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United Rentals, Inc. (NYSE:URI)

Q4 2011 Earnings Conference Call

January 26, 2012 12:00 PM ET

Executives

Michael Kneeland – President and CEO

William Plummer – EVP and CFO

Analysts

Henry Kirn – UBS

Peter Chang – Credit Suisse

David Raso – ISI

Joe Box – KeyBanc Capital

Scott Schneeberger – Oppenheimer

Emily Shanks – Barclays Capital

Ted Grace – Susquehanna

Seth Weber – RBC

David Wells – Thompson Research

Jerry Revich – Goldman Sachs

Operator

Good morning and welcome to United Rentals Fourth Quarter and Full Year 2011 Investor Conference Call. Please be advised that this call is being recorded.

Before we begin, note that the company’s press release, comments made on today’s call, and responses to your questions contain forward-looking statements. The company’s business and operations are subject to a variety of risk 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, 2011, 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 afternoon, everyone and welcome. With me today, as the operator mentioned, is our CFO, Bill Plummer and other members of our senior management team.

I’m going to start out with a quick recap of our fourth quarter results, which as you know, gave us a strong end to a very good year. And then we’ll look forward to 2012. This is obviously an important year for us.

We have the RSC deal on the table and we also have a strong outlook as a stand-alone company. So, I want to focus on the fourth quarter metrics that serve as potential indicators for our operating environment in 2012.

For the fourth quarter, we reported rental revenue up nearly 19% compared to last year; rates up 6.7% on higher volume of equipment on rent; and time utilization of more than 70%, which is a fourth-quarter record for us, once again.

Now all of this contributed to an adjusted EBITDA that was significantly higher at $281 million, an increase of 55% over the fourth quarter last year. All these metrics tell a very compelling story about our ability to exceed the expectations created by our operating environment.

We know from the Department of Commerce that spending on non-residential construction declined slightly year-over-year in October and was basically flat in November. And yet, we were able to drive our revenues and rates higher and our time utilization went up on a larger fleet.

So here’s what’s happening. First, despite the external reports, our sales force is finding that customers are more active and optimistic than a year ago. Our own survey confirms this. So we think there is an early upswing that’s not fully reflected yet in the government data.

Second, as we mentioned before, there is a secular shift towards renting and just this week several industry reports came out that support this. So there’s no question that the recession is encouraging customers to rely more on rental and less on capital purchases. And once they make that shift, they saw that it could enhance their balance sheet and liquidity. And we believe that this is the most rapid penetration our industry has seen in a long time and we expect most of it to stick as the conditions improve.

And third, we think that we’re getting a bigger share of pie. Changes in share can be difficult to measure our industry because it’s so fragmented and largely private. But clearly, our segmentation strategy and customer service initiatives are working. And you can see it in our fourth quarter numbers. We had 21% growth in rental revenues from key accounts compared to last year, including 22% growth in National Accounts.

Key accounts were 55% of rental revenues in the quarter and National Accounts was 35%.

And rental revenues from industrial were up almost 20% year-over-year and if we remove the impact of acquisitions, industrial was up still a solid 17%. And we are at a point in the cycle where the better run, well-capitalized rental companies can outperform both the environment and the industry as a whole. And we expect to turn another good performance in the first quarter.

While it’s all very positive, it’s still a tricky cycle and we know that and we are managing the business very closely. But it’s encouraging that we are getting the push in several areas. At the macro level, the leading forecasters predict a rebound in non-res construction of just over 2% on average in 2012 and about 6% in 2013. And this is supported by the architectural billing index, which came in above 50 for every month in the fourth quarter in our sweet spot the Commercial and Industrial sectors.

Now, if you compare that to the report from Global Insight, which you all know is the industry’s leading forecasting firm. They expect our industry to grow about 5% this year with the majority of those revenues coming from rentals. So, demand for equipment rental services is forecast to outpace construction spending in 2012, just as it did this year. And once again, we are prepared to capture a good part of that growth.

Another encouraging sign is the fact that all of our regions continue to show year-over-year growth in the fourth quarter. In fact, all of our regions saw double-digit growth with the exception of the Southeast and that was partly due to the capital decisions that we made.

We are also dealing with a bumpy demand both geographically and month-to-month. So our branches are doing an impressive job of implementing our strategy and driving results. Part of that strategy as you know is to constantly manage the productivity of our footprint against changes in the marketplace. We consolidated 28 branches in the year, 18 of them in the fourth quarter. We also acquired 16 branches and opened six as cold starts.

So, there’s very little change in our branch count from January to December, but we made some important strategic shifts. Of the 16 branches we acquired in 2011, six of them have a strong industrial base. And of the cold starts, half were specially rental branches, meaning trench safety, power and HVAC.

Our specialty operations are growing at a fast pace with segment revenue up 45% in the fourth quarter. And we benefited from the energy boom and recovery efforts from natural disasters, but there is also an underlying trend toward more demand for power and climate control equipment. And we are also selling, cross-selling our fleet more effectively than ever before. So, specialty rentals are more than a niche for us, it’s an important part of our growth strategy and you’ll see us make further investments in this segment as time goes on.

