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United Rentals, Inc (NYSE:URI)

Q2 2012 Earnings Call Transcript

July 18, 2012, 8:00 am ET

Executives

Michael Kneeland – President, CEO

William Plummer – EVP, CFO

Matt Flannery - COO

Analysts

Henry Kirn – UBS

Peter Cheng – Credit Suisse

Set Weber – RBC Capital Markets

David Raso – ISI Group

Manish Somaiya – Citi

(Nick Kopla – Thompson)

Philip Volpicelli – Deutsche Bank

Ted Grace – Susquehanna

Operator

Good morning and welcome to the United Rentals second 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 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 the 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 not 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 includes references to free cash flow, adjusted EPS, EIBTDA and adjusted EBITDA, each of which is non-GAAP term. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may be gin.

Michael Kneeland

Thanks, Operator. Good morning, everyone, and welcome. With me today is Bill Plummer, our CFO, and Matt Flanner, who became our Chief Operating Officer in April with other members of our senior management team.

We'll take a look at the quarter review and we're going to update you on the RSC integration and give you our thoughts on the balance of the year. And after that, we'll take your questions.

The second quarter, as you know, was a transformation for us. It includes one month of our results as a standalone company and two months in combination with RSC. That meant our employees had to manage an incredible amount of change during the quarter and they still turned in some great results despite the attention required by the integration.

As we reported last night, we had a 61.3% increase in rental revenue year-over year, a 7.4% increase in rates and a 63.7% increase in rental volume and $418 million of adjusted EBITDA and an adjusted EBITDA margin of 42.1%. That's seven points higher than a year ago and it's a company record for us.

Time utilization came in a little softer than we expected in the quarter and it was down by two-tenths of a percentage point year-over-year. That's primarily tied to the deployment of our fleet and we brought $1 billion of fleet into the market and it performed very well for us with the exception of a few regions.

We felt it was prudent to adjust our outlook for time utilization while we assess the markets for our new combined footprint. We now expect full year time utilization to be at 68% on a Pro Forma basis and this is the same as last year, which is a record for United Rentals.

The other Pro Forma targets we issued last night are an increase in rental rates of approximately 6.5% year-over-year, up 0.5 points over our previous outlook and net rental cap expenditures of about $1.1 billion after gross purchases of between $1.5 billion and $1.6 billion and negative free cash flow in the range of $90 million to $140 million and that excludes the impact of the merger-related costs.

All of these numbers are based on the assumption that full-year results for 2011 and 2012 reflect a combination of operations of United Rentals and RSC.

Now there are a number of reasons our confidence in this outlook, especially when it comes to rates. One is rental penetration. If we look at how we performed over the last few years, you can see the impact of the change in market behavior.

Our end markets are still evolving toward rental. That's one reason why we've been able to outpace the construction recovery quarter after quarter. The other advantage is we have an expanded value proposition. Our footprint is going to end up around 850 branches with a fleet size of more than 7 billion in regional equipment costs.

In addition, we now offer new site services like tool management and new customer facing technologies and we have a much stronger industrial presence. As a result, we've been able to engage our larger customers in discussions about serving more of their needs.

I'm particularly proud of how quickly we were able to align jour sales organization once the transaction was complete. Transition of our national accounts an strategic accounts has been nearly seamless.

Our rental revenue from national accounts grew by more than 20% in the quarter year-over-year and that's on a Pro Forma basis. Now this should give you an idea of how well we managed the combination.

So we have rental penetration driving incremental demand and a stronger, much stronger menu of competitive advantages.

There's also a third region we feel good about 2012 and that's the level of project activity in our end markets and we know there is uncertainty on the macro level. We hear the same cautions you do. Fluctuations in indicators like the ABI are making it difficult to pin down the path of this recovery.

But from where we stand today, we like what we're hearing from our customers. We stay in constant touch with our customers and what we're hearing is things are looking good. Our customers are not just optimistic now at mid year as they were six months ago; in some cases, even more so.

They're telling us that it's competitive out there but it's active. And we're hearing the same thing from our branches. At our national sales meeting just last week, the reports in the field were very positive. And the government numbers support this.

Non-residential construction spending in May was flat with April but it was up about 7% compared with last year. Now, it's worth mentioning a couple of sectors.

Energy, still robust, particularly in the US and manufacturers are spending more on construction each month with some forecasts calling for double digit growth this year. Commercial construction is still lagging but there is a sense that the turnaround is in sight and most likely by mid 2013.

Within our own business, all of our regions had positive year-over-year growth in rental revenues per quarter and all but four had double digit growth. So it's a good picture out there but we're not complacent and we continue to keep close watch on our markets. We're not adverse at fine tuning as you saw with our outlook.

We're an (inaudible) and we believe that's the right move to get our fleet in place sooner rather than later so that we can take market share and be positioned to grow even faster as activity picks up.

