United Rentals Inc URI
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/17/2013

Operator: Good morning, and welcome to the United Rentals Second Quarter 2013 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 risks and uncertainties, many of which are beyond its control, and consequently actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the release. For a more complete description of these and other possible risks, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as well as to subsequent filings with the SEC. You can access these filings on the Company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations.

You should also note that the Company's earnings release, investor presentation and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term.

Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer; William Plummer, Chief Financial Officer; and Matt Flannery, Executive Vice President and Chief Operating Officer.

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

Michael J. Kneeland - President and CEO: Thanks operator. Good morning, everyone, and welcome. As the operator said; Bill Plummer, our Chief Financial Officer is here with me; Matt Flannery, our Chief Operating Officer; and other members of our senior management team.

Last night we reported results that reflect a disciplined company focused on value creation and it was a strong quarter, and it set the stage for what we expect to be a robust back half of the year.

The past three months have provided some good insights into the pace of the recovery. And I want to share some thoughts on that, and then we'll discuss some of the actions that we're taking to grow the business in the current environment. After that, Bill will discuss the quarter in more detail and then we'll go into Q&A.

So let' start with our strategy in the second quarter. We increased our revenue, we improved our margins, and we brought down our leverage. This has been our strategy all along as a way to achieve long-term profitable growth. And we've shown that we can execute this strategy in any economic climate. Right now, the construction markets are still very soft compared to the pre-recession levels but our margins are extremely strong and that's a powerful tailwind taken to the recovery.

Now reviewing our results, I'm going to give you the year-over-year comparisons on a pro forma basis, and that is – they assume the combination of RSC and United Rentals for the second quarter of last year.

Now the standout for the quarter was EBITDA. We reported $549 million of adjusted EBITDA, which is up $76 million from last year; and we grew EBITDA more than twice the rate of revenue. That should tell you how efficiently we're operating the business.

Our adjusted EBITDA margin for the quarter was 46%, and that's a record margin for the Company in the second quarter, and is 370 basis points higher than last year. Our SG&A expense ratio decreased 2.2 percentage points to 12.6% for the quarter. Now we've been bringing down our SG&A for some time and we're going to continue to make that a priority.

Last night, we reaffirmed our 2013 outlook, which anticipates adjusted EBITDA in the range of $2.25 billion to $2.35 billion on total revenue of $4.9 billion to $5.1 billion. And we feel comfortable with these ranges as well as the outlook for rates, time utilization, CapEx, and free cash flow.

Now, right now the pace of the economy is still lukewarm, although the overall trend is improving. Seasonally adjusted private non-residential construction has increased slightly year-over-year for every month except May. And our customers' survey show that our key accounts remain bullish about business conditions. In fact, our most recent surveys show that the number of customers expecting a decline is at the lowest level right on record. And demand for equipment is growing. By the way, as of today, our time utilization is at 70 .5%, which is one month earlier than we saw last year.

Now, demand clearly drove our second quarter results. We reported a 4% increase in rate and a 5% increase in the volume of equipment on rent. Our time utilization increased 60 basis points year-over-year to 68%, and that's a second quarter record for us as well. And we sold used equipment at a 42% margin. In other words, we're exactly where we want to be in the recovery, with higher rates, volume, and utilization on a larger fleet.

It tells us that the market activity is picking up and that secular penetration is still in play. And based on what we saw in the quarter, we're making the necessary investments to sustain our momentum, and I'll talk more about that in a minute.

Now looking at our geography, 11 of our 14 regions had year-over-year increases in rental revenue, with the Southeast and Western Canada being especially strong. Western Canada is tied to the oil and gas sector and the Southeast is benefiting from a rebound in the macro economy in residential, particularly in the state of Florida. Although we see a landscape that's still uneven, our scale gives us tremendous advantage; and our footprint is one reason why we are performing at record levels.

We are now focused even more intently on revenue growth with disciplined investments in our fleet and sales force. In the second quarter, we purchased more than $730 million of new fleet to satisfy current demand and prepare for our peak season. And that's a big blow to the confidence in our operating environment, and it keeps us on track with our outlook which is to generate free cash flow between $400 million and $500 million this year.

As always, we remain flexible about our growth opportunities. Our ultimate goal is to generate superior returns; and one way to do that in a recovery is by making disciplined investments in fleet. Now we could end up spending more than our current plan of $1.5 billion in gross CapEx if we feel it's warranted. So how are we taking the fleet to market? For one thing, we've added 93 sales people towards our goal of 120 to 150; and we have a strong pipeline of candidates to build that number over the next six months to nine months. That's a pretty good indication of the confidence that we have in our end markets. The sales force is doing a good job of opening new accounts.

Our year-to-date rental revenue from new accounts through June was approximately $66 million. That's a healthy return in the short-term but has much larger implication for long-term growth. We also have aggressive programs in place to activate dormant accounts and recapture revenue that was lost during the integration and branch consolidations. We are ramping up our approach on both efforts and we've already generated $38 million of rental revenue this year.

We also have a number of additional revenue streams (treating) our rental line; all of which are showing double-digit growth year-over-year. For example, Total Control solution which had more than 30% growth in rental revenue year-to-date, driven in a large part by new installs. And we're planning to expand our specialty rental footprint by 18 locations this year, which is significant. Four of these branches are already up and running and the rest will open in the third and fourth quarters. Five are in the Trench Safety and 13 in Power & HVAC.

