Nov 4, 2008
Operator
Good evening, my name is [Katherine] and I will be your conference operator today. At this time I would like to welcome everyone to the RSC Holdings third quarter 2008 Results Conference Call.
(Operator Instructions). Thank you Mr.
Gould you may begin your conference.
Gerry Gould
Thank you, Katherine, good evening everybody. Welcome to the RSC Holdings third quarter 2008 conference call.
Joining me today from the company are Erik Olsson, President and Chief Executive Officer, David Mathieson, Senior Vice President and Chief Financial Officer. We published our third quarter results and updated our '08 guidance in a press release issued approximately an hour ago.
The results of our third quarter results slide presentation that accompanies this earnings call, the press release as well as the webcast, and the accompanying slide presentation, any non-GAAP reconciliation tables that are warranted can all be accessed on the RSC Holdings website at www.rscrental.com in the investors section under the about us tab. This conference is being recorded for replay purposes.
If you have any questions after the call please call me. Please turn to slide two.
Before the presentation and comments begin RSC would like to alert you that some of the comments such as the company's outlook and responses to your questions include forward-looking statements. As such, they are based on certain assumptions of future events and are subject to a number of risks and uncertainties that may not prove to be accurate.
Actual future results may vary materially. In addition, the factors underlying the companies look are dynamic and subject to change, and therefore this outlook and all the other information mentioned today speak only as of today.
RSC does not intend to update this information to reflect future events or circumstances. RSC encourages you to read risks and uncertainties discussed in the company's annual report on form 10-K for the year 2007 and our other SEC filings.
I will now turn the call over to Erik Olsson.
Erik Olsson
Thank you Gerry, good afternoon and welcome everyone to RSC third quarter 2008 earnings call. I will go over some highlights of the quarter and David will then talk in more detail about financials.
I will also talk about our outlook for 2008 and we will end with a Q&A. It has been a wild ride in the financial market and in the global economy over the last several weeks, the impact in which is still unfolding.
However, through this period our business has remained healthy and we have been preparing for a soft 2009 all year long. So we believe we are well positioned to face the difficult times ahead of us.
Turning now to the third quarter and beginning on slide number three, we were more than just satisfied. We were quite pleased with our performance in the third quarter given the worsening economic environment.
We delivered same store rental revenue growth for 1.8 % while maintaining our rental rates essentially flat on a sequential basis from the second quarter. Profit margins were strong with adjusted EBITDA of 44.1 % and free cash flow results which we will discuss in greater detail surpassing our expectations reaching $94 million.
Each day and at each of our locations we are managing the business with a laser focus on customer service. We are delivering and picking up on time, performing high levels of preventive maintenance on one of the youngest fleets in the industry, and emphasizing safety first.
In addition to enabling us to take market share this focus on customer service is yielding high profit margins and generating free cash flow. Our success is the result of a disciplined organization focused on the proven RSC business model.
Turning to slide number four, the third quarter performance demonstrates the strengths and flexibility for our demand rate in RSC business models, which includes first a commitment to providing customers superior service and reliable access to one of the youngest, safest, most diverse fleet in the industry. Second, a strong and proactive business discipline applied to pricing, demand driven CapEx, balancing of fleet we sell versus that that we buy to always have a high demand fleet mix on hand and the dedication to operating with optimal efficiency.
Third, a diverse customer base covering both the non-residential construction and industrial or non-construction markets, and finally a broad and national presence which enable us to redeploy our fleets to areas of highest customer demand helping us maximize fleet utilization and returns. Given weakening non-residential construction demand we see the current economic climate as an opportunity to continue to show leadership within our industry while maintaining our rental rate discipline, reducing CapEx, adapting our cost structure, and competing with our superior customer service offering.
Managing a rental business particularly in a changing and challenging market environment like we face today comes down to operating discipline, flexibility, and speed. We've done a very good job of incorporating these concepts into our business models, which works both up and down in the cycle.
The strength of this proactive model clearly shows again in the third quarter. Please turn to slide number five.
In the third quarter we maintained strong discipline in pricing in the deteriorating construction environment, maintaining rates sequentially from the prior quarter and managing only 1% year-over-year rate decline. The fuel surcharge we implemented early in the quarter as well as improved yields on pickup and delivery charges added $6 million to increased ancillary revenues.
Changes in our slower revenues have many of the same characteristics as a rate increase. However they are not included in the determination of rental rates we show on this slide.