And we firmly believe that the next several years will be strong years for our company and our industry and we're looking at our CapEx investment as a multiyear exercise and a competitive advantage, one that may put pressure on a couple of our metrics in the short term but will deliver higher returns in the years ahead.

And if you look, for some reason the economy stumbles, we'll deal with it. There's enough flexibility built into our model to address changes in economic circumstances. For example, we still have the ability to reduce our gross capital spend below $1.5 billion floor of our outlook and we could also accelerate used equipment sales in the back half of this year.

But right now, that's hypothetical and we don't see a reason to alter our course. Virtually every construction forecasting service shows some level of market growth in 2012. And the for the equipment rental industry, global insight latest outlook shows a bullish 9.5% increase in equipment rental revenues, which is several points higher than their forecast for the increase in construction spending.

Finally, the most important to our investors, that we're structuring our company to deliver on the bottom line. As I mentioned earlier, our adjusted EBITDA margin was 42.1% for the quarter. That's huge for us.

You know how hard we've worked to get that number up over 40% and we did it at the height of the integration and we won't stop there.

I'm also happy to report that we're ahead of plan in capturing out cost synergies related to the combination and Matt will discuss that in just a moment. But before I hand it over to Matt and Bill, I want to mention our employees.

This integration has tested every aspect of our business. We're not just combining two companies. We're identifying the best way to go forward on every level. Fortunately, we have 11,000 of the best people in the business working for us and it's to their credit that our customer service and our metrics have held up so well since April and that includes safety, which has been a constant conflict of communication with our branches.

Our combined reportable rate is an industry best and we intend to keep pushing towards zero.

In closing, I want to say that the RSC combination was never about just getting bigger. It's about raising the bar at every conceivable financial and operational metric. It's about becoming indispensable to our customers as a way to create long-term value.

Now 11 weeks ago our goals were completely aspirational. Today, we're well on our way to making them a reality. So with that, I'm going to ask Matt to give you an update on the integration and some regional detail about our performance and then Bill will cover our financial results. And after that we'll take your questions. Over to you, Matt.

Matt Flannery

Thanks, Mike, and good morning, everyone. I'd like to start with a progress report on our integration efforts and then give you a brief overview of market conditions across our regions.

I'm happy to report that our integration efforts got off to a very strong start in May and we've made significant progress since our last call. In early June we integrated the legacy RSC branches onto our technology platform, so the entire network is now operating on a common ERP system.

Now, this was a key dependency for the majority of our cost synergies and we hit that mark ahead of schedule. The fact that we achieved that conversion within six weeks of closing the transaction is a credit to the tremendous effort and hard work of our combined IT teams.

And most important, from our customers' perspective, it was a smooth transition that resulted in minimal disruption to our base business and it allowed us to launch our branch consolidations ahead of schedule.

So as you saw last night, we planned to consolidate 185 branches and we expect to have the majority of those completed by the end of this month. That should give you an idea of how efficiently we're moving through the integration.

This has allowed us to achieve $17 million in cost synergies in Q2 versus an original estimate of $6 million. So as a result, we've raised our 2012 realized cost synergy target to $80 million and we're reaffirming our total cost synergy target of $230 million.

We're making good progress on the revenue side of the integration as well. We've identified $50 million of incremental EBITDA from approximately $65 million of revenue synergies. And similar to the cost synergies, we expect his to be fully developed and achieved in 2014.

Now this is net of any negative impact we may incur as a result of store consolidations and it's consistent with our initial thoughts when we priced the RSC deal.

We plan to accomplish this by leveraging many of the best practices of each legacy company. One earlier revenue benefit we've seen has been the cross selling of our specialty rental services.

We've already secured close to $2 million in annualized revenue from our trench, power and HVAC business with legacy RSC customers. And in addition, we started to cross sell RSC's industrial tool products to legacy United Rentals customers. These are early indications of what we anticipated from the start that our new combined value proposition will improve our ability to win in the marketplace.

To support some of our new sales processes, we kicked off an aggressive training schedule for our strategic account teams last week. They're training on the use of salesforce.com and the Total Control technology we acquired from RSC.

For those of you who aren't familiar, Total Control is a system that helps us create win-win opportunities with our large customers and it's a strong differentiator in the market. The software focus is on consumption management. It can help our customers reduce their total cost of rental spend by increasing utilization of their rented and owned assets.

We've also taken this opportunity to harmonize other practices from the two organizations. For example, just this past week, the RSC branches went live on our core price optimization tools.

(Inaudible) manages pricing at a local level and optimizes the rates based on market demand. Now this will help drive consistent pricing methodology throughout the combined network.

I know there is some curiosity about the harmonizing of our large accounts. We've been actively renegotiating overlapping agreements. And while we're still in the early stages of these negotiations, we've seen a net positive impact. And this is due in large part to the fact that we offer a stronger value proposition with more ways to serve the customers' needs.