Now I've spoken about our specialty rental plans on prior calls and we will continue to expand these operations as part of our broader strategy. Our specialty segment had rental revenue growth of more than 20% in the quarter on an as reported basis, and a gross margin of 47%. Customers are asking for these services. Power & HVAC, in particular, has the potential to cross-sell to our construction and our industrial base. Cross-selling in general is an area of focus for us. When we combined with RSC, we added expertise in industrial, in tool rentals, on-site management and customer facing technology. And we are in a better position today as a single source provider than any time in our history; and this resonates more strongly with our larger accounts.

Key accounts of all sizes are growing in importance as a part of our component of revenue. In the second quarter, our key account business grew by more than 6% and outperformed rental revenue overall. These accounts contributed $1.2 billion in the first six months of this year and more than 70% of that came from national accounts. So, we continue to grow our national account base through both share of wallet and new agreements.

So, you can see we have a lot of growth initiatives underway, and we feel optimistic about our end-markets even in the early stage of the recovery. Our entire industry is poised for growth; and we're being very diligent about protecting our key account relationships in this environment by ensuring that they get the equipment and services they need.

Now, looking at the balance of the year, the recovery is unfolding exactly as we anticipated. And when you look at it, our strategy remains completely unchanged. We'll continue to deploy our CapEx as we see strong rates and high utilization. And we've got the timing right. Most of the fleet we've added in the second quarter was deployed by early July. So we're prepared to meet demand in our busiest period.

We'll also continue to build up our rental revenue. We had 5% rental revenue growth in the first six months of this year, and we're projecting roughly 8% growth in the back half of this year. And you know our position on revenues on prior calls. We only want to pursue profitable business and retain those customers as we expand our base.

Now, most importantly, we're delivering on the big picture of steady revenue growth, outsize margin expansion, and deleveraging. All three of these goals relate directly to value creation, and as our results confirm, we're right on plan.

Now, with that, I'll turn the call over to Bill for the financial results and then we'll take your questions. So, over to you, Bill.

William B. Plummer - EVP and CFO: Thanks Mike, and good morning to everyone. I'd like to structure my comments a little differently this morning than I normally do. We've gotten a number of questions about people wanting to understand better the year-over-year change in rental revenue and get a little bit more detail on how we think about that. So I'll spend some time talking about the drivers as we see them of rental revenue from last quarter to this quarter.

Then last quarter, you all will remember that we talked about the EBITDA bridge from prior year to current year in a little bit more detail. So, I'll give a similar bridge this quarter and hopefully that will answer some questions that folks might have. And then I'll finish up just touching briefly on cash flow and flow-through and the outlook. So, that will be the structure, but I'll remind everyone, as Mike said, that all of our comments will be on a pro forma basis as though both companies were combined in both the current period and the prior comparison period.

So, first, rental revenue; we grew rental revenue for the quarter by 4.7%. Within that, we told you that we had year-over-year rate improvement of 4.2% and our OEC on rent went up 5.1%; that's our volume measure. The rate story was a story of rates getting better as we went through the quarter. We had a slow start to rate in the early part of the quarter, and then saw sequential improvements in the months of May and June that gave us nice momentum coming into the second quarter. As we sit here in the early part of the second quarter, the way we characterize our rate performance is rates are coming in well.

On the fleet growth side, OEC on rent, up 5.1%, that's been developing well as well. We've gotten nice momentum over the last few months in putting more fleet on rent. As Mike said, the additional CapEx that we brought in during the quarter has gone out on rent very robustly. So, there is good momentum coming out of Q2 into Q3 around OEC on rent growth as well; and Mike called out the time utilization that we're seeing right here now, north of 70%. So 5.1% volume growth as measured by OEC on rent increase year-over-year.

Re-rent was a little bit of a headwind for us in the current quarter. We were down on re-rent this year by almost $8 million compared to last year's comparable quarter. And so, when you convert that into a percentage impact it's something like a 0.8% decline year-over-year. So rates are up 4.2%, volume is up 5.1%; re-rent as a separate item was down 0.8%, netting down that rate and volume impact.

In prior periods, we've talked a lot about mix as being sort of the other missing part of our year-over-year revenue growth, and we talked broadly about it as an impact from the shift in rental periods. The truth is that there is more detail to that mix calculation than we've talked about publicly. We've tried to simplify things in the past. But the questions that we've gotten from investors tell us that we need to give a little bit more detail. So we decided to start talking a little bit more about the replacement CapEx inflation effect that in prior periods we had baked in with the overall mix impact. So inflation impact on OEC is really just the impact of the fact that when we replace equipment, we are replacing equipment that in the current quarter on average is about seven years old. We buy a unit today at a price that's inflated compared to what it is that we sold out of our fleet as used.

In the last seven years, our equipment inflation has averaged something around 2% a year. So typically, when we replace a unit today, we're replacing a unit at a cost that's 15% higher than the old unit and that replacement effect – that inflation effect increases OEC on rent. So what we do is, we break out that inflation impact on OEC on rent, and look at it as a separate item. When you do that calculation in the current quarter, the inflation effect by itself is about a 2% headwind. So previously, we would have just lumped that in with mix, but I think going forward we'll call it out so that it'll help explain the revenue performance that we deliver.

