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Executives

Michael J. Kneeland - CEO

Martin E. Welch - EVP and CFO

Analysts

Christina Woo - Morgan Stanley

Matthew Vitorioso - Barclays Capital

David Raso - Citigroup

Scott Schneeberger - CIBC World Markets Corp

Philip Volpicelli - Goldman Sachs

Philip Gresh - JP Morgan

Ana Carolina Recinos - UBS

Seth Weber - Bank of America Securities

United Rentals, Inc. (URI) Q4 FY07 Earnings Call February 29, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the United Rentals, Fourth Quarter and Full Year 2007 Investor Conference Call. Please be advised that this call is being recorded and is copyrighted by United Rentals Inc.

Before we begin, the Company has asked me to remind you that many of the comments made on today's call and some of the responses to your questions will contain forward-looking statements. United Rental's business and operations are subject to a variety of risks and uncertainties, any of which are beyond its control and consequently actual results may differ materially from those projected by any such forward-looking statements.

A summary of these uncertainties is included in the Safe Harbor statement contained in the company's fourth quarter and full year 2007 earnings release. For a fuller description of these and other possible uncertainties, please refer to the company's annual report on form 10-K for the year ended December 31st 2007, as well as to the subsequent filings with the SEC.

You can access the company's press releases as well as its SEC filings on the company's web site at www.unitedrentals.com using the link captioned access Investor Relations.

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.

During the conference call, references will be made to free cash flow and the EBITDA, each of which is a non-GAAP term. Speaking today for United Rentals is; Michael Kneeland, Chief Executive Officer; and Marty Welch, Chief Financial Officer.

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

Michael J. Kneeland - Chief Executive Officer

Thank you, operator. Good morning, everyone, and thank you for joining us today. With me is Marty Welch, our Chief Financial Officer and other members of senior management team. Now I will open the call today with two words, focus and plan. These two words are the heart of our message. They are the driving force behind the solid numbers we reported last night.

Marty will go over the results with you in a minute, but first I'd like to pull back the curtain and full look at the powerful plan behind the results. Our strategy gets equal billing with our results today because we believe our record EPS for 2007, and our record EBITDA are just a beginning of what we can achieve.

Last month on our guidance call, I spoke briefly about the strategic plan we initiated last June. Essentially we did a complete recalibration of the business to take the emphasis of top line growth and we place it with an overwriting objective of achieving profitable growth. It really was a fresh start for our company. Our new strategy calls for stringent cost controls, more profitable management of our equipment fleet, and a refocus on our core equipment rental business. This is absolutely the right strategy for our company.

Equipment rental is what we do best, it is and always has been a high margin business for us. It's where we have numerous competitive advantages, including serving more than 900,000 customers each year. It's an important point because we are in a repeat business, where customer retention is key.

Our employees know that they have to earn their business everyday and show our customers why we are better option on every rental. In 2007, 93% of our rental revenues came from existing customers. This year, I think it's fair to say that we are cautiously optimistic about our end-markets. We used a number of external sources for forecasting and they largely predict flat to modest growth in non-residential construction spending in 2008.

We have our ear to the ground and we are hearing the same kind of things from our customers and our branch managers. That's on a national level. Regionally we are seeing some sizeable variations between markets. Demand for construction equipment in the Southeast and Southwest regions remained soft throughout 2007, and it looks like it will stay that way for at least the first half of 2008.

South Florida and California are particularly weak. We are deliberately reducing our fleet levels in these areas. By contrast our Rocky Mountain region and both aerial regions realized the greatest year-over-year improvement in time utilization and the highest percentage of OEC on rent.

We have good project diversity right now in aerial including long-term jobs and energy infrastructure, and the entertainment sectors. Our Gulf regions is another area where demand improved in 2007, and so far the Gulf seems to be on track for more of the same this year.

Canada as a whole continues to be success story for us. Our Canadian business accounted for 11% of our rental revenues in 2007, which equates to 14% growth rate for the year on a constant currency basis. Western Canada is particularly strong which contributes to the performance of our Rocky Mountain and our Northwest regions. If we see the market begin to soften in 2008, we'll make adjustments, but right now all signs point towards continued strong demand in Western Canada.

Now I want to mention residential construction since the subject always comes up on these calls. When home building is down as it is now, we feel it more sharply in California and our trench safety business. That was the case in 2007 and continues to be that case in our current quarter. But, overall residential construction accounts for only 10% of our business, so the effect is marginalized in most of our regions.

Looking at our trench safety, pump and power segment, we achieved 2.8 percentage increase in revenues, and 25.6% operating margin. Now some of that came from cold starts, but the bigger picture is that our trench business, which gets most of its revenue from infrastructure projects was able to tap into more of this business in 2007, and we are expecting another year of moderate growth in this segment.

While look at the full scope of our business, we are simply not seeing any signs of broad based slowdown yet. That said, we are watching the situation very closely, but everything we've heard and experienced up to this point tells us the construction experts are correct. We believe like they do, that non-residential construction will continue to show flat to moderate growth in 2008, and if it doesn't we are prepared to deal with that. We spent the last six months establishing excellent platform from, which we pursue profitable business at any market environment.

Now I would like to take the next few minutes to give you some insight into our strategic process. We started early last year that's when we took a hard look at our business and decided we could do better. As you know United Rentals had an explosive first decade and a rapid rush at the top of our industry.