Another major priority for us since the close of the RSC transaction has been the retention and engagement of our employees.

We've made a concerted effort to reach out to all employees to be sure that we understand any of the challenges that they may face as a result of the integration. Mike mentioned earlier what a stellar job our employees are doing in serving customers and adapting to change.

We're staying on top of their needs by listening to what they have to stay. So to help accomplish that, we've conducted more than 50 town hall meetings of branch level employees in our most populated markets and I'm pleased to report that time after time, we have encountered team members whose morale is high and who are focused on safety and customer service.

Now, shifting gears to the marketplace, I'd like to comment briefly on how our regions performed in the second quarter.

Overall, our growth in the quarter was very broad based. We saw growth in every one of our geographic regions with the strongest increases coming form the southwest and the south regions.

Both of these teams achieved rental revenue growth of approximately 29% in the quarter and our Midwest region grew by 23%. And I would be remiss if I didn't mention our specialty region, trans power and HVAC had one of the highest growth rates at over 20% and that's excluding the impact of acquisitions.

And when you look inside the region, we achieved positive year-to-date rental revenue in all but four states. And 35 of these states grew by double digits.

This demand for our equipment allowed us to put more than $600 million of addition of what we see on rent for the second quarter on a year-over-year basis.

On the flip side, an area where we've seen some softness is in Eastern Canada, and more specifically, in the greater Toronto area. We've had a minor decline in volume there but profitability remains strong.

We've been shifting the X axis to serve markets where the potential is stronger. Deployment of our assets will continue to be an area of focus for us, particularly with our new, larger footprint.

Before I turn the call over to Bill for the financial update, there is one more thing I'd like to share with you all. Last week I was able to attend our first sales leadership meeting in Phoenix.

This was our first meeting with all of our combined team of national and strategic account reps and their managers. The energy at that meeting was very strong and the teamwork that I witnessed was very encouraging.

Our reps confirm that the demand we're seeing from our larger accounts is substantial. I came away feeling good about where we're headed and, more importantly, I feel good about our ability to create value for our customers as a combined operation.

Ultimately, it's that value synergy that'll give us the ammunition to grow our company ahead of the industry. That's been our focus all along and that' what will determine our success. So thanks for your time and now over to Bill.

William Plummer

Thanks, Matt, and thanks, Mike. Good morning to everyone. As is our usual practice, I'll go through the second quarter numbers in a little bit more detail and hopefully add some color so that everyone can understand a little better how the quarter played out.

This quarter is one of the most difficult challenges the company could have in talking about its results, however. With a large acquisition, the reported numbers really look different than what you're used to, so I'll try to add some texture to help you understand that and talk a little bit about our performance on a Pro Forma basis. Apologies if I get a little repetitive on that as reported versus Pro Forma but I think it's really important.

We'll start with the P&L, touch on liquidity and cap structure and then finish up with an update on the outlook for the full year.

So starting with the report, the results as we reported, Mike hit the highlights already. Revenue, our revenue was up 61.3% in the quarter, strong rate end volume contributions in the quarter's results, so rates were up, as Mike said, 7.4% year-over-year.

And if you look at that on a sequential basis compared to the first quarter of this year, rates were up 1.3 percentage points, so a strong rate performance anyway that you look at it and certainly it is a great way to start the first half of the year. In fact, I'll touch on it a little bit later but the momentum that we were experiencing in the first half has given us the confidence to raise our outlook for pricing for the full year.

If you look at our volume performance in the quarter, our measure volume, what we see on rent was up 63.7% over the prior year. Obviously the acquisition is the main driver of that kind of strength but even underneath, excluding the acquisition, there was robust growth and I'll touch on that in a second.

That volume growth tied to a time utilization performance that was at 67.1% in the quarter, which was down two-tenths of a percentage point compared to last year, again, on the reported basis. And, again, our outlook I'll touch a little bit more on our view for the remainder of the year time utilization, which we took down.

Looking at used revenues, we had a used revenue result of 81 million of used proceeds on a reported basis. That compares to $41 million last year and we delivered a margin in our used sales of 30.9%, again distorted by the acquisition but certainly our margin performance we feel good about in the quarter. At 30.9% it's down a touch from last year on a reported basis but you'll see on a Pro Forma basis it's basically flat with the prior year.

Enough on revenue, if I move down to profitability, our as reported adjusted EBITDA profit was $418 million and that was an adjusted margin of 42.1% as Mike said. That margin performance is a record for United Rentals and it represents a 700 basis point improvement over last year.

Underneath that margin performance was a pretty solid cost performance both at cost of rent and SG&A and both were helped by our performance with the synergies. But even excluding the synergies it was a pretty solid cost quarter for us.