Given the way we entered 2012 in high gear, we’re very comfortable with the outlook we’ve issued last night. Our expectations for 2012 are grounded in a solid and achievable plan Bill will discuss in a few minutes. But I want to call your attention to one number that is particularly indicative of our strength as a standalone company. Now, we’re looking at gross rental CapEx of approximately $1 billion this year. Now I know that’s a big number and we are not going to turn away business that is profitable and strategically sound. The fact is demand is there and our rates are still improving.

We drove more than six points of rate achievement in 2011 and as we said last night, we’re projecting another five points this year. We are not a commodity; we deliver value in areas that matter most to our customers. And we’re very focused on communicating that message as a basis for rates.

Now if the economy turns against us, we have the flexibility to adjust our CapEx and accelerate new sales. And we’re becoming a much more disciplined company in that regard. And we will always continue to focus intently on customer service as to a way to achieve our targets.

Now, I should mention that the forecast excludes any impact from the RSC transaction and we will revise that after the deal closes.

So let’s talk about the RSC deal. I know the announcement created a lot of buzz and rightly so. It’s tremendously exciting. But I don’t want it to overshadow what this company has accomplished and continues to accomplish as we march forward with our strategy. Yes, we’re addressing the needs of the RSC transaction, but we’re also continuing to think about new ways to serve the customers in the field.

Now for me, that’s one of the things that makes this merger so exciting. United Rentals and RSC are both extremely well run companies and we’re seeking to integrate the best of both companies into one incredible organization. Now just last week, Eric and I kicked off our first all-hands meeting in Houston, Texas. We had a total of about 60 people there representing everything from operations and IT to sales and maintenance.

Both companies came away from that meeting feeling very good about how closely our cultures are aligned. Now, I’ve been involved in countless integrations for United Rentals both before and after becoming CEO. In fact, I came to this company through an acquisition myself. So, I’ve developed a pretty good instinct for the planning process and the process with RSC is going well. And it’s going to be as seamless as possible for everyone involved.

So when we get to Q&A, I’m going to ask you to please respect the fact that we are limited in what we can share with you about the deal at this point. So as you know, we filed a preliminary registration statement on Form S-4 with the SEC on January 17 and we understand that they’ll have comments and we’re prepared to address them. The forecasts in the S-4 reflect our view of how we would perform as a standalone company. And we’re still comfortable with our estimate, as we discussed in December, that we should get about $200 million – in fact at least $200 million in cost synergies from combining the two companies.

With the Hart-Scott-Rodino, the 30-day waiting period, expired on January 20. So that’s a major step forward in the process. And we did receive some requests for more information from the Canadian Competition Bureau, so the waiting period for Canada will be extended until 30 days from the date when all the requested information has been provided. So, as you can see, things are moving along and at this point we expect it to close in the first half of this year.

That’s about it for updates. So let’s use the Q&A for the best of our advantage this morning. In a lot of ways, we have a straightforward message for you today. We just came off a terrific year, and now we’re entering into what will be a landmark year where we believe that we can excel both as a standalone company and in combination with RSC operations.

When we set a goal for this company, we pursue it, and we achieve it, and that’s a matter of record. And now we’re looking at bridging to well over $1 billion of EBITDA in 2012 at about 40% margin. And that’s a source of pride for our employees and our leadership team. This company delivers on its promises. 2012 for us is not just about the deals that we can make or forecasts that are out there; it’s about what we can deliver. So with that, I’m going to ask Bill to review the numbers and then we’ll come back and take your questions. So, over to you Bill.

William Plummer

Thanks, Mike, and good afternoon to everyone. Just to stay focused on the key points here, I’m going to be very brief on the quarters – the quarter and full year numbers. You’ve all seen those. I’ll spend a little bit more time on the outlook, and then we will move to Q&A.

And I’ll just reiterate some of Mike’s comments to start out. It was a very strong year, a very strong quarter for us finishing up 2011. On rental revenues, that 18.5% year-over-year increase in rental revenue for the quarter was driven by a very nice progression in rate and volume in the quarter with rates being up, as Mike said, 6.7% year-over-year. Rates in the quarter were up 1.4% sequentially compared to the third quarter, which is a very nice progression in that part of the year seasonally. So, nice progression on rates in the quarter.

On the volume front, OEC on rent during the quarter was up 15.1% over the prior year, and it took us to a total dollar amount of OEC on rent of right around $3 billion. That’s the second highest quarter ever in the Company’s history of fleet that we had on rent, and it’s second only to the third quarter in 2011.

Time utilization in the quarter was up 1.5 percentage points at 70.8% in Q4. And that represents the seventh consecutive quarter of record time utilization over the last seven quarters. So, just tremendous momentum on the time utilization front to go along with very nice rate progression as well.

When you look at the full year last year, just real briefly, rate – Mike mentioned that rates up 6.1% came in right at – maybe a touch better than what we had guided to after the third quarter. And that set us up very nicely for 2012 as well. With rates at that level, we have a carryover benefit in 2012 full year of about 3%, so a nice starting point for 2012.