Our primary focus was on driving growth and creating critical mass. Over the last several years we tried our hand at some revenue building initiatives like contractor supplies and became somewhat distracted from our core business. Our business model simply was not operating at full potential. To remedy that we put our entire operation under a microscope, nothing was off the table, when it was over, we knew exactly what had to be done to accelerate our earning power.

We communicated that to our employees and gave them a target to take put our hands around. $500 million of incremental annual EBITDA within five years. We wanted our employees to see cost control and fleet management, and the rental business focus as mean to this end. This entire process involves some very difficult, but necessary decisions. We reduced our headcount by 1,100 employees which is about 9% of our workforce. We are in service business and we don't take workforce reduction lightly. We made the cuts with the full involvement of our fleet operators, and our corporate mangers.

The people most knowledgeable of our customer expectations. Now as a result the process was largely invisible to our customers, service levels remains high and internally we maintained our standards for safety and quality of work. In fact, in 2007 was the safest year on record for our company with the lowest recordable rate in our history.

We also undertook 360 degree optimization of our branch network. We evaluated all our branches every year, but this time our yardstick was reconfigured to EBITDA among other benchmarks. We closed 19 branches by the end of March, and put most of those assets to more profitable use, and we continue to watch for chronically weak links in our network.

Our branch managers understand our goals. Last month, we introduced new compensation plans that align management incentives more closely with building shareholder value. These new comp plans are important reinforcement for the strategy that's already in place. In fact, we are tearing down the walls to constrain fleet utilizations.

Our rental fleet will be managed as pull of asset available to drive all branches instead of all customers. Branch managers are looking now beyond their four walls to share equipment. Our sales people are no longer diverted to selling contractor suppliers, instead they are focus on growing our rental business. Our goal is to make these rentals as profitable as possible. We expect to loose about one point of rate this year, as the construction environment tightens, time utilization should more than offset any rate decline as it did this last year.

In 2007, time utilization our larger fleet increased 2.5 percentage points to 64% for the year. Our rates decline by 1.1%. Let me tell you some of these actions we took to achieve these results. First we leveraged our technology and developed new analytics related to our fleet, this helped our districts and branches allocated implement to areas working, work harder for us.

In 2007, on an average, we transferred 58% more fleet per quarter to branches in high demand, and areas where we are at high margins. For our current quarter, we are on pace to double our equipment transfers compared to 2007. Second we are very focused on turning equipment or around more quickly when it comes to our frame. We are not clearly as productive as we could be on this, but we made strides in certain areas. Our PM currency rate, which measures how much of our fleet is in compliance will required maintenance task, improved significantly and we are now running over 90%.

A third way, we are managing our fleet is to CapEx allocations. We plan to buy about $630 million of fleet this year. This includes $100 million of growth capital for our strongest markets balanced by $85 million of defleeting and markets that don't justify their asset levels. In the past, our branch managers have submitted CapEx request on yearly basis. For 2008, we've moved to a quarterly system to allow us to respond more quickly to market opportunities.

All of these activities are taking place in the field right now, with district over site and corporate support. Internally, we've got a dedicated team focused on driving efficiencies throughout the business. Our SG&A ratio is under intense scrutiny. Out sourcing initiatives, which Marty will talk about in a minute has significantly brought down the price of non-fleet purchases over the past 16 months, and is on track for an estimate $23 million of incremental savings this year.

We've made great moves, but this is just a beginning. Many of the gains we made in 2007 came late in year, when we have a lot on our plate with the service deal. Nevertheless we remain focused on our plan and we delivered one initiative after another.

We emerged from 2007 as a stronger, more energized company with renewed emphasis on operations. We are running more efficient, more profitable business today. We are managing our fleet better. We are listening to our customers and responding to their needs. I can assure you that we will continue to execute this plan from this platform of strength for the foreseeable future.

Now, before I ask Marty to review our financials, let me mention a couple of things. Our Board of Directors is currently fulfilling it fiduciary responsibility on two fronts. First, as noted in our earnings release, the Board is engaged an outside firm to perform a search for the CEO. This is clearly the right time to identify the best possible executive to lead United Rentals. I am pleased to be among the candidates on the consideration at the Board's request.

Now, on a more fundamental issue of shareholder value, our company just came off an excellent year in a very good position. Nevertheless, our stock continues to be seriously undervalued by the market and the Board is considering all viable means of enhancing shareholder value. Regardless of any conclusions the Board may reach, the strategic focus of United Rentals remained on our equipment rental business. We are all on the same page on this. That being said, we don't intend to comment further on the Board activities on this call. So please keep that in mind when you ask your questions.

And with that, I will now turn the microphone over to Marty for the financial review, and then we'll take some questions. Marty.

Martin E. Welch - Executive Vice President and Chief Financial Officer

Thank you Michael and good morning everyone. Michael has discussed some of our highlights for this year, as well as the new strategy we put in place. This strategy which includes an intense focus on our core business of equipment rentals, more profitable management of our rental fleet and continued execution of our cost containment initiatives, contributed to our record fourth quarter and full year EPS and EBITDA performance in 2007. Looking forward to 2008, we expect the continued execution of this strategy to deliver another strong year.

Now, I will discuss our results for the quarter and full year and review our outlook for 2008. Before I get into the details, let me say that my remarks this morning exclude the benefit related to the $100 million we received following the recent termination of our merger agreement with Cerberus. We are pleased with our progress on several fronts, which are focus areas for our business and yardsticks we use to objectively assess our effectiveness in executing our new strategy and delivering on our target to generate 500 million in incremental annual EBITDA within five years.

