Q4 2019 Earnings Call
Please standby your conference call will begin momentarily once again, please standby your conference call will begin momentarily. Thank you for your patience in please continue to hold.
[music].
To the United Rentals Investor Conference call. Please be advised that this call is being recorded.
What we begin note that the company's press release comments made on todays call and responses to your questions contain forward looking statement.
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.
For a more complete description of these and other possible risks. Please refer to the company's annual report on Form 10-K for the year ended December 31st 2019, 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 United Rentals has no obligation and makes no commitment to update.
Publicly released any revisions to forward looking statements in order to reflect new information or subsequent events circumstances or changes in expectations.
You should also note that the company's 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 presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.
Today for United Rentals, It's Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer, I will now turn the call <unk> Mr. Flannery, Mr plan or you may begin.
Thank you operator, and good morning, everyone. Thanks for joining our call.
Let's start with full year 2019.
It was a solid year of profitable growth for United rentals, both organically and through the impact of our acquisitions.
And we expect to deliver more growth again this year.
We're continuing to gain ground cycle, that's not without its challenges, but one that we think has legs in 2020.
You saw that reflected in the guidance, we released yesterday.
In many ways 2019 was a year of transition for us.
Now we've lapped the large acquisitions and we have a clean slate at a much greater platform for growth.
To recap for your highlights both our revenue and earnings were up year over year as reported and also pro forma.
We delivered record EBITDA of $4.4 billion and a record free cash flow of $1.6 billion.
On the flip side, there were some stubborn headwinds that impacted our numbers.
When we look at the fourth quarter, specifically, we had some rough spots.
We knew rental revenue growth would moderate but Q4 pro forma growth was lower than expected at around 1%.
And some of our costs were higher it's created a drag on our margins.
The single biggest constraint was a slow down in upstream oil and gas.
Well, then I'll rental operations it impacted not just revenue, but also our operating costs.
We spoke about this last quarter, Jeff will discuss he had packed in detail, including the expenses, we had for repair maintenance and repositioning of the fleet that we pulled back from the oilfield.
We're sending that equipment to other markets, where it can generate revenue down the road.
We didn't have grand expectations for the upstream market, but frankly, the speed of the decline was a surprise.
We expected the man to stabilize early this year, although year over year. The council remain tough for a couple of course.
[music].
I had to point to one metric where most disappointed in overall, it's weak productivity.
Our biggest opportunity to repair productivity in 2020 is what we had absorption.
We had the assets in place and the team is focused on getting excess capacity out on rent in a disciplined manner.
As activity ramps up.
Based on what we're hearing from our customers and the field organization, we're confident that the demand will be there.
On the subject of fleet I want to take a minute to comment on the Capex ranges in our guidance.
Our plan calls for $1.9 billion to $2.2 billion or gross Capex this year.
The low end of that range represents our expected maintenance capex.
And the top end accommodates growth this year plays out.
Would most likely be used for specialty fleet or equipment for specific projects.
[noise] broadly speaking the last three months of help confirm both the weakness and the strikes we see in the cycle.
We had a couple of regions hurt by oil and gas and a couple of others with strong increases in rental revenue driven by large infrastructure projects and nonres activity.
Aside from those are regions were generally slightly up slightly down.
Our specialty segment had another strong quarter.
Rental revenue from trench power and fluid solutions combined grew almost 9%.
About half of that was organic.
The highest growth came from what power in a tree AC business.
This year, we'll continue to invest and specialty was another 25 cold starts planned across our service offering that's falling 34, we added in 2019.
This will bring our specialty network close to 400 locations by yearend.
Our ongoing investments in specialty a part of our broader strategy that differentiate our service offerings.
Customer she has set the solutions provider not just an equipment rental company.
In 2019, we made strategic investments in growth initiatives that we believe can be highly accretive long term.
And we'll continue to invest in the business. This year, even though it may have a short term impact on our mortgage.