Adding this to our rental rates calculation would result in positive sequential and year-over-year pricing for the quarter with very strong result in deed. We maintained our discipline in CapEx spending given the environment we cut net CapEx from $154 million in the third quarter last year to only $37 million this past quarter.
This follows the second quarter in which we cut net CapEx from $195 million last year to $63 million this year. These cuts were made in response to slower growth, reduced need for replacement CapEx as our fleet is young and well maintained, and importantly the redeployment of fleets from low demand areas or from closed stores to areas and stores with higher demand.
Fleet redeployment was executed with a strong bias toward industrial markets. As we continued our efforts to adapt and tighten our cost structure by raising the bar on store performance, a process we initiated already back in the first quarter.
We closed or consolidated 19 stores in the quarter after closing ten stores in the second quarter and reduced our headcount by 213 employees year-to-date, excluding the acquisition of American. We successfully retained our sales force in most of the markets where we closed or consolidated stores enabling us to maintain our presence, serve customers, and achieve our immediate goal for profit improvement, and utilization of fleets.
Continually looking at how we can improve our efficiency enables us to make changes in a disciplined and thoughtful manner and retain key staff to minimize revenue losses. We will continue to adapt to market conditions and opportunities going forward.
As a result the free cash flow characteristics of the company are very strong and strengthening. As expected the free cash flow in the quarter was very positive reaching $94 million.
Our business model is clearly working and this allowed us to further reduce debt while continuing to retain one of the youngest fleets in the industry. As you can see on slide number six, we succeeded in delivering rental revenue growth of 1.7%, same store sales growth was a very solid 1.8% consistent with our historical track record of growing faster than our underlying market and main competitors.
Industrial or non-construction revenues succeeded 35% of total rental revenues reflecting our decision to continue to grow our industrial business faster than the construction segment, and continue to gradually increase the overall waiting of industrial in our revenue mix to further diversify the end markets we serve. To do that we have unique products and service offerings including, mobile tool rooms, and total control software designed to meet the specific needs of industrial [inaudible] customers.
Furthermore we are hiring new sales people with industrial background, and we are funding growth in the industrial market by redeploying fleets from weaker construction dependent markets. We completed the previously announced acquisition of American Equipment Rentals early in the quarter.
This provides access to three key states in New England, which is one of our target growth markets. We pursued other growth opportunities as well opening 14 new additional locations during the quarter with a strong bias toward industrial locations.
So in summary, in the quarter we closed or consolidated 19 locations in weak areas and opened 14 locations in areas with strong growth opportunities with a very high level of activity to position the company in the right areas. We had a solid financial performance with operating margin of 23.6%, adjusted EBITDA margin of 44.1%, and return on operating capital employed of 20%, well above our cost of capital.
This all added up to what we expect will be another industry leading performance in the quarter. In addition, we continue to invest in the organizational capabilities that will help us drive future growth.
Let me give you four examples and they are outlined on slide number seven. First, in support of our industrial growth objective we added Per Ohstrom to our management team, [seasoned] marketing executive with considerable industrial experience.
In September we held a total control sales conference attended by over 30 existing or potential large industrial non-construction customers. Our customer's enthusiasm and support towards our total control software is impressive and gaining momentum rapidly.
Second, we streamlined our divisional management structure, changing from three divisions to two, east and west. Each comprised of five of our operating regions.
This change makes us leaner, faster, and more efficient enabling us to respond more quickly to changing market conditions. Third, we have a number of environment friendly initiatives going on that benefit our customers and have safety and have a healthy impact on our bottom line and we intend to continue to invest in this.
Lastly, we continue to redeploy fleets to maximize returns. As an example, we closed three locations in the Toronto area, where are business relied primarily on construction activities, we moved the fleet from this location to Fort McMurray in Alberta where it is on rental rates today to industrial customers in the oil firm, utilization, profitability and industrial growth were all advanced.
Moving to slide number eight, RSC has two main end markets, non-residential construction which comprises less than 60% of our revenues, and the industrial or non-construction market which makes up more than 35% of our revenue? Non-construction or industrial segment includes such diversified industry segments as petrochemical, power and energy, mining, food processing, steel plants and entertainment, to name a few.
We believe the mix of diversified construction and non-construction markets provides us attractive end market diversity that compliments on our strong national footprint and importantly industrial business provides different cyclicality and seasonality from the traditional contraction market. Overall, market demand varied across geographies with Texas, Midwest, Gulf Coast, and Canada, continuing to show healthy demands albeit at the moderating rate.
