so we’ll start with the numbers. As you saw from our press release, we had a strong third quarter. We got some help from the environment in terms of demand, but for the most part we generally got a performance from the inside out by paying close attention to our strategy. As I shared with you in the past, that strategy is to transform the company for long-term profitability by defining on rentals according to our core business of rental, achieving customer service leadership in our industry, continuously improving our cost structure in fleet management, and leveraging our size by pivoting our customer base towards large construction in industrial accounts that we service to a single point of contract.

And we’re being very disciplined about how we target these accounts while at the same time, pursuing more profitable rentals from our customer base at large. So as a result, we had positive net income of $23 million, and an EPS of $0.33 per share. When you compare that with the third quarter of last year, when we had a net income and earnings of zero. The change is even more dramatic on the adjusted basis with an EPS of $0.40 compared with $0.01 in last year’s third quarter.

And we’ve repeatedly said that we’re only interested in profitable growth and here is the evidence. We increased our adjusted EBITDA dollars by 17% even though rental – total revenues increased by only 2%. Overall gross margin was up 1.9 percentage points for the quarter versus last year. In short, the numbers clearly show that we are delivering on our strategic priorities and we’re doing it within the context of a sharper recovery.

It’s true, the cycle is turning but it’s a slow turn. And I’m happy to say that our performance has outpaced the construction environment for two straight quarters now. We know the construction spending in the US actually took a step backwards in July and August compared to last year. So I’m happy to report that with ABI numbers that came in last night were actually up the first time since 2008. And we take that as a piece of positive news.

With our rental revenues were up 6%, with that includes a same-store growth of 9.7%. Now these are all good indicators of how well positioned we are to leverage this recovery. We also continued to be diligent about cost. We took an additional $4 million of SG&A expense out of the business compared to last year. That’s a sustainable improvement and it puts us solidly on target with our projects. But the cost of rentals ex depreciation which is a metric influence by demand, volume increased by $12 million. And some of the demand is seasonal, some of its cyclical and some of it we believe is coming from our end markets opting to rent equipment rather than to purchase it.

And when you take these external factors into account combining with the impact of our strategy, it helps explain the record time utilization we reported last night. Given these market opportunities, we’ve increased our strategic spend on fleet in the quarter by a $113 million. We also sold $74 million of used equipment at more than four times than margin we got last year. Again, another sign that things are stabilizing. We have a lot of discipline invested in both cost control and fleet management which is why we feel very comfortable reaffirming our free cash flow estimate for the year even with the projected increase in net rental CapEx.

Bill will go over these numbers and elaborate on our full year outlook after I complete this. Now before I talked about the environment, I want to be very direct with you on the subject of rental rates. I know rates are hot topic right now. I also know that there are some mixed signals in terms of these – of the metrics being reported by our industry. As you saw last night, our own numbers showed record time utilization for the third quarter but our rates were still down 1.4% compared to last year. So what’s going on here? Well, for one thing, rates in general are lagging utilization in the recovery as expected.

Second, monthly rates are lagging daily weekly rates because our strategy is focused on large accounts about 71% of our transactions are monthly right now. That’s up about two points sequentially in year-over-year. And the inherent difference in rates is obvious when you break it down in rental term. For example, in our third quarter our monthly rates improved sequentially 1.7% while daily rates were up 3%. That’s almost twice the pace of monthly.

The third factor is fleet mix. Aerial equipment accounts for roughly half of our fleet and we’ve said before dirt equipment gets rented first on projects followed by aerial. And we expect that aerial rates to be challenging in the short term and to some degree, they mask the environment in earthmoving and general rental rates. Overall, our rates have turned to corner and in the third quarter, rates improved 2% sequentially from the second quarter. And that’s one of the largest sequential improvements we’ve seen. And since we’re focused on achieving a more optimum balance of pricing and time utilization, our target [ph] utilization is also improving up 2.9 percentage point year-over-year in the quarter.

That’s good. But we planned to do a lot better. Now at this point, given current trends, we expect our rates to be flat or slightly positive year-over-year in the fourth quarter. And a continued trend upward as we go into the next year in the first quarter of 2011. Now we would normally be cautious by giving that outlook. But I have a lot of confidence in the discipline that we’re creating around rental rates. For example, our price optimization software called POR (ph) is now in place at all of branches except Trench.

POR is giving us customer centric pricing, which essentially means our sales team now has a better understanding of optimal pricing. They know how far they can negotiate. And more importantly, they know when to walk away. Our price optimization is an example of how we’re continuing to invest in technology again to support our strategy. Another one is our mobile website which we announced last month.

And when I look at all these initiatives I see our strategy at work, but I also see a marketplace that is ready to move away from the downturn. Now I want to share some information that we’re making available for the first time this morning. It supports what we hear from analyst and what our own employees report back for us in the field. And there are three good reasons to expect that rates will continue to trend upwards. In September, we surveyed over 1,600 of our customers with a wide range of rental spend. And to get their outlook on 2011, it excludes the gulf where the survey is being conducted this month.

And the results come from contractors out there in the trenches while they live in the reality every day. 43% of those surveyed expect business to increase in 2011, 38% indicated a status quo or uncertain and only 19% think things will continue to go downhill. The greatest uncertainly appears to be in the west, particularly the Southwest. The greatest optimism comes from the customers in our Northeast Canada and Midwest regions. So we’re staying very close to our customers and listening to their input. Now let me tell you what our own branches are seeing out in the field.

