Q3 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will be yen in approximately two minutes. Once again. Please standby your comfort scope will begin at approximately two minutes. Thank you for your patience and please continue to hold.
Good morning, and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded.
Before we begin note to the Companys press release.
It's 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 company's press release.
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 31st 2018.
As well as two subsequent filings with the FCC.
You can access these filings on the company's website at Www Dot United Rentals Dot Com. Please note that you're trying to rentals has no obligation and makes no commitment to update more publicly released any revisions to forward looking statements in order to reflect new information or subsequent.
Fans circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow adjusted EPS EBITDA and adjusted EBITDA.
Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure the most comparable GAAP financial measure.
Speaking today <unk> Reynolds, it's Matt Flannery, President and Chief Executive Officer.
And just go Graviano Chief Financial Officer, I will now turn the call over to Mr. flattery. Mr. Plenary you may begin.
Thank you operator, and good morning, everyone. Thanks for joining us.
I'll start by commenting on the quarter and the state of the operating environment and then just will cover the financial results and after that we'll take your questions.
So as you saw in our release, we reported a solid third quarter, but not a perfect one.
We're pleased that we delivered substantial growth, while wrapping up the integrations and that's an important achievement.
Because it speaks to the long term potential of leveraging our larger platform.
Yesterday, we reported the best revenue numbers of any quarter in our history.
$2.5 billion of total revenue and $2.2 billion of rental revenue.
And to put that into perspective, our total revenue was up more than 5% pro forma that took a lot of focus on the part of our field organization.
Their efforts drove an improvement in our fleet productivity metric, both sequentially and year over year.
Yes, we'll talk more about that in a minute.
Now here's what we could have done better.
Our adjusted EBITDA was a record 1.2 billion and that's good.
But not as good as we expected.
And it creates some pressure on mortgage and then flow through.
Part of that relates to a more moderate build with the l., we see on rent due to a slower growth in some of our industrial end markets.
This coupled with the acquisitions resulted in some excess fleet and we've been working through that.
And when it makes sense, we service these assets and relocate them to markets of higher demand.
This increases our name and delivery costs in the near term but.
Well it drives capital efficient growth overtime.
We also sold some older assets with high operating hours and this includes some equipment from the oil patch where upstream declined.
Sales like this are generally dilutive to our used equipment margin.
The parts of the quarter that weren't perfect are largely tied to positioning and that'll continue to play out to a lesser degree in the fourth quarter.
Well absorbed the near term impacts because the benefits will last well beyond that.
And we're confident that we're making the right long term decisions for the business.
Our job now it's a take this powerful engine that we built and extract increasing value from it overtime.
As we discussed in July in the first half of the year, we were focused internally on the structural phase of the Blue line integration as well as some smaller deals.
Now, we pivoted to an external focus.
Our sales territories are finalized we've added more sales talent in the field to expand our coverage and we've enhanced our outreach program to reactivate dormant customers.
We've also been making significant investments in our fleet mix, including continued investment in our specialty solutions.
Having the right fleet and the right markets delivers on two fronts.
It helps to solve more challenges for our customers.
And it's also key to our strategy for improving return on capital.
Now moving onto the operating environment. The construction landscape has remained strong across the board and our customer survey suggests this trend should remain intact.
All three construction sectors are showing good growth nonresidential infrastructure and residential.
In fact, the rental revenue from Nonres, our core market was up almost 9% pro forma in the quarter.
And our focus on infrastructure continues to pay dividends as it now accounts for double digit percentage of our total rental revenue.
This positive environment was partially offset by headwinds in some of the industrial verticals as I mentioned earlier.
The further deceleration and upstream oil and gas is reflected by the rig count data.
By contrast downstream grew in high single digits and there were some other puts and takes in the industrial verticals. So in general industrial was more of a mixed bag than it was in the first half the year.
So for the first time in a while construction and industrial activity appear to be on somewhat different paths.
And we've taken this into account in making the updates to our 2019 guidance.
Our new ranges assume more modest rate of growth and the near term impacts on flow through that I mentioned earlier.
As well as our expectation for higher free cash flow and just will address these in more detail.
Now looking at it geographically the majority of our regions were up in the quarter only a few were down the knows were small single digit decline.
Our specialty segment continues to deliver strong growth.
Trench power and fluid solutions combined generated a 21% increase in rental revenue as reported compared to a year ago.
Inorganic revenue accounted for about half of that game.
And a shout out to our European teamed fluid solutions, they delivered 17% pro forma growth in the quarter in local currency.
In North America, we opened another eight specialty cold starts and the last three months, bringing that network total to 361 locations against our target of 363 by year end.
Before I wrap it up I want to give you a safety update and it's a really good one.
Heading into September we challenged the team with an aggressive target for recordable rate well below one.
And our team responded with an incredible performance they did better than target, resulting in 12 of our regions and 99% of our branches reporting zero injuries.
September with the safest month for United Rentals in R 22 year history.
I'm personally inspired by the way our 19000 employees have come together as one and embraced our safety culture.
Now for one final comment before I turn the call over to Jeff.
I want to reiterate our confidence in our positioning going into 2020.
We appreciate that economic and political uncertainty is a concern for a lot of people.
And while we don't have a crystal ball, we do have a lot of experience and planning for different end markets scenarios. We can shift gears quickly when we need to.
Most important.
We remain strongly committed to our strategy driving profitable growth.
