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United Rentals, Inc. (NYSE:URI)

Q1 2012 Earnings Conference Call

April 18, 2012 11:00 AM ET

Executives

Michael Kneeland - Chief Executive Officer

William Plummer - Chief Financial Officer

Matt Flannery - Executive Vice President of Operations and Sales.

Analysts

Jerry Revich – Goldman Sachs

Ted Grace – Susquehanna

Manish Somaiya -- Citi

Scott Schneeberger – Oppenheimer

David Raso – ISI Group

Henry Kirn – UBS

Operator

Good morning and welcome to United Rentals First Quarter 2012 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 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 and Matt Flannery, Executive Vice President - Operations and Sales.

I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin.

Michael Kneeland

Thanks operator. Good morning, everyone and welcome. With me today, is our CFO, Bill Plummer, Matt Flannery, our Executive Vice President of Operations and Sales and other members of our senior management team.

Matt has been leading the integration planning for our merger with RSC and I have asked him to share some details about that process, so I have three speakers this morning. But first I want to spend a few minutes on the quarter and the closing of the transaction. So I’ll start with the results.

You saw the numbers we reported last night. We had a very good quarter, we showed 21% growth in rental revenues and realized $231 million of adjusted EBITDA in our slowest seasonal quarter. In fact our performance surpassed all prior first quarters with record time utilization, record fleet growth and record adjusted EBITDA and a record margin. Once again we drove the profitable growth faster than the construction recovery and this time we got some modest help, from the environment. Spending our non-residential construction appears to be running year over year. Now, I have to wait for the March numbers to see of that holds true.

And the architecture billing index, which has remained above 50 for the commercial and industrial sector for 7 straight months and this morning the ABI reported that the March index for our sector was 56. So, as you know we felt good about 2012 going into this year and we are just as bullish now and even more confident about our outlook.

We put $300 million of gross CapEx into the market in the first three months, because we saw demand and as a result show we didn’t just grow our fleet, we put it on at rent, at good margins.

Our rates improved more than 6% year-over-year, and time utilization was our first quarter record for us at 62.3%. Now, both of these metrics are in line with our expectations. These results speak volumes about the effectiveness of our strategy and the ongoing secular shift towards renting.

We’re managing the business to a new kind of construction cycle, one that benefits from both the upswing in activity and a change in customer behavior. Now, we’re making the right decisions at the top, more important our branch teams and our sales organizations are doing a stellar job of acting on those decisions, by living up to our promise of exceptional customer service, as the heart of our value proposition and are conducting business more safely than ever. We cut our [ph]reportable rate for more than half in the first quarter, so a lot of credit goes to this field and I commend them for the progress that they are making.

Now, as a quick overview, I can tell you that all of our operating regions show double digit rental revenue improvement in the quarter compared to last year. But our strategy doesn’t focus just on the top line. We’re pushing hard for profitable growth, in the Southwest for example where the environment has been challenging over the past two years. We showed 20% rental revenue growth in the quarter. And we also had a 5.7% rate improvement, as well as the strongest utilization improvement of any region, up 7.6 percentage points.

In the Gulf, with demand drove rates up 8.6%, our time utilization also improved. Now that being said, some areas are more robust than others. In Eastern Canada, although we are up year-over-year, we don’t expect the same vigorous market conditions that we saw last year. We still anticipate that rental revenue growths will be in the double digits, but it maybe they’re at slower pace. Now, the balance of rates and utilization is top of mind for all of our branches in every sales person. Our people know that when we compete for business, particularly big projects, the revenue dollars could be exiting, if the margins have to be protected.

Some sectors overseeing demand are energy, which is stronger than ever and plant construction in the manufacturing sector. Also institutional projects and big urban areas like Montreal and Dallas are seeing growth. And in more rural areas states like Oregon, the construction of datacenters represent a growing opportunity for us. Our specialty business in trench safety, power and HVAC had a very strong quarter with rental revenues up more than 40% year-over-year and an improvement in operating margin. Now some of that comes from our acquisitions in the trailing 9 months, but even excluding acquisitions, we still had over 24% growth in our specialty rentals.

It’s good to see project activity pick up again. And it still has a long way to go but our customers are in a better place than they were a year ago, particularly our target customers. When we look at our key accounts and national accounts as segments of our customer base, the rental revenue growth for each group was higher than the company’s 20% growth overall.

And we talk to our customers all the time and are optimistic about this year. And this supports our belief that 2012 will continue to be a year of significant growth for us. Now, very soon we will have a much larger organization, putting momentum behind that growth. And we schedule our special meeting of stockholders for April 27 to approve the RSC merger, and we planned a closer transaction on April 30. Now, immediately after closing on what we call Day 1, we’ll start communicating with all employees of both companies and move immediately into integration mode. The planning process of the past four months has been intense. Every detail has been scrutinized. Am very proud of the way we are handling this work load without taking our eyes off our customers.