First, equipment rentals, rental revenue increased 4.1% for the fourth quarter and 4% for the full year 2007, as improved time utilization on a larger fleet more than offset rental rate declines. For the full year, time utilization improved 250 basis points to a record 64%. Additionally, same store rental revenues increased 3.7% for the fourth quarter and 3.1% for the full year. Looking forward to 2008, we expect time utilization to improve another 200 basis points, again more than offsetting an expected 1% decline in rental rates.

Second, SG&A, our SG&A rate improved 80 basis points to 16.2% for the fourth quarter and 90 basis points to 15.9% for the full year 2007. I will talk more about this in a moment, but our targeted SG&A rate which we think is achievable within five years is about 13%.

Third, EBITDA. EBITDA increased 9.3% to a record $318 million for the fourth quarter and increased 8% to a record 1.17 billion for the full year. Additionally, our EBITDA margin improved 320 basis points to 34.2% for the fourth quarter, and 160 basis points to 31.4% for the full year. We expect continued expansion of our full year EBITDA margin in 2008, as we further improve time utilization, and continue to focus on rationalizing our cost structure.

Now, looking at consolidated profitability, full year equipment rental gross margins of 38.7% decreased 20 basis points compared to the prior year, as the impact of increased rental costs and lower rates were only partially offset by improved time utilization. Looking forward to 2008, we expect our rental gross margins to improve about 70 basis points compared to 2007.

Contractor supplies gross margin were 19% on the year, down 260 basis points compared to the prior year. The year-over-year decline reflects pricing pressure as well as a shift in mix as we sold a higher proportion of lower margin commodity type products in 2007, in line with our strategy to reduce our inventory levels. year-over-year, we have reduced our inventory levels by $37 million or 38%.

For 2008, even though we expect total contractor supply sales to decrease by about 40%, our actual gross profit dollars will decline only modestly. This is because we expect our gross margins in this business to increase as we focus on higher margin products that are complementary to our core equipment rental business and further consolidate, and also we further consolidate our distribution network.

Turning to used equipment sales. Our used equipment sales were down about 5% year-over-year and our gross margins declined by 300 basis points. The declining gross margin primarily reflects the sales of certain distressed and underutilized assets in the fourth quarter. For 2008, as we improve our fleet management, focus on maximizing cash flows over the life of an asset and more efficiently manage our CapEx budget, we expect used equipment sales to decline by about one-third.

SG&A of $595 million was 15.9% of revenue for the year, an improvement of 90 basis points compared to 2006. On an absolute dollar basis, SG&A expenses actually decreased $18 million, reflecting reduced professional fees, the initial benefits of our cost savings initiatives and reduced incentive compensation. During the fourth quarter, SG&A of $151 million was 16.2% of revenue, an improvement of 80 basis points year-over-year, and on an absolute dollar basis, expenses declined by $9 million for the quarter.

As Michael mentioned earlier, we put our operations under a microscope in 2007, and I am proud to say we emerged from that process with very specific plans to reduce our cost levels. I would like to spend a little time here to discuss those initiatives. We have a strategic sourcing initiative, which will lower our non-equipment related spent, a headcount reduction program, and other discrete projects, all of which are designed to reduce our cost.

First, let me discuss SSI. We realized about $22 million of cumulative savings in 2007, and expect to realize an additional $23 million in 2008 and another $27 million in 2009. Let me give you an example. We recently renegotiated our network in long distance rates and consolidated them with one vendor. As part of this new plan, we will be upgrading our T-1 lines and still realized annual company-wide savings of about $2 million.

Another example, we have implemented a new wireless program with our career, where we now pool all of our minutes and save about $24 per month on each of our thousands of wireless devices. Another example is our shipping spend. Our small package volume is over 600,000 packages a year. By consolidating the spend with one vendor, we were able to negotiate better rates and saved about $6 on each and every package set, representing about $3.6 million in the aggregate, and we also have better controls. Now, when our part suppliers send packages to our branches, they insist that they use our preferred vendor.

I can go on, but the point is we are focused and recognized there is significant opportunity to leverage our non-equipment spend the way we have already leveraged our equipment spend. Of the $70 million of total SSI savings, about two-thirds relates to cost of goods sold and the balance relates to SG&A.

In terms of headcount reductions, as Michael noted, we conducted an exhaustive review of our operations and reduced our workforce by 9% or about 1,100 people. And just as importantly, we eliminated these costs without impacting customer service. We expect this reduction to contribute about $55 million to $59 million of annual savings. Of this figure approximately 20% relates to SG&A and the balance will be reflected in the cost of goods sold.

In terms of other cost saving initiatives, we have identified about 120 individual projects. In the aggregate, we expect these projects to deliver about $70 million in savings over the next three years. For each of these items, we have identified a project owner, who is accountable for delivering these savings, and a number of these actions have already taken place. For instance in 2007, we eliminated our corporate jet fleet, contributing over $2 million in annual savings.

Other items include the in-sourcing of our SOX compliance work, eliminating our NHL sponsorship, and reducing our T&E spend by implementing better controls in spending limit. Of these initiatives, approximately 90% relates to SG&A and the balance to cost of goods sold.