And to the capital disciplined cost management and execution required to do that.
These are the attributes that drive returns in every area of our business under all types of operating conditions.
So with that I'll ask just to walk you through the quarter and then we'll go to acuity.
Jeff over to you.
Thanks, Matt and good morning, everyone as with past quarters I'll walk you through our as reported results, but I'll pivot at times to speak to our performance on a pro forma basis that includes Blue line and also includes a month of Baker as we lap the acquisition on July 31st let's get into the Q3 results.
Rental revenue on an as reported basis grew 15% or 286 million to 2.147 billion, that's a record for us.
The increase is primarily related to the impact of both Blue line and Baker, but on a pro forma basis rental revenue was up a solid 4.2% for the quarter.
Then rental revenue as reported Oh, we are growth contributed approximately 242 million of the increase ancillary added 44 million and re rent was flat.
There's a breakdown of that 242 million or 15% Oh, we are growth.
We had growth in our fleet of 18% that's about 287 million of additional revenue.
Fleet inflation cost us the usual, 1.5% or 24 million and fleet productivity on an as reported basis was down 1.3% or 21 million.
I'm more helpful way to consider fleet productivity is on a pro forma basis, which was up 1.7% within that number rental rates and mix were positive for the quarter, partially offset by lower time utilization.
That's rental revenue, let's move onto you sale.
You sales revenue was up 41% or 58 million year over year do you sales environment continues to be healthy and we sold 132 million more fleet Oh, we see than last year.
This included a significant increase in sales through our retail channel, which made up 60% of our overall sales.
The pricing on those retail sales was down slightly around 1.5%.
Adjusted gross margin unused sales was 46% down from 50%.
That decline is due mainly to the mix of equipment sold and channel mix, which included some auction sales of some tired fleet from the oil patch.
Taking a look at EBITDA.
Adjusted EBITDA for the quarter was 1.2 owes 7 billion another record for us and an increase of 148 million or 14% versus prior year.
Here's a bridge on the as reported changes.
The improvement in Oh, we are added approximately 140 million.
Ancillary and re rent together contributed 4 million you sales added 21 million to adjusted EBITDA.
As DNA expenses were a headwind of 24 million, mostly due to adding the blue line and Baker cost basis.
At least 7 million of adjusted EBITDA benefit in the quarter, which is primarily coming from better performance in our other lines of business.
Our adjusted EBITDA margin was 48.5%, which is down 150 basis points year over year due mainly to the impact of bringing in Blue line and Baker.
On a pro forma basis, our adjusted EBITDA margin declined 40 basis points.
That is in part coming from a shift in revenue mix with higher used sales in the quarter.
It's also due to higher operating costs, primarily in repair maintenance and delivery. These costs were associated with getting access fleet rent ready and into higher growth end market.
As reported adjusted EBITDA flow through was approximately 40% al if I reconcile flow through similar to what we've shared in the past, which is to adjust for the impact of our acquisitions, including synergies as well as the impact of new anew sales adjusted EBITDA flow through is still about 40%.
The biggest drag on that adjusted flow through this quarter comes from the higher operating costs. I mentioned, however that calculation is very sensitive so I'll add that the gap this quarter from 40% to a flow through of close to 60% is around $12 million, which on its own is the costs associated with DMD.
Estimate we've made in repairing and repositioning the fleet this quarter.
As for adjusted EPS, a robust $5, a 96 cents in the quarter compared with 474 in Q3 of 18.
That's an increase of 26% primarily from better operating performance across the business and includes the impact of our acquisitions.
Adjusted EPS was also helped this quarter from lower shares outstanding.
Let's move to Capex and free cash flow.
Year to date, we've brought in 1.97 billion in gross Capex with 845 million of that having come in during Q3.
We're on pace to purchase between 2.5, and 2.15 billion of Capex for the year.
And we've adjusted our view of net rental capex down for the year by $50 million as we anticipate selling more used equipment than originally expected.
That will refresh more of our fleet in a strong used market and position us well going into 2020.
Free cash flow very strong as we generated $1.1 billion through the end of September we're on track to deliver our full year expectation, which we increased in our guidance update.
Our tax adjusted ROI remained strong coming in at 10.6% for the third quarter and that continues to meaningfully exceed our weighted average cost of capital year over year tax adjusted ROIC was down 40 basis points, primarily as a result of the expected drag from our acquisitions and we believe that impact will moderate.
Overtime.
Taking a look at the balance sheet.
Net debt at September 30 was 11.7 billion, which is up 1.6 billion from last year. The biggest driver there was the financing of the Blue line deal offset impart by our reducing debt through the year.
Our total liquidity at September 30 was a very strong 2.16 billion, that's comprised mainly of ABL capacity.
Leverage at the ended the quarter was 2.7 times net debt to adjusted EBITDA.
It's down 10 basis points versus where we were at the end of the second quarter.
And as we've updated our forecast for the remainder of the year. We expect to finish 2019 at 2.6 times, which is a 50 basis point decline from the end of last year.
Here's a quick update on our share repurchase program, we purchased $210 million of stock in the third quarter on our current $1.25 billion program, which puts us at 1.05 billion purchased to date.
We still expect to complete this program by year end and also note that our total share count at the end of the third quarter was down about 7% year over year.
I'll wrap up with a few comments on guidance our update was impacted primarily by our third quarter results and trends some of which we expect will continue through the end of the year.
