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United Rentals (NYSE:URI)

Q2 2011 Earnings Call

July 20, 2011 11:00 am ET

Executives

Christopher Brown - Vice President and Assistant Controller

Michael Kneeland - Chief Executive Officer, President, Director and Member of Strategy Committee

William Plummer - Chief Financial Officer and Executive Vice President

Analysts

David Wells - Thompson Research Group, LLC.

Jerry Revich - Goldman Sachs Group Inc.

Seth Weber - RBC Capital Markets, LLC

Henry Kirn - UBS Investment Bank

Manish Somaiya - Citi

Peter Chang - Crédit Suisse AG

Emily Shanks - Lehman Brothers

Scott Schneeberger - Oppenheimer & Co. Inc.

Ted Grace - Susquehanna Financial Group, LLLP

Joe Box - KeyBanc Capital Markets Inc.

Operator

Good morning, and welcome to the United Rentals second quarter investor conference call. Please be advised that 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 end December 31, 2010, 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 would now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

Thanks, operator. And good morning, everyone, and welcome in joining us in our second quarter call. With me today is our Chief Financial Officer, Bill Plummer, and other members of our senior management team. Well, last night, we reported numbers that showed significant progress towards our targets as part of a multiyear strategy that is focused on profitable growth and margin expansion. And as you know, we reported earnings per share of $0.38 on 16% increase in rental revenue. Our rates were up more than 6% year-over-year and with a stronger performance each month in the quarter. To give you an example, rates were up 5.4% year-over-year in April, 6.2% in May and 7.2% in June. And time utilization of 69%, which by the way, was up fifth consecutive quarter of record time utilization and we did it on a larger fleet.

And our adjusted EBITDA margin was 35%, up 3 percentage points year-over-year. And these numbers are solid in their own right, especially given our operating environment but they also reflect a strategy that is engineered for long-term improvement of our operations, our market opportunities and the financial attractiveness of our business. Virtually every arm of our strategy is clearly working, however, there's more to come. Now for example, our model is capable of generating more operating leverage to continuous improvement of our cost structure, and one priority is our cost of rent. Some of the increase we saw in the quarter was a consequence of volume but we believe there are untapped efficiencies and we're looking hard at those opportunities.

And at the same time, we want to make sure that any moves that we make are in the best long-term interest of our company. We're not interested in quick fixes. And the actions that we're taking, like investments in technology, are strategically sound for us.

Now look, as a whole, we hit the midyear point solidly in line with our internal expectations. And that was no small feat given that this is not a summer of recovery for construction as some industry analysts originally forecasted. Nonresidential construction for the U.S. year-to-date is still declining from 2010, with May being particularly weak in terms of construction starts. Now other indicators like the Architectural Billing Index are reflecting the choppiness that seems to be the main characteristic of this recovery. And the ABI has bumped around between 47 and 50 since January. It's slightly better than last year, but overall, still disappointing.

And the industrial sector is doing better, both in the U.S. and Canada. And we've put our company in a strong position to capitalize in this opportunity with our recent acquisitions of the Venetor Group in Ontario and the GulfStar acquisition in Texas and Louisiana. And we made these acquisitions because they tie so well to our strategy. Together, they contributed almost $6 million of EBITDA in the quarter.

So also on the bright side, our customers are reporting that they're seeing more bid activity, which is consistent with what we're hearing from other sources. And the backlog of our larger customers seems to be improving.

And the biggest challenge for contractors right now is margin, and that pressure is being felt along the whole supply chain. So how are we getting double-digit growth in this environment, in a nutshell? When we formulated our customer segmentation strategies several years ago, we got it right. For our key customer groups, demand is up more than the market overall. In addition, when we signed these customers, we knew that we had the ability to earn more of their business through superior customer service. We estimate that our share of wallet with National Accounts run about 53% through June, which is significantly higher than last year. In other words, our segmentation strategy is unfolding exactly as envisioned. And all of our operating regions had positive growth in the quarter.

And we had double-digit growth in key strategic areas, let me go over some of them. Rental revenue for National Accounts was up 17% year-over-year; Industrial was up 18%, included the impact of the acquisitions; and our Key Account business was up 16%. Our Trench, Power, HVAC business had a very robust, up 29% growth due to the combination CoStar's, [ph] our acquisition and demand for our specialized expertise.

Canada, which is being compared against a banner year in 2010, was up 45% in the quarter and even if you exclude the impact of Venetor, it was still up significantly. So the provinces are becoming more important part of our business. Now as I've mentioned before, we also believe that we're benefiting from the secular shift towards rental, as well as the growing appeal of our brand as a premier customer service provider. These 2 dynamics can be difficult to measure but one thing is clear from our performance this year, this is not increasing utilization on our fleet by buying share at the expense of rental rates. We can say that with confidence because as many of you know, Rouse, has initiated metric tracking in our industry, and rates are part of the data that we see.

Now all of our employees understand the importance of rates and return on assets. Our approach to fleet management is much more disciplined this year and well-rounded than our prior cycles. And our CapEx plan for the year, which Bill will discuss in a minute, are calculated to drive returns, not just in 2011 or 2012, but over the full life of the asset. And we see opportunities to protect key relationships with certain types of fleet, but we also see more room to push rate in local markets.

