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United Rentals, Inc. (NYSE:URI)

Q1 FY08 Earnings Call

April 30, 2008, 11:00 AM ET

Executives

Michael J. Kneeland - CEO

Martin E. Welch - EVP and CFO

Analysts

Manish Somaiya - Citigroup

Scott Schneeberger - Oppenheimer & Co.

Philip Gresh - JPMorgan

Emily Shanks - Lehman brothers

Christopher Daugherty - Oppenheimer

Matthew Vitorioso - Barclays Capital

Philip Volpicelli - Goldman Sachs

Sundar Varadarajan - Deutsche Bank

Operator

Good morning, ladies and gentlemen, and welcome to the United Rentals, First Quarter 2008 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, many 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 first quarter 2008 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 a subsequent filings with the SEC.

You can access the company's press releases, as well as its SEC filings on the company's website 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 released 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 to 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 our senior management team. I want to open this call by discussing our first quarter results provided excellent perspective and the impact of our new strategic both financially and operationally. Next I want to review what we are seeing and hearing out there in the marketplace, and then I want to discuss our outlook.

First, start with the first quarter. Last year at this time we were still operating under our old strategy, which pursued several lines of business. This year we are focused on driving profitable growth in our core rental business managing our fleet and controlling our costs. We begin to implement the strategy in mid 2007, and use it to deliver our current year-over-year improvements.

We increased our earnings 13.3% to a record $0.34 for the quarter. Our income increased 18.8%. We also improved our operating income margin to 13.2% of revenue, which is 1.4 percentage points higher than it was to the first three months of last year. And we generated $11 million of incremental EBITDA that translates to 3.6 percentage point improvement in the EBITDA margin for the quarter.

We also became more respond to market conditions in the first quarter. In the process we generated $143 million a positive free cash flow. Marty will provide more insight into our CapEx landscape in a minute. On the costs side of the business we've constantly delivered on our firms to become more efficient. Last year we reduced our headcount by 9.2%, which put us on track to achieve $55 million and $60 million of annual savings. With an additional of potential savings as our field reacts demand, right now our work force levels running about 500 below year-end, so we have lot of room to move and still achieve our savings.

We also acted on our plans to optimize branched network includes the consolidated 23 underperforming locations in the first quarter of this year observing $2.6 million of pre-tax expense related to the closures. And we will continue to evaluate branch performance against expectations as the year progresses. Strategic sourcing, which generates $22 million in savings in 2007 is on target to save an incremental $22 million this year. Our target is $70 million savings by year-end 2009, and we are well on our way.

In addition, we've identified another 120 cost saving opportunities late last year and signed into project owners who delivered $20 million in savings in 2007, and was targeting an incremental of $40 million of savings this year. These initiatives address a wide range of opportunities including advertising efficiencies, in sourcing, and reduction of our G&A expense to name a few.

Now as you can see from our results our strategy is having a desired effect. Our SG&A expense was $16 million lower than last year, which improved our SG&A ratio by half a point in line with our expectations. We also transferred three times the amount of fleet in quarter versus the year ago, that's over $900 million of original equipment costs redeployed in markets where it can work harder for us. The increase in fleet transfer shows that our field operations have ear to the ground across our entire market. The construction slows in one area we look for up swing somewhere else and that's where the fleet goes.

From our current advantage point this is shaking into be a challenging year for our industry, ways the partner of commerce data indicates the construction spending overall was basically flat in February. Although, the March number is aren't out yet, we believe that non-residential construction spending are primary end-market will show first quarter declines in the number of sectors, and may in fact end up, flat or down for the year. The question is where are the current operating environment want to find rest of the year, and that remains to be seen, what I can tell you is that our company has prepared physically, mentally, and strategically for any construction environment, were being very aggressive and discipline about taking costs out of the business and we have for months.

We are also looking... we are making progressively better use of our capital, and we are working hard to build the royalty with our customers, beginning a lot of positive feedback from our customers, which tells us we made a right move and bring back our focus to our core business. In fact, the decline in total revenues of the quarter had nothing to do with rentals. It was the result of our decision to take the emphasis off less profitable revenue streams such as contractor supplies.