All nine of our regions show year-over-year growth in rental revenues in the third quarter. With the strongest being Northeast Canada, and the weakest being the East and the Southwest. And on a macro level, the picture is equally is encouraging. In the third quarter, our rental revenues were up year-over-year in 33 of our 48 states and all Canadian provinces. A 22 states and provinces now show year-over-year growth for 2010 through September. And our Trench, Power HVAC business had a good third quarter, up 6.8% in revenues and a 7.2% improvement in operating margin.

And we’re seeing demand from several directions. So one thing, the stimulus money is still in play and we have Trench Safety systems on about a 150 stimulus jobs right now. Both Trench and Power HVAC are servicing more infrastructure projects. A public sectors together with growth in industrial are driving results in this business. I also want to mention the joint venture with AMECO that we announced in the August.

This is initially focused on oil and gas customers in the gulf region. At this point all the pieces are in place and both partners are moving forward. And we’ll keep you posted as things progress, but I think we’ve made it clear how excited we are to be able to pilot with this industrial venture with AMECO. Even without the joint venture, our industrial business contributed an additional $5 million of revenue in the third quarter versus last year. Industrial rentals are just one example of how we’re training our sales people to look beyond the traditional boundaries into construction industry and pursue any market that fits our strategy for profitable growth.

As we identify these opportunities we are seeking our large customers where our scale has the most appeal particularly our ability to share fleet across our North American footprint. In the third quarter, national accounts accounted for about 29% of rental revenue, which is an increase both year-over-year and sequentially. And it’s worth noting that the increasing amount of our industrial business is coming from our national accounts. So as we grow our presence in the industrial sector, we’ve been guided by our customer segmentation strategy.

The concept of staying true to our strategy informs every decision we make as we steer our company into the recovery. It’s not going to be a smooth ride but when we look out at the markets, we see a customer choosing to rent more of equipment they need. So to manage some part of the strong momentum that we’re experiencing as we move into the two slowest quarters and it should help soften the effect of seasonality. We’ve begun the process of putting our plans in place for 2011 and to really we can comment on that we’ll share our thoughts.

So now on that note, I will now ask Bill to review the results and then after that we’ll take your questions. So over to you Bill.

William Plummer

Thanks Mike and good morning to everyone. As has become our tradition, I’ll give some more detail on the quarter, revenues, our cost performance, little bit on the fleet, liquidity, update our outlook for 2010 and then touch on as Mike said, touch on 2011.

On the revenue front, it was a good quarter almost any way you slice it, rental revenue in particular was up 6% year-over-year. That’s the first year-over-year increase we’ve had in a quarter since the first quarter of 2008. So it’s been a long time coming. Within that Mike mentioned the time utilization increase that we saw 71.3% time for the quarter, that’s up 7.1 percentage points year-over-year and I think its legitimate to say that we didn’t get it by shrinking the size of the fleet. Overall the size of the fleet averaged slightly smaller this year compared to last year.

The time really came out of stronger demand. OEC on rent was up 11% year-over-year. Rates were working against us, so I think that makes that 6% revenue increase in rental revenue even more impressive, as Mike said rates were down 1.4% year-over-year. Although, they were up two percentage points sequentially for the quarter. And when you look within the quarter, in fact if you look over the last couple of quarters, on a sequential basis rates, have been sequentially positive for six consecutive months starting in April, they’ve been up every month on a sequential basis.

Now Mike highlighted some of the internals going on within rate for example, daily and weekly rates are clearly outperforming our monthly rates overall. And then when you look at equipment type, earthmoving and other general rentals categories are clearly outperforming aerial and forklifts. But overall, the trend is established in the right direction. And we certainly as always will continue to drive for better rate realization just across the board.

The other area of revenue that I wanted to focus a little bit of time on is used equipment sales. We sold $32 million in proceeds of used equipment during the third quarter. While although it’s down versus last year, you’ll all recall that we were selling at record levels of used equipment sales last year. So there should be no surprise that the proceeds came down. On an OEC basis, we sold $74 million of OEC in the quarter and that was down as well versus $100 million or so that we sold last year. The good news is that we achieved a margin on our used sales this quarter of 31.3%. And as has been in the case for the prior two quarters of this year, the margin story is really heavily driven by the distribution channel.

We sold 57% of what we sold in the third quarter through retail. And supported by used equipment pricing, the trends in used equipment pricing continued to be positive backed by the Rouse data that we received, but also by our own individual experience in selling into the market. So the used equipment market continues to be robust and we’ll continue to use it very effectively to manage our fleet.

On the cost side, cost of rentals were actually up year-over-year in the quarter, $237 million, up $12 million compared to last year. And really that cost performance is the tale of two cities. When you look into the fixed cost of our cost of rentals, we continue to lever good to – to deliver good cost performance on the fixed cost component of our cost structure. So when you look at salaries and benefits, you look at facilities cost, other structural fixed cost components, we continued to deliver reductions in those components. It’s just being outstripped by the variable cost components that are flowing with the increased rental volume. So when you look at repair and maintenance, delivery, fuel costs, those kinds of cost components that really are driven by how many transactions you do, they are up. And they’ve offset the saves that we realized on the fixed cost side.