First we still expect to deliver mid single digit growth in total revenue, but the revenue mix has shifted between slightly lower rental revenue and slightly higher used sales.
That shift in revenue mix is reflected in our total revenue range and its impact on adjusted EBITDA.
Second.
Cost management remains a focus for us.
We are balancing that with the need to repair and reposition excess fleet, putting that fleet into strong end markets, which we believe is the right choice for the business.
As a result, some of those higher repair maintenance and delivery costs will play out through the fourth quarter that changes reflected in our updated adjusted EBITDA range as well.
Third and as I mentioned earlier, we expect to generate better free cash flow than originally expected. So we brought up the bottom of the free cash flow range, such that we expect to generate between 1.45 and 1.55 billion in free cash flow. This year that compares to a little over 1.3 billion last year.
And with that let's move onto your question. So operator would you open the line. Please.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered I do wish to move yourself from the Q. Please press the pound key our first question comes from the line David Raso from Evercore ISI. Your question. Please.
Hi, good morning.
Joining me today.
Given the way the rest of the year guidance played out where mix obviously is fairly significant.
As well as some of the cost office, either to repair and maintain and.
And move some of the equipment out of the softer industrial markets can you help us a bit we're trying to think about 2020.
Large insensitivity to mix can you give us a little education on exactly how we should think about if the industrial markets start the or a little bit weaker but construction of it better.
To think about some of the geographic issues of equipment say equipments coming out of Texas, but going to the southeast can you just give us a little late Atlanta, how to think about the sensitivity to mix going into next year.
Sure. Dave This is Matt. So so first off I think one of our opportunities, especially if we know it ahead of time right. So if we feel comfortable that the work we're going to do throughout this quarter and are planning process for 2020, and the field validation customer information that we garner gives us a better view the sooner we can reposition stuff.
Appropriate to where the opportunities are the better the outcome is going to be there will be some nuances not just between oil and gas and other markets. Some new wants us to markets that bring higher returns and other a different mix and other but I think in the in the balance of a full year planning area. The most important part is getting the fleet in the right.
Areas. So we can maximize the usage of that fleet and therefore, our fleet efficiency. So so thats, how we view it acknowledging there there can be some move all that work will be done in detail from the ground up and then review top down to get us ready for for 2020 guidance in January .
Would you see the fleet movement that occurred in the third quarter is the bulk of the moves you expect to make through the end of the year, meaning just trying to get to read on how you view some of the industrial markets and 20 by the actions you're taking in 19 as or so more to do or.
Do you feel you I think.
I think bye bye bye really probably midway through this quarter, but certainly by the end of fourth quarter that answer will be a yes.
To be fair to.
So the question oil and gas accelerated the downside of oil and gas accelerate faster than we thought in Q3, it's only 4% of our business now rig counts are down at the end of though as we sit here today, 17% and all revenues now 20, so does that get worse.
I don't know how far you can fall from this low level, but that would be the only wildcard and to be fair that is what created our challenge here in the back half on on movement in extra investment we need to make the pull that fleet out because it is a unique market other than that are movements are usually just part of our regular business because we have those very.
Fungible assets and such a broad broad network. So.
Long short answer, yes, understanding that oil and gas part can be the only variable and I don't pretend to know where oil and gas is going but I just got imagine it's pretty close to the Bob.
And lastly, the fleet productivity.
Pro forma or.
Every year or have you want to think about it reported.
Can you help us a bit which is some sense of movement from the third quarter to fourth quarter, what we should generally expect as if we productivity.
Improve on a year on year over year basis pro forma reported.
Help us with some some framing it.
Yeah, we.
As we've discussed before as much as I would love to be able to predict. This just like we would have loved to predict rate and time that precisely those are the two biggest variables along with mix in this numbers, we were not trying to predict it. It's an output that we are utilizing to discuss what happened.
And really not getting into even for the fourth quarter forget about 2020, the predictability of it or our ability to forecast that we still peg appointing a half overall throughout here is what we want to do what we want to achieve because we want to achieve our inflation that'll change in some years and maybe aren't relational change in some years depending on.
What the macro is but we're really using it as.
Postmortem on how to explain how our revenue acted then a predictive metric to be fair.
So that's a long no, but just trying to give you color on why.
No.
Push you to exact number but just the idea that the fleet will be bigger year over year in the fourth quarter than the implied revenue growth.
And.
Especially given used equipment sales will be up year over year in the fourth quarter Im trying to make sure we don't get off the phone thanking the fleet productivity.
Year over year.
Degrades deteriorates from what we just saw at least.
Materially.
One of what's implied in the guide if we use the revenue midpoint. So I just wanted to give you the opportunity to address that.
Yeah, No I I understand the viewpoint and the position there as always we'll do the obligatory don't anchor on the midpoint, but to be fair. We give you we create the midpoint for you it really is.
A number thats going to move compared to where we end up within that pretty tight range that we did so and part of that range. You will will be very pleased with it and if we end up in a different part of that range, maybe less please but I would just say is a way that we talk about the output and not to be predict so I get your point.
Thanks for that thank you for the time I appreciate it.
Thanks, David.
Thank you. Our next question comes from the line, Rob first time from Melius. Your question. Please.
Hi, Thanks, and good morning, everybody.
Morning.
So I just wanted to ask about outside of oil and gas. It seems I mean, you guys had a really good insight into what's happening sort of finger on the pulse. The construction another economy and it seems like it's pretty good still so I wonder if you could talk just a bit about how much visibility you have into next year.