Now, here's where we come out on the landscape looking forward.
We believe that our construction markets will continue to grow through 2020, but not at the same rate is 2019.
With industrial our base case of things more the same sluggish activity.
Our industrial revenue in 2019 was essentially flat with 18.
If we exclude the impact of upstream oil and gas industrial was up 3% for the year.
I can sum up or expectations for this year and for words slowing but still growing.
And this jives with a number of external data points, including our most recent customer confidence index sits at the highest point since August .
Construction backlogs are stable.
Brady I came in about 50, again and the CEO confidence remains strong.
The combination of these indicators help shape our outlook.
But we're not taking anything for granted if conditions change we have a lot of flexibility built into our business model.
Our job now is to unlock the value of this big engine we've built.
I made that comment on the third quarter call and it was a theme for our annual management meeting this month.
We had more than 2000 leaders in Minneapolis to kick off the year.
They came away with concrete plans to achieve our goals and a powerful platform could do it with.
Not just fleet and branches, but also digital capabilities.
Well I solutions and most importantly, our talent base.
Our people are the number one reason I can say with confidence well no company can control the operating environment, we do have the ability to continuously improve our performance from the inside out.
That's why I'm entre.
Bigger doesn't really matter unless we're constantly driving for better.
Also I want to give a shout out to our team on safety performance.
Give it another year with a total recordable rate below one despite the noise on the multiple integration.
Finally, I want to speak to our stewardship of United rentals on behalf of all stakeholders.
The priority of our leadership team to manage the business for the optimal balance of growth.
Margin returns and free cash flow.
In 2020, when looking at another year of profitable growth and strong cash generation.
We plan to use that cash in ways that will benefit our investors.
First we'll continue to invest in strategic initiatives that we believe have long term accretive value.
Second we're planning to use about a billion dollars to pay down debt.
Yesterday, we announced a new share repurchase program that will return an estimated $500 million to our investors over the next 12 months.
We have a lot of flexibility in the ways, we can serve our stakeholders.
The constant.
That we're disciplined resilient company with a focus on driving returns in any environment.
That's what our investors expect and that's what we'll deliver.
With that I'll ask Jeff to walk you through the quarter and then we'll go to QNX suggests over to you.
Thanks, Matt and good morning, everyone.
There's a lot to cover this morning, so let's jump right into the fourth quarter results starting with rental revenue.
On an as reported basis, our rental revenue grew 3.7% or 73 million to just over 2.06 billion.
Adjusting for Blue line on a pro forma basis rental revenue was up <unk>, 0.8% for the quarter or about 14 million.
Within rental revenue as reported Oh, we are growth contributed 62 of the 73 million increase.
Ancillary revenue was up about 15 million and re rent revenue decreased by four.
There's a breakdown of the 62 million or 3.7% Oh, we are growth.
We had growth in our fleet of 7.6%, which translates into 127 million of additional revenue.
We inflation cost, that's 1.5% or 25 million.
And we productivity on an as reported basis was down 2.4% or a decrease of 40 million.
I mentioned that year over year, we productivity on a pro forma basis was down 1.8%.
Hi utilization remained a headwind in the quarter and the combined benefit we've had in rate and mix, we're not enough to offset the impact of lower time.
[music].
That's right the revenue, let's move to use sales.
You sales revenue was up 31% or 58 million year over year.
That represents $154 million more fleet sold at all we see.
The environment continues to be strong with overall proceeds as a percentage of all we see of about 52%.
That number climbs to 56% if I exclude the auction sales we had in Q4.
Sales at retail made up over two thirds of sales in the quarter as we sold 40% more fleet through this healthy retail channel versus last year.
Adjusted gross margin unused sales in the quarter was 43% down from 51% in Q4 last year.
That's a claim is mainly due to more auction sales the fleet with high operating hours, including units from the oil patch as well as a 4% decline in retail pricing, we experienced given the increased volume that we sold through that channel in Q4.