Our supplies business had a top line decrease of $38 million for the quarter, which is about what we expected and we had lower revenues our new equipment sales. But our rental revenues were actually up slightly. On the first quarter behind us we are still seeing a great deal to be gained from our disciplined execution of our strategy that credit goes to our employees, they have done a stellar job in managing change and they are enthusiastic about their role and steering United Rentals our new and more profitable course. At the same time we are realistic about the external environment, the economic uncertainty that was constrained many industries being felt in construction as well, that being said we are entering the busiest two quarters of the season.

Our customers are telling us to be a lot of current projects on the books although there's not a lot of visibility as much as we'd like in the back half of the year. As commercial construction continues to flatten and the industrial starts don't rise to fill the gap, we would expect to see the bulk of that impact later in the year into 2009. We also expect that residential construction will remain weak for sometime, as home builders continue to cut production and reduced our inventory.

Our branches are still reporting many pockets of opportunity particular in the Midwest region, area east and west, northeast Canada, and the Rocky Mountain region, where we are continuing to get a balance from a construction economy in Western Canada. The Gulf region is anchored by taxes, where business remains strong or both the rest of the region is little stagnant and the Southeast and Southwest struggled in the first quarter as it is from most of last year.

So we are seeing some softness but it's difficult to tell how much is attributable to an economic slowdown as oppose to other factors. And there is simply not a lot of good visibility into the tailend of the year. Given the direction of all the information available to us, the industry forecast, which were up in the architectural billings index, the government data, and the input we are seeing from this deal we decided to lower our 2008 guidance to a range of $2.65 to $2.85, which represents our best estimate of annual performance at this time.

The rest of our outlook remains largely unchanged as Marty will cover in a movement. Now as the year progresses we'll remain agile in ways we manage our fleet, to respond to market conditions. For example, we intend to increase our used equipment sales to a new target of $265 million of revenue, that $60 million more than we originally planned in 2008.

It's a strategically sound way to respond to the market, and just one of the several operating levers at our disposal. I hope I have given you a sense of why our first quarter results are such an important signpost for us. They point to the fact that our companies moving towards the goal that we announced several months ago that is drive $500 million of incremental annual EBITDA within five years.

Like any path you can be affected by external factors, but our performance is also derived from preparation and strategic... our alternatives, our strategy, internal discipline and these are the things that we can and we will do as we go forward. A profitable growth in the first quarter is an important goal for us. And we are pleased with the results we reported last night.

We expect this to approach each quarter to the same drive and determination as the year progresses, but before I turn the microphone over to Marty as we said on our earnings release, we're continuing to explore alternatives for enhancing shareholder value, taking into account our operating environment, cash flow, capital structure and covenants, that being said it's not the focus of our call today.

Now I am going to ask Marty to give you the details on our first quarter performance and then we will go in the Q&A and take your 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 the quarter, and now I would like to get into some of the details of our first quarter performance and review our outlook for the year.

We were pleased with our first quarter performance on several fronts, which are focused aerials for our business and critical to our goal of generating $500 million in incremental annual EBITDA within five years.

First, equipment rentals, our rental revenue increased 0.7% as improved time utilization essentially offset modest rate declines.

Second, our SG&A of $131 million with 17% of revenue for the quarter an improvement of 50 basis points compared to 2007. Importantly, on an absolute dollar basis SG&A expense decreased by $16 million, reflecting the ongoing benefits of cost saving initiatives.

Third, earnings per share our continuing operations diluted EPS for the quarter was $0.34 a share account of 111 million shares compared with $0.30 and a share count of 110 million in 2007. This represents an improvement of 13% versus the prior year.

And finally EBITDA, EBITDA increased 5.2% to our first quarter record of $224 million. Additionally our EBITDA margin improved 360 basis points to 29%.

Looking at our other lines of business our first quarter contractor supplies margin of 21.4% improved 440 basis points versus the prior year, and 60 basis points versus the fourth quarter of last year. These results are consistent with our strategy of repositioning the supplies business and reducing the number of SKUs especially, in lower margin and commodity categories.