For the full year time utilization was up 350 basis points, 3.5 percentage points to 69.1%, and that’s another company record for the full year. So all-in-all, the rental story was very strong just across the board. It feels like we’re firing on all cylinders. I get nervous when I say that, but it feels pretty good going into 2012.

The other part – significant part of the revenue story in the quarter was used equipment sales. We sold $93 million in proceeds of used equipment in the quarter. That’s up from $40 million in the prior year. And that generated a pretty significant full year used sales proceeds number of $208 million, up from $144 million in the prior year. The especially good news though was that gross margins finished the year fairly strong for us both for the quarter and the full year. Just looking at the full year, our margin was 31.7 percentage points, and that’s up 320 basis points compared to the prior year, and it’s our strongest full year margin ever.

So, the used equipment story is very important to us because it’s a vital part of how we’re managing the fleet going forward. As we’ve said before, we’ve got a significant amount of use that we need to continue to focus on in 2012 and in future years. So we’re going to spend a lot of time thinking about the channel mix and in particular how do we enhance our retail sales contribution in our used sales. So we’ll be talking about that more as the year unfolds.

On the profitability front, again, a very strong quarter, adjusted EBITDA came in at $281 million for the quarter. That’s an improvement of $100 million or 55% compared to the prior year. And in fact, the fourth quarter EBITDA was basically flat with the third quarter EBITDA which, as you all know, is historically our highest seasonal quarter during the course of the year. Obviously, fourth quarter was enhanced by the used sales strength that we had as well as the $8 million self-insurance benefit that we had in the quarter; still a very, very strong performance for the quarter on adjusted EBITDA. Margin for the quarter came in at 37.7% and that’s an increase of 740 basis points over the prior year.

So, when you look at the full year, we had a very nice result. The full year adjusted EBITDA of $929 million, that’s a 34% increase. And the full year margin came in at 35.6%, and that’s a 470 basis point increase over the prior year, and indeed it’s a full year record for the company on EBITDA margin.

Flow-through was very robust. We had flow-through for the quarter of 67.1%, and that put us at 63.6% for the full year, well within the range that we’ve been guiding you to of 62% to 67% for the full year. So, a nice result on the flow-through front as well.

And for those who like EPS, we had a very nice adjusted EPS result, $0.82 on the year. Obviously had some puts and takes, including the self-insurance reserve benefit of $8 million. But that was offset by a higher than expected tax rate. So, when we look at that $0.82, we think that’s a good reflection of the strength of profitability that we delivered throughout the course of the fourth quarter.

Just a couple of key points on fleet management and free cash flow, we had promised $775 million of gross capital spend at our last outlook; we delivered $774 million. Combine that with the $208 million of full year used proceeds, that gives you a $566 million net rental investment in the Company for 2011.

And that spend, as we’ve said again and again, was driven by us responding to what we’re seeing from the market. So, it’s very encouraging that we’re able to put that much investment into the Company based on very strong demand. Certainly, time utilization for the year shows you that we’re able to make the investment and still put the equipment on rent. So, very encouraged by that coming in to 2012.

On free cash flow, we finished the year stronger than even we expected. Free cash flow was $23 million for the full year, and that was really helped significantly both by the used sales effort at the end of the year but more importantly by collections which were very strong late in the year.

So those are the key points I wanted to make about Q4 and full year 2011. Let me spend just a few minutes on our 2012 standalone outlook. And again, it’s standalone, not giving any effect for the transaction.

As Mike mentioned this outlook is fully consistent with the forecast that we put in the S-4 for 2012. So, if there is any question on anybody’s mind about the difference between what we’re seeing now and what was in the S-4, there is none.

On the revenue front, you saw in the press release that we expect rates to be up about 5%. And as I mentioned already, we’re starting with a carryover benefit of about 3%. So, we think that we’ve got a good foundation for delivering that 5% going through the year. And obviously, as we have for the last couple of years, as the opportunity presents itself to take more, we will drive more in rate realization.

On the time utilization front, we look to improve utilization by another 0.5 point or so for the full year. That would be another record year for us and to do that in the face of spending $1 billion of gross CapEx, we think it would be a very, very nice result on time utilization.

On the CapEx front, we are going to spend about $1 billion of gross CapEx and the net underneath that will be about $770 million to $820 million, that’s the range that we’re calling for. If we do that, we will drive up the average fleet size for the full year by $0.5 billion. The spend is going to be focused the way it has been for the last couple of years. We’re going to respond to key customer needs and we’re going to help to drive the fleet mix that we’ve been driving and so we expect to continue to shift the fleet through our spend.

Spending $1 billion gross and selling what we expect to sell will have the impact of also reducing the age of our fleet. It should come down about 2.5 months over the course of 2012 on that plan.

Free cash flow for the year will be a use of free cash of anywhere from $50 million to $100 million. And on the profitability front, we think the flow-through that we’ll realize in 2012 will be very comparable to what we realized in 2011. So, we are calling it mid-60s – for a range, we would say the same range that we gave you for 2011 between 62% and 67% adjusted EBITDA flow-through to total revenue.