That’s prompted us to reevaluate our outlook for cost performance over the remainder of 2010. And we are now saying that we expect cost of rentals ex depreciation to be a save of 15, or excuse me $5 million to $15 million compared to last year. Longer term, we’re still very comfortable that we’ve improved significantly the cost structure of this business and still feel very good about our work against the fixed cost components of our business.

The story on SG&A is better. SG&A was down $4 million year-over-year. And the benefits are still coming out of the same places that we’ve been talking about. So salaries and benefits, those are really driven by headcount, and the headcount reductions have continued albeit at a somewhat smaller pace than in prior quarters. Professional fees are still a very nice source of save for us as we continued to be disciplined about our spend there.

The bad debt experienced in the quarter was higher. We actually had year-over-year about $6 million negative in bad debt, and that reflects primarily the larger size of accounts receivable as we’ve driven higher revenue. We also had a slight deterioration in the aging of our portfolio but the real driver was the size of the AR balance causing that $6 million negative year-over-year comparison for SG&A.

All in all, we feel very good about SG&A and in fact we are reaffirming our target for a full year SG&A reduction of $40 million to $50 million. Obviously, we’ve got $37 million of that in our pocket already year-to-date. So we feel very comfortable that we’ll be able to achieve the target that we gave of $40 million to $50 million. Looking at the profit lines, adjusted EBITDA came in at $216 million for the quarter. And that’s at a 35.7% adjusted EBITDA margin, 460 basis points better than last year and to Mike’s point obviously we’re taking full advantage of the increased operating leverage that we’ve built into the business from lower cost.

So a great story there. That’s in spite of a decline year-over-year in rental rates, I think is very encouraging. EPS, similar story there. Adjusted EPS of $0.40 for the quarter. And the drivers are the same as the EBITDA drivers that I talked about. It is worth noting that in calculating EPS, we used a tax rate for the quarter of 39.5% and I pointed out simply because in the second quarter, we talked about a 54% tax rate as what we were thinking about going forward. That change in tax rate we can talk about in Q&A if anybody wants to get into it but as we look at the fourth quarter, we think something like the low 40s to mid-40s is the right way to think about the tax rate to apply to the fourth quarter income.

And we’ll continue to update obviously if anything major changes there. Just a couple of quick words on our fleet management in the quarter. We have continued to drive optimal use of our fleet, one of the ways we talk about that is the amount of fleet that we transfer within our system. And the transfers were strong again in the third quarter, $1.6 billion of fleets transferred during the quarter. It’s about 42% of our fleet overall moving during the quarter. And obviously we talked about how we believe that helps us more effectively utilize the investment that we’ve made in fleet.

In managing our used equipment sales for the quarter, we continue to execute our strategy of selling the older equipment first. So our used sales for the quarter came in at an age, at average age of 78 months, consistent with where we’ve been over the last couple of years, and again consistent with the strategy. Our net rental CapEx investment for the quarter was $81 million, that comprised of a $113 million of gross capital spend and the $32 million of used sales proceeds that I mentioned previously.

Year-to-date we spend $287 million of gross CapEx. And that spend has been as we’ve talked about before, it’s been directed towards supporting the growth that we’re seeing with large accounts, supporting the reshaping the mix of our fleet and making sure that we’re making good decisions about the components that we have that need to be addressed and need to provide the maximum rental experience for our customers. Where we’re buying, is in earthmoving equipment, a heavy proportion of the spend there. We’re obviously replacing aerial, when aerial is nearly half of your fleet, you’re certainly going to spend to replace there.

But we’re also disproportionately spending on other general rentals categories like light towers, compressors supporting in the areas like water trucks, pickup trucks and other important general rental categories. Given our spending in the quarter in what we’ve done year-to-date, we feel very comfortable with spending more to support the environment that we are managing in and so as we look at 2010 we now believe that we’ll spend net rental CapEx in the range of $180 million to $200 million that’s up from the $160 million to $180 million that we had guided to last quarter.

Free cash flow for the quarter was solid, $37 million in the quarter and that brings us to a $144 million for the year-to-date. And again that’s very well in line with the guidance that we’ve previously given of full year free cash flow in the $200 million to $225 million range. That obviously in spite of the lowered cost saves on cost of rent and in spite of the higher spend on net rental CapEx. So we feel very good about being able to preserve that kind of free cash flow.

Our liquidity position, ended the quarter strong again. We ended with roughly $860 million of total liquidity and so we feel very comfortable with the position of the capital structure currently and how it supports our business. As it relates to the capital structure, I’ll just touch real briefly on the bond deal that we issued press release around this morning, many of you saw that I’m sure. We are now saying that we expect to issue 10 years of senior subordinated notes and the notion there is to use to proceeds to redeem our 7 ¾ % notes that are maturing in 2013.

This is consistent with our ongoing strategy of making sure that the maturity within our debt is well managed and pushed out far enough so that we don’t have any undue concerns about refinancing needs in the near terms. We will be in the market today. We expect the issue to go well and we expect that we will price and finalize terms over the next couple of days. Just real quickly on our 2010 outlook, I think I had touched on most of the components of our outlook but just to reaffirm our SG&A guidance for the 2010 full year is still expected to be a reduction of $40 million to $50 million, so no change there.

Our cost of equipment rentals, we now expect a reduction of between $5 million and $15 million for the full year, that’s down from the $30 million to $50 million that we had previously guided to. Net rental CapEx, we expect to spend between a $180 million and $200 million, that’s up from the previous range of $160 million to $180 million. And then free cash flow, no change there between $200 million and $225 million.