Our used equipment sales were down about 20% year-over-year consistent with our life cycle management strategy as we focus on selling older assets, and although our gross margins declined by 350 basis points during the quarter they increased 610 basis points sequentially.

Looking at our cash flow and interest expense for the quarter, our first quarter cash flow from operations was $226 million compared with $127 million in 2007. We invested $136 million in our rental fleet compared with $265 million last year. Although our CapEx outlook for the year is unchanged at $715 million, we did significantly reduce spending in the first quarter as compared to last year, as we focused on better utilizing our existing fleet and managing our spend recognizing market conditions. Over the balance of the year we will add fleet to regions with the strongest demand, and we will continue to monitor developments and adjust our CapEx as conditions dictate.

Free cash flow for the quarter improves significantly to our first quarter record of $143 million as compared to free cash flow usage of $83 million in 2007. The significant year-over-year improvement reflects reduced CapEx and improved working capital performance. Our net interest expense decreased by $6 million reflecting lower interest expense as a result of less variable rate debt and higher interest income.

Now let's take a moment to review our expectations for 2008. Our EPS range is $2.65 to $2.85 per share down $0.15 from our original guidance. As Michael mentioned based on our feedback... based on feedback from our customers and in recognition of recent industry forecast we're revising our full year forecast.

Our revenue, EBITDA, and free cash flow guidance is as follows: We expect total revenue of between 3.4 and 3.5 billion. Additionally, rental revenue will be essentially flat at $2.6 billion. Our rental guidance has been reduced by $100 million driven by a change in our time utilization expectations. Previously, we have forecasted time utilization will be up about 200 basis points versus 2007, we now expect it to be up modest 40 basis points.

And as we discussed in our last call, we continue to expect rate to be down about 1% this year. Our EBITDA guidance of $1.15 billion to $1.19 billion is down $20 million from our previous guidance and represents an EBITDA margin of about 33.9%. We're forecasting our full year tax rate of about 37.5% and approximately $400 million to $450 million of free cash flow.

Our cash flow expectations that have been increased by $75 million based on the bonus depreciation provisions contained in the recently past Federal Stimulus package.

The last summarize is our outlook, which doesn't include any impact from regulatory matters, and now I'd like to turn it over to the operator to begin the Q&A. Chris could you open the Q&A session please.

Question And Answer

Operator

Yes, sir. [Operator Instructions]. Our first question of [indiscernible] comes from the line of Manish Somaiya with Citigroup. Your line is open.

Manish Somaiya - Citigroup

Good morning. A couple of questions Michael, you mentioned in your opening remarks that and this is your quote that you don't have good visibility into the tailends in the year, could you just sort of this an idea of how much visibility do you have in your business going forward?

Michael J. Kneeland - Chief Executive Officer

Yes, and that's great question. As we go through the balance of the year, we take a look at the lot of different indexes and one of which I mention was the AVI index, which tells you that it had two consecutive months below 50% fact that were drop down to 39.7 which is a low... a record low and the lead-time to that is really somewhere between six months to a year, so that really comes down to the visibility point that I am talking about we are... when it talks to our customers again we have a lot of business on the books and they have a lot of things to start, but it's really that going out, beyond that six and 12 month range looking of what we see today is not lot of visibility until we get a little closer.

Manish Somaiya - Citigroup

Okay. So basically you see well just back tracking a bit, I guess in your seasonally strong second quarters we have had a month to look at the trends have you guys seen a pick up in April vis-à-vis March.

Michael J. Kneeland - Chief Executive Officer

Right now what we are seeing is... we are actually seeing our time utilization equals of time utilization last year it's flat on year-over-year basis. We are still seeing the same seasonal pick up we are just not getting any traction above and beyond that point.

Manish Somaiya - Citigroup

Okay. And then just lastly on the competitive landscape, I think one of your competitors had mentioned that you are being a bit disruptive in certain markets and in Las Vegas in particular, and I was hoping that perhaps you could comment on what you are seeing out there in the marketplace in your own behavior in the marketplace?