Obviously, there will be fluctuations quarter-to-quarter as you saw in 2011 on that flow-through. And we will certainly keep you up-to-date as we go through the year.

And finally, just to offer a couple brief thoughts on the first quarter of 2012 as you can gather from our comments, we’ve got a very nice start on rate and time utilization so far through January in the first quarter. So, we expect the quarter to develop nicely for us.

There will be the normal seasonality. We haven’t repealed the seasons not just yet. So, on the revenue front, we will see sort of a typical kind of decline due to seasonality and profitability will also show a typical type of decline due to seasonality maybe somewhat muted as we drive better utilization, put more fleet into the business and continue to realize price.

But all in all, the momentum is good. Things feel like they are headed in the right direction. And we are very encouraged by the way the year is kicking off.

So with that, I will end my comments and ask the operator to open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) Our first question comes from Henry Kirn of UBS. Your line is open.

Henry Kirn – UBS

Good morning, guys.

Michael Kneeland

Good afternoon, actually. Thank you.

William Plummer

It’s morning somewhere, here.

Henry Kirn – UBS

It’s been a long day. Last year, there was some volatility and incremental flow-through as we went from fourth quarter to first quarter and then throughout the year. Can you talk about your expectations for incrementals as we progress in 2012?

William Plummer

Sure. I mean as I said, we expect volatility in each quarter. It’s a very sensitive calculation, so that’s going to happen. We feel good about the way things will develop as we get into the more busy season, second and third quarter in particular. First quarter, the flow-through, you’ve got to have some below the average in order to get the average if – somewhere above the average and first quarter is always a challenge on that front for us. So, I’d say you probably could see flow-through a little bit lower than the range in the first quarter and then improving as we go through the year.

Keep in mind, the flow-through is going to respond to things like how much you sell and you use equipment in a given quarter relative to the rental revenue that you generate. That’s a challenge in the first quarter. It will respond to things like the acquisitions that you do, right, when they came in last year and how that quarter comps with the quarter that you’re in this year. That can be a little bit of a drag in the first quarter given that we’ve started to add the acquisitions later on in the year.

So, those are the kinds of things that will flow through the flow-through calculation, if you will. And we’ll point them out as we go through the year.

Henry Kirn – UBS

I’ll respect that one question limit and pass the baton. Congratulations.

Michael Kneeland

Thanks.

William Plummer

Well, thanks. Thanks, Henry.

Operator

Thank you. Our next question comes from Peter Chang of Credit Suisse. Your line is open.

Michael Kneeland

Hi, Peter.

Peter Chang – Credit Suisse

Hi, good afternoon and congratulations on a strong year and another strong quarter.

Michael Kneeland

Thank you.

Peter Chang – Credit Suisse

Just a quick question on the forecast. I mean you pretty much went through your 2012 expectations, but for the S-4, you also have 2013 through 2015 in there. And I was curious as to kind of what your macro assumptions were and what contribution you were expecting from higher pricing for those three years.

Michael Kneeland

Well, I’ll give you what the macro environment and Bill can go into some of the other details. But the macro environment, as we have worked with all of the outside services that are – the IHS Global Insight and Moody’s, Economy, McGraw-Hill, all the typical names that you would play out; the consensus is starting in 2012, it’s up about 2.1%. Then in 2013, it goes to 6%.

And then, we also are working with the Global Insight, which as I stated in my opening comments, has been working very closely with the American Rental Association projecting what the growth patterns will be over the following years. So, those are the macro environments that we’re working with. Keep in mind, we also tie that by talking to our customers and we will do that and continue to update as we go year-to-year. But I would say that that was probably the biggest macro environment that we were looking at.

William Plummer

And in terms of other aspects of those forecasts, I mean we certainly used our usual thought about what the value of incremental rental rate is. So, it will drop through at something like 97%, 98% for rental rate improvement. But we also thought carefully about the fleet additions that we would make over that timeframe and the impact of additional fleet to profitability, how we might drive time utilization across that timeframe and what that means to us; really all aspects of our business. And starting from that macro backdrop, we put in what we thought were very attainable goals for the next several years, we’re not trying to dilute ourselves, we just wanted to tell the story that we thought was as close to accurate as we could and those are the numbers that came out.

Peter Chang – Credit Suisse

Just a quick clarification, is it fair to say that starting in 2013, we are expecting I guess kind of like a decel to a low single-digit to flattish rental rate environment as the years go forward?

William Plummer

I’m sorry, starting in 2012 you said?

Peter Chang – Credit Suisse

2013.

William Plummer

2013. Yeah, the way we thought about rate over that time period was 5% in 2012, and then we trended it down to low single digits over the next couple of years. So, I think it’s fair to say that we trended down from the 5% we assumed in 2012, and I’ll leave it at that.

Peter Chang – Credit Suisse

All right. Well, thanks for taking my questions, guys.

Michael Kneeland

Yep. Thank you.

William Plummer

Thank you.

Operator

Thank you. Our next question comes from David Raso of ISI. Your line is open.

Michael Kneeland

Hi, David.