Looking forward to 2008, we expect both our SG&A rate and our absolute level of SG&A spend to continue to decline. Our forecast for 2008 reflects a reduction of over $15 million and the absolute level of SG&A spend at an SG&A rate of 15.3%, as we realized further savings from these cost cutting initiatives. Beyond next year, we are driving toward continued improvement in this area with target SG&A rate of about 13%.

Our continuing operations diluted earnings per share for the year was $2.76 of on a share account of about a 114 million shares, compared with $2.28 on the same share count in 2006. These earnings which excluded the $.50 per share merger benefit represent an improvement of 21% versus 2006. We believe the strategy we outlined will further drive EPS expansion in 2008.

Looking at our consolidated cash flow for the year, our 2007 cash flow from operations, which includes the $91 million merger termination benefit was $859 million, compared $834 million in 2006. Excluding this item, our year-over-year decline is largely the result of a $67 million increase in cash taxes paid as we burn through our federal NOLs.

Turning to capital expenditures for the year, we invested $870 million in our rental fleet compared with $873 million in 2006. Our non-rental CapEx for the year was $120 million, $42 million increase versus last year. Excluding the merger benefit, free cash flow for the year was $151 million as compared to $235 million last year. The decline largely realized to the increasing cash taxes paid. In addition to achieving strong free cash flow during the year, our EBITDA margins also improved. Our EBITDA margin of 31.4% for the year represents a 160 basis point improvement versus 2006.

Now let's take a movement to review the balance sheet. Total assets were $5.8 billion, including the net book value of our rental equipment of $2.8 billion. Our total debt, including the subordinator convertible debentures at year end 2007 was $2.7 billion essentially unchanged from the prior year end. Our net debt however, decreased by $248 million or about 10% reflecting our strong liquidity position.

Our current borrowing capacity under our revolver and accounts receivable securitization facility is about $810 million. Now before we open up the call for Q&A, let me summarize our expectations for 2008.

Our EPS range is $2.80 to $3 per share. This is based on anticipated full year diluted share count of the same 114 million shares. This range does not reflect any provision relating to regulatory issues and related matters.

Our revenue EBITDA and free cash flow guidance is as follows; rental revenue growth of 3% to $2.71 billion and total revenue of $3.53 billion. Our rental revenue expectations reflecting an improvement in time utilization partially offset by 1% rate decline, virtually no growth capital and modest growth in our end-markets. EBITDA of $1.17 billion to $1.21 billion representing an EBITDA margin of about 33.7%. We are forecasting a tax rate of 38% and approximately $325 million to $375 million of free cash flow after investing about $715 million in CapEx.

In terms of our free cash flow guidance, we are in a process of reviewing the potential opportunity associated with the bonus depreciation provisions of the recently passed federal stimulus package, and we will update you in that matter during our first quarter call.

So that summarizes our outlook. And now I would like to turn it back to the operator, Chris if you could begin the Q&A session.

Question And Answer

Operator

: Thank you very much sir. [Operator Instructions] Our first question or comment is from the line of Christina Woo with Morgan Stanley. Your line is open.

Christina Woo - Morgan Stanley

Thanks. Thanks so much for adding the color that you did on the call. I was wondering with regard to pricing you are expecting pricing to be down 1% year-over-year, why take the pricing decline instead of just adjusting your fleet mix to tighten the fleet a bit more and keep pricing at least constant if not up a bit?

Michael J. Kneeland - Chief Executive Officer

Christina, this is Michael, we do our budgets from the ground up to all of our branches, in fact we are taking and we are defleeting in specific market areas the ones I outlined as weak, and we are shifting the capital around and... but its built from the ground up, keep in mind we are also looking at going from more to a monthly mix, a larger monthly mix expanding that and as you do that you actually get some price compression.

Christina Woo - Morgan Stanley

Actually can you give me a little more color on why you get the price compression shifting it to the monthly mix?

Michael J. Kneeland - Chief Executive Officer

Because when you go for longer term contracts, if you can imagine larger projects --

Christina Woo - Morgan Stanley

Especially in the industrial clients for example.

Michael J. Kneeland - Chief Executive Officer

Yes industrial clients as well as larger projects you will get some pricing pressure on that. But, it's the right thing for the company that the contracts are out longer, there is less touch points so less cost control or less cost associated.

Christina Woo - Morgan Stanley

Right so what would you estimate then I know your revenue mix now is at 10% residential, maybe you got 20% in the infrastructure industrial type of work?

Michael J. Kneeland - Chief Executive Officer

Right now the way in which we measure industrial, we measure industrial by SIC codes, so for actually doing business with a plant directly not building a plant or doing maintenance since or doing construction inside the plant.

Christina Woo - Morgan Stanley

Right.

Michael J. Kneeland - Chief Executive Officer

Is running at 12% industrial, 10% is residential and the remainder would be related to non-residential construction.

Christina Woo - Morgan Stanley

So for 2008, what do you see that revenue mix shifting to?

Michael J. Kneeland - Chief Executive Officer

Well, it's really hard to predict, but we are going to be focusing more on industrial customers, because of our broad footprint. We think we see that as an opportunity for us, and really just going after our still... our larger accounts we have got a national counts program out there, and a lot of our larger counts are still seeing '08 equal to '07 and we are...we want to go after more of the share of the wall.

Christina Woo - Morgan Stanley

Okay. What sort of estimates or what's your estimates assume in terms of the number of store locations for next year or 2008 versus '07 are you growing or shrinking location?