Let me give you an example of how hard we've been fighting for rates out there in the trenches. In the second quarter, we continued to shift toward monthly rentals, which as you all know is part of our strategy. Last year, monthly rentals was 69.6% in the quarter and this year, they're 72.8%, up very nicely. And that's part of what we call the period mix. We collect fewer dollars per day on a monthly rental but these transactions are typically more profitable than daily or weekly term. Now in addition to that, National Accounts as a percentage of rental revenue increased 33% in the quarter and these are negotiated agreements tend to be more competitive on rates. But even with that, we brought rates up more than 6% in the quarter. And so we stayed through to our strategy of transforming our customer mix, while at the same time we did the most effective job yet of raising rates in this cycle. In fact, rates were up at every one of our target customer groups and at every equipment category.

Our performance in the quarter also makes an important statement about the cohesiveness of our company, particularly our field operations. And our continuing to invest in this field will pay off both revenue and cost control. Now we've already done that with CORE, which is the software our branches used to manage rates. And we're also continuing to rollout our fast technology, which should bring more efficiency to our logistics end of our business.

Investments in technologies are not bandaids, they are a prudent way to improve our top line and our bottom line by changing the fundamentals of how we do business.

So looking ahead, it's obvious to everyone that there's a lot of macro uncertainty out there. It can be difficult to pin down end-market behavior with any real precision. And that's the reality of our marketplace, but it's not our reality. Our results have defined operating environment because they are being propelled by strategic plan that does not rely on rebound in our end markets. And that gives us a lot of confidence that tells us that we can make progress where we need to. And we expect our performance to remain robust for the balance of this year.

The 35% adjusted EBITDA margin we reported in the second quarter for our company, it's a solid step forward to our bridge to our near-term growth of $1 billion of EBITDA and stronger margins. Equipment rental like a lot of industries may be looking at the new normal but this is a new United Rentals, and we're prepared to take that on.

So on that note, I'll stop here and I'll ask Bill to review our second quarter numbers and then we'll take your questions and we'll go from there. So over to you, Bill.

William Plummer

Thanks, Mike, and good morning to everyone. As always, I'll give you some more detail on the quarter, a little bit more color on the drivers and then spend a little time updating the outlook for the remainder of 2011.

Starting with revenues. Overall, revenues were up solidly, as Mike said. Rental revenues were up 16.4% within that rate and time utilization strong drivers, rates being up 6.1% year-over-year and time utilization also being very strong, 69%, or up 3.3 percentage points over last year.

Dive into rates a little bit more deeply, that 6.1% year-over-year performance was one of the stronger quarters that we've seen in the history of the company. If you look at it sequentially, the second quarter was up 1.8 percentage points compared to the first quarter. Again, very strong, relative to where we've seen second quarter's come in sequentially in the history of the company.

If you break down the months within the first -- excuse me, the second quarter of rental rate performance, Mike gave you the year-over-year as by month, just to flesh that out a little bit more, the sequentials by month were as follows: April was up 6/10 sequentially versus March; May was up 1.1 percentage points versus April; and June was up 2 percentage points versus May. So a nice robust sequential growth in the quarter on rental rates as well.

If you look at rates year-to-date, our year-to-date rate is up 5.2 percentage points over last year and that's very clearly in line with the guidance that we've given for rates over the full year of 2011. So we feel very comfortable of being able to deliver that 5% or more for rate performance in 2011.

Looking at volume and time utilization. OEC on rent, our measure of volume, was up 13.8% year-over-year in the quarter. That happened along with an increase in fleet size. Our average fleet size was up just under 8% over the second quarter last year. Put those 2 together and you get the time utilization performance that we mentioned, 69%, up 3.6 percentage points over the prior year. That is a fifth consecutive quarterly record for the company in time utilization performance,, and it certainly bodes well for the second half starting out on a strong note.

That's enough about rental revenue for now, let me move to used equipment briefly. Used equipment proceeds for the quarter were $41 million, and that's up from $37 million the prior year. More importantly, the gross margins were quite nice in the quarter. We realized 31.7% gross margin on our used sales in the quarter this year, that's up 7.4 percentage points compared to last year. And as has been the case recently, the main driver was the channel mix. We continue to flow a tremendous amount of our used sales activity through our own retail channel. It was about 68% in the second quarter this year, that's up from 61%, prior year. Auction also continues to decline, again, as has been the case recently. We are only 12% auction in the mix this quarter, and that's down from 22% in second quarter of last year. So continued good performance in the used equipment sales in the quarter. As we look forward, we certainly expect to continue to drive good robust used equipment volume over the second half. We will continue to manage also the margin, the challenge there is that we plan, as we've said in our previous filings, to use more sales-to-vendors as one of the channels this year. And that made depressed the margin that we realized somewhat in the second half compared to the first half.

Let me move briefly to our cost performance in the quarter. Starting with cost of rent x depreciation. They were up $29 million on a year-over-year basis versus last year. Within that $29 million of unfavorability, volume accounted for about $10 million of it and I'll point out that the volume included little under $5 million of re-rent expense increase compared to last year. So $10 million attributed to volume of the overall $29 million year-over-year change.

Compensation contributed about $5 million to that change. That included increases in profit sharing among our field operations, as well as the increase in merit increases that we told you about in the first quarter. Those combined gave you the $5 million for comp, along with compensation, we also had about $5 million impact from the acquisitions in our year-over-year cost of rent performance. That's just the straight add of their cost.