Housing related markets like, Florida, California, and Arizona remains down sharply. There is no doubt that RSC geographic diversity across North America along with our large expanding industrial presence and balance and highly utilized fleet mix are significant benefits to us this time.
During the quarter, Hurricanes Gustav and Ike hit the Gulf region including eastern Texas. Given our strong market position there, this impacted business negatively in the third quarter.
That said post hurricane clean up and restoration activities will increase demand in the market place going forward. We were able to move additional fleet swiftly into that area, which will contribute meaningfully to the efforts to recover from this disaster.
Turning now to slide number nine, you see our utilization remains strong at 72.3% for the third quarter the normal seasonal uptake was seen but was somewhat mitigated by the aforementioned hurricane activity in the Gulf and high levels of fleet redeployment following store closures and openings. However, utilization strengthened towards quarter ends and has remained strong through the month of October.
I would like to turn the call over to David to amplify on those results and for a few words on our financial statement.
David Mathieson
Thank you, Erik, and good evening everyone. I would like to spend the next few minutes going over some additional details.
First go to slide 11 for a moment and you can see clearly that volumes have been slowing down for a number of quarters. In the current quarter rental volumes increased 2.7% including currency and the acquisition.
As a result of our disciplined approach to pricing, sequential rates were essentially flat in the quarter keeping the year-over-year decline to a very respectable 1% in a very competitive market. As we have stated before, our clear objective is to continue to manage rates very tightly on a daily basis and focus on value selling and service as opposed to price competition and thereby protect profits margin.
Moving to slide 12, merchandise revenues were down 5% due to closed stores and a softer market. Used equipment sales were down 4% as planned and down 19% year-to-date as we want to preserve fleets in order to minimize capital expenditures going forward.
These equipment margins continue to be strong and demand for our used equipment remains solid. Our fleet age at the end of the quarter was 31 months.
This gives us tremendous flexibility going forward and having managed CapEx investments. Margins on rental were down as compared to 2007 as the final year quarter includes the peak of the non-residential construction market and accordingly results were very strong.
And secondly, the current year stock offer costs included higher depreciation on our larger fleet rental equipment, and $6 million of higher fuel costs, which we are starting to recover with sub charges. Finally, $3.3 million of store closing and severance costs.
Volumes and merchandise were down somewhat because we closed 29 stores so far this year and margins were impacted by mix and freight costs. Continuing to slide 13, SG&A is at 9.9% of total revenues, up 110 basis points from the prior year quarter.
This reflects the additional costs associated with being a public company and $1.1 million of costs for store closures and seventh in the quarter, as well as the investments and opening 14 stores. Note that the total costs as related to store closures and severance were $4.4 million of which $3.3 million affected cost of rental and $1.1 million affected SG&A.
Interest expense was down $10 million as we have lowered debt thanks to the strong free cash flow and better rates than this time last year. The tax rates of 31% compared with 39% last year results from lower Canadian and certain state tax rates and their application of deferred tax liabilities.
We expect an income tax rate of 38.5% to 39% as we go forward. Net income was $42 million, down $5 million or 10.8% compared to the peak 2007 quarter and diluted earnings per share of $0.41, which is $0.04 lower than last year on an adjusted basis.
On slide 14, we show the annual adjusted EBITDA and the quarterly numbers as well as margins. You can see that we continue to generate significant adjusted EBITDA and consistently high margins.
Our RSC business model is working as designed. On slide 15, free cash flow is again presented so that our debt and equity investors can see the very strong capital characteristics this company has.
We see our entire accounts payable have impacted cash as we have very favorable terms with our suppliers and this can have a significant impact on our cash flows as we go from one piece to another with significant changes in CapEx. We expect accounts payable to fall by another $50 million in the fourth quarter.
We also subtotaled the cash flow to show unlevered pre cash flow before growth CapEx, then show growth CapEx separately to get to unlevered tax floors after gross CapEx. Unlevered free cash flow before growth CapEx is a metric that's independent of capital structure and growth and we believe this is a strong indicator of relative and absolute performance among industry participants.
Growth CapEx is a discretionary decision we make based on how successful we are in achieving growth and we show that separately as we have been growing faster than our major competitors, and we consider growing faster than your competitors while maintaining both industry leading margins and capital efficiency as a major positive. Year-to-date free cash flow is $143 million which has been negatively impacted by an accounts payable reduction of $107 million.
You can see that our net equipment CapEx is flat with prior year, but the most significant change is to growth CapEx. So year-to-date we are down to $74 million from $330 million last year, which is a 78% reduction.