Michael J. Kneeland - Chief Executive Officer

Well it will be down on a year-over-year basis, so we just announced that we are taking 19 stores out of the first quarter. We have not announced any cold starts in our plan, we have we have no cold starts estimated it's not part of our strategy, that's not to say if there is an opportunity, we may do one our two, but the net number will come down.

Christina Woo - Morgan Stanley

Okay. But, you have comfortable giving us any sense for the full year then what we can expect to see?

Michael J. Kneeland - Chief Executive Officer

It's too early to tell; as we go through the year we keep everybody updated.

Christina Woo - Morgan Stanley

Okay.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Christina Woo - Morgan Stanley

Thanks.

Operator

Thank you Ms. Woo. Our next question or comment comes from the line of Joel Tiss with Lehman Brothers. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Joel.

Unidentified Analyst

Hi, Scott, I am standing in for Joel, had to step out, I apologize. Just quickly on the quarterly run rate for the pricing, how does that progress through the year?

Michael J. Kneeland - Chief Executive Officer

It went from the third quarter I believe it was 2.1, 2.2, if you hang on, one second I will pull the numbers up.

Unidentified Company Representative

Hi, this is Chris Brown just responding to the rate question there. So they were down 1.7%, they were up 1.7% in the first quarter and down 1.2 in the second quarter, down 2% in the third quarter, and as we disclosed in our earnings release for the fourth quarter our rental rates were down 2.1% as Michael mentioned earlier. We are forecasting them to be down at 1% in '08.

Unidentified Analyst

Okay, great. And then as far as SG&A margin, I know the longer-term goal as we get those to 13% and it looks like you add about 16% and in 2007 I mean are you kind of on a year-to-year progression, do you think this year is close to the 15 or is it 13.5, how do we get to that 13% margin build over the next five years, if you could just outline that for us?

Martin E. Welch - Executive Vice President and Chief Financial Officer

Yes, I think we said we expect '08 to be about 53.The 13 is I think is a longer term goal and it will require us to have growth in our top line and it's unclear when there be a down turn here, so I would be uncomfortable say exactly when that's going to happen, but I definitely do think but we can see how accretive to that as I said over the next 5 years.

Unidentified Analyst

: Okay great. And then just lastly on the end-market. So you are looking for those flow throughout the year or you kind of think, don't hang in there throughout the whole year?

Michael J. Kneeland - Chief Executive Officer

We agree with the experts I mean we have double-digit growth throughout 2007, no one is projecting the end-market to grow and in fact we are actually seeing it come down and we are estimating somewhere between 3% to 4%.

Unidentified Analyst

: Thanks a lot.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

: Thank you, Mr. Tiss. Our next question or comment is from the line of Matt Vitorioso Barclays Capital. Your line is open.

Matthew Vitorioso - Barclays Capital

Good morning. I was wondering if you could give us some color on the used equipment market, I think you said you expected the sale of equipment for you guys to be down 35% in '08. Does that assume any deterioration in the prices for used equipment that you guys are getting?

Michael J. Kneeland - Chief Executive Officer

No, it's not that really just, our fleet management, our life cycle process, identifying the essence that we want to sell for the business. So that has nothing to do with the market. Relative to the market, over the last four months, prices did have come down, however, having said that the most recent report published by Ross Associates [ph] actually saw a slight uptick and a results that we have seen form the most recent auctions in Florida, have suggested the prices were actually better than expected.

Matthew Vitorioso - Barclays Capital

So then if utilization doesn't trended exactly how you'd like throughout the year, you could probably continue that kind of lower the size of the fleet by selling into that market?

Michael J. Kneeland - Chief Executive Officer

Sure that's one of the levers we have in these businesses. If we see the market go down significantly, do we want labors we can fall, is sell our fleet, but as we stand right now in our projections we are very comfortable with our fleet sales.

Matthew Vitorioso - Barclays Capital

Okay, great. And just to hit the pricing again I mean it clearly looks like its trending down through out '07, your assumption over 1% decline in '08 I guess that means you are expecting it to turn positive maybe in the second half or what's the expectations there?

Michael J. Kneeland - Chief Executive Officer

Well we don't give quarterly guidance on rates, but what I can tell you is there is markets where there's opportunity and we are going to expand in that area and we are going to defleeting in the markets where we seeing softness.

Matthew Vitorioso - Barclays Capital

Okay. And lastly just on the contractor supply business, it looks like you are going to be down to the four distributions centers by the second half of '08, I mean what's the longer term mean, is this business just, are you going to keep those four distributions centers, you think this business will be around in a couple of years or what do expect there?

Michael J. Kneeland - Chief Executive Officer

Well we are going down just the four distributions centers and we will recalibrate the business at that point, if in fact will probably we can drive some more efficiencies out of the business, we may take it down to one or two more. But, a real driver for the organization is not on contractor supplies. Our driver for the organization is focusing on our rental fleet and focusing on the rental business and that's going to be our main stay, that's where we are going to be focusing on as organization. And contractor supplies will be just an add-on, and will not be a significant portion of our business.

Matthew Vitorioso - Barclays Capital

Okay. Thank you very much.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you sir. [Operator Instructions]. Our next question or comment is from the line of Chris Doherty [ph] with Oppenheimer. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi Chris.

Unidentified Analyst

Hi, Marty.

Michael J. Kneeland - Chief Executive Officer

Mike.