In a matter of weeks we will begin building on the strengths of each company to form the world’s best equipment rental provider. United Rentals and RSC are both strong companies right now and are going to be even stronger united. And we’ll open the door for greater creation of value for our customers and our investors and that has been our goal all along. And we are very close to acting on those opportunities.

So, with that I’m going to ask Matt to spend a few minutes on the integration and then Bill will cover our financial results and after that we’ll take your questions, so over to you Matt.

Matt Flannery

Great, thanks Mike and good morning everyone. When the senior leadership teams of both RSC and United Rentals got together in early January, we were all ready in complete agreement about what would be our guiding principles for the integration process. These three principles were defined early on, as part of the decision to combine the operations.

First, we would do view any and all changes through the eyes of the customer. Any lapse in customer service would be unacceptable. Second, we would be diligent about making sure we created the best in class organization for the new United Rentals. We wanted to make sure we retained the top talent and continued on with the best process for each business function. And third we committed to follow the money and look hard for synergy opportunities along every step of building our new organization. I would like to take a minute to tell you all how we’ve gone about this process.

When Mike asked me to lead this integration, the first challenge that I confronted was at the most fundamental level. How can we pull together an integration team from both organizations without hurting the base business? Well, as you all read last night, both companies stayed on-track with strong first quarter performances despite the fact that we’ve had over 100 people deeply involved in the integration planning and thousands of others more than little curious about the process.

We accomplished this through the efforts of our align management as well as productive communication from both (inaudible). From an integration process perspective, we organized our efforts into 14 functional and strategic teams. All focused on a specific area of the business. These teams have a total of 25 sub teams working to assist them. Each team is jointly led by the functional expert from each organization to ensure that the end result incorporates the best thinking of both companies. One example of this would be the go-to market strategy team. They’ve been focused on sales, structure and customer segmentation. As a first step, the senior vice president of sales from each team reviewed the best practices from both companies. Then we had multiple field leaders from both organizations break out into sub teams. Each sub team is charged with focusing on a single component of the sales approach. By having the sub teams drilled down to the most basic customer touch points we’ve been able to be very precise in identifying the challenges and opportunities that employees will face as the new United Rentals.

All of our field managers will be handed a sales playbook on day one after the close. The playbook will identify what issues may arise and how they should handle them in the field. We’ve compiled similar playbooks for the business functions of operations, human resources as well as for all the corporate departments so that employees can be focused on keeping this a seamless transition for the customer. We want to be sure that everybody is on the same page.

While these teams are working on building the best process, they also continue to look for potential synergies. In other words follow the money. For the past 12 weeks each team has had weekly meetings to provide updates on the synergy opportunities they found and they would then report them to our Integration Management Office or IMO. The IMO evaluates each opportunity and gives guidance on how each potential decision would affect the business. In other words, is this synergy reasonable to attain. The IMO then reports out to our steering committee for final review every two weeks. We’ve gone through this process methodically since February and we will continue to review opportunities long after this field is closed.

These efforts have resulted in each team preparing detailed action plan that has not only uncovered synergies in excess of our original estimate of 200 million, but have also helped us to identify best practice. For example, we are in agreement that RSCs total control system is the best way to help our customers manage their equipment usage. And the fast dispatch system used by United Rentals will help the combined organization operate its delivery vehicles in a more cost effective and efficient manner. Another area where we spend much energy is on the people selection process. We’ve said throughout this process that we are focused on building the best team in the industry and I am pleased to report that the leadership teams from both organizations are very well represented. Earlier this month, we announced internally our field leadership team which includes 14 vice presidents heading up our branch network, 7 from RSC and 7 from United Rentals. We’ll also have 4 senior vice presidents working in the field; 2 from RSC and 2 from United. And although having these numbers be identical was never a target. The need signifies the balance that we’ll have in representation from each organization throughout our field network. And before I turn the call over to Bill I would just like to add that there is one thing I have learned in my 20+ years in the business and in the experience that I have gained with multiple acquisitions and to that success will be driven by the ability of the new team to work as a cohesive unit. For the past 4 months, I spend most of my time with the RSC and United Rental’s employees doing just that working side by side getting prepared for this integration. And it is very encouraging to realize that we are much more alike than we are different. I feel confident that this alignment will help immensely in delivering a smooth integration process for our employees and our customers. Now let me turn the call over to Bill for the financial review.

William Plummer

Alright, thanks Matt and good morning to everyone. In the spirit of saving more time for Q&A my comments would be briefer than normal and let me start by reminding everyone of the change that we made in some of the key metrics that I’ll be touching on here this morning. Effective, that the beginning of this year we adopted the ARA methodology for calculating certain key metrics, they include rental rates, time utilization, dollar utilization and fleet age. So, all my comments about the metrics here will be on the new ARA basis and year-over-year comparisons will have the prior period adjusted as well. So, let me start with rental revenue as always very strong quarter rental revenue as Mike pointed out. Rental revenues up 20.5% year-over-year and we had strong contributions from both rate and volume in that number Rental rates were up 6.3% for the quarter over the prior year and were on a sequential basis essentially flat, they were down 0.08%, so let’s call that flat for argument sake. So all-in-all the rate environment was solid and fully consistent with what we expected for the early part of the year and indeed fully consistent with the 5% target that we’ve laid out for the full year.