In fact, if you look at just the metric that we talk about of flow through of adjusted EBITDA from revenue increases, flow through on a reported basis for the quarter was 54.1%, again, a number distorted by the acquisition but still a robust flow through performance overall for the company.

I should point out, though, that the flow through did benefit from a self insurance reserve adjustment in the current quarter. Year-over-year, there was about a $7 million benefit from self insurance reserve adjustment that is playing through the profitability numbers.

But even excluding the self insurance reserve adjustment, flow through was 52% in the quarter, still pretty robust.

If you drop down to EPS, reported EPS on an adjusted basis was $0.66 for the quarter and, again, that includes all of the adjustments that we talked about previously in our update call that are called out in the 10-Q.

It's also worth pointing out that the adjusted EPS in the quarter includes a tax rate that was a little unusual. Our tax rate, our effective tax rate for the quarter was 18.8% and obviously a long distance from the low 30% that we've talked about as a tax rate previously.

That tax rate was impacted in the current quarter by several discrete items, the largest of which was about $8 million worth of deferred tax charges that arose out of the acquisition. Maybe we can talk more about it in Q&A if anybody is interested but those deferred charges really arose out of the merger of the legal entities primarily at the state level.

If you adjust for that tax rate, if you had a tax rate that was a little bit more normal, let's say 35%, our EPS would have been roughly $0.13 higher than the $0.66 adjusted EPS that we reported.

Those are the comments I wanted to make about the as-reported figures but, as Mike said, the way we think about our business is really on a Pro Forma basis. That includes RSC results for all three months of the current year quarter and including RSC on the prior year.

So I'll give you a few key data points on the Pro Forma performance of the company overall.

Starting with our revenue again, our Pro Forma rent revenue was up about 15% in the quarter and, again, rates and volume were both strong contributors. Rate, as we said, was up 7.4%, which is actually a full Pro Forma figure. That's the way we talk about rate now.

And OAC on rent, the volume measure was up nearly 14% in the second quarter, so a pretty robust environment, pretty robust performance there.

If you look at OAC on rent compared to the first quarter on a sequential basis, it was up 11% and, again, pretty good momentum for us on a sequential basis.

Regarding utilization, the Pro Forma time utilization for the quarter was 67.4%. That was down a tenth of a percentage point compared to the second quarter of last year. So it's slightly less than the as-reported figure but it's still up a pretty healthy 340 basis points when you look at it sequentially versus the first quarter of this year.

Used revenue in the quarter on a Pro Forma basis was $96 million and that was up 20% versus the Pro Forma used revenue in the prior year and the Pro Forma gross margin on used was at 40.1% gross margin and that was basically flat. IT was actually down one-tenth of a percentage point compared to the prior year, again, on a Pro Forma basis.

The used margin performance is pretty robust and it certainly is helped by the used environment, which is still pretty solid as well as our focus on the retail channel, which is a very strong contribution in the current quarter.

If you drop the profitability here, our adjusted EBITDA for the quarter on a Pro Forma basis was $474 million for the second quarter. That's at a margin of 41.9% which was 640 basis points better than last year's margin on a Pro Forma basis, again, comparing apples to apples.

So a pretty robust performance on an EBITDA basis and it certainly does reflect, again, all of the positives that are flowing throughout our business overall.

At EPS on a Pro Forma basis, just to give you a rough indication, if you were to make all the adjustments and include RSC for all periods, our EPS Pro Forma would have been something like $0.82 a share in the quarter, so, again, a strong representation at profit.

Let me move briefly to our cap structure and liquidity and then I'll update the outlook. In terms of liquidity overall, we ended the quarter with about $555 million of overall liquidity available to us and that includes $494 million of ABL capacity plus our cash and availability under our AR securitization facility.

So it's still a solid liquidity position for the company and if you look at how we've used some of that liquidity during the second quarter, we've reported previously that we repurchased about 2.4 million shares for an aggregate purchase price of about $100 million.

You'll all recall that we were authorized to repurchase a total of $200 million by the board at the close, which we plan to execute over the 18 months following the close.

But before we move on to Q&A, let met just update the outlook real briefly. First, in terms of rental rates, as I mentioned earlier, we now expect rental rates to be up for the year. It'll be up about 6.5% for the full year. And that's compared to our prior outlook of 6%.

The momentum that we're experiencing right here and now gives us that confidence that we certainly should be able to hit that 6%. And, in fact, if you just look at the momentum on rental rates that we're experiencing in the first half of July here, it certainly does support our raising of the rate outlook for the full year.

On time utilization, recall that our prior forecast was that we were going to raise time by about a percentage point on a Pro Forma basis for the full year. We now expect that time utilization will be about flat for the year and that will be flat at about 68% on a Pro Forma basis last year.

Keep in mind that last year it was a record utilization year for the URI side of the company and certainly we are comparing to a very strong environment on time utilization.