This demonstrates the beauty of this business model and the benefits of our young fleets. This business has [inaudible] cyclical cash flows.
As the business slows down we work CapEx and can generate strong cash flows, and the third quarter was a perfect example of that. On slide 16 is the balance sheet for the last three quarters and you can see that we have brought down net rental equipment from a peak in the third quarter of 2007 as in the last four quarters the depreciation has exceeded our capital expenditure.
This year we have reduced debt by $106 million due to the strong free cash flow. We're comfortable with our debt level as we have a highly liquid pool of assets.
The debt reduction is clearly prudent in today's financial market environment. Our leverage ratio remains at 3.3 times EBITDA as expected this quarter.
As a result of the improvement to the leverage ratio at the end of the second quarter we stepped down into reduced interest rates at the beginning of August to access rate 25 basis points lower than we have in the first half for the revolving credit facility. Slide 17 details our debt at the end of the quarter.
You can see that 40% of our debt is variable, 60% is fixed. Our earliest maturity is towards the end of 2011 and that we have adequate available borrowings of $584 million.
Now I would like to turn the call back to Erik.
Erik Olsson
Thank you, David. Before we go to Q&A I want to update you on our outlook for 2008.
Please advance to slide number 19. Our full year outlook of rental revenue growth is that it will approximate 4% around the mid-point of the 3% to 5% we previously indicated.
Adjusted EBITDA is still sitting in the range of $790 to $810 million and diluted earnings per share $1.27 to $1.39 consistent with previous estimates. The good news is that we expect approximately $20 to $30 million more of free cash flow than we last estimated and we should be in the range of $190 to $210 million range for 2008.
We are very pleased with this level of free cash generation considering the fact that we're downshifting from a period of high expansion and, therefore, expect to reduce our accounts payable another $50 million in Q4. This means that the underlying run rate of free cash flow in 2008 is projected to be well over $350 million, in line with what we saw on a quarterly basis in Q3.
Recent macroeconomic events are pointing to further weakening in the markets. We saw the magnitude of which remains to be seen as we enter 2009, however, we are confident in our ability to quickly react and adapt to the conditions as they appear and continue to demonstrate industry leading performance at all times.
Within this environment and in line with our strategy, we will continue to prioritize rate stability over volume resulting in slightly lower rental revenues than would otherwise be achieved producing meaningful higher free cash flows. We are adhering to our strategy of reducing CapEx in order to maximize cash flow and profit margins.
We will continue to consolidate or close locations and we will continue to open new locations in attractive markets with, of course, a continued bias toward industrial or non-contraction opportunities. To summarize, on slide number 20 the challenges for our industry are apparent and are upon us.
In fact, we have been in a gradual slowdown since the end of 2007. We have been and we will continue to confront this by sticking to the basics of the RSC business model on a day-to-day basis in each of our branch locations.
Our focus in on best in class, customer service, rental rates, high utilization, profit margins, and free cash flow in combination with a highly flexible and proactive business model including our geographic reach, balance fleet mix, and growing non-construction or industrial business we believe we are well prepared and positioned for these difficult times. With that I would like to turn the call over to the operator for instructions on the Q&A.
Operator
(Operator Instructions) Your first question comes from Vance Edelson - Morgan Stanley.
Vance Edelson
Congrats on the quarter. How would you say pricing discipline is at your peers throughout the industry?
What are you seeing on the frontlines? Are they matching your discipline or are you seeing any deterioration there?
David Mathieson
Vance, I think everybody is certainly trying as much as possible to maintain pricing discipline and there are local issues where we can some irrational behavior, but overall we think the industry is holding up pretty well.
Vance Edelson
Okay, got it and since opening and closing stores is expensive and it weighs on margins can you look forward and tell us when you might reach a more stable level or just going out over the next three months would you expect we'll see fewer openings and closings or are we going to see more, or will it be a lot like what we saw this past quarter?
David Mathieson
I think we had a very high level in the third quarter, as we said, both in closings as well as openings. It's fair to assume there will be some more closings and there will be also some more openings.
Vance Edelson
Okay and just one more for you. With the EBITDA margin down a little what are your views on where margins might trough out in this cycle?
Do you think we're getting close to what might be the bottom which would presumably be quite a bit higher than the last cycle based on changes over the years? Where do you think we are in that regard?
David Mathieson
I think it's clear that we don’t see this going anywhere near the trough levels of the last downturn. We are a completely different company today and have a completely different cost structure and business model and flexibility.
It's too early for me to call out where we are in this cycle and where it will bottom, but like I said we don’t see this ever going close to the levels of the last one.