Volume was also strong. We were up 18% year-over-year in OEC on rent, up to $2.6 billion of OEC on rent, a very strong number for the first quarter. It obviously reflects the size of our fleet being larger. We spent a robust amount of CapEx in the first quarter and increased the average size of our fleet by 16%. But it also reflects nice performance on time utilization. Time was 52.3% and that was up 120 basis points over the comparable period last year and that represents yet another record for the quarter in the company’s history. So, strong time on a larger fleet and getting the rate, it’s a pretty strong combination, we are firing on all cylinders and it gives us great momentum on rental revenue for the early part of 2012.

The other part of the revenue story that’s worth noting is the used equipment result for the quarter. We sold $76 million of proceeds of used equipment in Q1 and that’s up robustly from $32 million last year. Combined with that huge volume though was the gross margin result that was very strong, 38.2% gross margin and while it down a little bit from last year the size what we sold was truly impressive. The real driver of that strong margin performance was our channel mix. We sold 68% of that total volume of used sales through our retail channel. It was combined with a robust pricing environment, don’t get me wrong, but the channel mix is a major driver for us and so we were very pleased to be able to move that volume through our retail channel. A total of $147 million of OEC sold in the first quarter, another very strong performance for us in that regard.

Let me move briefly to profitability measures, anyway you cut it, again a strong quarter for us. Adjusted EBITDA for the quarter came in at $231 million and that was up 59% over last year, $86 million more of adjusted EBITDA this year compared to last year and along with that a great performance on margin. Adjusted EBITDA margin for the quarter was 35.2% and that was an increase of 750 basis points over last year. So nice performance on the top line, also good results in the cost of rentals and our SG&A performance as well, all of that contributed nicely in Q1.

On a flow-through basis, the adjusted EBITDA flow-through to total revenue was 64.7% for the quarter, again a robust performance and fully consistent with the range that we have given you for the full year of 62% to 65%.

EPS, again, another strong performance there. Adjusted EPS for the quarter is $0.36 of profit and that compares to a $0.32 a share loss last year. So, again, by any measure a strong profitability performance.

A couple of words real briefly on our capital plan for fleet and free cash flow for the quarter. On CapEx we spent $390 million of gross rental CapEx in the quarter. That’s a very very strong CapEx performance on the company’s part and I must say a strong performance on the part of the vendors as well. They were able to deliver a very large amount very rapidly in Q1 and certainly it was something that we wanted to take because we saw a very robust demand out there as you could imagine from taking $390 million of gross rental CapEx spend and still driving improvements in your time utilization in the first quarter seasonally weak. It’s a pretty strong performance. So, $390 of gross capital spends in the quarter. The spend has been as we have done for the last and several quarters, focused more on those categories that we are interested in, in the particular Boom and Scissor lifts and Forklifts and we have got some more earth moving equipment coming in for the quarter. So a good spend quarter for us on gross capital.

Our free cash flow in the quarter was a usage of $89 million that compares to a free cash flow source of $70 million in the first quarter of last year. The swing certainly reflecting the larger capital spend that we have played this year.

Let me as a final couple of comments update our thoughts about our outlook for 2012. I’ll reemphasize but these are standalone view of our outlook and obviously we will update the forward view of the company once we have closed the transaction with RSC. Our expectation is that we will offer some further guidance on the combined company in the middle of May once we have had a chance to take a closer look at some more detailed data from RSC. But for United Rentals, as it relates to rate, we are reaffirming the 5% rental rate improvement that we expect for the full year, and as I said before, our first quarter performance is clearly consistent with that level of improvement.

On time utilization, again we are sticking with the 0.5% improvement in time utilization for the full year that we had previously provided. And again, our first quarter experience is consistent with that kind of time, especially when you look at the pace that we have been bringing in new capital.

On capital spend, we are going to continue to target about $1 billion of gross capital spend for the year. Although now given the strong start on used sales proceeds we have reduced slightly the amount of net rental CapEx that we expect for the full year. We are now calling net rental CapEx in the $700 to $750 range, down roughly $70 million from where we were previously. I will point out that I have got a question or two from folks about whether that reduction in the net rental CapEx target without moving our free cash flow target for the full year does that imply any reduction in our outlook for profitability over the course of the year? The answer there is definitively no. We just are reducing the net rental CapEx to be consistent with what we have experienced and what we now expect in the way of used sales proceeds over the course of the full year.