Taking a look at EBITDA adjusted EBITDA for the quarter was just over 1.15 billion, an increase of 37 million or 3% year over year.
Here's a bridge on the as reported changed.
Rental Oh, we are contributed 7 million.
Ancillary benefited adjusted EBITDA by 2 million rewrite was a decrease of seven.
Used sales added 11 million to EBITDA and better performance in our other lines of business provided 3 million.
That's DNA health adjusted EBITDA by 21 million year over year.
And I know there that includes the impact of about 15 million in lower bad debt and we also recognized about 6 million in synergies year over year from the Blue line stub period.
Our adjusted EBITDA margin was 47%, which is down 140 basis points year over year I.
Adjusted EBITDA flow through was approximately 25%.
Both margin and flow through were impacted this quarter by a number of dynamics.
First and most importantly, with a slower read of gross realized in the fourth quarter in large part due to the decline in the upstream end markets.
As we've said before our ability to reach our targeted levels. The flow through requires a combination of positive suite productivity in revenue and cost productivity gains.
At <unk>, 0.8% pro forma rental revenue growth, which includes negative fleet productivity the margin flow through were challenged given slow growth in the quarter and our maintaining a cost structure that supports the capacity, we expect to need to service growth in 2020.
We also continued to make investments in growth initiatives that will drive value in the future.
Second our cost base with stressed by repair and repositioning cost coming out of continued declines in the upstream market.
I mentioned in the third quarter called it some of those additional costs would play out through the fourth quarter and they did I had around 8 million.
Slide a business mix was another headwind in pull through.
Fourth quarter included a sizable increase in used equipment sales as well as growth in our non rental lines of business all of which are dilutive to margin and flow through this period.
[music].
Comments on adjusted EPS, we delivered a strong $5.60 in the quarter compared with $4, an 85 cents in Q4 2018.
That's an increase of 15% primarily from better operating performance lower shares outstanding and tax benefits that we recognized in Q4.
Let's move to Capex and free cash flow.
For the full year, we brought in 2.13 billion in gross Capex with 158 million of that having come in during the fourth quarter.
Excluding 831 million in proceeds from U.S sales net rental Capex for 2019 was 1.3 billion.
We generated robust free cash flow in 2019 about 1.6 billion for the year or an increase of 258 million from 2018.
That's up over 19% and adds back about 26 million in merger and restructuring payments, we made last year.
Our tax adjusted rate remained strong coming in at 10.4% for the fourth quarter that continues to meaningfully exceed our weighted average cost of capital, which currently run south of 8%.
Year over year tax adjusted ROIC was down 60 basis points due in part to the decline in margin this quarter and to a lesser extent as a result at the expected drag from our acquisition.
Looking at the balance sheet.
Net debt at December 31st was 11.4 billion, which is 300 million lower than last year.
Leverage at the end of the year was 2.6 times, that's down 10 basis points from the end of the third quarter and down 50 basis points for the full year.
On a quick comments on liquidity, which at year end was a very strong 2.14 billion.
Price mainly of ABL capacity.
A few comments on capital allocation and our share repurchase program.
We completed our 1.25 billion dollar repurchase program purchasing $200 million of stock in the fourth quarter.
2019 purchases under that program reduce the total share count by about 7%.
As Matt mentioned, we will prioritize the use of our excess free cash flow towards reducing leverage and 2020.
We're targeting 1 billion towards debt reduction this year and I'll speak to guidance in a minute, but based on the strength of the free cash flow. We expect to generate this year. We also expect to return additional cash to shareholders three new 500 million dollar share repurchase program that will complete over the next 12 months.
I'll wrap up with a few comments on guidance.
2020 outlook was included in our release last night.
First we expect 2020 will be another year of growth in this cycle, albeit slower growth.
Guidance for low single digit growth in total revenue assumes continued support from our construction end markets as well as certain industrial verticals, while working through tough comps from oil and gas in the first half of the year.