Unidentified Analyst

Sorry, Michael. A question for Marty, and I think you have already sort of spoke about this. You might have thrown a little kink in my question, but you mentioned deferred taxes, and potentially depreciation from a stimulus plan. Given that you plan to keep the fleet where it is or grow slightly, it actually seems to be down recently. What could we expect from the timing differences in depreciation? Do you expect to work through the differed tax increase on the balance sheet in this last quarter?

Martin E. Welch - Executive Vice President and Chief Financial Officer

No. What's happening is that we constantly have deferred taxes that are generated from new assets. Remember that even though we are not increasing the size of the fleet in '08, we are going to spend $700 million in CapEx. And so, those new assets will qualify for the bonus depreciation provisions in the stimulus act, which will give us a larger than normal, the tax to book depreciation advantage which will beef up deferred tax in '08 that we would not have otherwise expected.

Unidentified Analyst

And then Michael, a question for you. In terms of rental rate, I know your largest customer if you sort of aggregated all the government agencies together would be your largest customer. Do you have long-term rental rates with them, or those market based?

Michael J. Kneeland - Chief Executive Officer

They are market based, but it is a... we have a contractual. Obviously, we have a GSA contract with them. It is market based, but we have a set formula that we work for them.

Unidentified Analyst

Alright. That's it. Thank you, gentlemen.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you Mr. Doherty. Our next question or comment is from the line from of Alvin Leo [ph] with Citigroup. Your line is open sir.

David Raso - Citigroup

Yes.Hi, it's actually David Raso here. Good morning. Quick question, in the channel, it seems, and correct me if I am wrong, that you are backing way a little bit from some of your at least within the mix of your historical fleet, your larger earthmoving equipment. Is that something I am picking up that's correct and I would think that might help alleviate some rental rate pressure for you, if... I mean you are running a big aerial fleet, but is there a conscious decision in '08 to move away from some of the larger earth moving, which might make your mix of rates better with how you're configuring the fleet?

Michael J. Kneeland - Chief Executive Officer

Well David, that is two things. One, we have on numerous calls been saying that we have been de-fleeting in that large arena. Yes, there is a lot of rate pressure that associates with the larger earthmoving equipment. We are going to be de-fleeting, but it's not going to be significantly. We did see about 2 percentage point decline in earthmoving, larger earthmoving on a year-over-year basis. Earthmoving is still going to be part of our product mix that we will offer, but we are not going to offer the large product mix that we've had in the past. It will be more of the smaller items.

David Raso - Citigroup

And when it comes to your rate projections for '08, can you give us a... I know it's a big generalization between all the portable compressors to earthmoving. But aerials versus non-aerials, when you look at our rate projection for the year?

Michael J. Kneeland - Chief Executive Officer

We would expect to see aerial actually improve slightly on the year-over-year basis, just due to the fact that time utilization has been so high.

Martin E. Welch - Executive Vice President and Chief Financial Officer

Yes. David, this is Martin. The 1% write down that we are talking about is actually the sum of our 11 regions, and we have a certain areas where we are expecting 3% to 4% rate improvement and other areas where we are expecting more than 1% rate decline, and the 1% decline is the net of all that, as built up for the ground up.

David Raso - Citigroup

Okay. I'll get back in queue. Thank you.

Michael J. Kneeland - Chief Executive Officer

Thanks David.

Operator

Thank you. Our next question or comment comes from the line of Scott Schneeberger with Oppenheimer [ph]. Your line is open.

Unidentified Company Representative

Hi Scott.

Scott Schneeberger - CIBC World Markets Corp

Hey. Good morning. Thanks. Could guys talk a little bit about what you are seeing geography to geography, and I am kind of curious about Canada. We saw you had a positive on currency. How are things up in the oilsands? How big is that now? And then if you could just touch on the regions in where things may be stronger or weaker? Thanks.

Michael J. Kneeland - Chief Executive Officer

Okay. Let me just start with the weakest area, is obviously in the Southeast in the Southwest. It comes down to really two states, Florida and California, as I mentioned earlier on the call. And when you take a look at the areas where you see pockets of strength, it's the Gulf, it's the Rocky Mountain, it is the Northwest, it's all of Canada. And then we are seeing improvements both in the Midwest and then also in the Northeast.

The Southeast, you have got our Southeast region goes all the way up to the Maryland border, all the way down to the Florida, and Florida is a large market. But having said that, and to answer your question, there is still a significant upside in Canada, and Canada as a whole was really a tale of few stories. Historically, we saw the western half much stronger and the east was not as strong. However, having said that, the energy-related projects that we are seeing in the pickups, Canada will be strong for all of '08. And then Alberta talking about the Rocky.... tar sands projects there still about over $200 billion worth of work up there.

Scott Schneeberger - CIBC World Markets Corp

Okay, thanks. And then just metric, I don't know how you track it, but fleet downtime things that are coming upfront and the time that takes to get back out on rent. Do you track that can just give us an idea of how you are tracking relative to your particular goals there? Thanks.

Michael J. Kneeland - Chief Executive Officer

Well, we were, historically we were... last year we were at 11, we are now at 10.7, it's an improvement, but it's not where we wanted to be. We wanted to be at 9%. We are not there yet, and we'll march towards that.

Scott Schneeberger - CIBC World Markets Corp

All right, guys. Thanks a lot.

Michael J. Kneeland - Chief Executive Officer

Thank you, Scott.