Not your forecast, but just like how far are your customers. You can see you can see some starts you can see some cancellations and et cetera, and then just as a management team how are you thinking about.
Philosophically the markets, obviously, a very worried about recession and different things or as you are seeing strong trends. So how do you sort of think about balancing those to go into guidance.
Yes, thanks, Rob so as we're into the planning process and we'll be doing reviews here within the next 30 days in detail at the field level well a couple of data sets that we'll look at in addition to everything that all of you have access to our additional information as we said before is our customer confidence index, which.
Which remains strong I referred to that in my prepared remarks, whereas we have still 60% of our customer survey believe next 2020 will be better than 2019. So admittedly that subset is more large customers. So as we said before strategically why we focus on large customers.
The ones that are going to do better in a slower growth environment. So that you could you could say if you want to Jay that'll, all but 97% or the customer say it will be flat to better only 3% of the customers are looking at their businesses 2020 being down. So that's a good indicator for US. We then need to test that with our field reps.
As analysts whether it be the sales folks for the managers and what they're seeing in their business in a competitive landscape in volume landscape in a jobs landscape. So all that work will be done throughout Q4 and will inform what we guide to for 2020.
In the industrial par I mean, the other part of it I'd say is I think some headwinds we had to absorb internally in the first half of the year won't be there next year. So I think will be better prepared to position fleet more accurately will be more externally focused so I'm looking forward to that after the team did a lot of work.
Internally in the first half of this year on is moving past that.
That's helpful.
Outgrowing the market for a number of years by acquisition and just you know.
You are on.
Investment and then obviously you are skewed towards a bigger customers at all to outgrow the construction market. So in a flatter market you would continue to expect to continue that trend.
It's always our goal to outperform the end market right. I mean that is always our goal. We've got a lot of resources, we got a lot of breadth and depth.
And we serve a lot of end markets. So for this quarter. For example, if if we were overly reliant on oil and gas or a flattish industrial sector that this would have been a different outcome for us right wouldn't had record revenue record EBITDA. The fungibility of the assets and the diversification of that portfolio gives us a lot of confidence that we have the opportunity to outperform.
In the end market and that is our goal.
Okay. Thank you very much.
The Q. Our next question comes on line of Rasco already from Bank of America Merrill Lynch. Your question. Please.
Hi, good morning, guys.
I'm not one Ross.
No you guys are acknowledging that the demand the industrial side, a little slower I mean, you sold off some excess fleet I'm just curious why didnt you cut the gross capex.
Guide again.
Is it fair to say that you're more likely to trend towards the lower end of the gross Capex guide as you as you finish out the year.
No Ross I wouldn't say I'll, let me answer the first part of your question, which is why we had the opportunity to take some older assets that were at the end of the rental useful life and sell them into a strong end market and what we think about some of the stats that that Jess reported in her prepared remarks think about that new sales market.
So throwing off high margin.
We're still recovering 53 cents on the original always see dollar for fleet. That's over the 86 months holds over seven years old and.
We had the ability after cutting capex in July we had the decision to make that we cut further if we've got to let's say 100 million ex capacity or do we take that opportunity to refresh refresh the fleet.
The other issue as we generate higher free cash flow. So there was no reason for us to cut the gross versus the net and we we think that positions our fleet better as we've always said, we want to keep that fleet age at the appropriate time. So when there is a downturn, we can Asia and that's part of our resiliency. So we view that as part of that stress continuing that part.
With that strategy.
Alright, Thanks, Matt and.
No you went through this a similar dynamic in.
The industrial recession, a few years ago, where you redeployed.
Out of the oil patch into some of these other markets and you managed to.
To pull it off can you give us a little more color as to.
Were in terms of geography or end markets, you are going to move that fleet and what gives you confidence that you won't create an oversupply situation elsewhere and doing so.
So no relative scale of our $15 billion of fleet, we're not going to move it it's still pretty small number right. We're not going to move it to any end market that it's enough to overwhelm I guess, we moved all of it to one market.
Technically that could be we're not doing that we're moving it to the markets, where nonres is strong and to be fair, even close by downstream still strong. So just for clarity, we talked about industrial being choppy, they're not all down downstream is still a good part of our business upstream and midstream or negative in the rest of them or just kind of little bit up a little bit down low.
Leading to a flattish industrial overall end market, but that those end markets that we have and the customers that we can serve outside of those verticals is where we're moving that fleet and it's not a single enough large enough number to any one of those verticals or geographies. That's that's going to create a supply glut in our opinion I'd say the.
The difference between because I know a lot of people will tie this dialogue of oil and gas to back what happened between 14 and 15 right when oil and gas was at a peak than it was a much bigger part of our business, but even for the industry overall that knock on impact of what happened with oil and gas in 15 of the infrastructure.
Sure to build to suit to help serve the area around it have improved or additional hotels retail right shopping centers, even schools all that built out already that was not part of this oil and gas run in the past couple of years. So therefore, I do you won't have the knock on.
Effect that you had back down and that's that's the way reviewing this reviewing this as a temporary.
Issue that we had to work through but nowhere near the impact that we had Bakken 50.
Got it thanks, and just lastly, how much momentum you feel like you have in the tank for for specialty into next year. I mean, it's got 20% of your business still growing 10% organically as it does it feel sustainable even if non res does.