We're focused on increasing sleep productivity and our plans he's positive fleet productivity for the full year, but to be clear will likely continue to see some challenges any seasonally slower Q1 closely managing our capex as we continue to reposition fleet in advance of the busy or started the season in Q2.
We expect to sell more used equipment in 2020, as we leverage what is still a strong used market.
And we'll keep our fleet refreshed with approximately 1.9 billion of inflation adjusted replacement Capex. That's at the bottom end of our gross Capex range will add growth capital in 2020, primarily in support of our specialty businesses, but we'll look to just capex accordingly, as we monitor demand and looks.
First to utilize the fleet, we already have in the field.
Our outlook includes low single digit growth for adjusted EBITDA as well this year.
Cost management remains a focus for us and it's balanced with continued investment in areas, we know well generate better customer service and shareholder value over the longer term like in our specialty cold starts the buildout of our services businesses and our digital platform.
Finally, while we continue to invest in growth will also generate higher free cash flow. This year. The majority of earmarked for debt reduction and the new share repurchase program.
So with that let's move onto your questions. Operator would you. Please open the line.
Certainly ladies and gentlemen, you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the Q lease press about.
Our first question comes on the line David Raso from Evercore ISI. Your question. Please hi, good morning. Thank you for taking my call I think one during the key issue is.
The productivity for 20, the credibility of the guy that it can be positive.
We always take is through a little bit the thoughts on cadence you mentioned that the early part of the year.
Still a struggle with productivity and it seems that the key metric really is the fleet utilization within that productivity number.
Can you give us some sense do you expect sleep productivity to be positive year over year.
It really is to Q or is it more threeq you just some sense of what kind of ramp do we need to see.
It really particularly in fleet utilization to give us confidence fleet productivity can be positive for the year.
Good morning, David Good question. This is Matt I would say.
We're no better I predict complete productivity that we were really tied to be Frank but when we we do have a lot more right three levers combined in the two.
In the one versus the two and then mix. So we think that we've been very explicit that fleet absorption is going to be the greatest opportunity. The only reason when we're talking about that'll take some time is because it's not going to be a light switch, but we think the combination of all rigorous management of it.
Good to hear comps quite frankly, as we get through the back half of the year is going and make it accelerate but I wouldn't necessarily take that's actually want to Q2 is positive or negative just that we feel it'll improve throughout the year Oh, we do feel I mean, if the if this guidance holds up these end markets hold up everything that we firmly believe in it.
Flys fleet productivity being positive it almost half so we do we do feel.
Them on that.
Would you say it'd be fair, Matt to say, the capex, especially the cadence.
If the fleet productivity is proving to be challenging as you get further into one Q into the key spring selling season.
We'll look back.
Sorry pull back on the on the net Capex.
Because that's more of the focus this year is making sure that the utilization improves.
Absolutely great.
That's an absolutely accurate and great point and that's why do you feel broader range this year and capex guidance than we normally have because where we end up in that range, obviously demand looks like partners, but this year, specifically absorption will play a part and how well we do want absorbing the fleet. So that's why you see that brought a range. So that's the right way to think about.
I guess my last question I mean, what we can debate the credibility if you can get sleep productivity be positive, but if you do you believe you can.
The incremental EBITDA margins for the year seemed very low I mean, you basically have 38% incremental EBITDA margins in a fleet utilizations getting.
Close to flat to allow fleet productivity be positive.
I'm struggling with so many cost in 2019.
12 million in the last quarter alone on oil and gas 8 million now in the fourth quarter oil and gas head I mean, that's $20 million of course, you would think won't repeat.
And if you pull that out of the guidance I mean, you're talking about almost no EBITDA incremental on the revenue growth. So I'm just trying to square up if you really believe can get fleet productivity positive why would the incrementals with all those cost not repeating be this week.