Michael J. Kneeland - Chief Executive Officer

Sure. We reported our rates were down 0.6% for the quarter. We still holding firm that we are managing our rates to 1% drop full year, and we truly managed our rates by our branch district and region level, pockets where we see softness that we adjust, pockets where we have growth we have seen increases. As far as the competitive landscape you know its mixed... we have got a lot of different players out there, there is no one company and there is a lot of small companies, there are local companies, there are some regional, but by and large there is no pattern of rate reduction across the boards what we are seeing today.

Manish Somaiya - Citigroup

Okay. Thank you.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

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

Michael J. Kneeland - Chief Executive Officer

Hi, Scott.

Scott Schneeberger - Oppenheimer & Co.

Hey, good morning.

Michael J. Kneeland - Chief Executive Officer

Good morning.

Scott Schneeberger - Oppenheimer & Co.

First if we could talk a little bit about industrial what you guys were doing there, what... would you like to get that up to as a percent mix of the business? What verticals are strong? How the pricing environment is just a very broad based?

Michael J. Kneeland - Chief Executive Officer

Sure. Let me start up with the industrial sector. The industrial sector is an area that is an opportunity for us given our broad footprint. We were able to increased our penetration albeit lower than what our competitors have. We did increase at two percentage points on a year-over-year basis roughly it's right now about 17% of our revenue. And we still see there is an opportunity, and... but you had a longer lead-time to that type of work what I mean by that is that typical work is when it is released is usually for a year or two, or as some sort of time element to it. So it's just a matter of us getting into that process and bidding that. So we see that it's been... it's competitive, yes, but it is also very profitable and doesn't have the cyclicality would have in the construction environment.

Scott Schneeberger - Oppenheimer & Co.

When you speak of competitive, could you just go little deeper on kind of the rate environment there. What are you seeing and competitive this that obviously an area where a lot of you and lot of your peers are moving right now?

Michael J. Kneeland - Chief Executive Officer

Well when I say competitive it's really, it's a monthly basis, so it's, you know, looking at something that's out there for a longer term, you are bidding something that, you know, going to be out there for multi months or some time years, so you have to put that into the equation. I don't think that it's a competitive as some of the other markets because once you are in the area it's not like you can you bump people off or anything like that. It's primarily it's based on your services and do you have to offer to that company, so it's nowhere near as competitive that you would see in any other market just doesn't have the cycles to it.

Scott Schneeberger - Oppenheimer & Co.

Thanks. And then just calling up on that what particular verticals are strongest geographies within industries specifically?

Michael J. Kneeland - Chief Executive Officer

Well obviously the Gulf area you've got the petrochemical industry anything related to the energy portion is very strong. There are food processing plants that are very strong, steel plants and there is also automotive even though automotive is down there is still maintenance that has to be on going inside those plants.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks. Just a little broader base question obviously, a lot fleet movement out of you in the first quarter, could you speak to that strategy I imagine higher fuel prices there are certainly a cost benefit you have to consider when making that move, I just was more curious on how those decisions are made, is it an absolute we have to get it to this new region because it's going to be healthier than this old region and we have to do regardless of cost just kind of the thought process there?

Michael J. Kneeland - Chief Executive Officer

Sure, we have fleet management at the region level and district manager both of them make their business decisions along with the branch manager. The request comes in, but let me kind give you some color to the, you know $900 million of equipment that we moved about $750 million of that was between branches within inside of districts. So you are moving from branch-to-branch with inside the four walls of the district, and then across district it's just about $156 million, so as you get towards the regions it's not so much transferring the equipment it's more, we sell equipment and say the Southeast and we will buy something else in the Rocky Mountain. So all of that is taken in consideration you take a look at the length of term, the rate you have to determine whether you want to move it for any length of distance.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks. And just finally the used equipment market as you mentioned, you know a little bit lower margin year-over-year, but up sequentially because and you have mentioned in fourth quarter that you've got a lot of hope a bit of lot of distressed assets, how do you see that going forward, we are going to see pricing pressure now with a slowing of the macro environment just your thoughts there?