So, the 2% number is a number that's right around what we've seen for a number of quarters, and I think it's fair to say that as you're modeling things, you should think about inflation at 2% going on as we go forward as well.

The remainder of our year-over-year rental revenue growth is what we would truly call mix. It's about a 1.8% headwind in the current quarter and it really is everything else that's going on in our revenue growth. So it is period mix shift, yes, but it's also a host of other things; like the currency effects; like the ancillary revenue impact in this particular quarter; like a host of other things, working day account changes, all of that gets lumped into that mix calculation in the way that we talk about the year-over-year growth in rental revenue. But we thought again that it made sense to give you the component.

So, for the 4.7% growth for rental revenue overall, rate was up 4.2%, volume was up 5.1%, re-rent was down 0.8%, replacement CapEx inflation was down 2%, and mix and all other was down 1.8%. I think that's probably the more useful way of thinking about our year-over-year rental revenue change.

I'd also like to spend a little time talking about the bridge from last year to this year on EBITDA. And it will be very similar to what we did in the first quarter. So, as we look at the key drivers of that $549 million of EBITDA that we delivered this year, obviously, the rental rate impact is pretty significant, so that 4.2% year-over-year rate improvement translates into about $33 million worth of EBITDA increase, and that's essentially taking the 4.2% rate and applying it to the prior year owned equipment revenue percentage and then knocking off a couple of percent to represent commission expense. So $33 million of incremental EBITDA from rate alone.

Volume – and again, volume calculated the same way as I just talked about in revenue. Volume contribute about $27 million of incremental EBITDA and that comes from the 5.1% OEC on rent growth that we told you about earlier applied to the prior periods owned equipment rental revenue, and then we apply a 70% flow-through factor to get to the EBITDA impact on that line.

Synergies, we told you that we delivered $60 million of synergies in the current quarter. And on a year-over-year basis that $60 million compares to $17 million of synergies that we had in Q2 of last year. And so, the year-over-year impact of synergies is $43 million. This is the straight difference between this year and last year.

By the way, on synergies, I might just add that the impact of synergies on our flow-through drove us to an overall flow-through for the quarter of 103%. If you take out those synergies, the flow-through ex-synergies was a little north of 44% in the current quarter, and I'll touch on that again as I update the outlook a little bit later.

Used equipment sales were pretty robust improvement for us this year compared to last year. Used equipment contributed an incremental $16 million to EBITDA in the current quarter, driven by higher used equipment volume and better margins. We continue to see very, very good sales through our retail channel. And as you all know, that gives us the best margin of all the channels that we participate in. 59% of our sales were through retail in the current quarter and the margin performance showed that affect. So used sales contributed $16 million year-over-year.

What are the headwinds? We told you about 5S implementation expense; and OEC not available; reduction efforts in the first quarter. We call those two combined about $10 million impact in the first quarter. In the second quarter, those two combined were about a $6 million headwind. It played out as we expected. We reduced the level of expense although they didn't go away completely during the second quarter.

Looking forward, I think it's fair to say that the 5S expense and the OEC not available special expense are essentially done for the year. So if you are modeling. I would say that those go to zero for the second half of the year on a year-over-year basis.

We had a merit increase impact in the second quarter of about $6 million, the $6 million headwind year-over-year. That's comparable to the $5 million that we called out in the first quarter. Also in the second quarter, we had an impact from an adjustment to our self-insurance reserves. The irony here is that the impact in the second quarter alone was actually positive. It was an adjustment in our favor by about $3 million in the quarter. But in the prior year's quarter, we had an even larger favorable adjustment of $9 million. So the net impact there year-over-year is about $6 million of headwind in the second quarter.

I talked about inflation earlier. If you take that inflation impact on revenue that I talked about earlier and apply a 70% flow-through to that inflation revenue impact. That represented a headwind in the quarter of something like $12 million at EBITDA. And everything else which is mix and all other effects, aggregated to about $13 million headwind. So, all of those are the pieces that explain the change in EBITDA from $473 million last year to $549 million in the current quarter.

Hopefully, that level of detail is helpful for people and it gives you a little bit more insight into how we think about it. If not, please ask whatever questions you think appropriate in Q&A.

Real quickly on cash flow and liquidity for the quarter, we delivered year-to-date free cash flow of $77 million and that includes, obviously, the rental fleet investment that we made and other investments that we made. Rental fleet; we've invested just a little over $1 billion so far in the year on our way to the $1.5 billion outlook that we've given you for the full year. And as Michael mentioned, we're confident we'll be able to deploy not only the fleet we've already bought but any incremental fleet that we buy very effectively, and we are taking a look at whether the $1.5 billion is the right number to stick to at this point.

Liquidity overall is still pretty strong for us. We have been working to execute the share repurchase program that we announced last year. We're essentially done with that program as we sit. At the end of the quarter, we had $15 million left to do against the $200 million authorization that we have. And as we sit here today, we've reduced that remaining amount even further. We'll get it finished during the course of this current quarter.