For CapEx we haven't changed anything in our CapEx view from the May update that we did. So we're forecasting gross rental CapEx of about $1.5 billion to $1.6 billion with a net of right around $1.1 billion, $107.5 billion on the low side, $112.5 billion on the high side.

Free cash flow we still expect to be a usage between $90 million and $140 million and, again, that's unchanged from our May update. And I'll remind everyone that that excludes the impact of the merger-related costs but it does include the impact of the change in payment terms that we called out back in our May update.

So as we accelerate payment terms on RSC side fleet purchases, we're going to pay those faster and that impact we estimate at about $200 million.

So all in all, a fairly robust quarter for us. As you look at a variety of measures, it's pretty strong. I didn't mention, for example, the flow through that we achieved on a Pro Forma basis but it was very strong relative to what we talked about in the past.

Pro Forma flow through in the quarter was almost 89%. And even though it benefitted from, as I said, a $7 million year-over-year self insurance reserve adjustment, even stripping that out it was about 84%.

So very strong profit performance as we see it in the quarter and that sets a nice tone to tackle the second half and we look forward to being able to report our results going forward.

So with that, I will ask the operator to open the call for questions and answers. Operator?

Question-and-Answer Session

Operator

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

Henry Kirn – UBS

On a Pro Forma basis, the rental revenue was up 15% in the second quarter. Now, I know you don't give full-year revenue guidance but could you give some color on the level of growth that you might expect for the second half of the year given the comps that you face?

William Plummer

I think the fair thing to say would be that we would expect the level of growth in let's say the third quarter to be down a touch from where it was in the second quarter. So on a Pro Forma basis we were 15%. I would expect that we would come down just a shade from that just given the strength of the third quarter last year.

And obviously the interplay of rate and time utilization in the quarter will determine exactly where we ended up. But it's hard to keep repeating against the comps that we know are coming in the third and fourth quarter and so I'd say down a touch.

Operator

Your next question comes from the line of Peter Cheng – Credit Suisse.

Peter Cheng – Credit Suisse

I guess to build on Henry's question and, again, with the caveat that you don’t give explicit financial guidance, but with the inner play of the growth in your rate guidance compared to the decrease of the utilization, I mean, would you say if you did give explicit financial guidance that this would be a flat raise or lower?

I mean, it looks like a flat to me. But the reason why I ask is because I think there's some confusion that utilization is more important than the increase in rental rates, which actually drive higher EBITDA and I just want to get your comment on that.

William Plummer

If – maybe I can simplify. As we think about the full year today compared to the way we thought about the full year back in May when we gave you that outlook, the inner play between rate and time results in a view of profitability that's really not significantly today than it was back in mid May.

So even though rates have done a little better, time has done a little worse, when we look at that and blend it with the underlying cost performance that we expect, the synergies that we expect and so on, the profitability looks – the picture looks very much the same today as it did back in mid May.

Operator

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

Seth Weber – RBC Capital Markets

Going back to the rate question, I'm just trying to understand the sustainability, your comfort in the sustainability, the rate strength. I mean, is it – do you think it's a function that your smaller customers just don't have product to put out in the market or is it that you're resetting previously lower-priced contracts?

And the reason why I'm asking is because one of your bigger competitors reported recently with rates that were more like in the 3% to 4% range.

Mike Kneeland

Yes, I can't speak for my competitors. I don't know where they're coming from or what their (dollar) utilizations or – I mean, all I can tell you is that the way we report rates based on ARA metrics and that' show we go forward.

But what we see is what we're doing is – one, our value proposition we think is more attractive. We do think that we're harmonizing our contracts with some of our larger – our contractors but that's not – that's only part of it.

I think the other part of it is our broad footprint and having the fleet to satisfy the demand that we see out there.

I just – I want to point one thing out that I think gets lots in the shuffle here is – and I've mentioned this in the past – based on my experience of 34 years in the industry, rates, one is very near and dear to me. I've said it several times over the years but typically with rates going up gives you – should give you some comfort that the underlying business is doing well.

Overall I've never experienced a downturn where time led it. It was always rates led the downturn. So I look at rates as a lever that we're pulling, something that we think is – we're good stewards of our industry and we're going to continue to drive.

We're still not anywhere near where we came off from our peak and we're just driving it to the extent we can.

Seth Weber – RBC Capital Markets

Maybe if I could shift gears a little bit to the equipment, to the fleet, the fleet age, the age of the booms and the lifts is up to 55 months. I mean, can you talk about what your target is for that category and maybe just help us understand why the utilization in that particular category came down from 1Q?

Mike Kneeland

From the (areal) perspective or are you talking about any other specifics?

Seth Weber – RBC Capital Markets

I mean, specifically on the (areal) side. The fleet, the age of the fleet is up to 55 months. What's your target for that category and maybe just some explanation why the utilization of that category came down.