Michael J. Kneeland - Chief Executive Officer

Well most of our sales is accomplished through our sales force, so it's more on a retail environment, and the returns that we are seeing you know, part of what we have seen over the last couple of quarters. The areas where we see some pricing pressure is... we consciously made an effort to reduce our heavy equipment. We did that in the first quarter, and as a result it impacted our gross margins. But, as far as the market is concerned from the auction, the auction still has a lot of activity from foreign investment.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks very much.

Michael J. Kneeland - Chief Executive Officer

Thank you, Scott.

Operator

Thank you. Our next question or comment comes from the line of Phil Gresh with JPMorgan. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Phil.

Philip Gresh - JPMorgan

Hey guys, how are you doing?

Michael J. Kneeland - Chief Executive Officer

Good.

Philip Gresh - JPMorgan

Good. Hey one thing I didn't see in the release was the same-store sales for the quarter, could you give that to us?

Michael J. Kneeland - Chief Executive Officer

Yeah they were flat for the year... for the quarter.

Philip Gresh - JPMorgan

Flat. Okay. And just on the guidance there is a couple of things I am trying to square. You have for rental revenues specifically you talked about rates down 1%, but flat overall revenues that were implied volumes kind of flats or up 1 percentage, but the same time I look at and I see you closed 3% of your store base basically in the first quarter and if I look at the rest of the year it looks like the comps get tougher and you talk about reduce visibility, so I'm just trying to make all that kind of square?

Michael J. Kneeland - Chief Executive Officer

Well, you're right I mean, we anticipated in our two point increase in our time utilization in our original guidance, and we revised that down to just to your point about a half a point of improvement over 2007, so we are now the yield about a... just a 0.7 improvement in time utilization from the first quarter, we revitalized our target based on the fleet sharing and we talk about reduction of our branches. Keep in mind that we are not taking our all the equipment out, we are repurposing that equipment, of that fleet that we took out of those closures we pretty purposed them 60% or 70% of the fleet that was there are removed.

Philip Gresh - JPMorgan

Okay. And just do you see with the tougher comps as we progress to the year I mean do you see a kind of pickup in the volumes despite those tougher comps or because of that repurposing the equipment I mean was there something in the first quarter because you move that equipment that tender volumes I am just trying to get understanding?

Michael J. Kneeland - Chief Executive Officer

No, just... one other point I want to make, I didn't probably point out is our average fleet size is bigger this year than it was last year. So there is also that portion that it gets baked into the revenue stream, but specifically the answer your question, no, I mean we haven't seen anything else other than what we have laid out here.

Philip Gresh - JPMorgan

Okay. And then just I guess the last question will be, could you talk a little bit more about pricing by the product, aerials versus earthmoving in the quarter and the trends you are seeing heading into the second quarter? Thanks.

Michael J. Kneeland - Chief Executive Officer

While we don't give specifics based on product mix. What we did say is that our aerial will focused on the high time utilization, we are improving our time. We have done that, and keep in mind that the first quarter is also almost challenging quarter. And... but we don't give specifics based on products, and we don't give it based on regions, we can assume that areas where we had softness, I mean we had to adjust the rates and areas where we had growth we improved our rates.

Philip Gresh - JPMorgan

Yeah, would you be able to tell us that aerials are up, right now?

Michael J. Kneeland - Chief Executive Officer

Aerials were up slightly, yes.

Philip Gresh - JPMorgan

Yes. Okay. Thanks.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Emily Shanks with Lehman brothers. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Emily.

Emily Shanks - Lehman brothers

Hi, good morning, I just wanted to ask a follow-up question around the use of equipment sales, I want to be clear or the margin is down simply because of mix shift and sales are heavier equipment or are you seeing overall pricing pressure in the secondary market?

Michael J. Kneeland - Chief Executive Officer

No it was the first, it was the mixed and heavier equipment and we did that there was auction that happens every year down in Florida, I mentioned in our fourth quarter call that we saw margins that actually much higher than we anticipated, so we did much better than we thought, so that was a cautious step in our parts so yes, it was mix.

Emily Shanks - Lehman brothers

Okay, great. Thank you.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Emily Shanks - Lehman brothers

And thenjust I could, just a couple of more in terms of pricing how much discretion does the branch manager have or its pricing where in that sort of tier of management is that determined?