Again, our free cash flow target for the year is unchanged, its $50 to $100 million free cash flow negative and again we think that’s the appropriate level of capital as we look at the year currently. If we execute the CapEx plan at these levels we will improve the age of our fleet, over the course of the year, it will improve roughly two-and-a-half months over the course of the full year. We got roughly three months of improvement from the beginning of the year to the end of the first quarter with the level of spend that we did and the level of robust used sales. So that will continue to play out as we go through the rest of the year.

On the profitability front, in terms of flow-through, we still think that flow through will be in the mid-60% range for the full year, call it 62% to 67%, again consistent with what we have said previously.

Finally, let me just offer one thought on the merger. As I said, we will be updating our view about the merged company in comments that we will make a couple of weeks after we have closed. But having just completed the financing transaction I just wanted to remind everyone of our view on one of the key measures as it relates to the capital structure our total leverage. Total debt-to-EBITDA we have said previously, we expect to come down rapidly. We have included in our investor deck a view of what that means. We show there on a pro forma basis for 2011, 2012, and 2013 the total debt-to-EBITDA leverage that we expect assuming the forecast that we included in the S4. So, on a pro forma basis with those forecast assumed, we would be something like 4.6 times debt-to-EBITDA at the end of 2011, but that will come down to roughly 4 times by the end of this year and down further to roughly 3 times, 2.9 times to be overly precise, by the end of 2013. That kind of deleveraging is what we have in mind and what we think is appropriate and available to us on a combined basis.

With that I’ll end my comments and ask the operator to open the call for questions and answers. Operator?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Michael Kneeland

Hi, Jerry.

Jerry Revich – Goldman Sachs

Hi good morning.

Michael Kneeland

Good morning.

Jerry Revich – Goldman Sachs

Matt, can you talk about your updated cost cutting targets? I believe in slide 15 it looks like the branch consolidation number has moved significantly higher, I wonder if you could just step us through the change in branch plan and also touch on relatively lower share on the corporate side as well?

Matt Flannery

Well, as you could imagine, we had our original model back in November/December time frame that we built out. I think at that time Bill had stated that we are going to have about two-thirds of our synergies were going to be realized in the first 12 months. As we have got into the process and started looking under the hood there is some puts and takes in some areas and you recognize one of them in the branch consolidation opportunity. We also think we can get some of that done sooner than the original model. So we have actually updated– the probably most significant update is we have updated our first 12-month, say to $147 million realized in the first 12 months and that was from about $132 to $133 million previous.

Jerry Revich – Goldman Sachs

Matt, in terms of the timing you touched on to some extent is it fair to assume that the branch consolidation will be some of the faster moving operations, so is that the biggest driver of the increase to $147 million from $132 million or are there other factors that we should be thinking about?

Matt Flannery

I would say real estate overall we have been able to find ways to accelerate. There are no other major puts and takes but will continue to refine this and as Bill has stated there are some things we haven’t been able to look at yet due to regulatory reasons and when we get into those after the close that we will might be able to incorporate some more detail into our mid-May update.

Jerry Revich – Goldman Sachs

Okay. And Michael and Bill, can you touch on the CapEx sections that you are seeing out of your competitors? It’s great to see you are putting the new fleet to work at very high utilization rates. For the first quarter here, I am wondering if you can comment on the range of CapEx increases that you are seeing out of your competition as well? I think we have been hearing up to 50% CapEx increases in the first quarter off of a low base for a lot of the smaller companies but we would love to hear your view on the landscape? Thanks.

Michael Kneeland

Yes, Jerry, it’s Mike. What we have been hearing – and from some various executives of some of our vendors is that they have been seeing a big pickup. It really came – the ARA has their first show in the first quarter and that’s where there is a lot of traffic and they are seeing some upward activity. It’s safe to say that I think that’s a positive sign for the industry as a whole and also from United Rentals specifically we are well positioned because we have had our orders well in advance of making sure that we don’t get squeezed by any lead times.

William Plummer

Yes, I think that a key point is that folks who are placing orders right now are going to face a much more challenging environment in terms of lead times. You have to understand what that means, when they will get the equipment and where it will put them relative to the seasoned. That’s one of the things we feel good about is that we place pre-orders very extensively for the early part of this year. You see it in the CapEx that we realize in Q1. I’ll mention something that I forgot to mention actually in my opening comments that as we look at our CapEx plan for the first half, previously we have said we would be spending about $600 million out of the roughly $1 billion of gross capital spend that we are going to spend this year. Our view now is that we will spend a little north of $700 million of that $1 billion in the first half and that reflects not only the pre-orders that we placed but also the relative strength of the vendor’s performance. So we feel we are positioned well and yes, we are seeing some of the others place orders and the question is when do they get it and what does that mean in the marketplace.

Jerry Revich – Goldman Sachs

Thank you very much.

Michael Kneeland

You are welcome.

Operator

Thank you. Our next question comes from the line of Ted Grace from Susquehanna. Your question please.