Fuel pricing was another driver. Our fuel prices were up roughly 33% on a year-over-year basis. We did have hedges in places as we have mentioned but even so, the hedge prices were such that our fuel impact this quarter was significant. About $3 million of the $29 million was due to fuel price differences this year versus last. The remainder is a host of items, fleet age, we talked about that in the past. Fleet age contributed a little under $2 million of incremental expense, just servicing an older fleet. We had an insurance benefit last year that didn't repeat this year, that contributed roughly $2 million and then the remainder was a host of puts and takes on a variety of lines within our cost of rent.

Moving briefly to SG&A performance. We continue to leverage our SG&A more effectively as we go forward this year. In the second quarter, SG&A represented 15.9% of revenue and that's a 30-basis point improvement over last year. The SG&A dollars were up $10 million in the second quarter compared to the prior year, and the big drivers of that change were compensation with the G&A-related bonuses being up with higher performance and volume was another significant driver, primarily commission expense increases with the higher revenue. The other components of SG&A change were puts and takes here and there, including about $0.5 million of fuel here as we include fuel for our management vehicles in SG&A as opposed to in cost of rent. Another $0.5 million to represent the increase in investments in things like FAST and CORE systems over last year and then a host of puts and takes elsewhere in the SG&A area.

So let me move now to profitability, starting with EBITDA. On an adjusted EBITDA basis, you saw the report of $221 million for the quarter and that's up nicely versus last year. 23% improvement over last year, obviously driven by the key components that I mentioned in revenue and cost. As a percent of sales, Mike mentioned 35% is a very nice increase of 300 basis points over the prior year and it represents a record for the company in the second quarter in its history.

Moving to EPS, GAAP EPS of $0.38 for the quarter and adjusted EPS of $0.40 for the quarter were nice improvements over the prior year. On an adjusted EPS basis prior year was $0.25, for example. So a nice robust improvement there as well.

Let me just address our fleet management activity briefly in the quarter, first, starting with fleet transfers. We continue to transfer fleet at a rapid pace across the business to leverage the fleet that we have as effectively as possible. Transfers total about $1.4 billion in the current quarter, that's very comparable to where we've been over the last number of quarters. As we think about the size of the fleet, we reported already that the average fleet size increased almost 8% year-over-year. Clearly, that reflects the spending that we've been doing. Our gross CapEx in the second quarter for rental fleet was $297 million and the net rental CapEx was very robust as well, well north of $250 million. We continue to look for opportunities to invest in our fleet. And we're investing in those places where we get the best bang for our buck. So, for example, of that $2.97 gross spend in the second quarter, 20% of it was spent in Canada, and Mike told you about the strength that we're seeing up there. Of the spend in the second quarter, we continue to emphasize those categories of equipment that represent the best opportunity, i.e. earthmoving equipment and generant categories like generators, compressors, trucks and other general categories. And we continue to spend albeit at a lower than pro rata share on scissor lifts and other aerial work platforms. AWPs were about 33% of our overall spend, for example, in the second quarter compared to a mid-40s percent share of our overall portfolio.

Touching quickly on cash flow and liquidity. Free cash flow for the quarter was a use of $118 million, clearly reflecting the heavy CapEx spend. That brings our year-to-date free cash flow to a use of $48 million. This is still very much in line with our view of being free cash flow positive for the year and so we look for nice positive free cash flow over the third and fourth quarters as we finish out the year. I'll touch on that when we go through the outlook as well. In terms of liquidity, we finished the quarter with a total of about $610 million of overall liquidity. That includes our ABL availability, our cash availability and our AR facility.

Let me briefly update our outlook for 2011. As you all are familiar, we have been guiding to rate performance for the year of 5% or more. And as I said earlier, we still feel very comfortable that we will be able to achieve the 5% or more for the full year, even though the comps get more challenging in the second half, given the increases that we saw in rental rate during the second half of last year.

On time utilization, the year has been very robust and we are therefore raising our expectation. Year-over-year, we expect time utilization to be up 2.5 percentage points, compared to our previous target of up 1 percentage point. On a CapEx basis, we now expect to spend about $650 million of gross rental CapEx, that's up $25 million versus our prior guidance. We also have raised our expectations of net rental CapEx for the year to the range of $450 million to $500 million. Again, up $25 million.

Even with this increased spend, however, we still expect to be free cash flow positive. We're now saying between $5 million and $10 million of positive free cash flow for the year and as always, we'll continue to look to drive that even more positive given the opportunity.

In terms of our flow-through outlook for the year, we are revising our view of where flow-through for the year will come in. From 65% to 70% previously, we now see it at 62% to 67% for the full year, and again that's adjusted EBITDA to total revenue as a flow-through measure. The decline of 3 percentage points reflects the impact of the acquisitions. You can all do the math, you can see when you add acquisitions, you add 100% of the revenue but you only add EBITDA at their margin not at their normal flow through, and that's the impact that we're anticipating and leading us to decline, to reduce the range of expected flow-through for the year.

I'll stop there and open up the call for Q&A. But before we do, I just like to offer my view, which echoes the view that Mike espoused. This was a strong quarter for us in so many ways. We're very pleased to be able to deliver the rate that we did in the quarter, 6.1% increase. We're very pleased with the level of time utilization on the fleet that we've been able to achieve, it's very robust, that in the face of an increased fleet size. And we're also pleased at the margin expansion that we've been able to deliver, 300 basis points of EBITDA margin expansion in the quarter. So that's a great starting point to finish out the year.