Let me just finish up updating our outlook. As Michael said, we're reaffirming the elements of our outlook. So, we fully expect that our total revenue for the year – for the full year, will come in in that range that we've given previously; $4.9 billion to $5.1 billion for total revenue. Within rental revenue, we are still looking for our rates to improve by 4.5% for the full year over the prior year, and time utilization; we should deliver 68%, which would be a 50 basis point improvement over the full year 2012.

The EBITDA result; again, we're reaffirming the $2.25 billion to $2.35 billion range that we've given for EBITDA and that reflects a $1.5 billion of gross rental capital spend and just about a $1.5 billion of net rental capital expenditures.

Free cash flow in the year; again, we're sticking with the $400 million to $500 million on the year. And I will just reemphasize the flow-through point, as we look at the full year; we still expect to deliver overall flow-through excluding synergies of between 60% and 70% for the year.

That's about all I'll do on a prepared basis here. But again, if there are any questions about anything that I've said, please feel free to ask it in Q&A.

So, I'll ask the operator to open up the call for questions. Operator?

Transcript Call Date 07/17/2013

Operator: Seth Weber, RBC Capital Markets.

Seth Weber - RBC Capital Markets: So just on the pull-through margin assumption of 60% to 70% for the year, I guess, can you just tell us, are there any of these expenses that we should be thinking about for the third quarter, fourth quarter, things that could come up that we're not aware of? I know that some of these expenses go away; the 5S and the OEC not available, but the merit increases and incentive comp and things. Could you just help us understand what could be out there for the second half to help us get to the 60% to 70% number? It's a big range.

William B. Plummer - EVP and CFO: Yeah, it's certainly the range that we've talked about historically. I think the one thing I would point to that – that it's hard to forecast whether we'll have or not is the self-insurance reserve adjustment. As I said, it was a $6 million headwind in the current quarter. We update our estimates for the self-insurance reserves twice a year. We do that in March and October, I believe. It's hard to say what that might do in the latter part of this year, but our view right now is that that – I wouldn't – if I were modeling, I wouldn't model an incremental impact from self-insurance reserves. OEC not available; 5S go away as I said; and those are the key things that we've experienced so far that I would say would go away. The possibility is that – again, that we might have a self-insurance adjustment late in the year, but it's hard to say what that might look like on a year-over-year basis right here.

Seth Weber - RBC Capital Markets: I guess if I could just slide another one. On the rate increase, the rate guidance for the year, it seemed to – it was a little bit lower than what I was thinking for the quarter. I mean, can you just talk about the competitive environment? Are you seeing – are your competitors being rational, both the bigger national guys? And also, are you seeing any increased pressure from the smaller independent operators?

William B. Plummer - EVP and CFO: Go ahead, Matt.

Matthew Flannery - EVP and COO: Seth, it's Matt. We actually are seeing the competition pretty responsible. We're comfortable that the whole industry realizes that this is important for us all. You may have some one-offs in an individual market, but I'd say all the public companies specifically are doing a great job of rate discipline. And we're seeing the benefit of the demand as well. And we know what the headwind we have to meet our full year rate number. But historically, we've achieved what we need to achieve to get to our guidance, and we have a laser focus on it.

Seth Weber - RBC Capital Markets: Are you seeing a lot of re-fleeting from the local independent guys?

Matthew Flannery - EVP and COO: Not across the board.

Operator: Scott Schneeberger, Oppenheimer.

Scott Schneeberger - Oppenheimer: Could you address – you alluded on the prepared remarks that you could do a little bit of upside to the CapEx and that implied the strong demand environment, and you just addressed the price a little bit. What types of fleet are in demand? What have you bought? What are you buying? If you could take us a little bit deeper on that?

Michael J. Kneeland - President and CEO: Well, let me just kind of tell you, since I talked about the idea of the capital side. Keep in mind, our principles have not changed. It's about profitable growth, higher returns, and it's also about generating cash flow to reduce our leverage. Those principles have not changed, to be clear. We have to balance rate and time. As Matt said, we're looking at the rate. Most of those have to be played out. The one thing that I will tell everybody, if you go back to our earlier messaging, we originally were only going to have nine locations, cold starts in our specialty business; we're no doubling that. That does take up some capital, but as I mentioned, at 40% margin, it's very attractive and accretive. So we think it's the right thing to do. That's probably in a order of $30 million to $40 million. Everything is under review. Nothing has been decided. We want to continue to see the nice progression we've seen on time utilization and net demand and specifically on rates. So, Matt can talk specifics on what kind of assets.

Matthew Flannery - EVP and COO: As Mike has mentioned, the really only big change over our current product mix is much more focus on the specialty products; and that's in line with the direction that we want to go strategically. We think not only are they profitable, but it's a differentiator between us and the marketplace and a value for our customers.

Scott Schneeberger - Oppenheimer: And is there a big difference, I see key count growth up 6% in the quarter, unassigned accounts up 1.5%. Is there a big difference in what you purchase for each of those target groups?

Matthew Flannery - EVP and COO: I wouldn't say that there is a big difference. One of the opportunities that we are finding, and we have found since the merger of RSC is the increased need and demand for us to cross-sell and we've got great results from that. So I'd say that's one of the more significant changes for our key accounts is the legacy RSC customers are now getting access to Trench, Power & HVAC product, and we are cross-selling our tools across the network as well. So, those would be the most significant key account differences.