Real briefly on 2011, as we look down the road we’ve started making some high-level decisions but we are certainly deep into budgeting process as we speak. Still we thought it was appropriate to give you some highlights as we’re thinking about 2011. So on the rate front, Mike said that we expect if trends continue that the fourth quarter of this year will finish out with rates flat to up slightly year-over-year, if we achieve that, then going into 2011 we’ll have nice momentum and in fact if we achieve that fourth quarter performance and then just kept those rates flat throughout 2011, we would experience carryover in 2011 of about two percentage points year-over-year.

Obviously, we’ll drive from more than that but I just wanted to give that data point that there is a couple of points of carryover in 2011 as we think about it today. On the CapEx front for 2011. We’ve said this in one on ones, but wanted to say it here more specifically. Our gross and net rental CapEx spend next year will be more in 2011 than it is this year. And in fact I think we’d say now that it would be significantly more. Somebody is going to ask me what I mean by significant in Q&A and I’ll tell you that we don’t have that number yet but what we’re thinking for 2011 based on the good momentum that we’ve seen with key relationships from 2010, we’re going to need to spend to support those relationships as well as to continue to position the fleet for where we wanted to be over the long haul.

That said, we still expect that we will deliver positive free cash flow in 2011. And again somebody is going to ask me well what does positive free cash flow means its somewhere between zero and infinity. So we can talk about that in more detail as we go forward as well. Those are the comments I wanted to make. Maybe I’ll stop there and open it up for Q&A and we can take it from there. So, operator.

Operator

(Operator Instructions). Our first question comes from the line of Henry Kirn from UBS. Your question please.

Henry Kirn – UBS

Hi good morning guys.

Michael Kneeland

Hi Henry.

William Plummer

Henry.

Henry Kirn – UBS

Could you dive a little deeper into the increase you saw in time utilization this quarter. Is there any way to attribute the improvement between the secular shift to rental, the underlying demand improvements in what you’re doing on the fleet management and mix side? And maybe any other bucket I’m missing?

William Plummer

I’ll take a first stab at Henry. It’s really hard to decompose it into those kind of buckets. I do think that it’s fair to say that the seasonal pattern was stronger this year. And so that certainly helped. We are – we’ve argued earlier in the year that this year’s seasonal pattern seemed to be stronger than where it’s been over the last several years, certainly stronger than last year. And so if you think about 7.1 percentage points of year-over-year time utilization improvement, I’d hate to put a number on how much of that is just seasonal, excuse me that year-over-year will have a seasonal component.

I’d hate to put a number on how much of that is broken out into the other buckets. That said, we’ve got nice growth in our key account relationships year-over-year in the quarter. So clearly a portion of it is just growing those key account relationships. Mike, I’ll let you put a number on how much of it might be to shift to secular, secular shift to rental versus owning. But I’d say that that’s a smaller component of that year-over-year change. It’s just really hard to put numbers on it.

Michael Kneeland

Yes Henry, its Mike. It is very difficult, I mean what we can say is that when you look at a year-over-year basis, last year it’s safe to say that we really didn’t see any kind of seasonal uptick at all, it was very lackluster I think because of where the economy was and the lack of any kind of visibility and the uncertainty in the financial markets. Seasonality has returned. The one thing I can tell you is that we look at and it’s on a year-over-year basis, our new accounts are up. So that means people are looking at ways to rent. They’re up about 15% year-to-date on a year-over-year basis. So but as Bill mentioned it’s very difficult to quantify the numbers specifically.

Henry Kirn – UBS

That’s helpful. And as a follow-up, given your increased focus on sharing a fleet, how high do you think you could get time utilization over the course of the cycle when demand picks up?

William Plummer

So Henry, we’ve talked about over the course of the year getting time up into the high 70s. As we sit here I think 67% over the course of the entire year would be a very high level of time utilization for this company. Could we do better than that? Yes, we probably could. But as we’re seeing right now operating at these levels of time utilization involves some operational challenges based on how we run the business historically. And so we’re going to have to figure out better ways, new ways and different ways of operating in order to be able to sustain these kinds of time utilization levels at reasonable costs. We’re going through that right now, we’re learning those processes but we as an executive team are convinced that we can operate in the high 60s.

I think we put 67% as the target in our sort of normalized EBITDA analysis last quarter and I think that’s a good indication of where we think we can drive it to on a sustainable basis.

Henry Kirn – UBS

And one final one if I could. How should we think about the cadence of the repricing by customer type, across your book of business?

William Plummer

I’m sorry, ask that question again.

Michael Kneeland

We’re checking up.

Henry Kirn – UBS

Sorry, how should we think about the cadence of repricing by customer type across your book of business. Does industrial take longer to get repriced than the contractor fleet, etcetera?

Michael Kneeland

Yes, Henry its Mike. The way in which we setup our contracts are, there is a kind of a range in which we work within. It is the range would be from the global perspective not to exceed pricing. So you have a bandwidth in which you can work within the current markets. In other areas, we have the regional differences because of cost structures and where they’re located.

I think each one is priced accordingly. Typically, these are one year to three year in duration. So we do have flexibility within the contract itself.

Henry Kirn – UBS

That’s helpful. Thanks a lot. Nice quarter.

Michael Kneeland

Thank you. I appreciate it.

Operator

Thank you. Our next question comes from the line of Manish Somaiya from Citi. Your question please.