Why don't we stop here and ask for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Manish Somaiya from Citi.

Manish Somaiya - Citi

A couple of questions and I think you touched on this before. Obviously, you had pretty strong growth for rental revenues. Obviously, you talked about the weak macro environment. And I guess the question that we, as analysts get consistently, is where is the growth coming from? So perhaps if you can touch on that a bit. And then I have 2 more follow-ups, please.

Michael Kneeland

Sure. Basically, when we talk to a lot of our customers, obviously, given the uncertainty in the marketplace, coupled with the fact that the credit markets are still very tight, particularly for lower tier type of clients, they're going to be prone to renting. You talk to them, we see it in our new account activity and then we see our current customers, we're focusing on rental. Given the fact that a lot of the jobs they have are various jobs that they wouldn't otherwise would have not been bidding on. So the need to have the depth of equipment is going to be very important for them. That, along with our strategy of focusing on the customers, of making sure that we earn their worthiness to rent from us, through our service, is very important. So I look at it as a 3-pronged approach. It's our strategy with our go-to-market with single point of contact, focusing on the customer with that one-on-one relationship and following the customer with our customer service and the uncertainty and the tight credit markets. And keep in mind, Manish, as you know, during the downturn, a lot of companies, not only the large public companies but a lot of companies de-fleeted and they don't have the ability to fleet up because of the credit market. So I think a combination of all those things are playing true to the industry today.

Manish Somaiya - Citi

Okay, wonderful. My second question touches on the Rouse information package that you have been receiving and I was hoping that perhaps if you can offer some high-level comment on how you stack up vis-à-vis some of the participants in the study and where do you see the opportunities for the company?

Michael Kneeland

Well, it's a newly formed metric program that they put forward. Rouse puts them out there, the key metrics things like rates, age, dollar utilization, time utilization and they are working very closely with ARA. As you know, we're supporters of ARA, coming out with a set of industry standards so that we can all look at the world at the same way, for the investors. That's why I said we get this confidence on our rental rates but that we're not growing our time utilization at the sacrifice of rate. That I can say with confidence based on the data that they're supplying to us.

William Plummer

We're well-positioned, Manish, in almost every one of those measures, relative to the competitors that are included in the survey. So we feel pretty good. Obviously, there's always room to improve but for the markets that we seen out of Rouse, whether it's dollar utilization, time, whatever measure, we are at or near the top in the reports that we've seen.

Manish Somaiya - Citi

Got you. And then just lastly, obviously, we're week 3 into July, can you just give us some initial impressions of how July has faired?

Michael Kneeland

Well, I would just tell you that, again, we took up our guidance on a time utilization. So it's safe to say that we continue to see that level of activity go forward in July, and as well as a rate improvement -- sequential rate improvement, month-over-month.

William Plummer

I've been using the word robust so I think that, that gives you a sense whether it's rate or time, there's a pretty strong start to July.

Manish Somaiya - Citi

Okay, so the best is yet to come?

William Plummer

I didn't say that.

Operator

[Operator Instructions] Our next question comes from the line of Jerry Revich from Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc.

Michael, we have rising engine regulations for under 150-horsepower construction equipment coming next year, I'm wondering if you can talk about what proportion of your fleet will benefit from rising replacement costs as a result? And what's the extent of replacement cost increases do you see for those product lines, based on your conversations with OEMs?

Michael Kneeland

Yes, that's great. And for everyone on the call today, as Jerry's alluding to is called the Tier 4 and that's 75 to 175 horsepower which is required in 2012. And the manufacturers have been struggling and working diligently to reengineer their products, to get those things ready for the demand that we will all be looking for next year. As far as the company is concerned, the way we look at it, and we've analyzed it, our fleet team does a lot of work on this, dividing out the different types of engines and requirements that are needed. Right here, now today, about 3% to 5% of our total units, or about 10% to 15% of our total fleet would fit in that category. Now you're not going to replace that all in one year and keep in mind on the larger products, the engine is a small portion of the total piece of equipment. So when we look at what the cost impact could be next year, it's not going to be a significant number as we reported this year. I mean, I think our prices were flat to up 1%. I think what we would see next year are blended increase in the low-single digits, given the fact that it's small percentage of our total fleet.

Jerry Revich - Goldman Sachs Group Inc.

And just a clarification question in terms of the 2013 piece, can you tell us the proportion of your fleet that will be impacted at that point? I believe it's all under 75 horsepower at that point?

Michael Kneeland

Yes, that's correct. That actually fits the whole bucket. Anything over 75 horsepower fits in that complete tier I just talked to you about.

Jerry Revich - Goldman Sachs Group Inc.

And 2013 will be under 75 though, do you know what horsepower of your fleet?

Michael Kneeland

Yes, it goes to 25 to 75. We've been working diligently for several years on the lower class assets. So again, we don't see it going up significantly.

Operator

Our next question comes from the line of Philip Volpicelli from Deutsche Bank.

Philip Volpicelli

My first question is regard to the free cash flow guidance, you guys clearly I think made a point of keeping it to $5 million to $10 million positive. Does that underscore management's commitment to stay free cash flow positive this year?