Have a sort of a notch lower and what are the areas you're most excited about in that and the specialty portfolio.
No we absolutely feel good about it and that team continues to to generate not only good returns, but good growth and I think fluid solutions right. We sometimes it gets lost in the in the conversation of the bigger integration.
Fluid solutions is a new go to market strategy, where we had to integrate the baker and the old pump team and so they've worked through that in the past 12 months I think they've got great opportunity to get externally focused and run with the ball a little faster so we like to prospects.
Thanks, a lot.
Thank you Rob.
Your next question comes in the line of Tim from Citigroup. Your question. Please.
Thank you so yeah, Matt you touched earlier on on mix and I wanted to see if you could give any sort of help in terms of you get high level thoughts on on rate for 2020, and specifically if if the remaining couple of months here played out with with whatever normal seasonal patterns would would suggest.
What would that imply in terms of the rate carryover for 20.
Yes, Hi, Tim wish I could help me, where we're committed to not giving that level of detail. The way that we're going to talk about rate time and mixing the future is exactly how we're talking about it this quarter, we're going to give it in arrears, we're going to give at all in year over year, and we're going to talk about it and fleet productivity and we'll give you that.
Numerical value and then what we're going to do qualitatively to say.
We did this quarter rates a good guy mix has been a good guy overcoming some headwinds that we've had and time utilization as we look forward I mean, the mix. So those three will be impacted by the demand environment, certainly right all three of them and our decisions on where we invest our capital and what our customers rent. So.
Yes, that's how we look at it to I wouldn't I want to stay true to that we want to stay true to that because we think isolating in any one of them belies the the interaction between the three of them in our business going forward. That's really why we make change our businesses change. If this was back 2006.
It was very simple we know our fleet mix did change much and it was it was a direct correlation the interplay the three as much more relevant for today, which is why we made.
Okay, and thoughtful habits, diehard I guess, but.
Maybe just the second one who is coming back to.
You said your non reserve or just maybe was construction in total up.
Almost 9%.
In a backdrop, where depending on and what statistics you are using their theres not much by way of overall construction.
Spending growth so I'm just curious in terms of.
But the this whole notion of outgrowth, and then kind of the magnitude and is that it basically what's contributing to that is pretty pretty big number and I don't know if that's or is there any tangible.
Share not share, but I'm kind of penetration gains you think are contributing to that or maybe just touch on that in terms of.
If we are an environment where.
Nonres spending is flat to maybe up a little bit next year, just was what and what sort of of outgrows could we potentially be looking at thank you.
Sure. So first of all I think it's little bit a share gain right and when we think about the big is getting bigger which is something we've talked about I mean, it's why the consolidation plays where we think the opportunity that density and diversity gives you.
The opportunity to over indexed in places that are growing and therefore dampening impact or mitigate the impact of places that arent. So that's the overarching reason why we think we can.
Swim upstream so to speak in different end markets and and we continue we continue to feel that way I.
I would say that.
Every time, we look in arrears, what some of these end market data says its megan to sell certain to say, we outperformed because maybe sometimes theyre just wrong, but at the end of the day. The macro data is a good framing for us to look at but that deep dive on what our customers are telling us their backlogs are and what our managers and sales teams or tell us a little work that day foreseen.
Turning to Sir.
Is our single largest barometer to how we build the plan I'm not saying, we're going to over perform by 30% what the end market forecast say, because they're just not reliable enough for billed business plan around that so we're going to do all that hard work as I said throughout Q4 throughout our planning process and Alan form where we guide for two.
20.
All right. Thanks, a lot.
Thank you. Our next question comes on line of Jerry Revich from Goldman Sachs. Your question. Please.
Hi, good morning, everyone.
One of your.
I'm wondering if you could talk about the Bam cadence.
The course of the quarter.
Your fleet during the quarter grew about 3% which is.
Point better than normal seasonality. So looks like you were able to put more equipment to work. This third quarter sequentially compared to normal seasonality can you comment on that is that what's playing out in the field.
It looks like by the improvement in fleet productivity.
I would imagine.
Position improved at least in line with normal seasonality in the quarter can you just comment on that because in the prepared remarks spoke about oil and gas headwinds et cetera, but you folks were able to pull out a lot of equipment to work this quarter and I'm just trying to square those two points.
Hi.
I really just thinking that there with that level of demand in our core end markets and with our key customers and frankly.
We will like to have done little better and how do we not had some of that Choppiness. That's why we pointed to it we when you look at the year and break into hast, we talked in July about.
The internal focus maybe not getting that bill that we want to than first half when you look at the back half of the year, we're pretty dead on as to what our original thoughts were how much do we see on rent fleet you built in the back half our hope was that we backfill some of that whole and as we got into some of the end markets not giving us that.
Specifically oil and gas midstream and maybe flattish, but let's say manufacturing down a little bit we just didn't get that opportunity in some of those to offset what the team did do buy back filling the hole in a lot of the Nonres markets and that's the way we look at it so I'd say the demand trend was back half probably as expected origine.
Really what of where the part Rice said, which we've done better I wish we could have backfill that whole a little bit more and therefore, we we would've drove a little bit more volume, we're talking on 1% area. So we're talking on the margins here. When you look about year over year. When we what we reported in January versus where we did here, but I said demand allowed us to have.
Growth.
Throughout Q3.
Okay.
Okay, and Matt earlier in the discussion you spoke about how pricing played out in the oil and gas downturn and the fact that those smaller.