Operator: Ted Grace, Susquehanna.

Ted Grace - Susquehanna Financial Group: I was hoping just to ask, maybe start on guidance. At this point, what would be kind of the key factors to drive you towards the upper end of the revenue in EBITDA guidance? Would it more likely be pricing over volume? And the same question on EBITDA; would it be pricing, volume, cost less synergy. Just, if you could help frame out kind of what you think the key drivers would be, I guess, both driving to the upper end, and then what the biggest risks could be – could drive it the other way?

William B. Plummer - EVP and CFO: Ted, I'll start and Mike and Matt, please chime in. Look, we all know the leverage that rate has in our business. So, if we got a little bit more pricing, I think that would have the most outsized impact overall. So, that would almost always have to go to the top of the list of what might drive us to that higher end of the range. But volume is a very significant lever for us right here and now. It's going well, and so if the market momentum that we see today continues or even increases a little bit, that could be a significant driver to push us towards the top end of the range. And then the synergies could be a pleasant surprise as well. The synergies have developed according to plan so far. They are going nicely. If we saw a little bit more strength in some of the synergy areas that are still developing, right. Many of the synergies are baked, they are done, right. The actions have been taken. The branches have been closed. The headcount has been reduced. But we're now at the synergies that require process change and development of tools. If some of those pan out better than we expected, we could see a lift from synergies as well. Then, if for some reason, we decided to spend a little bit more on capital, that could be a driver as well. I guess, you'd count that as volume, but I'm counting that as volume that we trigger versus volume that's driven by the marketplace. So, those are the – I'd call it, four things that I would like at that say could push us toward the high end of that range. Any additions?

Michael J. Kneeland - President and CEO: Look, I completely agree with Bill. I think rate would be number one, and the synergy and cost would be number two. Those are probably to me – it would be the two biggest buckets.

Ted Grace - Susquehanna Financial Group: Then, I guess, just digging into that pricing comment, if we look at your comps in the third quarter and fourth quarter just on a single, on a double, it looked like they're relatively static versus the second quarter. Are there programs in place that could help you improve reported pricing on a year-on-year basis in the back half? Or – I know you're reaffirming the (4.5), but how would you encourage us to think about the potential to do maybe a little better than that (4.2) we saw in the second quarter?

Michael J. Kneeland - President and CEO: Well, one of the things I would say, you're right. To be clear, I mean, was it a little bit slower than I would have hoped for; absolutely, but the team is always up for the challenge and they've always been able to meet or exceed my expectations. That being said, it's supported by strong timing utilization. So, we'll see that continue to play out. On top of that, we do have our systems in place that we use. We use a zillion, as you're very much familiar with, as a way in which we go to market. And it's not only the top line rate, it's also taking off the bottom part of the underperforming rates that can drive that outcome. So, I will just tell you that we're laser-focused on it. I feel very confident in the team. And time utilization is a benefactor for us. So, to the extent that we continue to see the time utilization that 70.5% right here in now a month early, if that continues, I really feel though we'll deliver.

Ted Grace - Susquehanna Financial Group: Then the second question was on SG&A and I know in your prepared remarks Michael, you said that that's a key focus for you guys. It looked great, so congratulations on that. Normally, you see that number tick up sequentially. It obviously had a nice tick-down; more synergies and more efficiency. But how should we think about that as kind of run rate going forward? And can you just walk through maybe some of the puts and takes that helped you to do as well this quarter as you did?

Michael J. Kneeland - President and CEO: Yeah, I'll start, then I'll ask Bill to walk you through it. But it's fair to say that when we think about profitable growth, it's not all about rate and it's not all about the customers that we serve, it's also in a way in which we go to market in driving efficiencies. That efficiencies is not only played out in the field as a cost to rent, but it's also in the SG&A. How can we have a more effective sales force? How can we do things more effectively? How can we streamline the processes that we have in place? All those things will play. We started out several years ago talking about driving cost down, and we've shifted towards more – talking more about efficiencies. That hasn't changed; and we still remain focused on finding ways to do that. I'm a disciple of growing the top line, but at the same time, reducing cost to grow the bottom line, in a combination. Bill can give you a walkthrough on – in some reoccurring and some data points.

William B. Plummer - EVP and CFO: So, Ted, you will see a sequential increase in SG&A from Q2 to Q3. Without quantifying, I would say, clearly Q3 is our highest revenue quarter. So you'll see selling costs be a significant part of that sequential increase. And that's probably going to be the biggest driver of the sequential change. What has driven the SG&A improvement that we've seen especially the year-over-year improvement that we saw this year? Two factors, one is salary and benefit improvement, and that – I'm talking the total number here. That reflected the synergy actions that we took during the second quarter last year, really having a full effect in the second quarter of this year on a comparison basis. So that's been a big chunk of it. The other big chunk is bad debt expense. As we were early in the merger last year in the second quarter, slowly we started to build some older receivables as we transitioned through systems and trained people and figured out a new working relationship with customers. During the second quarter, we started to see our bad debt expense start to rise. We've got a better handle on all of those actions, right. Systems are now better, and people are more comfortable with using those systems. Our customers and we have a better understanding of how we're working together. So, we're starting to see the age of our receivables balance come down in the second quarter. That was a significant contributor on a year-over-year basis. Will we get as much of that benefit in the third quarter? Maybe, maybe not quite as much but we will see a nice benefit as well. So that might add to – that might offset a little bit the sequential increase that I talked about for commission expense. Those are the biggest things that I'd point to right here and now on SG&A both on a sequential basis and year-over-year. Is that helpful?