William Plummer

It does, Phil. It's Bill here. We view that as a good disciplined mechanism for ourselves to make sure that we're using our fleet as effectively -- our existing fleet, as effectively as possible. And so it's sort of arbitrary but it is a good disciplined mechanism for us as we go through the year. Now that's not to say that we're religious about it. I think I may have said this on a previous call. If we see very strong opportunities with important key customers, that prompt us to say, this is the business that we want for the long haul. We might dip into free cash flow negative for the right set of reasons but we're being very, very conscious about when we might decide to do that. And the statement of staying $5 million to $10 million of free cash flow positive is a statement that as we look at things right now, we think that's the right place to be.

Philip Volpicelli

Great, understood. And then just on the volume and the rate question, was there any change in mix or was there any discounting of delivery costs or fees?

Michael Kneeland

The delivery is not part of that rate calculation.

William Plummer

Yes, I'm not quite sure I heard your question. So was it that was there a change in mix in the second quarter?

Philip Volpicelli

Yes, what I'm trying to do Bill is that when I look at volumes being up 13.8% and revenue being up 16% and change, with rates being up 6.1%, there's obviously some give up there. And I'm wondering if that's mix or if it's just the way you, guys, talk about rates versus the way I might calculate what I call yield?

William Plummer

Okay, I got you. So it's clearly a mix impact. We have shifted more of our revenue to monthly rates this year, compared to second quarter last year. The monthly mix this year is up about 320 basis points higher as a share of our total revenue than it was last year. And as you know, because of the pricing structure of the industry, the average daily revenue that you achieve from a monthly rental is less than if you rented it on a daily rate basis, or weekly rate basis. So that's a phenomenon, that's clearly playing through our revenue performance. We knew it was coming, right? It was an exclusive part of our strategy, as a matter of fact. We pursued the national and large regional accounts because they rent more and they rent for a longer period of time. And it offers the opportunity to serve them at a lower cost point. So it was exclusively part of the strategy we've been pursuing. We certainly saw it in the second quarter and it had an impact.

Operator

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

Emily Shanks - Lehman Brothers

This is somewhat a follow-up to Phil's question. I was just curious. I noticed that beginning last quarter you stoped reporting dollar utilization on the full fleet. I see it by type of fleet, do you have that number and/or was there a reason for not including that any longer?

Michael Kneeland

The dollar utilization for the fleet was 49.9%.

Emily Shanks - Lehman Brothers

Okay, thank you. And just one other housekeeping item, what is the OEC on a out-to-the-million number?

William Plummer

I'm sorry, Emily, say that again?

Emily Shanks - Lehman Brothers

I'm just looking at what the OEC dollar amount is out past the 4.18, do you have what the next decimal point?

William Plummer

Okay. This is where Chris Brown gets his cameo appearance. Go, Chris.

Christopher Brown

4.175, Emily.

William Plummer

Well, done.

Emily Shanks - Lehman Brothers

Okay. Thank you. And then one other -- thank you, Chris. One other housekeeping item, you did highlight the fact that you are looking at hitting the $1 billion mark on EBITDA in the near term, and I want to get a sense from you, is that something that you think you're going to be running -- hitting on a run rate by year end, or is that next year's business, what sort of the time frame associated with that?

Michael Kneeland

Emily, in the investor presentation, we put together a bridge on our EBITDA to get over at or above $1 billion over the next 2 to 3 years. Again, as I mentioned, that's our near-term goal and we clearly see our focus on our way there. And we look at the second quarter as a step in the right direction.

Emily Shanks - Lehman Brothers

Okay, great. And then if I could just one more quick question. Bill, thank you for the comments around the used equipment sales margins and what the trends are we should expect to see in the second half. It looks like your year-over-year gains in 2Q are less than in 1Q, should we just assume that, that will continue to compress in the back half of this year, around gross profit margin?

William Plummer

Yes, that's a fair assumption, Emily. It'll obviously vary with how much of the vendor sales that we do in the third quarter versus fourth quarter. But that it's fair to assume that the trend will decline.

Emily Shanks - Lehman Brothers

But you are still looking for gains, right?

William Plummer

I'm sorry, say that again?

Emily Shanks - Lehman Brothers

You are still looking to be up year-over-year for gross profit margin expansion, right?

William Plummer

For margin expansion, we haven't guided to the full year margin performance. I will say that the full year margin for used sales will be lower than what we've seen in the first half, but we haven't gotten more specific than that.

Operator

Our next question comes from the line of Ted Grace from Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP

Quick question. I think your message on how to think about incrementals is very clear, so appreciate that. What I was hoping you might be able to speak to is at least thinking about the third quarter and fourth quarter, how should we think about the interplay, we call it rates and costs, which will face various comps and I know you don't give explicit margin guidance but at least maybe some framework to think about how those 2 forces will counterbalance over the next couple of quarters?