Matt Flanner

So as far as the age, we're very comfortable with that age. Within that you have your scissors, your rough terrain scissors and then your boom lifts. And we can age lifts significantly further than our current age if we needed to.

As far as the time utilization, our time utilization is still well into the 70s on almost every category in our (areal) and even our reach forklifts. Part of what we're running up against is we were probably losing business last year.

We were running time utilization well into the 80s on many categories and long term that's not healthy. There could be some discussion of overall of whether the denominator versus the numerator drove our time utilization issue here this year because we did have significant growth.

But I think we're in good position where we are, and Mike stated it in his opening comments, to take advantage of opportunities in the marketplace, specifically while we're merging the customers from the two organization together. So I'm very comfortable where we are from the age and time utilization from an (areal) perspective and we continue to see that ramp up throughout the – to the peak season in the fall.

Michael Kneeland

Yes, and Seth just real quickly, some of the change that you're seeing in both the age and the time utilization probably comes from the fact that this is presented on a Pro Forma basis now whereas in the prior period they would have been in URI only basis.

So I don't know off the top of my head how much of an impact that is but that might be some of the change.

Operator

Your next question comes from the line of David Raso – ISI Group.

David Raso – ISI Group

Real quick, the July rental rate so far, if your Pro Forma year-to-date around (7374) full year at 6.5, obviously it implies the second half, call it 5.5, 5.7, something like that, quoted to date, where are we versus that implied second half average? Are we even above 6.5, six? Where are we?

Mike Kneeland

Well, according to today, it's pretty short right here, David. But right now, we're better.

David Raso – ISI Group

Better than the 6.5 or better than the five, 5.5, 5.7, back half implied data? Are you above the full year 6.5 still?

Mike Kneeland

We're better than both.

David Raso – ISI Group

What I’m alluding to is you mentioned the incremental margins in the second quarter were high and obviously the year-to-date, the Pro Forma incremental margins are 76. The second half of the year your comment about the inner play between rates up, utilization down about the same profit and profile as you had, we saw in the second quarter when rate drives the story more than utilization, especially a net positive for the EBITDA that (inaudible), second half we have more synergies as well than we had in the second quarter run rate.

So when you look at the incremental EBITDA for the back half of the year – you can answer it any way you want. You can answer it versus the 76 you had in the first half. You can answer it versus the 89 you had in the second quarter, with or without the self insurance reserve. How would you look at the second half incremental EBITDA?

The way you're laying the guidance out, it's going to be more of a rental rate driven second half than you even saw in the first half, which is usually a positive for EBITDA. So I'm just trying to get a feel of how you're looking at the profitability.

William Plummer

So you're right. Year-to-date our adjusted EBITDA margin – or excuse me, flow through – is about 76%. As we look at the second half, those are positive forces, better rate and the synergy's kicking in.

We expect also that there will be solid underlying cost performance. So we feel very good about our ability to deliver flow through in the second half. When we guided in May, we said 70% plus. We're already on track to do better than that and we are hopeful that we'll do better yet.

But without nailing the number too specifically, I'd just say it feels pretty good right now for being able to deliver flow through in the second half.

David Raso – ISI Group

All right, well, if you won't give us the bogie versus the fixed first half of the 89% 2Q, is the premise accurate that – let's take it at face value that you feel you're raising rates, it's hurting utilization, it's your choice.

And we could argue since it's your (AD) marketplace you're not seeing it. But basically if it's as you're saying, rates up, we get a little bit dinged on utilization, but look at what dropped to the bottom line.

If you just changed the guidance to be more rate oriented and less utilization oriented, why was the earlier answer that your outlook on profitability is similar to a couple months ago. The premise would be that would be a better profit profile because it's more rate driven in the second half.

You didn't change your CapEx because the size of the fleet is not going any differently than you thought.

William Plummer

Yes, no, it is more rate driven. I think the way I'd say it is that our view on profitability in dollar terms is about the same as it was back in May. But our view on flow through is higher.

Operator

Your next question comes from the line of Manish Somaiya – City.

Manish Somaiya – City

Just a follow up on what Matt outlined, I think you mentioned that one of the weak markets that hurt utilization was Eastern Canada with some of the other markets being strong. But Matt, was that the only weakness in the quarter or were there other regions prone to weakness?

Matt Flannery

Specifically, it was really Ontario in Eastern Canada. There are other parts of Eastern Canada as a region. As Mike had stated earlier, all regions were up year-over-year. But Ontario was down and we probably ran a little bit heavy on assets there as they came out of the seasonality. We probably didn't recognize the softness quick enough, if I was going to be self critical. I would have moved a few million dollars out of there sooner.

But as far as the growth over all the rest of the regions, we've seen a little bit of softness in the northeast, but softness is still high single digit to mid single digit growth on a year-over-year basis. It just doesn't keep up with the growth that we had there last year. That was our top geographic region in the whole organization last year.