So I guess, well I think the great job breaking down some of the issues in her prepared remarks, and I'd love Jeffs comment in a minute, but I would not most obvious one supply growth right. So it's just having to absorb both the natural inflation of the business when you're in a low single digit.
Environment, but also some of the choices, we're making to continue to lean in making sure. We're building out capacity for some of our other initiatives. If if we were managing for a quarter. Maybe you wouldn't make those investments were certainly not nor would I think anybody wants to so let's just a little bit of headwinds from those two but slow growth is the main driver Jess I don't know if you want any more color.
I think they the only thing I'd add is the there's really two other dynamics that are playing through one is those calm in the first half for upstream right. We really we saw in 2019 that the rig count in upstream business really started to decline in the third quarter of 19, right. So let me to comp that.
But through the first half the other thing is we're going to continue to make the investments that I mentioned right continue to build out some of our services business that frankly come in with lower margin, whether they're not as asset intensive. So the returns are really good in those line, but in building those up off of a lot low base.
All right, there's gonna be some investment that we're going to continue to make in building those businesses out. The other is continuing to invest in cold starts, but also a need time to build up and build out and and someone digital capabilities that we're going to continue to grow and lean into and a in 2020.
All right I appreciate the time. Thank you thanks, David Thanks, David.
But do you aren't next question comes from a line of Seth Weber from RBC capital markets. Your question. Please.
Hey, guys good morning.
I sat here, what hey, good morning, two questions I guess can you just talk about what your assumptions are for disposing of used equipment. In 2020 do you expect to continue to use the auction channel as much as you did in 2019 here at the end of 2019.
And then my follow up question is just on on these oil and gas markets. The energy markets are you seeing any kind of knock on effect as a as of this point in a more traditional construction equipment. Thanks.
Well process, so first answer.
For the auctions no that we think this year with all if we were pulling out of the oil and gas and some of the extra capacity we had through the Blue line acquisition, we had more than our usual by by quite a bit of really tired old fleet and it was just the appropriate decision.
I'd, probably did for four or five times more the options we have in any other your we have but we're not going to sell that type of fleet to our customers. It's just we're just not going to do that.
The good news is that just pointed to this and her prepared remarks, you end market for used equipment retail was really strong and so so we'll continue to push that lever. We think that's a a unique strategy that that separates us and our returns in our ability to get the high proceeds per per our capex dollars.
For for we see dollar and we'll continue to focus on that the only thing will tend to options and stuff that we're just not going to sell where customers.
On the oil and gas, where we're not really seen a knock on effect.
Broadly like you might have been 15, because all that infrastructure was already built around it. What we are seeing though is you know that 31% drop in Q4 brought us to a 16% dropping upstream oil and gas full year that was significant and you saw a little bit of that drag on midstream as well those those are the two areas that.
Frankly surprised at the the how fast they decelerated.
Within our embedded guidance, we're thinking that maybe another 10% drop in the here. So we're not counting on oil and gas to recover and we don't feel there's gonna be any broad knock on effect as a result.
And do you and thanks, Brian do you feel like you've finished the moves that the relocation or the fleet out of those markets. At this point or is there still more more equipment that needs to come out I mean do you can you just can you characterize your utilization levels in the energy markets.
You know relative to where you want them to be thanks.
Yes, what we think about the cadence of 12 million in Q3, <unk> and 8 million in Q4 I take that cadence will continue we don't expect to see a big drag probably want to hopefully one that we wouldn't even call out in Q1.
Not to be fair, if it dropped a lot more than 10% I mean, it's only 3.7% of our business right. Now. So we think were appropriately size. There. If you take 10% off of that that's still not a big number and then the repairs on that shouldn't need to be a call out. The only reason you heard me say caveat. This because I didnt expected in Q4, but we don't really expect to have a big lumber.
In 2020 odd for repair and repositioning in oil and gas.
Okay. Thank you very much guys I appreciate it thanks Seth.
Thank you. Our next question comes from the line that Michael from Bank of America. Your question. Please.