Michael J. Kneeland - Chief Executive Officer

The pricing is really at the focus of the district manager in the regional platform. And it's market specific and they have a certain threshold within each individual branch and it requires the approval of the district manager to exceed that.

Emily Shanks - Lehman brothers

Okay. Okay. And then if I could just one last question, you know, this past fall I think there was some commentary out of URI that you had quite a nice pipeline of the aerial or big guns project. I am just curious you know it's very prevalent in the news around the cancellation of the big construction site that was proposed in Downtown Seattle etcetera. Are you seeing any change to be absolute dollar amount as to say with that pipeline?

Michael J. Kneeland - Chief Executive Officer

No we are seeing I mean when you say absolute we are still seeing a large projects come on broad, and you know the other area that is very strong as the energy related to power plants and the EPA requirement to put scrubbers on every one of this facilities, so that demand is still there obviously, we still have a lot of entertainment ongoing and that bodes well for the of portion of the business.

Emily Shanks - Lehman brothers

Great. Thank you.

Michael J. Kneeland - Chief Executive Officer

You're welcome. Thank you.

Operator

Thank you. Our next question or comment is from the line of Chris Daugherty with Oppenheimer. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Chris.

Christopher Daugherty - Oppenheimer

Hi Michael, and Marty. Marty, can you just tell us I know you guys tend to just give one decimal place in terms of fleet, but could you go out to three and say and tell whether your fleet was actually down or sequential basis?

Unidentified Company Representative

Hi, Chris, this is Chris Brown speaking, how are you?

Christopher Daugherty - Oppenheimer

Good.

Unidentified Company Representative

Good. Yes, the OEC or the fleet at the end of Q1 was 4186 and in the fourth quarter of last year it was 4207, so sequentially it's down a bit.

Christopher Daugherty - Oppenheimer

And then what about dollar utilization, what was the dollar utilization for the quarter?

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

The dollar utilization for the quarter was at 50--

Unidentified Company Representative

52.9%.

Christopher Daugherty - Oppenheimer

And how's that compared to last year?

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

Its stand about three points.

Christopher Daugherty - Oppenheimer

It's sound great. And then Marty in the past you have talked about the RPB basket being about a billion dollars. Is that based on bond levels and if so is the bank agreement a little bit more restricted than that?

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

Yes that is exactly correct the basket now is somewhat over $1 billion slightly over $1 billion the baskets that are in our bank revolvers about half that size.

Christopher Daugherty - Oppenheimer

All right. And then lastly the improvement I guess in margins the expected margins from the new guidance and also the free cash flow did that have anything to do with faster realization of some of the savings or an increase in the savings and also can you just sort of tell why you expect free cash flow to go up?

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

Sure, free cash flow is of course cash from operations minus CapEx so that extend, we are spending less CapEx than a year ago that's a factor. We definitely are benefiting from the less cash taxes in the new tax act that's just passed. So I think you know, that's the nature of this business is that when you rate in the fleet free cash flow goes up.

Michael J. Kneeland - Chief Executive Officer

With regards to the cost savings yes, sir, absolutely having an impact on our profitability and we have... we have spoken about that we are focused on that and we continue to focus on our costs savings as we go forward to improve our EBITDA.

Christopher Daugherty - Oppenheimer

All right. Thank you, gentlemen.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Matt Vitorioso of Barclays Capital. Your line is open.

Michael J. Kneeland - Chief Executive Officer

Hi, Matt.

Matthew Vitorioso - Barclays Capital

Hi, guys. I was wondering if you just comment on edge of the fleet I think it ticked up a bit to 39 months how so you see that playing out over the balance of the year given the reduction in fleet CapEx and then balance with defected [ph], I think you said the expected sale a little bit more of the older equipment how do you see that playing out?

Michael J. Kneeland - Chief Executive Officer

Obviously, we expect to be in the range of 39 and 40 months and we are... why wouldn't that rage as we go to the balance of the year our objective is to really sell the oldest fleet and we will continue to do that and we have been very fortunate that most of the fleet that we sell to our fleet management process is an excess of seven months and we continue along that process.