Operator
Your next question comes from Philip Volpicelli - Goldman Sachs.
Philip Volpicelli
Just want to talk a little bit about used equipment pricing and your fleet age target. How is used equipment pricing holding up?
Are you seeing any pockets of weakness regionally? And then your fleet age was at 31 months how old are you comfortable aging the fleet to?
David Mathieson
These equivalent margins are holding up pretty well. We don’t see any significant softness anywhere.
Margins in the third quarter were very 30%$, so we're pretty solid. Based an aging point of of view we peaked out in the last downturn at something like 43 months without any issues there, Philip.
So, we've got considerable flexibility in front of us.
Philip Volpicelli
Okay, should I by that measure the 11 million of growth CapEx was that for the new locations or was just that spread across the entire network?
David Mathieson
Well we did have growth in the quarter. We had same store growth and it's from that.
Philip Volpicelli
With the free cash flow you're generating can you give us a list of priorities? Is it making acquisitions, debt repurchases, whether stock or bank debt, or equity repurchase?
Erik Olsson
Well, I think our priorities are to pay down debts and to from an operating point is to pay down debt and also look for acquisitions, very strategic, highly complementary and rightly priced and I think the example of American fits that mold perfectly. So, for the rest our board is to continuing to evaluate other alternatives and if and when they choose to do something, I guess we will announce it at that time.
Philip Volpicelli
But right now equity repurchases is off the table.
Erik Olsson
Like I said, our board is evaluating different alternatives, so we'll leave it up to them to announce what or if there will be anything done.
Operator
Your next question comes from Adrienne Colby - Deutsche Bank.
Adrienne Colby
I was wondering if you could give us any more color on the branches that you closed in the quarter and the areas that you are opening new branches. I know you probably can't give the specifics but just in general terms?
David Mathieson
Well, I'll give you an example as Erik talked about on the call actually. We closed non-residential branches in Ontario and one in Langley and western Canada.
We put the fleet on trucks and we shipped it to Alberta where we have a very strong business in the oil plant. The other thing, Adrienne, we do is we look at stores that don't have enough cost of capital and we ask them for a plan.
Do they have a credible plan to recover the cost of capital in the medium term and if they don't, then we make the long-term decision opening and closing stores. So we're using that as a way to screen what we do close.
Adrienne Colby
I think last year you applied for a permit to apply for government type of work and I was wondering if you could comment on any type of government work you're doing currently or what kind of opportunity you see there.
Erick Olsson
It's clearly a big opportunity and its part of our non-contraction activities that we are gearing up to find our way into the purchasers or buyers in the government sector. So it is one of the growth avenues we're going down, and it's not a major contributor to our revenues yet, but it may well be as we get more accustomed to that segment.
Adrienne Colby
Would it be fair to assume it's less than 1% of your revenue?
Erik Olsson
At this point yes.
Operator
Your next question comes from line of Emily Shanks - Barclays Capital.
Emily Shanks
I just have a couple of follow-up questions. Around the residual values, I think you had mentioned that there had been some pressure on pricing.
Can you speak to what that magnitude is? Secondly, if there have been any significant options in the market where you've actually seen the ticket printed at those levels.
David Mathieson
Well we haven't seen the pressure on pricing that you're talking about, Emily. Our margins held up 10%, the same as last year.
So this year is pretty strong margins. Evaluate each store and either the bulk or the vast majority of our used equipment we sell ourselves to our own stores, so we're not seeing that pressure you're talking about
Emily Shanks
Apologies if I misunderstood. As we think about the fleet age, thank you for the information regarding the last cycle, how should we think about the cadence of that aging?
For instance, do you have set plans for where you want the age to be over the next three months, six months, twelve months?
Erik Olsson
Not really. The fleet age is not a target in itself for us.
It's a function of where we are in the cycle, what the growth is, what we think the prudent thing is to do. The more we tear back on CapEx the quicker the fleet will age if you like.
That's not the bad thing; we think that's the right thing to do now. So we will stay very flexible with market conditions and let the fleet age develop as it will, and like David said we have considerable room to age the fleet in response to the market development.
Emily Shanks
And then just one final question, in terms of the sequential debt reduction that took place, was that all in your ADL or did you pay down any of your term loan and/or bonds during the quarter?
Erik Olsson
It's all in the ADL.
Operator
Your next question comes from David Manthey - Robert Baird.
David Manthey
First question, as you de-fleet and age the fleet out, have we seen the peak in D&A this quarter?