Shipments size market today can you just expand on other differences you see in the market. So.
Talk about the impact of data availability, we're hearing from construction equipment dealers rental fleets that the supply demand data has been really helpful are you seeing that in your market in terms of better ability to match the supply with demand for the industry. Because we concern is in the last cycle.
Utilization move down and then pricing move down and I just want to make sure.
We ask the question of what's playing out differently in this cycle. So I'm wondering if you can expand on.
Any other drivers there.
Sure first and foremost.
I think the discipline that the industry and we've been talking about this for a few quick discipline the industry showing.
In the last 10 years in my career compared to the first 18 years in my career is night and day right. So that's that's number one and I think data has been a big help of that and I think history has been a feature that too right going through a nine and and that's far tissue. I think you can't underestimate the impact that may have had on folks being much more response.
So for that there'll be times throughout any cycle, where it'll get ahead and pull back and I think I think the industry overall is responding appropriately but to be clear I also don't think the end of demand is here. So we have the opportunity to continue to put fleet to work I think our actions of.
Consolidating capacity to drive growth as opposed to just adding capacity to drive growth is a significant difference right. When you think about the last 10 years.
I think some what competitors are doing the same I think thats. Good news. So I think when you when you think about all those issues the availability right that those of US which is about half the industry now get from the routes information is helpful technology in general the professionalization of the industry, which consolidations helped bring.
Having analytics, having data as a resource to think through investments and timing. All those are part of why I think we'll see a better out why we've been seeing a better outcome in supply demand.
Okay. Thank you and lastly on the cold starts within specialty can you just talked about what the learning curve has been as you ramp up the cold starts over the course of this year and as you look at the opportunity in terms of.
Potential new locations over next couple of years, what the opportunity. So for expanded cold starts looks like on a multiyear base was based on everything we've learned what the rollout this year.
Yes.
Not terribly different than what we've been doing right. So we don't really communicate it that way the year one the year to the year three communication that's not our that's not the way we do it mostly because more and many of our cold starts are growing on the border of another one so theres a lot of efficiency. That's built in when one store doesn't especially in our specialty network as.
We build it out that network doesn't have to travel out as far to serve the market. We can be more responsive we get growth out of that but then we also get better value in the existing store that's no longer going there. So there's a couple of different calls to look at it.
I think we're going to have a specialty day that maybe we could talk about that and Paul will be leaving that in more detail.
That would be more helpful as opposed to trying to get to that level of of specificity on this call but.
What will follow up with Ted make sure that we we get that on your calendar I think that would be a great opportunity to learn about how specialty cold starts and specialty growth play out.
We look forward through it thanks.
Jerry.
Thank you.
Next question comes on line of Steven Fisher from UBI ask your question. Please.
Thanks, Good morning, guys.
Two.
Hey, I just a follow up on Ross's question.
Really if you could characterize how tight are.
The markets from a supply demand basis in those construction areas, where you see the better opportunities to move fleet and I guess to to what extent are you seeing other sending equipment into those same places at the moment.
I wouldn't say less or more competitive than they fit right. So I'd say, we're not seeing any any extra competitiveness.
And we're not seeing any any easy roads, either right. We have to earn a customer's business everyday I would say that theres only a few companies and this is why I think the banks are getting bigger there's only a few companies that have that flexibility in flint and fungibility to do that so it's not the whole market. It's only a subset of the market that can make those.
Pivot and.
And then in a quarter to quarter or within an annual cycle because other companies that don't have stores. They aren't can finish not going to have the ability to go ramp up and open up and thats location, because all the sudden there's there seems to be better opportunity there than where they reside they may do it on the fringes right. They may travel a little further but that's that's.
That's a little bit different than than the.
Broader footprints that a couple of companies in the industry have so I think thats, a big differentiation and why you're not seeing a rush to any any individual but quite frankly I hope that answers your question.
Yes, that's helpful. And then any chance you can give us some color on how the fleet productivity metric trended over the course of the quarter did your upside to the 1.5% target. The did that come more later in the quarter or or kind of steady throughout.
Yes, no wait where we're not we don't we're not pull and actually we don't calculate that way, but we're not pulling it apart that way. This is a quarter and year over year result that we look at in prep for earnings to help communicate what happened in the quarter, but not not sequentially or not trying to use it as a trend line or anything like that Tonight I don't have that color for you.
Okay. Thanks, a lot guys.
Thanks, Dave.
Your next question comes in the line of Joe date from vertical research. Your question. Please.
Good morning.
Can you quantify how much fleet youve taken out of the oil patch and then just I think you touched on this but just to confirm what the related repositioning and repair costs are that are attached to that.
So so I'll start I will start there Joe the so we called out about 12 million of of costs that we incurred this quarter going forward into Q4, we think it'll be something less than that as we do have a little bit more to work through but that's something last night I don't.
A number right now but.
Yes, when you think about the fleet, it's a portion of and it will be in Q4.
Say what percent of 4% of your business right. So somewhere in $100 million range Weve, Let's say, we moved about half of it out of there. We got another has to go.
Depending on how it turns with that could accelerate or decelerate, if we get any different news there, but it's in that realm of impact from Oh, we see perspective.
And then just the related kind of EBITDA bridge sequentially, you're implying margins up seasonally either typically down threeq to Fourq do you still going to have some of these carryover costs just any other factors to consider as we move from Threeq to Fourq EBITDA margins and see that improvement.