Matthew Vitorioso - Barclays Capital

Okay. And then I was just hoping to get a little more visibility I mean you have reduced your guidance for CapEx year-over-year its $715 million, is there anyway that you can give us a little more visibility on how that plays out like do you expect second quarter the different to sort of a free cash flow negative quarter versus this year was a nice increase in free cash flow year-over-year, how do you see that playing out over the next couple of quarters?

Michael J. Kneeland - Chief Executive Officer

Well we don't forecast our cash flow, but what I will say is that typically as you buy more equipment you would have a tendency to have reduce your cash flow in usually first and second quarter going into the third, and really pickup a lot of positive cash flow in the fourth quarter and that's how that plays out.

Matthew Vitorioso - Barclays Capital

Right, right, Okay. And then lastly just sort of more philosophically as you guys continue to contemplate certain actions you might take for shareholders etcetera. How do the interest of bondholders play into that decision just given where we are sort of in the business cycle and the state of the markets today?

Michael J. Kneeland - Chief Executive Officer

Well you point out that there is lot of flexibility for the company on our balance sheet and there is a lot of complexity associated with all different options. We having said all that I don't think it's appropriate for us to comment or speculate on what we may or may not do.

Matthew Vitorioso - Barclays Capital

Okay. Thank you very much.

Michael J. Kneeland - Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question or comment comes from the line of Phil Volpicelli with Goldman Sachs. Your line is open.

Philip Volpicelli - Goldman Sachs

Thank you. Good morning. With regard to the cash that is on the balance sheet of 5.15 and the potential shareholder from the actions. Give us a sense of when that might occur is there a timeframe that we should think of it, is it 2008 event, is it 2009 event?

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

You know, I think the board continues to evaluate options as Michael mentioned is a complex area. I think as we disclosed in the past the holders of the C&D preferred have consent right for any kind of traction that will be of any size. And so that's an additional factor on top of the baskets. So it's really very difficult to say what timing might be for any kind of a major use of the cash.

Philip Volpicelli - Goldman Sachs

Marty could you comment if you had discussions with the C&D preferred shareholders?

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

No it's appropriate, appropriate for us to comment on any kind of conversations that might have gone on.

Philip Volpicelli - Goldman Sachs

Understood. With regards to the consolidation of site is it a hard rule that you guys are using to figure out, which site should be consolidated and are there more consolidations to be contemplated?

Michael J. Kneeland - Chief Executive Officer

Sure we constantly have a list of what we call underperforming branches that we look at, and we challenge ourselves can we serve that market with fewer pieces of real estate. We don't look at it is necessarily existing a market, as much as we do using the resources that we have in a better way, so as Michael mentioned when we calls the branch the bulk of the fleet in that branch typically gets reallocated to surrounding branches and we try to serve the market in that way.

Philip Volpicelli - Goldman Sachs

Andare you willing to comment on the percent of your fleet that's not ready at the moment?

Michael J. Kneeland - Chief Executive Officer

Basically it's about flat from what it was at the end of the fourth quarter which is about just a shy about 10%... 10.3%.

Philip Volpicelli - Goldman Sachs

Great. Okay. And then I am going to ask a question, forgive me that everyone else has been dancing around. Would you approve offering fleet for free to customers to win share or did you approve to offer fleet for free to win share?

Michael J. Kneeland - Chief Executive Officer

I am not aware where we one... probably from the comment but, you know I know where this questions are coming from and you know we are not in the business of giving our free fleet.

Philip Volpicelli - Goldman Sachs

Understood. Great, thank you very much. Good luck.

Michael J. Kneeland - Chief Executive Officer

Yes.

Operator

Thank you. Our next question or comment comes from the line of Sundar Varadarajan. Please excuse me for miss pronunciation with Deutsche Bank. Your line is open.

Sundar Varadarajan - Deutsche Bank

Yes. Hi, just going back to the CapEx guidance, you taken a somewhat more conservative view of your end-markets and given the lack of visibility taking a cautious view here, but left your CapEx guidance kind of virtually unchanged. Could you give us some color on what percentage of your CapEx spend this year is actually maintenance versus growth, and how much more flexibility or do you have in terms of reducing your CapEx spend even further?