David Mathieson
Yes, I think so. I think that's a good point David, because we are now going into our slower season.
Normal seasonalities will begin to de-fleet and will continue to de-fleet in the fourth quarter as well.
David Manthey
And on the GP coming in a little bit lighter than we thought, I understand a few of the issues you've mentioned here, in terms of industrial mix, the fuel prices, moving inventory around and opening and closing locations. Beyond those four things I just mentioned, is there anything else that we should think about relative to GP this quarter?
Erik Olsson
No, I think you've captured the main ones, David.
David Manthey
And then the final question this is more anecdotal than anything, have you heard anything from the field about customer's inability to procure their own credit line renting more frequently than buying equipment? Or maybe you're seeing some new customers that historically had purchased their own equipment, renting, sort of accelerating the trend towards rentals?
Is that something you've heard from the field or is that too far on the margin?
David Mathieson
I think it's just a tad too early for us to pick up on that. I think there's something to be said that in times of economic uncertainty there is a propensity to ramp more and obviously this go around if credit also is scarce, there should be good opportunities for us to pick up new customers, but it's still too early to tell.
Operator
Your next question comes from Christina Woo – Soleil Securities.
Christina Woo
A number of your competitors have talked about trying to increase their revenue mix into the industrial segment, and I'm wondering as you bid for new non-construction work, are you running up against more competition, especially now that the construction market has softened further?
Erik Olsson
No we're not.
Christina Woo
That's simple. I was wondering if you could also provide some input on the mobile tool rooms, if you could speak about the margins, if they're similar to the margins in your core equipment rentals business, and if you could also discuss the seasonality and cyclicality with the tool rooms?
Erik Olsson
The tool room has less of cyclicality, or seasonality I should say as it more follows the industrial business pattern and are used throughout the year. The returns are very good, very, very strong.
Margins marginally lower than the average margin for the company, but like I said the returns from the assets are much stronger.
David Mathieson
I would also say that business is like cyclical too, because you're really tapping into maintenance budget, Christina, which in itself is less cyclical.
Christina Woo
Following up on some of the pricing discussions, for the third quarter United Rentals results reflected rental declines of 3.4%, and yet Hertz today announced that they are starting to implement price increases of 5% to 10%. I'm just curious if over the last few days you've noticed any shift in pricing reflecting Hertz's announcement and if you think that the industry has right sized its fleet enough to get some pricing momentum?
Erik Olsson
We have not noted any difference in the marketplace in the last couple of days, no.
David Mathieson
I do believe though the industry is de-fleeting. We are told of competition are closing stores just the same way we are, so I do believe the industry is doing the right thing.
Christina Woo
One last question having to do with your fleet age, you've talked a bit about it and the utilization rates. With you aging the fleet in order to save some CapEx, when do you expect you'll have to start investing meaningful amounts of CapEx into the fleets?
Is it when you reach that 40 month mark or at some other point?
Erik Olsson
Ideally we've said that on a going concern basis we'd like to keep our fleet in the mid-30s or so, but if the market conditions are warrant, we can move up to 40, or we were even at 43 months in the last downturn for a quarter or two. So it really will depend on market conditions when we will start to invest in the fleet again.
Christina Woo
So we could even potentially see something in fleets in the fourth quarter of '09 if you really cut back on your CapEx?
Erik Olsson
Potentially, I haven't done the math so I don't want to say a specific month, but yes.
Operator
Your next question comes from Scott Schneeberger - Oppenheimer.
Scott Schneeberger
On the used equipment sales margin, still over 30%, how long with all this de-fleeting that you guys believe has been occurring, how much longer can that stay as elevated as it is?
David Mathieson
In the last downturn Scott, we were still making margins. I think the bottom that it dropped out at something like 18%, so.
Scott, as far as we see the market remains healthy and as I said before, we sell 70% to 80% of that are sales to our customers. Our customers realize that we have a very well-maintained fleet, so we don't have any major concerns about the used equipment market.
Erik Olsson
Historically in slowdown or downturn for the market, the demand for old used equipment drops off or goes away. But like David says, we're selling middle-aged, well-kept, well-maintained equipment and historically there's always been a good demand for that.
Scott Schneeberger
In merchandise sales, a bit of a slide in the margin in the quarter, was that just because of a bit lower revenue or is there any shift of what you're offering there?
Erik Olsson
The mix changed somewhat to more new equipment in terms of the merchandise. So the mix changed somewhat and did increase in moving around merchandise, closing older stores, opening new stores, so we had I'd say unusual activity in that quarter.