William Plummer

So Ted, I'll take a shot at it but please, if I don't address your question, ask it again a different way. As we look at -- maybe I'll frame it in terms of our flow-through performance, given that we gave an outlook there. As we look at flow-through, the impact of having relatively more of your year-over-year rate being generated by time utilization versus rate is to depress your flow-through, right? Because time brings along the variable costs associated with getting the equipment out on rent. That's quite honestly one of the phenomenons that we dealt with in the second quarter. And the strong time utilization performance that we had and while rate was strong, time was more of a surprise to the upside, if you will, and it tended to depress the realization of flow-through in the second quarter. That phenomenon could continue in the third and fourth quarter if time continues to be very strong, relative to rate. So that's one of the things that we think about in terms of judging the interplay of rate and time as it impacts flow-through. And all of these is excluding the impact of acquisitions. So in the third quarter, we could see -- you saw in the second quarter here, our flow-through of adjusted EBITDA was only about 58%. In the third quarter, you could see something like that again, where the flow-through is a little less than the overall range we've given of 62% to 67%. But we think that it will -- we'll make up for that in the fourth quarter, and we'll certainly continue to drive for all of the flow-through that we can. But one other thing, if I could, on the second half as it relates to flow-through performance, we know that we've got some events coming in the second half that are going to help us. In particular, in the fourth quarter, we know that last year, we took the $18 million self-insurance reserve adjustment in the fourth quarter. That's not going to repeat this year. We feel very confident that, that was an unusual set of items in our self-insurance activities. So there is an $18 million benefit in the fourth quarter that will help flow-through significantly in that quarter. So you have to think about those specific items as you think about flow-through.

Ted Grace - Susquehanna Financial Group, LLLP

So that's actually very helpful. And I guess and I know you don't give specific quarterly guidance on pricing but should we think about pricing at least as offsetting or counterbalancing some portion of that incremental costs realized in higher time utilization? Or is it going to be more neutral impact?

William Plummer

So it all depends on what kind of rate you're able to realize, whether it offsets the incremental. I'm not saying that incremental time utilization is a bad thing, please, don't take that away. It's a very good thing. It's just as it relates to the flow-through calculation, if you get your revenue from time instead of rate, then you're going to get less flow-through than if you got it the other way around. That's all I'm trying to say.

Operator

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

Seth Weber - RBC Capital Markets, LLC

Just going back to the pull-through discussion, I guess I also appreciate the color there in the acquisitions. Given just your last comment about having this tailwind from not the fourth quarter is going to have the easier comp because the insurance settlement last year or the insurance expense last year. I mean, what can we think about as sort of the normalized pull-through for next year? I mean is 2012, is that still a 65% to 70% number that we should be thinking about for next year?

William Plummer

Yes. Seth, I'd rather not get into 2012. We'll update as we get a little closer, get through our planning process and have a better sense of where we're going to fall on certain key decisions like the amount of fleet spend, for example. So because that number is so sensitive to different decisions, let's leave it until we get into 2012 in more detail.

Seth Weber - RBC Capital Markets, LLC

Okay. To ask then I guess a question on pricing. Maybe how would you characterize the health of kind of the other 70% of the market that's outside of top 10, I mean, are they distressed? I guess I'm trying to understand, is there a ceiling on how high you can raise prices? I mean, you already alluded to sort of some margin pressure at your customers. I mean, if the 70% of the other rental guys are not doing very well, what's to prevent them from just getting more aggressive on pricing and so I'm just trying to understand how high you feel like you could push pricing here?

Michael Kneeland

This is Mike. Obviously, we have a goal that we want to climb back in our bridge and then we want to get back 10 to 11 points from the bottom of '10 at a minimum. And we're not going to stop there, by the way. To talk about the market, my sense is everyone is going to see rate improvements. This is an industry that definitely has to go over it's cost of capital that it's going to be necessary to sustain itself over time. So my sense is that everyone will start to benefit from the rates and the demand that they're seeing in the marketplace, whether people get aggressive, depends upon their strategy. There are some pockets where there's some areas of the country aren't doing as well as other areas. Are they being more competitive, absolutely, but there's areas like Canada that are expanding nicely. So I think in general, in order for people to expand their fleets, they're going to have to be able to show that they can have the ability to pay back their loans over time. And so I think the trend will be towards better improvement in rates.

Ted Grace - Susquehanna Financial Group, LLLP

Okay, thank you. And then I guess if I could just one quick follow-up. Is there a fleet OEC number that we should be thinking about target for the end of the year?

William Plummer

Well, we haven't given an explicit number. I think it's fair to say that if you use -- you can back into it fairly closely, Seth, if you use something like 48% of OEC as the used sales activity where we'll end up on used sales activity. So that will tell you how to translate proceeds into OEC and then we've given you the gross CapEx and that will tell you the used OEC sold and you can back in to a number from that.

Operator

Our next question comes from the line of Peter Chang from Crédit Suisse.

Peter Chang - Crédit Suisse AG

Given that we're almost at a 5% increase in utilization if we average Q1 and Q2 and Bill's comments that so far July has been robust, is the reason why your target of utilization growth being only 2.5% higher, is that because of tougher comps, because you're growing your fleet? Or should we be expecting some significant seasonal fall-off in Q4 versus Q4 of last year?

Michael Kneeland

Well, I think you just hit -- all of the items, I would tell you, yes, we're going to tighter comps. Two, there is typically a seasonal. We don't know what the winter will bring to us and whether it will come sooner or later. But it's really going to be based on customer demand out there, and we know we brought it up for full year, 2.5%. Could it be another 0.5 point? Possibly. But we are bringing more fleet in and we'll update everybody as we go through the third quarter. So we'll have better visibility into the fourth.

William Plummer

Yes, just to remind you, last year, third quarter, our utilization was 71.3%. Fourth quarter, it was 69.3%. So those were, as we pointed out, records for those quarters in the history of the company. And we're just mindful that we are comping against records last year, along with the other factors that Mike mentioned.