Ted Grace - Susquehanna Financial Group: That's incredibly helpful guys. Thanks a lot. Congratulations. Good luck this quarter.

Operator: David Raso, ISI Group.

David Raso - ISI Group: The last four quarters, your sales growth has been notably slower than some of the major competitors. I could just keep it open end of the question. I'd like to hear your explanation why and maybe how was that influencing your decision on CapEx for what you just experienced in 2Q and how you're thinking about the rest of the year.

William B. Plummer - EVP and CFO: So, David, I'll start off. I think – well, I don't spend a lot of time wallowing in the competitors' metrics. I do know that in some key cases they're growing their fleet robustly right here now. Our fleet is growing, as we said earlier, 5.1%, using nominal OEC dollars. And so that's the robust foundation. If you're pumping your fleet up 15%, 20%, that's a very strong underpinning for growth. We know because we were growing our fleet in the high teens, four, five, six quarters ago, if you go back and take a look, and we were delivering revenue growth in the 20% plus area. So, I think that's a big factor that's going on. Another factor is the customer segments that we focused on. Our large key accounts, I would argue, experienced a rebound earlier in the cycle than some of the mid-size and smaller accounts that some of our competitors rely upon. So, the timing of the customer segment that they're focused on is playing to their benefit right here now. It played to our benefit earlier in the recovery cycle. And so that's another, I think, important factor. So, those are the two things that I would point to. Michael, Matt, would you guys add anything on top of that?

Michael J. Kneeland - President and CEO: What I would add, David, is, keep in mind; we closed 200 locations, so we knew going in that we would have a dyssynergy. That dyssynergy comes much quicker and then we build our way out of it. As I mentioned, we are looking at the dormant accounts and we are growing that. And so, Bill is right, it's a different strategy and we are very happy with how we look at the world and the principles that we've laid out for profitable growth; higher returns and cash flow.

David Raso - ISI Group: I think we're all just trying to figure out the run rate for rental rates and the delicate balance you always have between growth of fleet versus rate and how do we think about rate versus fleet growth in the '14. Because if I look at the rental rate growth for the full year to 4.5%, obviously, the OEC on rent, especially with the way the July utilization started strongly, it appears from your fleet utilization/average OEC, that's probably upside to the targets. But the rate of 4.5%, it would seem like a bit of a challenge. So, can you educate us a little bit maybe more detail on how you are thinking about rate in the third and fourth quarter? And I'd probably weave that into – how should I think about that interplay going into next year? Because look, I mean, a lot of the (indiscernible) always are thinking about the stock as, if they can grow nicely and generate a lot of cash it's not just enjoying the cycle, you are enjoying an improving company, better return on capital; the whole story. But to grow the top line more by fleet, I might have to forego some of their cash flow. So I am just trying to think at that balance. So if we can go back, how are you thinking about rates the next couple of quarters to get to the 4.5%? Or is it probably more of a – maybe you missed the rate target a bit but you have the upside to the fleet utilization and then dovetail that into 2014 thoughts?

William B. Plummer - EVP and CFO: So, again, I'll start and ask for input; Mike and Matt. As we think about the back half of the year, the math is pretty clear, right. You've got 5.4% year-over-year in the first quarter on rate. You've got 4.2% in the second quarter. And so, in order to get to the 5.5% – or excuse me, 4.5%, maybe that's (for you), 4.5% for the full year, the back half has got to be somewhere around 4% growth, and the quarters will break out differently based on the comps last year, right. Third quarter last year, we had a very strong rate improvement, and so, that will be a difficult comparison in Q3 for this year. So, somewhere between 4% and 4.2% is where the back half has got to be and the third quarter is probably biased a little lower, and the fourth quarter a little higher than that. So that's the way that we are thinking about rate to finish out this year, and it leads into the 2014 comment. In 2014, we will follow years in which, if we do what we say this year, we will follow years in which we had rate at 4.5%, what was it, 6.9% last year? Folks, somebody remind me.

Michael J. Kneeland - President and CEO: Yeah, it was (6%).

William B. Plummer - EVP and CFO: And it was 5% unchanged the year before that. Those are very strong consecutive years when you look back at the history of not only this Company but this industry. So it's hard sitting here right now to say we're going to stack another 4% or 5% rate on top of that, but that's the kind of thing that we ask ourselves as we think about 2014. Should we expect another 4% or 5% in 2014? That's a tough thing to decide right here and now, but it's in the neighborhood of where rate should be next year. So let's say it's – I won't pick a number, in that area of 4% to 5%. So let's say it's in that area. What can we do to generate profitability, margin, return and cash flow in that scenario? We would look at that question and ask importantly; what's the fleet investment assumption that we want to put underneath that. What we've said so far is that we want to think about fleet investments over the next several years that are in the neighborhood of what we're doing this year and what we did last year. If we do that, then the cash flow generation is very robust over the next few years. But that limits us to something in the high single-digits of fleet growth over the next few years. So the thing that we are struggling with – not struggling, discussing right here and now is, is that's the scenario that we want to play out over the next several years. That's our mindset right here now. And if we do it the way we've been talking about, we'll get a lot of free cash flow over the next few years.