Operator

Thank you, sir. Our next question or comment is from the line of Philip Volpicelli with Goldman Sachs. Your line is open.

Philip Volpicelli - Goldman Sachs

Just with regard to the CEO search, is there a timeframe that must be completed by?

Michael J. Kneeland - Chief Executive Officer

I have no comment, I don't know how longer it will take, Philip, this is Michael. We just announced it, obviously, it will take some time regard to the candidates but that's really up to the board.

Philip Volpicelli - Goldman Sachs

Okay. And then with regard to the planning as laid out which sounds very good and attractive. What has been buy end from each of the different district leaders and is the managers of the branches?

Michael J. Kneeland - Chief Executive Officer

The direction of the organization is focusing on the rental business, as caution ally it went over, it is very positive. That's where all of us including myself, I have been in the industry since 1978. And rental was always our core business it's what we focused on. And that the other items such as new sales used sales was just an offshoot of our rental business. So it's really going back to our basics going back to what we know, and it has been received very positively throughout the field.

Philip Volpicelli - Goldman Sachs

That's great. In terms of the restricted payment capacity last call, I think you mentioned it was 970, and you had about $150 million of net income so are we at about a 1.50 billion now in terms of restricted payment capacity?

Martin E. Welch - Executive Vice President and Chief Financial Officer

Yes, this is Marty that's in the ballpark I wouldn't have said around $1 billion probably slightly above that and just to remind you that there are sub limits there are threshold payment levels contained in the indentures for our C and D preferred which would essentially limit payments to around a $100 million.

Philip Volpicelli - Goldman Sachs

Okay, meaning you have to take those out before you could access the total $10.50 billion or--

Martin E. Welch - Executive Vice President and Chief Financial Officer

No it would have to be some kind of an accommodation with the others of the C and D preferred.

Philip Volpicelli - Goldman Sachs

Okay. And have you begun conversation if I remember correctly those are tightly held I mean you have begun conversations with them or is that's something that's in the in plans?

Martin E. Welch - Executive Vice President and Chief Financial Officer

That is something that's in the preview of our board and I am sure they are working as diligently as they can to increase shareholder value.

Philip Volpicelli - Goldman Sachs

Understood and then with regard to the class action law suit that have been filed. Can you give us any update on where we are in that process? I know you can't comment on the results, but have you guys started discovery, have you sorted negotiations with, where do we stand on that?

Martin E. Welch - Executive Vice President and Chief Financial Officer

Yes, we really don't comment to the level of the stages, I mean I think that the news, the cases are fairly new and as event occur that we think warrant disclosure would certainly do it.

Philip Volpicelli - Goldman Sachs

Okay. And then specifically with can you... I don't know if you are willing to do this or you want to do this, how bad the rate pressure was in your two weaker markets South Florida and California, can you just give it to us in numbers or just how much worse it was then what you saw what you recorded?

Michael J. Kneeland - Chief Executive Officer

Well we don't give that numbers out for other regions, we don't give that type of granularity out for various reasons obviously there are some competitors on the phone calls. We can take this offline.

Philip Volpicelli - Goldman Sachs

Okay, great. Thank you very much.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

: Thank you very much. Our next question or comment is from the line of Matthew Oronsky [ph] with Citigroup. Your line is open sir.

Unidentified Analyst

: My question is already answered. Thank you.

Michael J. Kneeland - Chief Executive Officer

Thanks, Matt.

Operator

: Thank you sir. We have a follow-up question or comment from the line of Joel Tiss. Your line is open again sir.

Michael J. Kneeland - Chief Executive Officer

Hello Joel, how is it going?

Unidentified Analyst

Good. All right, do you have any sort of target on your age fleet or anything that you can give us just the guidance and the direction say by the end of '08 or end of '09?

Michael J. Kneeland - Chief Executive Officer

End of '08, Joel, we plan on being an up 40 months. Historically, we have always said we are very comfortable between 35 and 45 and we don't, we are not going to move from that, we are very comfortable within that range, so obviously if the market was to go down, we can age it out further put 40 months is what we are projecting for '08.

Unidentified Analyst

Okay, and to follow up on what David was asking about before, can you talk a little bit about what are the sources of strength in the area work platform business, what are some of the end mark that you would highlights that are driving the strength in that business for the next twelve months?

Michael J. Kneeland - Chief Executive Officer

While the energy sector is very active. Larger projects, the entertainment industry, casinos, stadiums, large projects also some manufacturing, we have some manufacturing coming in from foreign investment. Those are the likely projects that we... large projects that we are actively on.

Unidentified Analyst

And are you seeing any trend changes on the municipal side, it seems that the municipalities are having a little bit more difficulty raising funds and maybe collecting as higher level of taxes as they were recently. Are you seeing any trends there that you can talk about?

Michael J. Kneeland - Chief Executive Officer

No, we haven't seen any, the latest report I saw from the government was projecting the infrastructures spending in that space to be up about 2.8 percentage points.

Unidentified Analyst

Okay. And last, can you give us some maybe like body language I would say on the CapEx because now you have added in this flexibility, and maybe you are going in a monthly ordering or quarterly ordering. And could you just give us any sense you are leaning toward, beating your CapEx, but spending more or spending less than where you are more on that not asking for forecast just sort of like body language a little bit, flexing with what's happening in the end market? Thank you.