Michael Kneeland

Hi, Ted.

Ted Grace – Susquehanna

Hi guys, congratulations on the quarter.

Michael Kneeland

Thank you.

Matt Flannery

Thanks, Ted.

Ted Grace – Susquehanna

I was hoping to touch on the rental gross margins and the incrementals, in particular, 84% on our math is very impressive relative to our expectations kind of history in the guidance you have given. Just wondering if you could give us as sense for what went on in the quarter that may have helped you hit those numbers and if we could possibly do the cost of rent bridge to understand the puts and takes in the quarter that would be great?

William Plummer

Sure, Ted. So, clearly the impact of rental rate is something you always have to be mind full of in this business and we had a good rental rate performance on a year-over-year basis, up 6.3%, so that gives you a nice backdrop in terms of the contribution of revenue falling to profitability but in addition to that there were a couple of, I guess, I would say one-off items that you should be aware of in order to kind of make sense of it. One is, we had a several million dollars benefit from a recapture of bonus accrual from 2011. We accrued for bonus during calendar 2011 based on an assumption about what we would pay out. When we actually made our final decisions about payout in the first quarter, we ended up paying out less than we accrued. And so, we recognize that benefit as a bonus recapture in the first quarter, in cost of rent that accounted for, as I said a few millions bucks, call it $3 million to $4 million. So that helped, we have had couple of other sort of minor puts and takes. There was a one-time personal property tax benefit that we received that was close onto a million bucks that fell in to the cost of rent bucket as well. So that is another one timer that helped with the follow through in the Q1. The rest of the year-over-year variance in cost of rent, the great majority of it is driven by variable cost associated with higher volume. As I said, volume was up over 18% in the quarter and between repair and maintenance, and delivery expense, and fuel costs, and salaries and benefits associated with the incremental headcount, that really drove the great majority of the year-over-year increase, and as I said, offset by those two benefits, those one-time benefits that I pointed out.

So I think that’s probably the way to think about it. A lot of volume related cost going up, as you would expect and as you want and then a couple of one-timers helping you out to give you that outstanding flow through. Is that helpful? We lost Ted.

Ted Grace – Susquehanna

Say it again.

William Plummer

I just wanted to make sure that that’s useful for you, anything else?

Ted Grace – Susquehanna

That is exactly what I was (inaudible).

William Plummer

Great.

Ted Grace – Susquehanna

And then on the SG&A side just similar, strong kind of leverage performances, I was just wondering, if you could talk about the quarter and how we might think about the rest of the year? And, I will get back in queue.

William Plummer

Sure, so for the year-over-year in SG&A, the big drivers there, obviously wages and bonus accrual would be sort of several million dollars of that, let us say it was up $7 million, so let us say $3 million of it or so was wage and – excuse me. Total wage and bonus would have been closer to up 7 by itself, but I would point out there was a one-time headwind from that bonus recapture effect in SG&A. It was a tail wind of a few million dollars in cost of rent, there was little bit of a headwind of about a million bucks, if I remember correctly, about a million bucks in SG&A, but that combined with other wage and bonus accrual adjustments would have taken SG&A up about 7, volume related to commissions and other selling related costs would be up another 3, so now you are up 10 and then we had a very strong bad debt performance in the quarter that actually took that down to the roughly $7 million increase overall. There are a couple of other nits and nats that are kind of offset each other, but those were the big movers. So, wage and bonus and I will call it up 7, volume call it up 3, and then bad debt call it down 4 to get you to -- down 3 to 4 to get you to roughly the net up 7 that we reported.

Ted Grace – Susquehanna

Okay that is helpful. And on a go forward basis I know it is going to change in a couple of weeks of the combined company but any kind of guidance, Mike would be willing to share with us?

Matt Flannery

Go forward for these two cost lines.

Ted Grace – Susquehanna

Yeah, well SG&A and then the two cost lines?

Matt Flannery

I think, the couple of things to keep in mind is just the bonus accrual will flex with how performance plays out over the course of the year. So, we started out very strong, we are accruing to a little bit higher level of bonus than we expected in our original plan for the year and you have to watch that to see how it plays over the course of the remainder of the year. In cost to rent, you have got a trend of lowering the fleet age so there will be a benefit as we go through the year there from lower repair and maintenance expense, as a share of overall cost of rentals. So you have to keep that mind, there will be a little bit of a tail wind if we can keep the age trending down the way that we planned. Those are the things that come to mind right off. We have raises, marine increase is scheduled to take effect, that took effect at the beginning of April, so that will be on an absolute dollars basis, there will be increase of, call it 2.5% to 3% that flows through our both cost to rent and SG&A because of raises. So you have to make sure that you keep that in mind. Those are the things that come to mind Ted.

Ted Grace – Susquehanna

Okay, that is super helpful guys, congratulations and best of luck of this quarter.

Matt Flannery

Thank you

William Plummer

Thanks Ted.