David Raso - ISI Group: That's kind of why I asked the question the way I did. I mean, if you feel you need to look at your peers – and I know they're growing their fleet more, but still you're truly not growing nearly as fast, if you feel you'll – we can have that much of, at least optically, will think you're losing share, we have to go after the fleet expansion. That might be able to close the gap on the revenue growth, but you've clearly begin to give away the cash flow target that you set of $2 billion in aggregate '13, '14, '15. So it sounds like you're still feeling the balance should be – look, we're not trying to chase the double-digit top line growth, we're trying to get the returns and the cash flow is still a pretty high priority?

William B. Plummer - EVP and CFO: I think that's fair, and Mike please offer your view. But I don't think we feel like we've got to deliver double-digit or near 20% revenue growth. I don't think that's where any of us have our head set right here now. We're focused on profitable growth. We're focused on doing it in the context of managing our leverage and that means free cash flow. We can grow, and we can improve margins, and we can improve return, and deliver significant free cash flow over the next few years all at the same time. That's where we are as a company in this current cycle, and we feel pretty confident about that. The details of whether it's 5% growth a year or 7% or 8%, I think would inform the exact amount of free cash flow that we generate. But that's the neighborhood that we're talking about, rather than saying, oh, we've got to up at 15% or 20%.

Michael J. Kneeland - President and CEO: I agree with everything that Bill just said, David. The one thing; if we – this 4.5% just leading into 2014, you're going to assume a carryover of somewhere around 2% going into next year. And then you take a look at what some of the industry analysts are saying about the end markets, it actually is – it grows, so it should, again, support more rate and higher returns. And Bill is exactly right, we have never said that or pound the table on double-digit growth; we're pounding the table on profitable growth and higher returns and cash flow and delevering.

William B. Plummer - EVP and CFO: I don't want to get on my soapbox here, but we are in a phase now where we are delivering if we do what we say $400 million to $500 million of free cash flow, while growing our fleet, while improving our time utilization, while improving margins, while improving returns. There are a lot of things lined up right here now, and we think we can extend that run over the next several years, and to give up all of that in pursuit of just absolute top line growth is not where our heads are.

Operator: (Manish Somaiya, Citi.)

Ishan - Citigroup: This is (Ishan) on for Manish. Just a quick question. I know you get this every quarter now and then. I just wanted to get your latest thoughts on the M&A environment given there appears to be a number of opportunities out there in the market right now.

Michael J. Kneeland - President and CEO: This is Mike. We've said this time in, time again. It has to be a – as we call, the three-legged stool. It has to be strategic. It's not like we have to run out and buy somebody for the sake of getting big. The big is not the endgame here. It has to be accretive and it has to be a cultural fit with our Company. I think the success that we have with RSC speaks volumes of how we approached it. Do we look at things that are out there? Absolutely. But again, our principles are out there. As these things become available or come across our desk, we will look at them as we should, but again it has to fit those three buckets. It has to fit with our long-term strategy.

Operator: Jerry Revich, Goldman Sachs.

Jerry Revich - Goldman Sachs: Michael, can you talk about the opportunities to continue to improve fleet availability or reduce fleet not available now that you've got RSC under your belt for an extended period of time? Is there a one year plus opportunity to continue to improve and drive higher equipment utilization rates longer-term?

Michael J. Kneeland - President and CEO: Short answer is yes. But I'm going to start and I'm going to ask Matt to chime in because it's a project that we've announced and is underway here inside the Company. But we're doing a lean process and we're taking a look at our processes. And we do think that there's opportunity to improve the day to day operations and streamline things, take out redundancies and effectively get better results, not only from the turn that we have from fleet coming in, but also fleet going out, and we're very excited about that. Matt?

Matthew Flannery - EVP and COO: Yeah. Jerry, Mike's absolutely right. I mean, on average we have stores that have 30% more fleet year-over-year, and some of them significantly more than that. So we've got a new scale coming through these locations and it's a great time for us after the year anniversary to start looking at our new business model and how can we get waste out of the model and improve efficiency. At the end of the day, that's the output that we're looking for and we've got a lot of folks focused on that. And we think that we'll see that throughout the next few years. And part of that is the gap that we're going to fill between the $230 million to the $250 million range that we want to get in synergies. It's going to come out of the shop. And that's, as Bill stated earlier, it's a little more. I won't say complex, but it's more process-oriented and it's going to take time to achieve, and that's where our focus is.

Jerry Revich - Goldman Sachs: A follow-up just on the broader demand environment. To get to your pricing number, you really need to get pricing accelerating into 3Q to a rate of improvement of closer to a point a month from roughly half that amount in June, and I'm just wondering, based on the increase that you see or backlog of work that you see, are you on track to ramp-up to that level of sequential price increases, and how would you characterize the demand environment in 3Q versus 2Q on a seasonally adjusted basis?

