RSC’s Rental Volume Increases Despite Higher Costs in Q2

RSC Holdings last week announced second-quarter rental revenue of $405 million, a 5.3-percent increase from $385 million in rental volume during the second quarter of 2007. Rentals represented 90 percent of RSC’s revenue, which totaled $449 million for the quarter, a 1.4-percent year-over-year increase.

Equipment rental volume for the first six months of 2008 was $777.2 million, a 6.1-percent increase compared with $732.6 million in the same period in 2007, with total revenues increasing 2.6 percent from $849.2 percent last year to $871.1 percent this year.

Same-store rental revenue growth was 4.4 percent and the company’s industrial business continued to outperform the rest of the business in revenue growth. Rental rates rose 0.9 percent on a sequential basis from the first quarter, but were down 0.5 percent year over year. Utilization of fleet increased to 71.6 percent in the second quarter, compared with 68.6 percent during the second quarter of 2008.

RSC continued to slow sales of used equipment to reduce capital expenditures, causing a drop of used equipment sales in the quarter from $38 million in Q207 to $25 million in this year’s quarter. Capital expenditures in the quarter were $63 million, down 68 percent from $195 million in the year-ago period. For the first six months of the year, net capital expenditures were $115 million, a 56-percent drop from $261 in the same period of 2007.

“Our strong performance is a direct result of proactively managing the operating levers of our business by focusing on sustained rental rates and high utilization through reduced capex and fleet redeployment,” said Erik Olsson, RSC president and CEO. “Thereby we support profit margins and generate free cash flow, which is precisely what the business should be focusing on now. We could have grown faster in the second quarter, but it would have come at the expense of higher capex and lower rates and margins. Instead, we have chosen to reduce capex and drive free cash flow. At the same time, we are investing in the growth of our business, as evidenced by the recent acquisition of American Equipment Rental and the creation and filling of two key executive management positions in the areas of strategic development and sales.”

Second-quarter operating income increased to $114 million, or 25.5 percent of total revenues, from $101 million last year. Profit contribution from higher rental volumes and productivity gains was offset by increased depreciation on a larger fleet, rapidly rising fuel costs and costs related to store closures. Adjusted EBITDA increased 0.4 percent to $207 million in the second quarter, compared to $206 million in the same period last year.

“Our priority remains on rental rates, utilization, profit margins and cash flow and as a result we delivered an impressive 46.1 percent adjusted EBITDA margin and 25.5 percent operating margin,” said Olsson, adding that the company consolidated or closed 10 low-performing stores during the second quarter.

Free cash flow was $91 million for the quarter, compared to $33 million in Q207.

The company expects that non-residential end markets will decrease at a low single-digit percentage rate for the remainder of 2008, based on projections by independent research firms. The company said it will prioritize rate stability over volume, resulting in slightly lower rental revenues than previously anticipated. The company expects rental revenue growth of 3.5 percent after previously expecting 4- to 7-percent growth. The company said fuel cost inflation is expected to continue at higher levels than the company can recover in its rental and delivery rates in the current competitive environment.

“We are operating in an environment of economic uncertainty and are running the company with a strong focus on fleet utilization and optimizing capital expenditures in order to maximize free cash flow and maintain our industry-leading profit margins,” added Olsson. “We continue to review all aspects of our business to improve efficiency including ongoing reviews of underperforming stores.”

Based in Scottsdale, Ariz., RSC Equipment Rental is No. 2 on the RER 100.

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