Peter Chang - Crédit Suisse AG

Great. Thank you, that's helpful. And then I just had a question on Slide 13 of your presentation deck, it looks like in May, strategic accounts growth spiked up to 40% year-over-year and I just wanted to know if there was any sort of large one-off project that contributed to that or just anything unusual?

Michael Kneeland

No, nothing is really unusual. I mean, it's really -- those are going after individual accounts across North America. And we're tracking them on a daily basis through our sales efforts, and following the customer. As I mentioned before, even with our National Accounts, and our share of wallet increased nicely, significantly on a year-over-year basis. So we're earning more share of their wallet and those are the things that we track.

Operator

Our next question comes from the line of David Wells from Thompson Research.

David Wells - Thompson Research Group, LLC.

First off, looking at the rental rate guidance for the full year, here we are, I guess, kind of half way through and you've raised time utilization. You're already on a year-to-date basis over the guidance. So I guess I'm trying to understand, what is it that may be lurking in the second half of the year that gives you more pause for concern, that would make you hesitate from raising that 5% number for the rest of the year here?

William Plummer

So I wouldn't say that there's anything that gives us concern about the second half. We are mindful of the fact that the second half last year, in addition to being strong utilization environment, was a strong rate environment for us. We had rates marching up continuously through the second half last year and so the comps do get tougher just as a matter of history. So that's what we're thinking about. We know that we've got to continue to manage rate higher in the third and fourth quarter in order to preserve that 5.2% that we got year-to-date. And we're confident that we can do that. The question becomes, how much more than that can you do? We feel good about the environment. Could it be better? As Mike said, yes, it could be better but it's hard to say right here and now that we want to put a lot more, especially for the full year, right? Because you got to drag the average that you've already achieved higher if you're going to raise the full year average outlook. So we're being what we think of us as observant of what the market is today and how we'd have to perform compared to last year in order to raise that rate outlook anymore than where it is.

David Wells - Thompson Research Group, LLC.

That's helpful. And then to your point earlier in the call about seeing some additional re-rent expense, if you could walk us through the thoughts around using re-rent versus just doing more CapEx, and was this kind of a go one-off-type instance, or your thoughts around that will be helpful to?

Michael Kneeland

Yes, David. It's Mike. I've been in the industry for 33 years and the term re-rent has been around for many, many years and just not everybody uses it. The reason why you do re-rent are really 2 reasons. One of which is if you have an immediate need, you determine whether it's prudent to have that machine hold in from wherever it may be, look at what the cost is and how long you're going to need it and then you make a business decision. When we take about the re-rent and when we look at the large percentage of their re-rents that occurred in the second quarter, it was really because what we're doing is performing more services for our current customers. We're renting assets that they're asking us to supply for them that we typically don't carry. And in fact, as some of our customers, as part of our agreement, we have to supply things that we don't carry. For an example, we don't carry cranes with the exception of the acquisition that we had up in Canada. So if we need a crane as part of our contract, we'll get a third party to get in there and then we'll go for it. So that's the reason. Actually, I look at it as a positive because our customers are relying on us to do more for them as part of their services.

David Wells - Thompson Research Group, LLC.

That's helpful, I appreciate your thoughts around that. And then lastly, if you look at the kind of percentages of wallet that you gave earlier on the call being at 53% for your larger accounts, how much higher do you think that, that number can go? And then ultimately, I would assume that most of these folks are going to want to have at least a couple of suppliers, just to make sure they are optimizing their pricing. Do you read the situation then where to continue to grow those businesses, we ultimately have to see some in-market growth return to the construction market?

Michael Kneeland

Well, obviously, you're going to have to -- to answer your question, we're going to see some end-market growth. At some point it will come. It's not going to be held down forever. And even when I said that the ABI Index is showing some choppiness, it has improved year-over-year. It's just still disappointing that it doesn't have consistent growth at 50 or above. That being said, with our share of wallet at 53%, that's a great percentage. Not done yet, do I expect to have 100%? No, not at all. We want to earn the lion's share of our business and that is going to be based on customer-by-customer. In some instances, we may be as high as 70%, 75% of their business. And we fully understand that there are some products that we don't carry and there are some products that they will want to have as a backup, fully understand that. I'm very pleased with the results that the team has put together. It really shows that our services, our customer service and our model is proving true.

Operator

Our next question comes from the line of Henry Kirn from UBS.

Henry Kirn - UBS Investment Bank

Could you talk a little bit about the timing of used equipment sales in the third and fourth quarter? Just philosophically, would you hold equipment for selling late in the year to maximize the fleet available in the peak third quarter?

William Plummer

Yes, Henry, that's a very common way to approach it. It's one that make sense. You would want -- we're getting a lot of feedback on the call here. You would want to hold the equipment through the peak season, if you can. And then get rid of it when it normally would be coming off rent anyway. So if this year will be back-end loaded, as many years are, back-end loaded in our used sales activity to reflect that.

Henry Kirn - UBS Investment Bank

Okay. On M&A, you made a few acquisitions so far this year. Could you talk about your latest thoughts there. Are there still areas of interest or would you prefer to integrate the existing deals?