Operator

Thank you. Our next question comes from line of Manish Somaiya from Citi, your question please.

Manish Somaiya -- Citi

Good morning everyone and my hearty congratulations as well.

Matt Flannery

Thank you

William Plummer

Thank you

Manish Somaiya -- Citi

Couple of question, I guess since we have Mat on the phone, I guess particularly on the integration Mat, obviously, the slides are terrific as far as kind of laying out your thought process. But, as we kind of think about on the ground execution and with 2Q and 3Q being seasonally strong for the industry, how should we think about how much is going to get done over the next two quarters? Is it something that is going to have to wait till fourth quarter? And then, related to that how quickly do we expect to have the MIS systems aligned?

Matt Flannery

Great questions Manish, I would say as far as the synergy timing, what we do expect to get in this calendar year will be more towards the back half of the year. We really need to use the second quarter to validate some of the assumptions we have made to take look and make sure that -- we want to be prudent. As I had stated in my opening comments, the most important thing is to make this a seamless transition for the customer. With that being said, whether it falls in the third or fourth quarter is not going to be managed output for us. As opposed to getting them done as quickly as we can, so that we can move with our operational best practices. So that will be my answer on the timing issue of the synergies.

William Plummer

The other question you have was on the IT, IT we are looking at a go live date Manish, somewhere between 60 and 90 days in close.

Matt Flannery

Yes.

Manish Somaiya -- Citi

Okay and then just two other quick questions, one is on branding, any thoughts on keeping two brands, one brand and then just on Tier 4, I know we have talked about Tier 4 equipment in the past, but now that we have more of that equipment in the field, may be if you can talk about what kind of pricing you are getting on Tier 4 versus non Tier 4? Are you getting more because certainly I mean you are paying more on Tier 4, so may be if you can just kind outline something’s there for us?

Michael Kneeland

Manish, I will handle the branding question and I will pass of the other part of your question on prices of the equipment to both Matt and Bill. But, branding is a great question, I want to make sure everyone understand that the name will remain United Rentals, but to me a brand is much more than just a name. It is about understanding and implementing a vision and getting collective of thoughts from our employees our customers and our investors. And once we collect an information, we will come forward at the appropriate time to voice and communicate what our vision and our statement will be going forward, but right day one it is going to be United Rentals and RSC, it will be plus United RSC and I will tell you that we have got, -- I assume this is what Mat talked about on teams from both sides. We have a gentlemen from RSC who is leading this up, going deep inside the organization and collecting some very very good information about the people’s collective thoughts around both companies and I think that is the important. This is an opportunity for us, because it is a new phase of not only our company but I think of the industry to step back and take a look at our brand. On the question of pricing --

Matt Flannery

Manish, was your question about whether we realized different pricing, different rental rates for Tier 4 versus Tier 3 units.

Manish Somaiya -- Citi

Yes, exactly that.

Matt Flannery

No, the short answer. Although, I will expand a little bit, we are looking at segregating the assets for two reasons, not just for pricing reasons, but if we have a -- as the manufacturers are manufacturing a limited amount of Tier 4 and as you can imagine they face into the fleet will initially we a small percentage, we want to segregate them out to make sure that customers who have Tier 4 requirements on the project or in the states that they are in, that those assets are separated out, so they don’t -- the worst think we could do is send a Tier 4 engine to a project or customer that doesn’t need it. So that does give us the opportunity to separate them out from the rest of the category which then you would obviously look at how the pricing will play out.

Manish Somaiya -- Citi

Got you, thank you so much, I appreciate it.

Michael Kneeland

Thank you.

Operator

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

William Plummer

Hey Scott

Scott Schneeberger – Oppenheimer

Thanks Mike, good morning. I guess my first question would be, how do you guys feel with regard to visibility into the upcoming peak season and the full year from what you are seeing and hearing from the field on, just on projects and what is the visibility (inaudible)?

William Plummer

I will talk about, what we, the visibility around the customers and I will ask Matt to talk more about projects and what he is seeing more of from a geography stand point. As you know, we have quality business reviews with all of our business segments and we go into depth about talking about what we are understanding and hearing from the customers. Similar to what we experienced in the fourth quarter of last year, our first quarter results from all indications from our customers remains true 80% came back and said that they see 2012 to be equal to or better than 2011. So, we see that as being comforting, I will also tell you anecdotally, and all the quite comments I have had with customers. They are seeing the level of biding activity go up again and that is another healthy indication of the environment. As far as geography and projects Mat will you –

Matt Flannery

Scott as far geographically our growth has been very broad based in North America, we had all but four states showing year-over-year growth and the large majority of those have been double digit, as far as those states showing growth. And the four states that haven’t shown growth are in the single digits and then in Canada, all but two provinces has shown growth so, the growth is wide spread, which is good news for us, they are coming from the sectors that you would imagine, the energy sector through power plants and oil and gas drilling, through manufacturing there is some large projects that are going on there like to Walker project and the BigThree[ph] are starting to invest back into their plants and even the commercial sector is up, right here in lower Manhattan, we have got five major projects going on with the four Freedom Towers and the 9/11 Memorial as well as a path transportation upgrade, so the opportunities are pretty broad based.