Michael Kneeland

Hi Manish.

Manish Somaiya – Citi

Hi Mike, congratulations and good morning to everyone. Couple of quick questions, Bill on CapEx. When you said significantly higher CapEx, I’m not asking for the amount, but I’m just asking for is it going to be more concentrated in earthmoving or aerials?

William Plummer

Yes, we haven’t definitively laid out that level of detail in the CapEx spend for 2011, but I do think it’s fair to say that I would be shocked if we don’t end up spending sort of relative to the breakdown of our fleet, the mix of our fleet today. I’d be shocked if we didn’t spend more than the current earthmoving share of our fleet on earthmoving, less than the current share of aerial on aerial, more than the current share on trench and other general rental categories on those categories. And probably not dramatically different on forklifts.

So I know that’s high level and just directional but we want to continue that trend, right? We want to continue to focus on reshaping the fleet away from aerial toward earthmoving and then supporting the growth that we’re seeing in general rental categories especially driven by industrial relationships as well growth in Trench and Power and HVAC. So that’s where our spend is going to end up.

Manish Somaiya – Citi

Okay, thank you. Michael, two questions for you on AMECO JV. Do you have a revenue or EBITDA or industrial penetration type targets that we should benchmark against?

Michael Kneeland

It’s too early, I the both – AMECO and ourselves have gotten together and we’re putting a plan together. As Bill mentioned we’re going through our planning. They are as well. As things start to develop, we will be open to share those with you. It’s too early to tell at this time, Manish.

Manish Somaiya – Citi

Okay. And then just on the bigger picture, the industry obviously with the ABI Index indicates at least hopefully initial step in the recovery process. The question really is on how impactful will the regionals be in the future? Is that a model that can exist, is it sustainable or do you think that they might just need to consolidate?

Michael Kneeland

It’s a great question. It’s one I often get and its somewhat complicated to answer it back, but let me give you a try. I think yes there is always going to be an area for regionals. I do think that regionals have been severely punished and pressured in this downturn. The question is accessibility to the capital markets and whether they can, like anyone else be able to sustain the capital structure and maintain their growth and their profitability to exist. So I do think that they will continue, there will be pockets, but I do think that they will always be pressured.

It’s kind of one of those things where you’re not small enough, and you’re not big enough on the same coin. I will tell you that historically there has been a lot of growth for regionals. And I do believe that there will be further consolidation in our industry. Our industry is still immature and it’s still very fragmented. So it wouldn’t surprise to me to see a continuation of consolidation.

Manish Somaiya – Citi

Okay. And then just lastly for Bill. Bill, you mentioned the gross margin on the used equipment, you said that the mix helped with the higher margins but compared to some of the peers in the industry, your margins have been running quite strong and I guess the one question I have is I just want to make sure that the book basis of used equipment sold, was it ever impaired?

William Plummer

There might – in the current quarter there might have been some, I can’t remember whether we had any impairment impacts only what we sold in the current quarter. Chris is shaking his head, no. Yes, I’m just trying to remember the timing of when we sold the Mexico assets which we may have impaired previously but that was in second quarter of was it third quarter? But regardless even if it was third quarter, it would be a small portion of overall, the overall sales.

So there is nothing unusual going on in the book basis of what we’re selling even in the third quarter or fourth across the entirety of this year. It answers your question.

Manish Somaiya – Citi

Yes, I just wanted to make sure. Thank you again and best of luck.

William Plummer

Thank you.

Operator

Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets.

Seth Weber – RBC Capital Markets

Hey good morning guys. Going back to the CapEx discussion, I mean is that number that you’re kind of thinking about, is that designed to bring the age of the fleet down, I mean you’ve talked about in the past you know kind of a maintenance CapEx level. Should we think about plus or minus that maintenance levels, what you’re thinking?

William Plummer

Seth, it’s not specifically – the thought process is not specifically that we need to bring the age of the fleet down. Our view is that we can operate very comfortably at or above where we think we’ll end the year on fleet age. So that’s not the driving consideration for our thoughts about how much CapEx to spend next year. It’s a factor but it’s not the driving factor. We’re really more focused on what do we need to spend to support the relationships that we’ve deemed strategically to be the most important. And then how do we remix the fleet and then how do we make sure that we’re addressing the replacement of the units across our portfolio that we think could interfere with the customer’s rental experience.

Those are the prime thoughts that will lead us to a CapEx number. It’s just become very so far to our planning process that that number is going to be significantly higher than it is this year. I don’t know that I can say much more than that at this point, I wish I could.

Seth Weber – RBC Capital Markets

Let me ask you in different way, and do you expect the age of the fleet to come down next year?

William Plummer

Haven’t definitely decided. What I can promise you is that we will make sure that wherever the age of the fleet goes next year that it’s not getting in the way of our ability to generate revenue. If we operated next year in the low 50s, I don’t think that would be a problem. Obviously that’s higher in fleet age than where we are today and so that would suggest that we could spend less than sort of the level that we’ve talked about needing to keep the age constant.

Seth Weber – RBC Capital Markets

Okay.

William Plummer

I wish there was more definitive answer that we can give you right now but we’re still thinking a lot of these issues through.

Michael Kneeland

And Seth we’re going through our plan process, this is Michael, going through our plan process. But the way in which we look at the world is based on demand and returns and our customers, those are going to be some of the driving forces that we’ll be looking at very closely as Bill mentioned, I think we’ve proven, the industry will prove that time utilization can go back up and age is not the deciding factor on that, it’s how well you maintain it.