Michael Kneeland

Henry, this is Mike. Yes, obviously, we're going to integrate those. In fact, GulfStar is already been integrated. And we're in the final stages of integrating the Venetor because it's a much larger acquisition. We're always looking for things that strategically fit with the company. And as we've always said -- a lot of feedback here on the call here so I apologize if it's going through to everybody. But basically, when we look at this acquisitions, strategically, they have to fit with the company, they have to be a cultural fit and they also have to have an incremental margin improvement to the company, internal rate of return that's positive. And those are the 3 key areas. The level of activity continues to grow and we see opportunities, and some we passed on and some we find of interest. So we'll continue to focus on those but the key area to think about is it has to be strategic.

Operator

Our next question comes from the line of Joe Box.

Joe Box - KeyBanc Capital Markets Inc.

Mike, earlier in the call, you talked about URID coupling to a certain extent from what your end markets might do. I realize that you don't want to get too specific on next year, but with the ABI softening again this morning to 46, should non-res be flattish or slightly down again in 2012? Is it reasonable to think that rates and fleet size could increase again next year? Even if you talk directionally about the possible impact on fleet size and pricing in a challenging non-res environment, I think that would be helpful.

Michael Kneeland

Yes, Joe. I mean, look, anything is possible, right? And as Bill mentioned, we'll have a better picture as we go through into the fourth quarter of what 2013 will look like. So it's a little too early to tell. Having said that, what would be the components that would fall into that? The credit market being choppy, the uneasiness, the uncertainty, I think we'll still be continued drivers for people wanting to rent as opposed to owning. There are pockets where we are seeing improvements, particularly, with power. We talked about, and we've talked about this privately with a lot of you, about the frac-ing industry and how that is exploded. And so there's going to be opportunities like that to continue. We also are penetrating new markets. I mean, the industrial market's a growth opportunity for us. And we continue to see a lot of runway there. So yes, I think next year, it's always a possibility. As I stated in my release and on the opening comments of the call, we clearly see that we're marching towards the $1 billion of EBITDA and improved margins. So we'll have to stay tuned.

Operator

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

Scott Schneeberger - Oppenheimer & Co. Inc.

I guess on Venetor and accretion with regard on the impact of dilution in this quarter on the incremental EBITDA margin. Basically since you took that guidance down by that 3 percentage points, should we expect that, that maybe conservative as I would guess that integrates over the second half and maybe what we saw in the second quarter improves? Am I thinking about that the right way?

William Plummer

Well, we certainly will love to take more synergies out of Venetor and GulfStar as we proceed with the integration and to the extent that we do that, it could be better than the full year guidance. The full year result could be better than the guidance range that we've given. If you look within the quarters, it's a harder thing to judge, right? I think we've said before, flow-through will vary from quarter-to-quarter, and so it's harder to say what the impact of Venetor or GulfStar might be on flow-through overall in the third quarter. As we sit here today, flow-through in the third quarter could be a touch lower again than the range that we've given for the full year. It's hard to say because that flow-through calculation is so sensitive. Our year-over-year total revenue increase in the second quarter, for example, was what, $72 million. In order to impact flow-through by a point, that's only $700,000 worth of change in expense. That's not a lot of money. So that's the kind of variation that we're trying to manage through and that's why we're reluctant to give more specific guidance on a quarterly basis on a measure like flow-through. But for the full year, we feel like we've got leverage that we can pull to make it happen at the 62% to 67% range that we're talking about.

Scott Schneeberger - Oppenheimer & Co. Inc.

Okay, thanks. Just a couple more. With regard to the second half pricing, someone asked earlier why not upside, actually when we get asked, hey, the comps were easier in the first and I know and we've actually seen it month-over-month building sequentially through the year. Could one of you guys just restress, maybe what would give you the most pause why that could be at risk and then to dispel that?

William Plummer

Really, it's just -- I don't know what you put it down to maybe it's nervousness on the part our CFO but these are pretty heady rate moves and it's hard to write down on a piece of paper that I expect to see year-over-year rate increases at 7-plus percent like we have in the month of June. So I'll take a little bit of the heat for maybe not being able as aggressive on rate as some other people could be but it's something that we're being very conscious of. The other thing I'd point out is that we want to make sure that the rate that we realized out of the market is supported by the services that we offer to our clients, it's supported by the fleet we have available for them and it's supported by the whole strategy behind operation United. And as we get assurance on our ability to serve, we have no hesitation about pushing rate. We just want to make sure we're doing it in the context of our strategy.

Michael Kneeland

Scott, I'll also say that you got probably in contacts, you go back to the beginning of the year, we're the ones who basically said 5%, at least 5% this year and we stuck our neck out to do that. And the team has delivered on that and we're not done. If we can get more, you can bank on it that we're going to go out and find it. So we'll continue to focus, and rate is the biggest driver of profitability in our industry.

Operator

Thank you. And due to time constraints, this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Michael Kneeland for any further remarks.

Michael Kneeland

Yes, thanks, operator. I just want to -- I'll just wrap up this call by saying thank you for joining us today but more importantly, I wanted you to take a look at the bigger picture. The way I look at it, that was a strong quarter. We had time utilization up, 3.6 percentage points at fifth consecutive quarter. We have rates up 6.1%, with the fleet on average up 8% for the quarter. And on top of all that, we had margin expansion of 3 points. I clearly see how this company is transforming itself. And we're not done, we have more work to do. And I look forward to talking to all of you on our third quarter call. So thank you.

Operator

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

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