Scott Schneeberger – Oppenheimer

Great, thanks, if I could sneak through into my last question, could you comment on the weather impact in first quarter, if there is, if it influences the second quarter at all? And then Bill, separately how should we model used equipment sales margins going forward? Thanks, that is it from me, I appreciate it.

Michael Kneeland

Excuse me, can you rephrase your first question, did you talk about the weather?

Scott Schneeberger – Oppenheimer

Yeah, just weather, general question on how you think it influenced the quarter and will that have any influence on second quarter results.

Michael Kneeland

Weather is always one that and in particularly in the fourth quarter and first quarter is really any mans guess, as we go through it. As you know that everyone has noted that there was a very warm and dry winter across North America and has it benefited us? Absolutely. How can I quantify it? Very difficult. Do I think it is going to impact the project and our type of customer that we go after in the second quarter? No, most of those are well start up projects, they have to bring their steel, the steel is ordered well in advance, they just can’t fast forward that that quickly. With regard to some of the smaller projects, yeah there are probably some projects that got longer term that probably came on board sooner, I don’t see them ramping or taking away from the second quarter, given the demand that we are seeing and also we are bring in more CapEx because of the demand that our customers are expressing to us, so that is how we see it.

William Plummer

And Scott on your second question about modeling used margins, I guess what we have said is that, if you go back over a long period, 10 years or so and exclude ’09 and ’10 which are obviously major upheaval years, our used margins have been in that high twenties kind of percent area over each of those years. Given the strong start that we had to this year, I think it is very fair to say that that will be a little bit higher than we normally have been we were last year, I think we realized for the full year used margins of 31 and change, 31.7% and I would have to guess that we would do that at least again this year as just a general statement to how to model it. So, I would say higher than our normal historic average, I will let you use your imagination for how much higher.

Scott Schneeberger – Oppenheimer

Right, thanks guys great job.

William Plummer

Thanks.

Operator

Thank you. Our next question comes from the line of from David Raso from ISI Group, your question please.

William Plummer

Hi David

Operator

David, you might have your phone on mute.

David Raso – ISI Group

Sorry, I am here, thank you. Two quick questions, first the progress you see quarterly on the rental rates in the fleet utilization to maintain those full year targets. I appreciate seasonally the rental revenue in the first quarter doesn’t completely carry its -- say 25% of the year waiting, but specially on the fleet utilization, if we were positive 120 bps year-over-year in the first quarter and we are looking for 50 for the full year, can you walk us in that quarterly progression? Are you expecting the back half of the year, fleet utilization to be largely flat at that stage or how do you think that would do that progression?

William Plummer

Yeah David, it’s very clearly that as we get into the back half of the year, we are going to be comping really huge utilization quarter. So, we brought the year-over-year improvement down aggressively in the back half to reflect that very fact. So, we think half a percent, we can make without giving a specific year-over-year number by quarter. Yeah, it comes down pretty close to nothing as you get further out. And keep in mind obviously, the fleet is getting much larger and we are comping very strong utilizations last year, so in our view that is going to require us to put a huge amount on rent as we get that larger fleet in. And our belief is that the markets there, the demands there to be able to do that, but that’s underlying the time utilization model. On rental rates and the progression there, the one way to think about it is, given what we did in the first quarter, we would need something like half a percent per month sequentially out through October and then basically nothing sequentially thereafter, in order to deliver the 5% full year. So, that’s very clearly within the realm of reasonable and as always we are going to look for more if it is there. Does that help?

David Raso – ISI Group

Well, could you give us some color on how the rates were moving sequentially, I know there is some seasonality with the first quarter, but how much were rates up March versus February? How are we looking at April so far versus March? Just to see how that progression is playing out so far?

William Plummer

Sure, so on a sequential basis, I would give you the sequentials and I would remind everybody that this is on ARA basis. The sequentials for January, sequential is down 6/10th and then it went positive 3/10th and then flat in March. And I guess, I would offer that April is -- the first half of April has been strong. Just to give you a comparison, if you look at last year, the sequentials in January were down half a percent and February up 2/10th and March down 2/10th, so the sequential progression this year is actually better than it was last year, when you think about the monthly sequentials, so that again gives us a lot of confidence that we are off on a nice run and that the 5% should be attained.

David Raso – ISI Group

Then when it comes to CapEx, lets say your comment, first half of the year you’ll be over 700 million of the billion growth lets call it 07/10 for argument sake. It implies to back after the year CapEx is down 20% year-over-year. How shall I think about that in the sense of by the time we get to June how are you viewing the age year old t? Are you comfortable with that? Or simply look that is the map, it is right map, but we will obviously evaluate the CapEx when we get there. How shall I think about that back up CapEx implication.