So that's what we're seeing but overall we're still seeing growth in all of our geographic regions. I don't know if that answers your question.

Manish Somaiya – City

Just looking at Page 19 of the investor presentation, you talk about fleet mix and changes to them. Can you talk about lead times with OEMs as it pertains to earth moving, which his obviously a big focus item for you? And then where does pricing stand as far as buying new equipment?

Mike Kneeland

So lead times in earth moving, Manish, are actually not too bad. We can access earth moving equipment that we might be interested in with pretty short lead times. And in fact, in some CAT classes there's stuff in inventory that we can have right off the bat.

So in earth moving, not too bad; in some of the more popular other CAT classes, still some decent lead times. If you're looking for high capacity reach forklifts it's still a decent lead time to get some of those units.

So all in all, it's a little better than it was in terms of lead times earlier in the year. But it depends on the CAT class that you're looking. And I'm sorry, I forgot the second part of your question.

Manish Somaiya – City

Pricing.

Mike Kneeland

Pricing is pretty god for us. As we said back in the May update, we've been rolling through looking at the RSC purchases or the purchases that we would do to support adding RSC to our business and we've been renegotiating the purchase agreements with the vendors for those purchases.

And we've been realizing some nice price reductions in the range of 2% to 5% consistent with what we've said previously. So that's going pretty well for the purchases for 2012 and at the same time we're negotiating around our 2013 purchase plans and we feel good about how that has progressed so far.

So the price environment still is pretty decent for us and we'll continue to drive a hard bargain as we always do.

Matt Flanner

Manish, if I could take the opportunity to expound on the answer I gave before, I'll correct what I didn't mention in our opening. As I say, we had 35 states that had double digit growth. I forgot to mention the provinces and Ontario was the only province where we did not have year-over-year growth. So similar to the comments I made earlier, our growth has been really broad-based.

Operator

Your next question comes from the line of (Nick Kopla – Thompson).

(Nick Kopla – Thompson)

Is there anything you're willing to share with us on how utilization has trended to date in July?

Michael Kneeland

So (Nick), I think the way I'd say it is that the trends that we saw in June continue in July. And I say it that way very specifically because I think in order to understand what's going on in the business you have to disaggregate utilization into the two pieces, right.

OAC on rent, we're still seeing nice growth in OAC on rent in the numerator of that calculation here in July year-over-year. Seasonal build, we're getting a seasonal build. So that's continuing.

We can come back and talk about some of the factors that are driving that. But we brought a ton of fleet in in the first half of the year. We brought a lot in and we brought it in very quickly. That was a drag on utilization as we got into the May-June timeframe. It continues to be a drag on utilization here in early July.

William Plummer

I would also point out that we are still going through the integration process where we've integrated 50 locations and we're going to ramp that up very quickly and as we go through this quarter most, if not all of them, behind us.

(Nick Kopla – Thompson)

Then one follow-up question; the $50 million revenue synergy target, where is that coming from? What are the components there?

William Plummer

It'll be a combination of harmonizing contracts, getting everybody on the core system. There will be some cross selling, as we had mentioned about the trans power HVAC. The mix will be – have a higher flow through and that's why we had stated $50 million of incremental EBITDA somewhere from $60 million to $70 million range and you can guess why the flow through would be higher is because a lot of the synergies don’t have any additional cost related to them.

Operator

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

Philip Volpicelli – Deutsche Bank

My question is with regard to debt and I’m just trying to figure out where the debt balance is at the end of the year. And you guys maintained guidance for $90 million to $140 million of free cash flow usage and that does not include the merger cost. Is the merger cost you're referring to the $90 million in the appendix? Or is it more than that?

Michael Kneeland

So the cash portion of our merger-related costs for the year, the cash portion is going to be – bear with me one second here. I want to make sure I've got a useful number. It is those transaction costs that we've already paid, which is banker fees, lawyer fees and consultants but it's also the other transaction-related costs that are in process now such as the lease termination cost, severance cost for employees and so on.

And I don't have within my reach right here and now the number that we have excluded but that would be the simplest way to kind of get you to a year-end debt balance.

Philip Volpicelli – Deutsche Bank

Maybe I'll follow up with you.

Michael Kneeland

I'll – yes, if you could follow up offline, I'd appreciate that.

Philip Volpicelli – Deutsche Bank

And the second part of the question is as you look at the cash structure, clearly you've got high (inaudible) that are, I guess becoming callable and then your future. Is the thought process that you guys will try to keep your balance sheet – in other words, will you try to do smaller refinancing or will there be a larger refinancing at some point in the near future to kind of turn out a lot of the smaller pieces that are (inaudible)?