It to us it’s about discipline and demand in where we’re going to put our money to get our returns.

William Plummer

And just don’t lose track of the fact that we did say free cash flow positive next year. So that’s a constrain, and a constrain quite honestly that we’ll flex based on how active the market is next year. If we get better rate performance then sort of we’re thinking about right now. If we get that better volume demand than we’re thinking about right now, than we may flex the amount of spend up. If we don’t get it, we may flex the amount of spend down. That’s why it’s so important for us to get through this planning process to have a better sense from our regions of where we think we’re going to end up on the cash from upside and then we’ll nail a CapEx number coming out of that.

Seth Weber – RBC Capital Markets

Right, and do you think that used equipment sales will be about flat next year?

William Plummer

I think they’ll go up as well. Again don’t have a definitive view of how much they’ll go up but if we’re going to spend more we’re going to make sure that we’re taking out as part of that greater spend, taking out the units that needs to be taken out and we won’t be shy about doing that. So I’d say used sales will go up next year. Will it go up proportionately? Yet to be decided.

Seth Weber – RBC Capital Markets

Okay. And then just a follow-up question on the fourth quarter pricing commentary. Is that – so you’re talking about pricing up year-over-year, can you give us what that would equate to on a sequential basis?

Michael Kneeland

Sequential basis I think it’s like 0.75%.

William Plummer

So I think for the quarter if we got sort of what we’re thinking about for the quarter, it’d be a little less than that. It’ll be sequentially the quarter would be flat to up just a little bit.

Seth Weber – RBC Capital Markets

Flat, so from 3Q to 4Q flat up a little bit?

William Plummer

Exactly.

William Plummer

Which the seasonal pattern of our industry is we get into November and things start coming off rents. So that tends to put a little bit of downward pressure on pricing late in the year and early in the year for the winter months as well. So that’s not a shock that we might be around flat in the fourth quarter maybe up just a touch.

Seth Weber – RBC Capital Markets

Right, so that was the spirit of my question was how much of – how good is your visibility there, I mean is that being driven by longer-term contracts that you’ve singed recently that you can definitely say that you have that in the bag or do you think that the markets just getting better?

William Plummer

We certainly have some longer-term relationships that we’ve signed this year that gives us some more visibility. I would say though its mainly just reasoning from where we’re standing right now in terms of the amount of equipment that’s on rent. We’re at a high level of OEC on rent and on time utilization of our fleet as you can tell. Fourth quarter has started out with good momentum coming in from the third quarter. So we’re starting from a pretty high level of overall demand and we think that that will it’ll fall off seasonally but it will fall off less severely than it has over the last couple of years and the momentum on rates has been positive enough so that the seasonal impact will be as negative as maybe it is usually.

So that’s the reasoning that we apply to say that we could get flat year-over-year and flattish kind of sequentially.

Seth Weber – RBC Capital Markets

Was pricing up in September year-over-year?

William Plummer

We haven’t addressed that explicitly, I guess in the past we’ve given the month year-over-year. So yes, in for penny, in for a pound. September was not up year-over-year for the month, it was down.

Michael Kneeland

Zero point five.

William Plummer

Yes, 0.5%.

Michael Kneeland

Zero point five. Yes, 0.5.

Seth Weber – RBC Capital Markets

Okay, great. Thanks very much guys.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please.

Scott Schneeberger – Oppenheimer

Thanks. Good morning guys. Just following up on that last question. Bill, you’ve breached in the past, could you give us a little color on the months by months pricing sequentially through the third quarter please?

William Plummer

Mike, you want to do it?

Michael Kneeland

Yes, I’ll do it. In the month of July, it was down negative 2.3, August was down to negative 1.4 and as I just mentioned September was down 0.5. Those are year-over-year numbers.

William Plummer

Those are year-over-years by month and I guess I would only add that the down in July reflected what was a very strong comparison month last year. The July comp was through the roof last year. And so I think that was the key driver for that down to change for that month. We’ve reestablished the trend that we expected here in August and especially in September and what we’re seeing so far in November gives us confidence in the statement we’ve made about rates.

William Plummer

And if I want to give you the sequential its 0.8 for July, 0.7 for August and 1.4 for September.

Scott Schneeberger – Oppenheimer

Great, thanks a lot guys. And then on just could you speak to pricing overall out in the industry. What are you seeing from the national players, the regional players, the level of discipline. Where is it now that we’re into the fourth quarter to the extent you can comment on that? Thanks.

Michael Kneeland

Well I think that that everyone is being good stewards of the industry and doing their best to get rates up. That’s a general comment I’m getting across all of my regions and my branches as I go on visits. Is there pockets? Yes, there is always going to be pockets. Is there going to be one where we see competitive pricing. I think the area that we see the most competitive pricing is in aerial. In aerial, the aerial players are scattered across North America and you can take that from small to medium. But I think overall the industry is waking up and responding to need to improve on prices.

And by the way the industry overall is healing as I mentioned before its going out into the second quarter, used prices improving continue. We are seeing time utilization improve and my sense is that will be across the industry as a whole and as a result of that pricing will follow.