David Raso – ISI

Hi, good morning, good afternoon. Quick question about the S-4 progression on the EBITDA margins, again we’re – excuse me, talking standalone company. The improvement that you see is obviously a little more significant 2011, 2012, but even from then on still getting a couple of hundred basis points. And I know there’s a lot that can go into that beyond just the rental margin itself.

But how are you thinking about looking out a couple of years, the rental margin ex-depreciation, right? I mean, it used to – you know, high watermarks used to be 55, go back in the day maybe a little higher. But we’re already at a pretty high level coming out of 2011. So, again, on a standalone basis, what are the things when it comes to the mix, the kind of accounts you’re taking, how should we think about your target for the rental margin? Because the other things have a lot issues around your capital decisions, right? Some buying a lot of new, you can sell out a used, and so forth, but truly the core kind of business, the rental margin ex depreciation.

William Plummer

Yeah, David. I think rather than sort of talk about specific rental margins, I’d just point to a couple of key aspects of our business that I know you know. We’re putting fleet into our business in a fairly significant way over that period. And that’s a very powerful lever for improving margins for us. So the amount of fleet that we’re adding over the horizon is hugely important. That’s point number one.

Point number two is that, what we just said with Peter, the rate assumption, while it does trend down over the next several years, we’re still realizing rate improvement which as you know is a hugely powerful lever and generating better margin as well. So I think those are two very prominent aspects of how the margins of the business, overall rental included, will trend. And we feel comfortable that we can deliver that if the market demand is there to support that additional fleet. We believe it will be based on the macro backdrop that Michael just talked about. And so that’s why we put together the forecast the way we did.

Michael Kneeland

Yeah, David, we’re also trying to drive some efficiencies in the business. As you know, we’ve kicked off fast. We’ve got by the end – midyear this year, we’ll have all of our locations up on that. We do believe that, using technology to further drive efficiencies, we’ll be able to realize in the out-years.

David Raso – ISI

Okay, I appreciate it. I was just – the S-4, you’re already above 40% for 2013, next year, and then in the north of 43% in 2014. So I was curious, obviously the new machine gets it on the depreciation line, your maintenance goes down with the new machines. So I could see why the new machines obviously create a better rental margin. I was just curious if you had any color around how you thought about the mix of business, maybe deemphasizing aerials in the fleet. Just trying to think about cycle to cycle, the configuration of the accounts and the fleet size and the type of fleet might be a subtlety on why the margins can be better at the rental level cycle to cycle. I was just trying to flesh out some of those items that might show a difference between the companies cycle to cycle?

William Plummer

Yeah. I think our general assumption is that we can continue maybe at a somewhat slower rate, but continue to trend in the customer mix that we’ve established, growing with the larger players who we believe offer us a better profit opportunity. So we continue to trend in that direction, continue to trend more toward industrial in that mix of customers.

As for the fleet, again, we’ve been very consistent in saying that we’re going to continue to trend to a slightly smaller aerial share of the overall fleet and grow in some of the other areas. Some of those other areas are the specialty businesses like trench and power and HVAC. So, those will contribute very nicely as we go forward. So I think those are the things that I would call out as part of that longer-range forecast that we believe supports the margin trends that you see there.

David Raso – ISI

No, I appreciate that. I mean there is a difference between saying we’re just going to run the company more efficiently, which hopefully you will, it’s a higher hurdle rate to jump over than simply – the mix, it’s just more advantageous to have a higher rental margin, thus the idea of doing a 40%-plus EBITDA margin or a higher rental margin in the last cycle is – it’s not quite as high a hurdle rate in the investors’ mind, so. Okay. No, I appreciate it. Thank you.

William Plummer

Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from Joe Box of KeyBanc Capital. Please go ahead.

Michael Kneeland

Hey, Joe.

Joe Box – KeyBanc Capital

Hey. Good afternoon, guys.

William Plummer

Hey, Joe.

Joe Box – KeyBanc Capital

A question for you on the competitive environment. One, can you maybe just comment on the health of some of your independent regional peers? And two, because I think most of them are also fully utilized, do you think that 2012 could actually be a better year for you in terms of share gains?

Michael Kneeland

Well, Joe, this is Mike. We have our plans. We laid it out. We’ve – as Bill was saying, we put a lot of – set of assumptions. Could it always be better? Yeah. It could be. When you look at the landscape, as I mentioned, the well-funded, the larger companies I think will outperform the industry as a whole. And you are right; I think time utilization has kicked up for everybody. But I think that the credit market is still restricting a lot of growth and that bodes well for the larger organizations.

So is there an opportunity? Yes. Our strategy is to focus on profitable growth and be selective of the customers that we’re going to choose, and also expanding our trench, power, HVAC side. So, yes, the answer is, could it be? Yes.

Joe Box – KeyBanc Capital

Great. Thanks for the color. I’ll hope back in queue.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your line is open.

Michael Kneeland

Hey, Scott.

Scott Schneeberger – Oppenheimer

Thanks. Hey, guys. Good afternoon. I apologize in advance, just out of habit I’m going to have a multi-part question. But, with – Bill, mostly for you, with regard to CapEx, could you discuss timing throughout the year since it’s such a large number this year; implications of how the RRR transaction might make you rethink that, and then just a reminder of your supplier commitment and rates that you have locked in with them? Thanks for the run-on.