Michael J. Kneeland - Chief Executive Officer

Yes, I think what the Marty said, on the raise also goes back to the comment on CapEx. We build on ground offering that's with all the branches; they are projecting the anticipated work levels. We are probably seen movements with inside the company or we are not going to see a significant movement of for our CapEx other than we projected.

Unidentified Analyst

Okay. Thank you very much.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question or comment is from the line of Phil Gresh with J.P. Morgan. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Phil.

Philip Gresh - JP Morgan

Hey, guys. Quick question on the used equipment sales, can you talked about sales of distressed assets in the fourth quarter. So it is pretty margin there. How much did that affect the quarter and what you are looking at your margin in that business in '08?

Martin E. Welch - Executive Vice President and Chief Financial Officer

Sure. The decline in the fourth quarter year-over-year was entirely due to our stepping up to some distressed assets that we had. If you were to strip those sales out we would had a used margin rate that was comparable to our trend line. And as Michael mentioned we don't expect to see deterioration in that margin. We are moving forward to manage our fleet in accordance with our age and condition requirements.

Philip Gresh - JP Morgan

Okay. So you think you are pretty much through that that sales of distressed assets at this point?

Martin E. Welch - Executive Vice President and Chief Financial Officer

You know, we continuously look at our fleet, but I think we were doing kind of special effort there at year end.

Philip Gresh - JP Morgan

Okay. And then just interims of the 500 million in incremental EBITDA over five years, appreciate the additional color in the cost side, but in '08 it looks like there going to be 20 million or so incremental according to your guidance. I am wondering if you could talk a little bit about maybe the trajectory that and how much was that based on cost cutting versus revenue growth etcetera?

Martin E. Welch - Executive Vice President and Chief Financial Officer

Yes.I think it's more than 20 million in '08. But the labor savings and loan is worth 50 million, but the point is that there is another price increases that we constantly face that are netted against that. I think directionally of the 500 million, roughly half of that we would kind of view as under our control, specific cost cutting initiatives that we have, and the remainder of it is going to require some top line growth and which we would then continue to maintain our cost at a controlled level and realized the reduction in rate as a result.

Philip Gresh - JP Morgan

Okay, that's helpful. Thanks.

Operator

Thank you. Our next question or comment is from the line of Ana Recinos with UBS. Your line is open.

Ana Carolina Recinos - UBS

Hi, good morning.

Michael J. Kneeland - Chief Executive Officer

Hi, how are you?

Martin E. Welch - Executive Vice President and Chief Financial Officer

How are you?

Ana Carolina Recinos - UBS

Fine, how are you?

Michael J. Kneeland - Chief Executive Officer

Good.

Ana Carolina Recinos - UBS

One last question I guess on the CapEx, just wondering, what types of price increases are declines you are expecting to pay on your new equipment purchases this year?

Michael J. Kneeland - Chief Executive Officer

Each year our fleet management team negotiates vigorously with our vendors. We are projecting this year, our prices to be flat on a year-over-year basis.

Ana Carolina Recinos - UBS

And what was the number last year?

Michael J. Kneeland - Chief Executive Officer

That was up about two points.

Ana Carolina Recinos - UBS

Okay, thank you.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

: Thank you. Our final question or comment comes from the line of Seth Weber with Bank of America. Your line is open.

Seth Weber - Bank of America Securities

Thanks. Good morning, everybody.

Michael J. Kneeland - Chief Executive Officer

Hi, Seth.

Seth Weber - Bank of America Securities

Just real quick, on the used equipment, I am going back to that, have you guys started to exploit the opportunity of selling used equipment overseas or into some of the emerging markets and if not is that something that you think could hit the rate over this year?

Michael J. Kneeland - Chief Executive Officer

Well Seth, this is Mike. We participate in that arena through the auction houses. They are clearly set up for that, they do advertising across all of the other markets that you just mentioned. And that was the result of we saw the activity at Ritchie Auction and the out sign [ph] auction, the large auction down in Florida, where there was a tremendous amount of foreign investment and foreign buyers. So we really leave it up them. That's their strength and I'll go back to say what I said earlier. We are a rental company and we really need to focus on our rental and those experts who can sell the equipment that's what we are going to leave up to them to do.

Seth Weber - Bank of America Securities

Okay and would you say, just unbalanced that there is more tolerance to take older equipment in those markets I mean if you have a view on it?

Michael J. Kneeland - Chief Executive Officer

Well what I can tell you is the results that we have seen out of the most recent auction, where as we anticipated that the prices are actually came in much better than we anticipated. I mean a large impact of that was the influx of foreign buyers.

Seth Weber - Bank of America Securities

Okay. Thanks very much.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

: Thank you very much. I would like to turn the presentation back over to Mr. Kneeland for any closing remarks.

Michael J. Kneeland - Chief Executive Officer

Thank you, operator. Before we close, I want to leave you with this thought. In my 10 years at United Rentals I have seen firsthand how this company can do anything it sets its mind too. We have great people in place with our braches, and we have a powerful plan regarding our progress. We know we can capitalize and substantial upsize to our business in any market environment by making continued improvements in our cost structure and by harnessing the full earning power of the largest equipment rental fleet in North America. As we stand hear today we have excellent momentum and results to show for it. And you can expect this year more good news from us as the year progresses. So I want to close off by saying thank you for participating in this call.

Operator

Ladies and gentlemen, this does conclude today's conference. We again thank you or your participation. You may now disconnect at this time. Good day

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Source: United Rentals, Inc. Q4 2007 Earnings Call Transcript
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