I wouldn't expect that to continue.
Scott Schneeberger
So margin going forward, probably a little higher than what we saw in the third quarter.
Erik Olsson
Yes.
Scott Schneeberger
And then you guys mentioned you shut down in Toronto and moved up to the oil sands, still all within Canada, but a zero FX impact in the quarter and that had been a positive tailwind in past quarters. Do you anticipate in this fourth quarter it's a headwind?
I know it's hard to guess what FOREX will be beyond, but into October and what you've seen will that be any type of a headwind?
Erik Olsson
If it is, it will be very small. We have 5% of our business in Canada, so it's a very small piece of our business.
Scott Schneeberger
And could you repeat the tax rate guidance? I had missed that.
David Mathieson
Yes, we expect rates to come down slightly. Canadian rates are coming down and some of the state rates for us are coming down.
So we would expect a tax rate going forward of between 78.5% to say 79%, maybe somewhere in the middle.
Scott Schneeberger
Was the impact of the hurricane in third quarter a material impact, and can you quantify any impact you think you might benefit from going forward?
Erik Olsson
It wasn't material enough to call out. It was negative, but it will be positive for us in the fourth quarter net and net-net it will be positive for us.
David Mathieson
Not good for the people unfortunately, but it's good for the business.
Operator
Your next question comes from Paul Mammola – Sidoti & Company
Paul Mammola
First, given that you narrowed your revenue expectations for the year, there's still a range in EPS though, so I was wondering is there a variable cost or is it rates that you're not sure of on the quarter, maybe that's why you're leaving the range there?
David Mathieson
Yes, we wanted to narrow the revenue range. There is still variability to that, mainly looking at December and when does the winter come on, so there is still a little bit of a [whale] count there.
Paul Mammola
Good enough, and then on SG&A, can you give us a sense in order of magnitude, what had the most inflating or adverse affect on that account?
David Mathieson
Well a public company costs, followed by the 110 cost, and then developing. We are below 10% for SG&A.
We're still investing in the business. We are happier where we are on SG&A, having SG&A under 10% is pretty good.
Paul Mammola
If I could just follow up on a previous question, would you say it's accurate that you haven't seen customer problems related to financing so far in October, is that correct?
David Mathieson
So far no. I mean on the line totally we have seen things be canceled, but some we can't see it in the way things are progressing in October.
Operator
Your next question comes from Henry Kirn - UBS.
Henry Kirn
Question on the metrics that you've looked at as you try to judge the future health of the industrial business, what do you view as the key drivers and what do you look to say, okay things are going to stay strong, or maybe we should be more concerned in cutting back in that business?
Erik Olsson
Well we don't ramp for their production of goods or wares. We ramp for their maintenance and turnaround repair needs.
So slowdown inactivity can to some extent be good business for us. For example, we have had several turnarounds in the petrochemical industry that were all on schedule for the third quarter, being postponed into first quarter and next year as the refineries were busy producing oil at $100 plus prices, as well as being mandatory to produce gasoline after the hurricane.
So we believe we're going to have a strong business there next year. And for the rest, I think we just stay very close to our business.
We track our utilization every day. Also, on the industrial side we work closely with many of these industrial customers and partake in their planning for expansion and maintenance and so forth.
So we have a pretty good picture of what's going on there.
Henry Kirn
Okay, and if you look at new equipment pricing from the low end, have you started to see any discounting that would incentivize you'd use to pump up your orders ahead of time?
Erik Olsson
No, I think we have not seen that from any supplier so we think that's a good thing obviously, we the suppliers learned hopefully the lesson the last go around, and I think more importantly the rental companies learned the lesson as well.
Henry Kirn
Is it possible to talk about the categories of equipment that are strongest and weakest within your portfolio either by rental rate or by utilization?
Erik Olsson
We manage each product category in our fleet individually, so we sell what we don't need and we buy what we need. So we are fairly satisfied with the utilization across all our product categories.
We have continued to buy less dirt equipment. Dirt has now shrunk to 16% of our total fleet, coming down from being 21%, 22% of the fleet a couple of years ago, but the dirt that we have is highly – it's nice, and at a good rate.
Henry Kirn
You started to de-fleet from the aerial side as well?
Erik Olsson
No.
Operator
Your next question comes from Yilma Abebe – JP Morgan.
Yilma Abebe
If you compare the pace of the slowdown in the second quarter of this year versus the third quarter of this year and actually going into the fourth quarter, how would you characterize it, about the same, accelerating, decelerating?