Scott Schneeberger – Oppenheimer

Thanks. One more if I could, Bill probably more targeted towards you, with positive momentum on SG&A relative to your guidance and obviously with the strong revenue on cost of service a little bit with the variable in the different direction. For us building out our models in ‘011 and into the out years, where should we anticipate grabbing the majority of the leverage of those two line items and just a little bit more on how you’re thinking about that? Thanks.

William Plummer

So I’m sorry, you’re strictly focused on the selling and G&A components of SG&A. Is that your question?

Scott Schneeberger – Oppenheimer

No, no cost of services, yes cost of rental versus SG&A and yes with a little bit of itemization of sales versus G&A if you could.

William Plummer

Yes, so again I’ll plead the planning process to a some extent but I would – if you’d ask me that question a couple of months ago I might have had a slightly different answer on the cost of rent components that I have today, given the momentum we’re seeing on volume demand and the variable cost drivers there, I’m probably less optimistic about a dramatic reduction in cost of rent next year. I know that we’ve got some initiatives that will help us address some of the fixed cost components I just think that the variable cost components could be a pretty strong headwind if the kind of volume demand that we’re seeing continues into next year.

So that one’s is a harder one to say that we’ll have absolute dollar saves year-over-year next year, or how much those dollar saves might be. SG&A I think I’m more optimistic that while we should have selling cost increase next year that there is some other initiatives on the G&A cost components that we could use to offset those. I’m not ready to put a number on the page just yet. I’m hopeful that we’ll be able to target further SG&A reductions next year. But I’d want to get through my planning process before I can say that with any conviction.

Scott Schneeberger – Oppenheimer

Sure enough and thanks for that color.

William Plummer

Yes.

Operator

Thank you. Our next question comes from the line of David Wells from Thompson Research Group. Your question please.

David Wells – Thompson Research Group

Hi everyone.

Michael Kneeland

Hi, how are you?

David Wells – Thompson Research Group

Doing well. I guess first off, I appreciate these colors regarding the difference between the daily and the monthly rates. Just to get a sense of the elasticity. Are you finding that when you have a monthly rate that comes off, if a customer is renewing, are you being able to push that pricing up or you finding some push back from customers as you to try to move the right needle?

Michael Kneeland

Yes, this is Mike. The way in which we measure that would be sequence one which would be first sequence as they come out. And to your point we’re seeing the monthly rates improve as they come off rent and they go back out on rent. And that’s on a global site of all of our assets collectively. So it’s a fair comment.

William Plummer

So maybe if I can say exactly what you said, in maybe a few different words, sequence one is the first billing cycle of a new rental. So that gives you an indication of the new rate that’s being established with that new rental. When you just look at those transactions the monthly rate is up as Mike said. When you look at the monthly revenue components that are from the mix of new transactions plus outstanding transactions that billed on a monthly cycle, the monthly rate is not as attractive.

David Wells – Thompson Research Group

That’s helpful though. And then just looking at the location count in the quarter, continuing to find locations to close as you look at the store count going into next year, what are your thoughts on that and is there room for additional cost takeout just from a consolidation of locations?

Michael Kneeland

This is Michael. As we’ve said that we’re always looking at our optimizing our footprint and we will continue to look at where we can optimize overall. As we said before we continued to look at this and make sure that and the idea is that not lose any market share or to capture the revenue once we leave, a lot of these are consolidations. And some would take longer to sink them through than others. But we’re going to continue to just process.

Going back to even what one of the other comments on cost overall. This is a dedicated team that’s focused on cost reductions. We’re not going to let off just because we’ve got a good quarters behind us. We’re going to continue to focus on trying to drive efficiencies. So it is still an area that we were focused on. I would also point out that we also had some cold starts as well in our branch count and we’re focusing on growing the areas of profitable growth. So we’re going to do both going forward.

David Wells – Thompson Research Group

That’s helpful as well. And then I guess an additional question regarding that the cost savings that you’ve seen just looking at I guess second quarter to third quarter, you saw almost 350 basis point of adjusted EBITDA margin improvement. Is there anything from like a onetime perspective that would have been a benefit in the quarter or is that just more a function of the cost takeout being leveraged as you get additional rental rate, excuse me additional rental revenues through the door.

William Plummer

There is nothing that would have been a significant onetime benefit, no individual action, I might add that I called out the $6 million year-over-year change in bad debt, so on a year-over-year basis that hurts us sequentially it’s probably not a dramatic change in bad debt. So I’m not thinking of anything on a second quarter to third quarter comparison basis that was unique or significant in that improvement in margin.

David Wells – Thompson Research Group

Great, thank you so much.

William Plummer

Okay.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from the line of Philip Volpicelli from Deutsche Bank. Your question please.

Philip Volpicelli – Deutsche Bank

Good afternoon.

William Plummer

Hi.

Philip Volpicelli – Deutsche Bank

So the first question is the bond offering that you guys have in the market today, would you consider upsizing that to also take out your 7% notes or do you prefer to have two sub tranches in your cash structure?

William Plummer

Phil, its Bill. We’ll continue to evaluate the strategy as we see how the demand develops. The notion going in was as we said 500 to take out the 7 ¾. If its blow out demand, we’ll give full consideration to upsizing and acting on the sevens. That would be sort of a logical thought process if we had more money. So go out and tell your folks to buy and we’ll see if we can face that question.

Philip Volpicelli – Deutsche Bank

It sounds good. And then on the one and seven-eighths, I saw you had $93 million put-back to you. The $22 million that remained outstanding. Are they still putable to you or did that expired?