Michael Kneeland

So we're looking at our alternatives basically every day to see which is the preferred route to go. You're right. Right now we don't have an immediate call available to us that – on any of the really high coupon issues that makes sense to exercise. I think the first call that we have available on our 10 and seven-eights issue comes up sometime like this time next year, if I remember correctly.

And so that certainly will be a point at which we will make some kind of a decision. Until then, though, we'll continue to look at not just the high coupon but all of the components that are in debt to see if there's anything that makes sense to do right here and now.

So far the answer has been now. But the one thing I would point out is that we will refinance our AR securitization facility over the course of the next couple of months, so that's something that we will get done.

But in terms of the longer debt issues, we're going to continue to look at it on an ongoing basis and we'll let you know if we decide to do something.

Philip Volpicelli – Deutsche Bank

And presumably the AR securitization can grow now that you've got all of RSC AR also (inaudible).

Michael Kneeland

I'm sorry, say again.

Philip Volpicelli – Deutsche Bank

Presumably the AR securitization can grow now that you've got all of RSC AR also (inaudible).

Michael Kneeland

Yes, we'll look at upsizing it a little bit as we go through the refinance process.

Operator

Your next question comes from the line of Ted Grace – Susquehanna.

Ted Grace – Susquehanna

So I was just wondering if we could walk through the cadence of time utilization by month in the quarter and then kind of compare it to the monthly cadence of either CapEX spend or OEC additions and then also the store closures.

And kind of what I'm curious to understand is just even if we just look at it optically how those would coincide, especially the store closures. You closed 6% of the fleet. In my mind I just think there's a transient kind of dilutive effect it has on time utilization because if you close a store then for some period of time equipment is in transit being absorbed by new stores.

And I'm just trying to understand how that also may have contributed to the commentary you made, Michael, about just the timing of CapEx.

Michael Kneeland

So I'll start it. So the cadence of time utilization through the quarter – I'll just give you the month, Ted – 66.3 in April and that was up four-tenths from the prior year, 67.7 in May, that was up one-tenth, and 68.2 in June, which was down eight-tenths from the prior year.

And those are all Pro Forma numbers, Pro Forma numbers. So it's apples to apples in the period. And to compare that, most of the closures that we got done in the second quarter – there were 61 of them – happened in June.

So it's always hard to kind of tie direct correlation between those activities but clearly if there was a distraction, June would have been the time that there was a distraction as a result of all the closures and personnel moves.

Ted Grace – Susquehanna

Yes, I was hoping that that's the trend we would have seen. And in terms of the OEC additions, could you just give a sense for how those kind of layered in across the month – across the quarter?

Michael Kneeland

You mean the purchases and the …

Ted Grace – Susquehanna

Whatever's the easiest way to express it, whether it's CapEx or OEC addition.

Michael Kneeland

Across the months, don't have it handy here.

Ted Grace – Susquehanna

We can follow up then.

Michael Kneeland

Yes, they're showing it to me as we speak here. So in April, gross – those are all gross? April gross CapEx was $210 million; May was $179 million; and June was $120 million. Those are all Pro Forma, apples to apples with both companies included.

Ted Grace – Susquehanna

Then the second part of the utilization question, I was just curious to get your perspective on is it looked like there was a greater shift towards earth moving and trench and safety and other and away from (areals).

And as we think about it, (areals) tend to have the highest time utilization, so there is a mix shift that clearly ends up being manifested in your reported time utilization. On Page 20, I know you show the time utilization in the second quarter. Could you either give us the year-ago comp or at least help us think about qualitatively what that impact or how that dynamic might have played out because, again, that would provide, again, optically a lower time utilization when, in fact, the numbers could have been better on an underlying basis.

William Plummer

That's a great question. And it's also a great observation that our fleet mix has changed dramatically and it's more in line with our longer-term objective, which is to expand the horizon on our earth moving and trench and other.

And when you take a look at the Pro Forma fleet mix, we're not around 45% versus 49% (areal). And to your point, that will have some bearing on our time utilization.

Michael Kneeland

So let's – I hate to do this on the fly – but maybe one of the things we can do is just to give you a comparable Pro Forma number for some of the figures that are on Slide 20. Let us look at updating the slide to include some comparable information so that you have a sense of where we're coming from on a Pro Forma basis.

Operaotr

This concludes the question-and-answer portion for today. I would now like to turn the call back to Mr. Michael Kneeland, Chief Executive Officer.

Michael Kneeland

Well, thanks, Operator. I want to thank everyone for joining us today and on our next call we'll have a full quarter of combined results to share with you as opposed to as reported.

In the meantime, you can always look at – look us up in (Granich) and please download our presentation from our website. If you have any questions that you'd like to put forward, please contact Fred Bratman and/or visit one of our locations.

And with that, that concludes our remarks for today and I want to thank everyone.

Operator

Ladies and gentlemen, thank you, once again, for participating. This concludes the …

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