Matthew Flannery - EVP and COO: So, the demand environment is very strong. As we discussed, time utilization is a point higher than it was last year. We reached the 70% threshold at least 30 days earlier than we did last year. The sequential rate improvement, we are very aware of the sequential rate that we need throughout the balance of the year to reach our target and it has been achieved. And if you look, the third quarter over the last few years is our largest sequential improvement. We know it's going to take more focus than it has because of the slowish start and we're putting that appropriate focus. But it is achievable or we wouldn't have reaffirmed that guidance. So we know exactly what's going to take to do it, and the team is focused on it.

Operator: Philip Volpicelli, Deutsche Bank.

Philip Volpicelli - Deutsche Bank Securities: My question is with regard to the flow-through calculation in the press release; and Bill, your comments regarding that. I'm having a hard time calculating it. If I take the $549 million of EBITDA minus the $418 million of last year divided by the $1,206 million of revenue minus the $993 million, I get to about $61.5 million versus the $102 million in the press release. What am I missing?

William B. Plummer - EVP and CFO: So the prior year pro forma adjusted number is $473 million at the starting point compared to the $549 million. So, that year-over-year in total is – somebody do that math for me – $76 million; and then, the revenue change is $74 million in the period. So, say again Phil, what were the other numbers that you're using?

Philip Volpicelli - Deutsche Bank Securities: Okay. So the ones in the press release are not the ones you are using. You are using the pro forma numbers from last year's release?

William B. Plummer - EVP and CFO: That is correct.

Philip Volpicelli - Deutsche Bank Securities: Okay, great. And then just to go back to the M&A question, do you have enough dots on the map? I mean, you've got 820 some odd locations. It seems to me that you wouldn't really need to add any more general rental locations. You just simply now are going to add more units per location and that should increase your EBITDA margin and increase the economies of scale. Is that the way you guys are thinking of it?

Matthew Flannery - EVP and COO: Generally, yes. Well, this is Matt. I mean, there may be gaps based on upcoming projects, and specifically in Canada where we may have a gen-rent cold starter two planned. But that's what our focus is on our specialty business. Because even if they share real estate; we always look at that opportunity. We do want to build out the footprint of our specialty product. It's a huge growth goal of ours and a strategic focus. So, as far as the 836 and gen-rent footprint, it is fairly robust and we don't have really any gaps to fill.

Philip Volpicelli - Deutsche Bank Securities: And just on that specialty piece, there would be 18 locations. How sooner – are those third quarter events or is that fourth quarter?

Matthew Flannery - EVP and COO: It will depend on the timing of getting the real estate, and getting the employees. But it is a number that we feel we can achieve in the balance of the year.

Operator: Joe Box, KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets: Just a quick clarification. Bill, that was helpful on the mix and the inflation impact. As we think about the rental revenue walk going forward, should we expect the impact from national customers to still be a negative mix headwind but maybe less than in the past couple of quarters as you anniversary the RSC deal?

William B. Plummer - EVP and CFO: Yeah, I don't know that I'd point to national specifically, but what I would say is that the mix impact – so excluding inflation, the remainder we are calling mix will likely continue to be a negative. I won't characterize the size of it, but I think that dynamic of continuing to mix more toward the larger players who do length longer typically, so you've got that period mix dynamic going on; a little bit of cat class mix that's influenced by the growth of the larger strategic accounts; and then just all the other puts and takes that flow through that number, I would expect that to continue to be a headwind over the next several quarters.

Joe Box - KeyBanc Capital Markets: Mike, could you maybe just give us a little bit more color on regional demand in the quarter, and maybe just comment on the weather impact? Obviously, we had a lot of rain this year versus last. Just any thoughts on how much weather could have impacted the numbers?

Michael J. Kneeland - President and CEO: Well, you know me; I don't like to hide under the covers of ground weather, but of the three regions that we basically talked about that were down on a year-over-year basis; clearly, one of them was impacted by weather; the other one which is Northeast Canada, Northeast Canada, we knew that was going to be down on a year-over-year basis; and they did also are going through a union issue in the Province of Quebec that has had some impact, so we expect that. The other regions – I think the other region; the Gulf, South, that we talked about; it was the third one, was more of a timing issue related to its projects, and they're back on line. And the rest of the them came up very nicely on a year-over-year basis. When you look at the two performing ones; obviously, you can take the Southeast, which, I think was really impacted by the downturn severely; has come back strong, both from residential and on the construction side. And then the Western Canadian region still performs very well due to the oil and gas sector that's out there. As long as the oil stays up, it will do and perform exceptionally well.

Operator: Due to time constraints, this does conclude the question-and-answer session of today's program. I'd like to turn the program back to management for any further remarks.

Michael J. Kneeland - President and CEO: Thanks, operator. I want to thank everybody for joining us today. If you go on to our website, you can see our investor site where you can download our latest presentation. We are also settling to our new offices here in Stamford, Connecticut. We have relocated from Greenwich. So you can reach us on the same phone lines or reach out to Fred for any additional comments or questions, if you'd like to see any of our facilities, and if you want to discuss anything else in more detail. So, thank you very much. Look forward to our third quarter call. Thank you.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.