David Mathieson
We see the fourth quarter this year is actually very similar to the third quarter. We've already talked about we have a fairly substantial industrial business and we've got some shutdowns put out from the – to the fourth quarter and the first quarter next year.
We've got a slight negative in the third quarter with the high teens which gives us a positive in the fourth. So we see the fourth at this point very similar in growth to the third.
Yilma Abebe
My second question is regarding acquisitions, in this slowdown are you seeing more assets becoming available at attractive prices in the marketplace?
Erik Olsson
I think we've seen a marginal uptick in activity, but not in attractive prices. I think there's still a little bit of a valuation gap between what current owners believe their businesses are worth and what we think, and I think it will take another quarter or two for that to adjust.
Operator
Your next question comes from Sundar Varadarajan – Deutsche Bank
Sundar Varadarajan
Most of my questions have been answered, but just kind of from an outlook perspective given that you're three-quarters into the year, where do you think non-residential construction shapes out for '08 versus '07, and as you think about '09, any color on what you think kind of macro trends are going to be in '09, and what kind of year-over-year changes are you guys planning for in terms of the overall non-residential construction?
David Mathieson
I think over the year we'll have grown in non-residential business.
Sundar Varadarajan
I'm talking about the overall kind of the market.
Erik Olsson
You have to look at real growth. The non-residential numbers that the government puts out there's a lot of inflation in those nominal growth rates, so I believe 2008 will be less than half of what 2007 was in terms of real non-residential growth.
It's too early to say what 2009 will be. These things are unfolding and changing on a daily basis, so up and down I would say.
Operator
Your next question comes from Chris Doherty - Oppenheimer.
Chris Doherty
One, can you just confirm that the severance store closing cost is 4.4. Is that what you said total?
Erik Olsson
Yes.
Chris Doherty
In terms of your pricing, how is that actually calculated? Is that mix adjusted, is that new contract or is that just affective billed rates?
Erik Olsson
Its mix adjusted. It's calculated for each product category separately and it's calculated for daily, weekly, and monthly rates separately.
So we mix up both product and rental contract mix from the calculation.
Chris Doherty
But that is actual realized rates not a sort of new billed rate?
Erik Olsson
No, it's realized. It's within our billed revenue.
Chris Doherty
And also, what was the OEC of the American acquisition?
Erik Olsson
$30 million
Chris Doherty
Would that be considered sort of a small or average or large acquisition relative to what you're looking at going forward?
Erik Olsson
I'd say average.
Operator
Your follow-up question comes from Philip Volpicelli – Goldman Sachs
Philip Volpicelli
Just wanted to get, if you guys have done an audit recently on the fleet and what the sort of the liquidation value is.
David Mathieson
We do that twice a year, Phillip. Last time we did it was in June, we'll do it again in December.
Philip Volpicelli
Okay, so it's a pretty interim period for your borrowing base you just use an estimate of what it was during the last period?
Erik Olsson
Yes.
Philip Volpicelli
And then I calculate $1.00 utilization rate, about 58% in the third quarter. Does that tie with what you guys are calculating?
Erik Olsson
Again, when we do our ROI, we call it ROI, we exclude ancillary revenues and just use pure rental revenues, and I don't believe you have that number, but our number would be slightly lower.
Philip Volpicelli
In that general ballpark and slightly up year-over-year?
Erik Olsson
Yes, like I said we don't do that particular calculation so can't comment on it. Follow up on it afterwards.
Operator
Mr. Olsson, do you have any closing remarks?
Erik Olsson
Well, thank you all for joining us today on our third quarter 2008 earnings call. We have put another strong quarter behind us with rental revenue growth of 1.7%, and then adjusted EBIDTA margin of 44.1%.
Business environment is tough and we're clearly in the midst of a construction market downturn. But we're growing our company over and above the underlying market demonstrating strong execution of our business model, the disciplined pricing, lowered CapEx, and producing solid results.
Our underlying free cash flow generating capabilities are very strong and we've proven that our business model indeed works as designed. Looking forward, we will continue to adhere to our strategy of focusing on rental rates, high utilization, profit margins and cash flow, and of course we will continue adapting our cost structure, as great companies do, and we will continue to raise the bar for lower performing stores.
We believe our flexible RSC business model and strategy will deliver industry leading results at any point in the cycle and create shareholder value. We look forward to reporting back to you next quarter with our full year business results.
We appreciate your interest and support, so thank you all very much and have a great evening.
Operator
This concludes today's RSC Holding's third quarter 2008 results conference call.