So there will be the impact in addition to the the acquisition impact there will be the impact that will flow through margin of as I mentioned, we'll have a little bit higher used sales and so that's going to come in Italy at a lower margin than than the rental would.
At the other the other caution and I know, Matt mentioned, it earlier, but I will caution against using the midpoint.
Yes, I think whether you use the low and high end or midpoint, it's implying a 48.8% EBITDA margin in Fourq versus 48, five in Threeq you and so it was just curious about what some of the good guys are in terms of that sequential move.
The two drivers are the ones, we mentioned the the Blue line impact a which.
We will anniversary that I know in November Onest, and then the that shift that mix shift between used in rental.
Okay.
And then Matt just on on replacement Capex as you do a little bit more this year does that mean that you're positioned to do a little bit less next year and then just bigger picture as you think about the backdrop of the market are you seeing anything that's leading you to think we're going to pause.
A little bit on some of this replacement spend.
No I Wouldnt definitely we're not planning on doing less right. The new sales end markets as we talked about are still strong.
We still want to keep that fleet age is fresh as weekend as we're still in a growth cycle. So I wouldn't I would say if anything we plan to be maybe five and 10% more for the placement for replacement in 2020. So that's the way we're thinking about if the market chain, if the outputs right change, which were not seeing even as recently.
As of last month.
The new sales channels are still good and we're going to utilize them keep the keep the fleet fresh and a little bit and what we did here in Q3 of its a good way to Reprofile.
Right. So as you're trying to continue to get your mix right you could sell off some of the older assets and and use those funds as a net cat in net capex to help Reprofile your fleet versus only using growth, which is a much smaller number three profile.
So just to be a little bit helpful. One step further we're still pulling the plan together. So obviously we're still.
Landing on what we think the growth capital could be for next year, but as far as the replacement as Matt mentioned that will be up next year.
And if you think about something in the neighborhood of selling kind of 1.6 to 1.7 billion at all we see inflation adjusted that's going to look like something called at one eight to one nine.
That's really helpful. Thanks, very much sure.
Thank you. Our next question comes from a line of Courtney I come on US from Morgan Stanley . Your question. Please.
Thanks, guys. Just wanted to go back just on the comment about the 12 million of costs incurred was that totally incremental or kind of what was that versus your baseline expectation for fleet repair maintenance and then I think you had called out in the press release.
Increases of 27% and 19% for repair and maintenance first as deliveries. So just wanted to understand if that was included in the in that number and then if you could also just help us understand for the general gross margin impact how much was in general for specialty. Thanks.
Sure So hi, Tony just.
So from the for that 12 million that that was incremental for the quarter.
In terms of isolating what we leaned into two repair and reposition the fleet or some of that excess fleet that Matt talked about and getting that into two lies stronger and end markets.
As far as what you're seeing is as the increases are an m. versus delivery. The mix impact of that is we saw a little bit more of the repair maintenance and delivery costs in the together in the general segment, there was a bit more on the repair.
Our main inside on the specialty segment, a little less delivery.
So that that's the dynamic there.
Okay got it and then can you just help us understand when you do you know the repair and maintenance for something like this does it extend the fleet age do you consider it you know getting resigned at all but I you know how to how do we think about how much that's kind of extensively age.
Yeah, there's there's no theres no real extension of the fleet age per se.
It's just making sure that it's in a.
Ready mode to get into those those markets, we did spend a little bit more on some of the repair of the fleet that came out of the oil patch because that's going to be.
Kind of worn down a little bit more than a across some of the under other end markets. So theres, a lean into the repair maintenance and the results of that and we don't account for it in any way is capitalizing or extending or anything like that either so thats thats. It.
Okay, great. Thank you.
Thanks Corey.
Thank you. Our next question comes on line up Seth Weber from RBC capital. Your question. Please.
Hey, good morning, guys.
Hey.
Most of the questions have been asked but you know just on the on the 50 million or so that fleet that was moved in the 100 that maybe in aggregate is most of the is it fair to assume most of that is generally.
Versus specialty and can you just talked about what you're seeing in the specialty side and some of these oil and gas markets. Thanks.
Sure certainly most but theres some pump and gen sets that we have some some some work there as you know in the specialty but I would say it's primarily.
Gentlemen.
Say 70, Okay. You want to just we don't have I don't have broken down pretty heavily maybe that data, but primarily generate think about our fleet profile overall and it follows sure.
No I mean, just some of those specialty is harder to move obviously, so just trying to get understanding.
I think in in 2000 during the last downturn. If you gave us a number that something like 80% of the revenue from tax in Texas was from non energy stuff is that is that still kind of a good framework to use so.
You know I know the energy business the upstream business is smaller today than it was back in five years ago sort of it.
Is maybe as at less than 20% of your business in Texas at this point.
I, Yeah, I would I would.
I actually don't have that answer for you I think we've talked about it in whole I actually don't recall had been or while I just cant remember ask talking about it as far as what percentage of Texas business as a whole somebody must have slipped that by me because I would certainly a stop that conversation just from a competitive perspective, but.
I actually don't recall that number.
Okay Fair enough and then just you know given the.
You know the potential for caution on the around the macro you know clearly it's not manifesting yet, but you know just on the broader macro on the construction business et cetera are you thinking about changing.