William Plummer

Sure. So on the timing of CapEx, we’ve talked about looking at the year, and 2012 is a year of two halves, with the first half being fairly hefty amount of spend. We’ve talked about something like $600 million of the $1 billion would be spent in the first two quarters of the year. That’s our thinking as we sit and speak right now.

And based on the commitments that we’ve gotten from the vendors, and indeed based on the receipts that we’ve had so far in the month of January, I don’t think there’s going to be any issue with getting that much fleet delivered in the first half. So that’s the first half; the second half would be the remainder.

And as we said, though, we’re going to evaluate how the market develops to make sure that it warrants spending that second half roughly $400 million or so. So that’s how we’re thinking about the timing.

As to the impact of the transaction, we – it’s really too soon to say the specific amount of impact on the transaction. We are going to evaluate what their capital plan is, what our capital plan is and where there might be opportunities to realize some benefit managing the two as one. My guess sitting here right now is that there will be some impact, but it’s going to be pretty small in 2012 is my guess. And that’s the way we modeled it as we modeled the acquisition to set the valuation. So I would say pretty small impact to the overall spend in 2012.

As to the suppliers, I’m sorry, Scott, I’ve forgotten, what was your question around the suppliers?

Scott Schneeberger – Oppenheimer

Just negotiated rate going into the year with the suppliers.

William Plummer

So, we’ve been very focused on mitigating the impact of inflation, as we always are. If you exclude the Tier 4 purchases that we do, the rest of our purchasing will come in in the low single-digits in terms of inflation over last year. The Tier 4 units, depending on the manufacturer, will cost more. There’s just no avoiding it. That’s partly though why we wanted to try and pre-buy a significant amount of our fleet this year as well. We were able to place orders that take advantage of run-on production under the old Tier 3 rules, and so that has helped mitigate any impact of our capital spend – of inflation on our capital spend. So ex-Tier 4 in the low single-digits inflation, very low single-digits I would say. Does that help?

Scott Schneeberger – Oppenheimer

Yeah. Great. Thanks and congratulations.

William Plummer

Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from Emily Shanks with Barclays Capital.

Michael Kneeland

Hi, Emily.

Emily Shanks – Barclays Capital

Hi. How are you, guys?

Michael Kneeland

Very well.

Emily Shanks – Barclays Capital

Good. Congrats on a great quarter.

Michael Kneeland

Thank you.

Emily Shanks – Barclays Capital

My one question is just around the 4Q rate coming in better than your forecast and your thoughts around that. I’m specifically curious if there’s anything of note going on on the competitive front and/or is it just simply demand, and with that secondarily if you could comment if you are seeing any improvement from some of your competitors? I know it seemed as though they had fallen off in the summertime.

Michael Kneeland

Yeah, Emily. This is Michael. My sense would be is, we are the first to report and if you look at historically what you have been hearing from all of my competitors who are public; they have all publicly have come out with improvement on rates, so my sense is that that trend will continue.

I have said this before, and I will say it again, rates is a powerful lever within our industry. And if you look over the last several years, all of our rates came down quite a lot. And the fundamentals of getting over your cost of capital hasn’t changed and so my sense is given the high time utilization, given the fact that the Tier 4 engines and Tier 4 products are going to cost more, it’s going to behoove all of us to make sure that we get the right return on all of our assets.

So my sense will be given what we’re seeing in the marketplace, it should continue. But we’ll have to wait and see but, again, my sense would be is, as you hear other companies come out publicly I would not be surprised to see their rates up as well.

Emily Shanks – Barclays Capital

Great. Thank you.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from Ted Grace of Susquehanna. Pease go ahead.

Ted Grace – Susquehanna

Hey. Thanks, guys.

Michael Kneeland

Hey.

Ted Grace – Susquehanna

How are you doing?

Michael Kneeland

Good.

Ted Grace – Susquehanna

Congratulations on another great quarter.

Michael Kneeland

Thank you.

Ted Grace – Susquehanna

I just wanted to tag on to David’s question, and take it one step further and go in the direction of returns. And I know one of the big things you guys have really tired to emphasize is – is improving the full cycle returns on invested capital.

William Plummer

Hey, Ted. I’m sorry. I’m having a hard time hearing you. Can you get a little closer to the phone?

Ted Grace – Susquehanna

Sure. Is that any better?

William Plummer

Yeah. That is.

Ted Grace – Susquehanna

Oh, great. Sorry about that. So what I was hoping to do was talk a little bit more about your returns on a go-forward basis. And I know one of the big internal pushes has been to improve the full cycle returns. And so, given the inflection that we’ve seen in the business, I’m just wondering if you can update us on how you think about returns over this upcoming cycle, both on a standalone basis and to the degree you can talk at all about the pro forma that would be great as well?