Michael J. Kneeland - Chief Executive Officer

Well right now as it stands we have about $583, 85 million this replacement CapEx based on the sales that we have. We had about $15 million of growth that really is a function that was just the inflationary costs of the replacement and then we've got lease buyouts and we've got non-rental CapEx, which makes up the balance, non-rental is some of our vehicles, as well as some of our real estate improvements. So with regards to the flexibility that's one of the levers that we can pull, but right now given the market conditions as we see it we are going to maintain our capital outline.

Sundar Varadarajan - Deutsche Bank

So by spending about 580 of CapEx on replacement type CapEx you expect to keep your fleet age at this 38, 39 month level is that fair?

Michael J. Kneeland - Chief Executive Officer

Yes. Yes, it's between 580 and 600 just round it but yes.

Sundar Varadarajan - Deutsche Bank

Okay. Thank you.

Michael J. Kneeland - Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question or comment comes from the line of Emily Shanks. Your line is open once again.

Michael J. Kneeland - Chief Executive Officer

Hi, Emily.

Emily Shanks - Lehman brothers

Hi, thank you for taking my follow-up. I think you've commented on the restricted payments in the bank and bond debentures, but just to be clear there is a restricted payments provision and the C&D preferred that's about $100 million is that correct?

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

Yes it's a consent right, and it is roughly 7.5% of our market cap which is a number that's slightly larger than $100 million right now.

Emily Shanks - Lehman brothers

Okay. And then could you just give us an update is the CEO search still in play right now?

Michael J. Kneeland - Chief Executive Officer

This is Mike, yes it is. The Board is very active and doing our due process going through that still a candidate, but they are working through that.

Emily Shanks - Lehman brothers

Okay. And then if I could just one last one, as we look at what the absolute number of contractors supply sales were is that a pretty good run rate that we're assuming of this year?

Michael J. Kneeland - Chief Executive Officer

We hang on one second... go ahead Chris.

Unidentified Company Representative

Yes, hi this is Chris Brown speaking, for full year 2008 we are expecting contractor supply sales of about $230 million, which is up slightly from our original guidance.

Emily Shanks - Lehman brothers

Okay, great. Thank you.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you. Our final question or comment is a follow-up from the line of Philip Volpicelli with Goldman Sachs. Your line is open again sir.

Philip Volpicelli - Goldman Sachs

Thanks. Just with regard to equipment costs new equipment costs clearly the market is weakening in North America, you guys are one of the largest purchasers, but we've got steel prices can you give a sense or are you getting better deals on equipment right now, or steel prices eating into any benefit you might have?

Michael J. Kneeland - Chief Executive Officer

This is Mike. Obviously on some of the products we buy were getting favorable. Overall, we are going to see anyone between zero to 2% in that range and we... no to your answer your question specifically, we have not seen anything related to steel prices with regards to our... our prices coming to us.

Philip Volpicelli - Goldman Sachs

So,zero to 2% better than last year or zero to 2% worst in price increase?

Michael J. Kneeland - Chief Executive Officer

I would say it's about price increase just because some of it, and we're changing some of the products.

Philip Volpicelli - Goldman Sachs

Yes.

Michael J. Kneeland - Chief Executive Officer

One, two some of the options in which we bring in and so it's about a 1% to 2% price increase put inflationary factor you would say.

Philip Volpicelli - Goldman Sachs

Okay. Thank you very much.

Michael J. Kneeland - Chief Executive Officer

Thank you.

Operator

Thank you.

Michael J. Kneeland - Chief Executive Officer

That was a last question and I am going to close this off. Well first I want to thank everybody for taking the time out for our first quarter earnings call. We are clearly making progress. We've only just begun. We believe that with the effort or EBITDA can be the best-in-class. We will focus on our core business of rental. We are doing a better job at fleet management, sales force effectiveness, and controlling costs these are within our control and we are committed to focusing on improvement. With that I would like to thanks everybody and look forward to the next call.

Operator

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

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Source: United Rentals, Inc. Q1 2008 Earnings Call Transcript
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