William Plummer

It was one time put at this time, there is another put in three years that they have available to them.

Philip Volpicelli – Deutsche Bank

Okay, last question and probably more philosophical. Clearly some of the regional players out there are I guess in more difficulty that you guys are at this point in the cycle. What is the thought process in terms of do you prefer greenfield starts or do you prefer to make a larger acquisition?

Michael Kneeland

This is Mike. The reality with this is as I mentioned we have five cold starts that we put out there. So we’re not afraid to do both, but to be clear it has to be strategic, it has to fit with our strategic vision of where we want to take this company that we’ve articulated to everybody. But we’d always be interested in looking and seeing if they do fit strategically, but we’ll take it as it goes.

Philip Volpicelli – Deutsche Bank

Okay so there is nothing – you’re not actively looking out there at acquisitions. Its more – if something comes along you’ll take a look at it?

Michael Kneeland

Yes, we’re always, we’re always scouring to see what opportunities exist out there. We’re not going to be sitting idle. It’s a matter of making sure that if we can find something we’re interested in it. And that’s what my team does and we’ll continue to focus.

Philip Volpicelli – Deutsche Bank

Great, thank you.

Operator

Thank you. Our next question comes from the line of Emily Shanks from Barclays Capital. Your question please.

Michael Kneeland

Hi Emily.

Emily Shanks – Barclays Capital

Hi how are you guys?

Michael Kneeland

Good.

Emily Shanks – Barclays Capital

Just two quick ones for you, the first one is more housekeeping. On the AR securitization if I have it right, it actually matures I think a year from today. When will you start looking at renewing that? Is that within the year or just much closer to the actual maturity?

William Plummer

Yes, Emily we will look at it on an ongoing basis. We haven’t set a definitive time in which we want to renew it. And I guess I’m a little bit relaxed about it just because those facilities have been so readily available even through the turmoil last year, they were readily available. Our lenders were coming in saying hey we want more money basically.

So we’ll look at it on an ongoing basis and I think we’ll pull the trigger as we line up set of banks and a set of conditions that we think look favorable. So stay tuned.

Emily Shanks – Barclays Capital

Okay, great. And then my last and final one is just more of a bigger picture one, clearly before the consumer driven recession you guys had forged leveraged down quite nicely. What is your larger picture view on what the appropriate leverage target is for URI and I know obviously you will have growth in there, but how are you thinking about leverage over the next couple of years?

William Plummer

Yes, so I think what we’ve talked about internally and I’ve probably have said it externally as well is that, there is two ways to approach that, one is to flip the question around and say how do I feel about the level of leverage that I’m at today or that I got to last year in the most severe downturn that we’ve seen a long time. And the answer was we felt comfortable with the level of depth that we carried even in the depths of last year.

And so you can kind of back into what debt-to-EBITDA ration in that environment was and infer that we would be comfortable there. Let’s say that we got up to something in the 4.5 to 5 times that the EBITDA range at the depths of last year on a trailing 12 basis. That probably defines the upper side of that leverage measure that we’d look at. I’d peg a number I’d just 4.5 if we had a choice of actively managing it on high side.

On the low side, we’ve thought about the philosophy of the capitalization of this company quite a lot actually over the last year and a half. And we feel comfortable operating at levels of leverage that imply being a high-yield issuer. At the low end of the range 3.5 times debt-to-EBITDA is something that we think is probably a good place to look for the minimum of leverage. You go much beyond that and you start to lose some of the cost of capital benefits that we see from being a highly levered company. So that’s the range that I talk about generally, 3.5 to 4.5. And I’d say we’ll operate that way unless there is something really extreme one way or the other.

Emily Shanks – Barclays Capital

And just as a follow-up, I really appreciate that color Bill, as you look at, I mean you’re obviously throwing up some pretty nice cash this year and as you indicated you’re expecting free cash flow positive next year, your leverage could naturally work down below that 3.5 times if you think about that priority for free cash. What are you targeting?

William Plummer

Well on the surface, we’ll certainly continue to drive down debt until we get to the low end of that range. We’re not going to be religions about 3.5, I mean if sort of the natural momentum of our business making the decisions, the operating decisions that we want to make takes us to slightly lower number than that, okay fine, we can do that for a while.

So I don’t know that we would go out of our way at the point we reached 3.5 to say oh my goodness, now I’ve got to do something differently. But at the same time we do think that we’ve got operating objectives and some of those we might address more aggressively if we are getting towards the lower end of the range. For example, spending a little bit more on rental CapEx if it makes sense from an investment perspective. So we’ll balance all of those things as we go forward but it’d be a high class problem to have to figure out how to manage or leverage ratio that’s too low.

Emily Shanks – Barclays Capital

Okay, thank you.

William Plummer

Okay.

Operator

Thank you. This does conclude the question and answer session in today’s program. I’d like to turn the program back to Mr. Kneeland for any further remarks.

Michael Kneeland

Thank you operator. And I want to thank everybody for joining us today. Please feel free to join us any time or call us up here in Greenwich. And if you would like to go see one of our facilities, please get a hold of Fred Bratman. And if you go to our website you can download the investor presentation which has updates from last night. And also I’d like to point out that we also have a new page out there on our call center which explains how this service is growing and the importance this as a competitive advantage. So with that, that concludes today’s call. Thank you very much and looking forward our next earnings call. Goodbye.

Operator

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

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