William Plummer

You said it beautifully. I don’t question the map, but we’ve done and you’ve seen us do it the last several years right. What we do is, we assess where the market is and where it is heading and how it feels and whether we can put more CapEx on rent at good rates and expect good returns over the longer haul and if and when we make that call we are not short about raising our CapEx guidance. I think we’ve done it all three years that I have been here and so our plan is bring the 700 in the market certainly feels like it will soak that up right here now and then lets take a look around as we get toward the end of the second quarter and make a separate call about whether we should be raising the back CapEx expectation or leave it where it is.

David Raso – ISI Group

And related to that question from my very last question, the CapEx’s decision to bring the equipment in a little earlier, that may be the original plan in the first quarter. What drove that? I mean obviously you can answer the business was strong (inaudible), but safe from the supplier side or some of the dynamics that drove that decision and take the equipment a little earlier and if you could enlighten us like when was that decision made, I am not sure how quick your suppliers can respond to a change in that decision?

William Plummer

So, great question. We started placing pre-orders for the first two quarters in late last year and I think the first pre-orders that we placed we probably did in like September and that was the signal to our vendors that we were going to have demand, robust demand in the first half of the year. So, they started to position themselves to be able to deliver against those pre-orders as sort of a baseline of capacity. They did a nice job of ramping up their production capacity and they were able to supply fleet into us, quite honestly even faster than we had in our plan with the pre-orders. So, we asked ourselves can the market absorb more fleet faster than what we had thought and we concluded, yes it can and so we said yes if you can ship it we’ll take it and that played out very nicely and resulted in the numbers that you saw for Q1 and what you’ll see for the first half and it was a combination of the market being able to absorb additional fleet and the vendors being able to supply it and in us obviously being able to buy it. So, it all worked together to accelerate the CapEx.

David Raso – ISI Group

Alright, great. I really appreciate it. Thank you.

William Plummer

Thank you.

Operator

Thank you. Our next question comes from the line of Henry Kirn from UBS. Your question please.

Henry Kirn – UBS

Hey good morning guys.

William Plummer

Good morning Henry.

Henry Kirn – UBS

You’ve sold a lot of equipment over the last few quarter into the used market, just wanted you if you could talk about who is buying, it is generally staying in the equipments original home market or have you seen international buyers come in and clear it out of your serve market.

William Plummer

Michael, you want to say something.

Michael Kneeland

I am just going to say Henry, I actually attended one of the auctions, actually both of the auction. Actually, both of the auctions that the two large auction houses I had in February and the general feel I had and the comments I received back was at the offshoring of equipment actually went up significantly over the prior year. That’s to me is a tell-tale sign. That demand is robust in other parts of the globe and the demand for our equipment which realistically, if you are looking for used equipment there is no better market than the US and North America, because it’s still the largest producers of used inventory.

Matt Flannery

The who is buying question, as we said many times before it really is the who is who of people who use equipment, so wide range of folks. But I do think Michael’s point is a very important one. Strong offshore demand I think is really supplementing demand that we are seeing from a wide range of customers here in North America.

Henry Kirn – UBS

That’s helpful. One follow up, could you talk a little bit about how far along do you think we are on the secular shift? And maybe, how does the new prospect look today compared with a year ago, cycle is picking up, have you seen an increase in enquires from potential customers who weren’t renting before?

Michael Kneeland

Well, Henry, we have had this discussion and we have been talking with Global Insight with Scott Hazelton and as you know they have been commissioned by the American Rental Association to do some research. All indications that they have put forward based on a lot of data that realistically is very in depth, they are suggesting that the CAGR growth for our industry over five years is going to be somewhere in the vicinity of 12.5%. That’s a pretty healthy number by any stretch of the imagination. When you asked about secular shift and what happens, I think that going into this year they are continuing to see that secular shift movement going in a positive direction. When the capital markets are wide open, when you asked them what has occurred historically the secular penetration doesn’t decline, it levels itself off until the next downturn and then it actually goes back up again, continues its march upward. I don’t think that that pattern is going to change and what we are seeing right here and now.

Henry Kirn – UBS

Thanks a lot. Congratulations.

Michael Kneeland

Thank you.

Matt Flannery

Thanks, Henry.

Operator

Thank you. Due to time constraints this does conclude the question-and-answer session of today’s program. I would like to hand the program back to Michael Kneeland for any further remarks.

Michael Kneeland

Okay. Well, thank you very much operator. I’ll remind everyone that to download our new IR presentation from our website we have made some substantial updates since our last quarter and obviously if there is any additional questions please reach out to Fred Bratman so that we can answer your questions specifically. I want to thank you for joining us today. This is a big year. Next time that we issue earnings we plan on being the new United Rentals, but we will be in touch before then and as always we welcome your calls here in Greenwich. Thank you very much and have a great day.

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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