William Plummer

Yeah. It’s – I’m rapidly scanning my brain trying to think about how to talk about the returns and not be flippant and say something like returns are going to go up. We’re certainly focused on the elements of return. And we certainly, over the forecast horizon that we put in the S-4, improve our returns. They’re going to come out of the usual suspects, right, improving rate, being more efficient with the cost side of the P&L, leveraging your fixed costs in particular over a larger fleet. We think we get better profit improvement than the increased average size of the fleet in the forecast horizon that we’ve put out there. So – maybe if you ask a more specific question, but overall we think that there is a very nicely trending path of returns over the next several years and it’s just up to us to go out and get the elements that lead to that trend in returns.

Ted Grace – Susquehanna

That’s great. That’s helpful. Asked maybe differently, could you speak to specific numbers about your targeted returns on invested capital, maybe that will be implied by the forecast you had in the S-4 and what that might mean cycle-over-cycle, will the average return would be for the company?

William Plummer

Yeah. No, I wouldn’t comment on a specific targeted return that’s in the S-4 forecast. Maybe I’d just drop back to say that we’re very firmly committed to the idea of delivering cost of capital returns over the cycle. And we think about our cost of capital as being something like 10% as a target. So I’ll stop there without getting more specific, but we feel good about the trend that we have toward that goal of delivering cost of capital returns over the cycle.

Ted Grace – Susquehanna

Okay. That’s great. Well, congrats again, and best of luck this year guys.

Michael Kneeland

Yeah. Thanks, Ted.

William Plummer

Thanks, Ted.

Operator

Thank you. Our next question comes from Seth Weber of RBC. Your line is open.

Michael Kneeland

Hey, Seth.

Seth Weber – RBC

Hey. Good afternoon, guys.

Michael Kneeland

Afternoon.

Seth Weber – RBC

Kind of conceptually, I just want to throw something out there. I mean as the commercial construction cycle gets better, would you expect the – your construction bucket to outgrow your industrial bucket going forward, just have a faster growth? And then, what would the implications for margin be? I know you’ve talked about I think industrial margins being actually higher, fewer transactions, what have you, so can you just – maybe as the market get – as the cycle gets better, how we should be thinking about that?

Michael Kneeland

Yeah. Seth, basically what we’ve been saying is we’re looking to diversify our portfolio. And to your point, around industrial, the dynamics around industrials are typically larger. They rent longer. They have the equipment out for longer periods of time. Those same dynamics you could fit into the larger national accounts spread across North America. So, we said we wanted to expand our portfolio to be somewhere in the 30% to 40% range of industrial. And I mentioned on the December call that this transaction with RSC gets us to where we want to be.

And I think that when you – we look at industrial, industrial recovers first, and it’s less cyclical. We can park 2009 for a moment because it affected almost anything and everything that was moving. But in a typical cycle, it’s more resilient. But in a recovery, as you can imagine, production goes up and industry goes up, first, and then you see construction kind of lag behind it. And, my sense is you’re going to see that again here. So, when I look at it, we want to make sure that we have a blend, but it’s more the type of customer that we are focusing at inside of construction that I think is the difference today versus yesteryear.

Seth Weber – RBC

Yeah. That makes a lot of sense, okay. So even though the construction – commercial construction is getting – accelerating, the customer profile is different than it used to be?

Michael Kneeland

Yes.

Seth Weber – RBC

Okay. And then I guess just – on the acquisition front, does the RSC transaction preclude you from doing other deals in your mind? I mean, you’ve had some good success picking off some of these specialty operators. Do you think you’ll continue to do that? Or just get too distracted with the RSC deal?

Michael Kneeland

Well, let me just say this, that we’re razor-focused on the RSC deal and getting that done and completing that. Having said that, as I said, we’ll continue to look at the opportunities that do exist in our specialty business. We see that as a unique opportunity for growth. And more importantly, there’s a connection of cross-selling between our current customer base and those lines of business. So, we will be cognizant of what’s available out there, but we’ll also look at it from a cold start and also from a capital allocation for assets. So, it’s all the above on our specialty, but clearly I want to make a point that we are focused around the integration process of RSC and United Rentals.

William Plummer

Yeah, just if I could; that – the integration process will certainly be a major focus, but we want to make sure that we’re seeing opportunities and put those opportunities in the context of everything that we’ve got going on. So, integration and, as Mike mentioned, our capital structure and how we allocate capital. That won’t be lost on us and we’re going to be very protective of the capital structure to make sure that we do good work on the capital structure over the early part following the acquisition of RSC.

Seth Weber – RBC

Got it. Thanks very much, guys.

Michael Kneeland

Thank you.

Operator

Thank you. Our next question comes from David Wells with Thompson Research. Please go ahead.

Michael Kneeland

Hi, David.

David Wells – Thompson Research

Hi. Good afternoon, everyone. So, my question is if I look at the industry data flow out of the company, you had your survey results from August and September that were positive, and then we’ve had a really nice run of positive weather here. And, what I’m trying to get at is: we’ve got some signs that the market is looking good.

But, my sense is what’s the risk that that’s a head fake to some extent, and another year where the macroeconomists come out and talk about a recovery in construction, and we had the same thing happen last year and it didn’t really happen in 2011. So maybe could you steer us to what’s giving visibility to really make the big wager on CapEx that you’ve made in the first half and maybe even any data points here over the last, say, six to eight weeks that give you the confidence and visibility to put the big roll of the dice, so to speak?