You know your cadence so discussions with the Oems and this is our you know this is kind of around the time of year you would start to plan for 2020 your discussions with the right with the Oems I mean are you thinking about maybe going a little bit more slowly this year versus prior years. Thanks.
Yeah, No I think we'll keep that's been pretty successful for US I think we'll keep that similar cadence I think it helps to them right and it helps us so we make sure we understand what pipe once we build the plan we understand what pipeline, we think we need with flexibility right, which we always have as you know and we tried to be reasonable we don't overuse that flexibility for her no.
Value and it gives them the opportunities to build their plan I mean, we need good suppliers, we need them to get their supply chain in order. So it's a it's a partnership and I think the way we've been doing it we're comfortable with the output. So we're going to we're going to stay on cadence.
Okay I appreciate it guys. Thank you very much thanks, Seth thanks.
Thank you. Our next question comes from the line of Stanley Elliott from Stifel. Your question. Please.
Hi, everybody. Thank you all for fitting me in.
Quick question back on the outgrowth piece.
How much that as.
When you look across the portfolio International Count profiles are you over index under index to to any any verticals necessarily or is it is it pretty much consistent with the rest of the portfolio.
From an efficacy perspective, yeah.
No I wouldn't say over indexes their percentage points of movement in certain verticals, that's more primarily.
I would segregated as key accounts not just national accounts as we've talked the all before a national accounts used our national footprint, but we have strategic accounts a key accounts are equally as important just use maybe regional marketplaces right. So I would say the combination of those.
Is.
No I wouldn't call them heavily more influenced by any specific vertical I think that's a pretty broad portfolio as well.
I appreciate that I was just curious about the 9% construction growth which is.
Much better than than what we're saying.
And then just thanks for the slide on the free cash flow conversion of.
Anything or any reason out of the ordinary why those numbers shouldn't carry.
Carry forward as we look into 2020 beyond.
So we're still planning 2020, which includes what we believe our view of free cash flows going to be I'm not just from from an operating perspective, but also taxes and interest in some of the other lines.
So too.
That's still to come Stanley what I will tell you is we are planning for another robust year free cash flow exactly how much I don't know, yet, but a lot, but it'll be a robust.
Perfect I look forward to seeing it thanks, guys thinking right. Thank you.
Thank you. Our next question comes on line of Scott Schneeberger from Oppenheimer. Your question. Please.
When everyone.
Hey, Matt.
You covered in the beginning in prepared remarks, a bid on on on the integrations in Blue line, but that was a bit of a hiccup last quarter. So just looking back for a second what what were some of the actions that we're taking this this summer and a two to enhance data that integration process and maybe some lessons learned.
And since obviously you are I is well experience in acquisition integration, but.
What were some things that you took out of that process and then.
Going forward.
Great Great question Scott So.
We do have a robust playbook in its we every deal makes it better and Thats, one Oh I think the values of learning that that gives us.
I want to focus specifically on Blue line, because the real thing that we learned is blue line was the third deal in many markets in 18 months. It was the first steel and we'd be talking about a different deal that had the challenges and it would probably still be the third deal. So that's a part of it and if I had to do it all over again I'd spend much more time, making sure.
Sure the external portion of it that customer outreach was which we havent had to spend extra energy on in the past. So that's something in this deal and whether it was just because it was a third.
Which I think plays a lot or whether it was the largest of the three.
I don't even care, which one of those two it is because I don't really know, but that's what I would change we would learn we would have a much stronger external focus on the front end of it versus.
What is a very aggressive internal focus as we get everybody on the saying system in nine days and try to get all the branch consolidations done. So we're working as one unit and people know what they're doing in the first three months. So we've got a bounce that aggressiveness internally with equal addressing the sex certainly that would be.
My learning and I think what we did a great into playbook.
The good news is I don't think we're going to I don't think there's three big deals to get done in a row again in the near term. So I don't think that that's that's parts going to be an issue, but the external focus a good learning.
Hi, Thanks appreciate that and.
Here at the end of the call I guess, a question I can't help but ask.
You are generating a lot of cash a lot of flexibility there and.
There's theres been a lot of talk.
This year more than in years past of of M&A in the in the specialty rental space. So as we head into next year and everything you've been working on integrate will now be in the rear view mirror, having anniversary <unk> just could you address the use of capital again I know just you have the new new lower leverage.
Active but I just please put that in perspective for us here at this part of the year. Thanks.
I think you hit on it as we've been saying that our lean.
A time, where we're a little more focused on absorbing and leveraging we still look at deals we are still a pipeline that we.
That we do work on but the lean would be more on additional products and services to customers for us are overlapping products and services in the second would be filling out any gaps and in distribution footprint. So by definition that leans towards specialty and on top of that they're good return businesses. The.
The three criteria of cultural strategic and financial still need to be met and.
That's a high bar for also.
But there's deals out there and we'll pay if any of the meet those three deals we have the flexibility guests in the team has given us the balance sheet and the flexibility that we could still do stuff that's accretive to the business, but we certainly also has the opportunity to absorb and leverage what we thought.
So if that balance right now with a lean towards specialty.
Thanks.
Thank you.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.
Great. Thank you operator and everyone. Thanks for joining us in just a reminder, that our Q3 investor deck is available online as always you can reach out to Ted with questions in Stanford and we'll look forward to have great holiday season, and we look forward to talking you all in the new year and sharing our thoughts on 2020.
And looking forward to that be safe and thanks for joining.
Operator, you can in the call.
They do you think you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.