Michael Kneeland

Well, I look at it – it’s a little more scientific than rolling the dice. But, as we went through the year, our time utilization consistently quarter-over-quarter was at record levels. And, as Bill mentioned, we are seeing that play out going into this year as well. But, when we talk – it’s about our customers and the way in which we go to market and we’re focused with our customers and we’re more connected with them than we ever have in the past. And, again, they’re more optimistic. It’s the work that they have in front of them.

And, we also take a look at where the opportunities existed, but because of our process and the way in which we planned last year, we could have grown. We’ve been mentioning quarter over quarter and – with investors that we could have spent a lot more money last year, but we were very disciplined, and we wanted to achieve certain hurdles which we have overcome.

As a result of that, even if the market were to play out at flat, forget the 2% for a moment, take a look at this past year. The market declined, and we had significant double-digit growth. I think it still plays out that the uncertainty in the marketplace, coupled with the capital – or the credit market tightness still – the secular shift toward renting is continuing that momentum. So, we have something else at play here than just the macro environment.

William Plummer

Can I just add one thought? Maybe it’s a little too granular; but one of the things that gives me comfort is not only to hear our customers say how encouraged they are about this year and the next few, but then to dive deeper into some of our tools like our job board and actually look at the projects that those customers are on, right?

And, you look at XYZ customer is on an airport expansion; well that’s going to run for a couple of few years. Another customer is on a new power plant construction project; that’s going to run for a while. Here’s a hospital over here; here’s a school expansion over there. So when you scratch the projects that folks are working on, it just feels like there’s something real and substantial underneath. The overall tone that we get is that there’s a solid year coming up. So that’s one of the things that I look at.

David Wells – Thompson Research

Thanks, that’s very helpful.

Operator

Thank you. Our next question comes from Jerry Revich of Goldman Sachs.

Michael Kneeland

Hi, Jerry.

Jerry Revich – Goldman Sachs

Good afternoon. Yeah, on the RSC acquisition, to the extent you’re comfortable commenting, can you just talk about, if the acquisition is approved, how much upside to your utilization rates should we think about from the RSC Total Control system? And, can you comment on whether you would ultimately expect the revenue share for the trench and HVAC businesses for the combined company to be similar to where you are on a standalone basis today?

Michael Kneeland

Yeah, Jerry, let me just say that, as I mentioned, the integration process is well underway. We just kicked it off. Individuals from both companies are looking at a way to launch the new combined organization.

But, also at the same time, I want to emphasize that operationally we are two distinct companies until such time that we get all the approval and votes and we close. So, we are conducting ourselves accordingly at all levels. That being said, we do have a team that is dedicated for just what you just talked about and many more. It’s made up of both sides. I will tell you the operating principles that we are working under, I think, are the key takeaways. We are looking at it through the customer’s eyes.

How do we affect the customer? And, we’re looking at integration of the best of both worlds. And, there is a lot of things that RSC does great and there are some things that we do as well. So, the question is, how can we get both of those married up and put together and that’s what these teams are focused on. Bill talked about and I mentioned about following the money and making sure that we deliver on at least that $200 million. But, then the last one is communication and we have to – we’ll continue to communicate as we come through and find these answers. But, it’s too early. We just kicked it off but you just mentioned the one thing that they have that quite honestly is a valuable asset to them. We just don’t know yet at this point.

Jerry Revich – Goldman Sachs

Okay. And, can you talk about how you’re thinking about fleet age in this cycle compared to the last cycle for your stand-alone business? I appreciate it’s – that’s more of a byproduct of your capital allocation decision than a target in and of itself but I would appreciate your broader thoughts if you don’t mind.

Michael Kneeland

Well, sure. And, I’m going to ask Bill to chime in as well. But, what we have experienced during this downturn is our ability to actually achieve record time utilization while improving our rental rates on the older fleet. And so, we’ve pressure tested our theory, and we seem to be able to operate a lot – just fine at record levels on the older fleets. So, I think we will probably do some reevaluation to better understand that. As Bill mentioned, with the capital that we’re spending, we will drop our fleet age down over time and starting this year. But, to say what is the optimum area, I think we’re – we still have to refine that because, like I said, this downturn opened our eyes.

Jerry Revich – Goldman Sachs

Thank you very much.

Operator

And, at this time, I’d like to turn the call back over to Mr. Kneeland. Sir?

Michael Kneeland

Okay. Well, thank you, operator. I think this is a good time to wrap up the Q&A. And, I want to thank everybody for joining us today. And, also I suggest that you download our latest investor deck that we’ve got posted on our website. It has our full year numbers and also some additional information. And, as always, we welcome your calls to Greenwich and for site visits to our locations to see how we operate. Again, I want to thank everybody, and we look forward to our first quarterly call. So, thank you.

Operator

Thank you, Mr. Kneeland, and thank you, Mr. Plummer. Ladies and gentlemen, this does conclude your program. You may disconnect your lines at this time. Have a great day.

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