Michael you might have your phone on mute.
We're still not hearing you Michael.
Oh, well move on our next question comes on line of rough with.
Your question please.
Howdy I'm, just asking similar question a little bit.
Bigger picture versus what has been artist already I mean, you look at your EBITDA margins over the past four or five years and there are higher than today and you have absorbed obviously, a tremendous amount of growth and some asset mix changes to I guess, you know Baker and and other things so.
Leaving aside the vagaries of this year do you believe you're intrinsic.
EBITDA margin potential is you know is higher than today or or is this the right level and you know you grow by capital redeployment you know from here. Thanks.
Sure I I think it's a great point it really depends on how fast some of our other businesses grow.
Generally we feel like this as a kind of EBITDA margin, we can continue to drive longer term and maybe even improve upon as we get some of these lower margins businesses that we bought over the years to improve I I would say that's the only thing that we're really focused on it as we build out the service businesses, it's not there they're very asset light.
So there's not a lot of there's not as high and EBITDA margin, but really good returns.
I think it's too early for us to worry about that now, but I'm just as I'm projecting to your point, a higher thinking longer term, what [laughter] EBITDA margin could diluting returns could be higher theoretically I spoke about how fast we grow some of these asset life and service businesses.
But we're going to be on this ballpark we feel.
Around this area for awhile.
And then just to just I, we've traded about this in the past, but how long does it takes to get Blue line fully up and operational.
For your eye levels is it a year or two years three or four years, you're still seeing benefits. How do you think about that.
So I think that you know all the sales challenges and and repairs are pretty much done external facing and that's what I meant when I say clean slate I think as we get to the seasonal build to this year get pass some of the cost of just talking about for the first half the on oil and gas I think we're in pretty good shape as an organization, including.
It seems that came from Blue line, when you're thinking about some of the legacy acquired shops.
I'll point to I think we played a video a couple of years ago Investor Day, where we had the branch manager from Boston did a real good job talking about your one they were just strictly from a fire hose and all the new tools in your two they really started to comprehend how to utilize them and then none of that third years, where they ramp up so if I take that smoking I think the blue line can you, maybe they're a little bit.
Probably maybe they're even faster learners, but I think that when we really think about the full maturity of productivity out of those acquired stores.
Sometime in the back half of this year 21, you know I don't know when exactly I think they're really catching onto the tools and being able to focus on utilizing them at scale, which is really the difference that we've done here in our legacy United stores. The scale is new to a lot of folks outside of our comp.
Okay. Thanks.
Thanks, Rob Thank God, but.
Your next question comes online.
Joe date from vertical research your question. Please.
Hi, good morning.
First question is just on Capex and an implied growth range of flat up 300 million. It seems like based on the specialty growth.
Targets that you revised recently you should be at least at the midpoint of that if not higher so I don't know if it implies that the the gen rent fleet, if anything could even shrink this year and so just how how you're thinking about.
You know that path of specialty growth and then maybe what's implied in terms of general fleet thinking.
Sure. So as I'd answer I think it was David to ask question first we're going to work, where we end up in that range depends on how fast we absorb net absorption is real primarily in the January business. So you are accurate we are going to fund our specialty growth when I think about you know you at the midpoint.
That's that's probably in the range of between the cold starts and the organic growth that we're driving through the specialty team will need to fund over and above the replacement Capex. So we're not really guiding to that we will shrink generead unless all of the demand can be filled with the latent capacity, we're not betting on that we're not even.
Hoping for that but it is a fair observation, so don't think that that onenine.
We have to use some of that one nine because we're not absorbing its best device, especially assets that is what we will do.
And then I'm on the time you'd side of things I'm, just trying to understand a little bit better why that surprised in the quarter a lot of attention on oil and gas.
Was it all oil and gas or were there other things that you saw developed over the course of the quarter that wound up shaking out just a little bit differently from what you anticipated and say end of October .
Yes, so oil and gas is certainly a big driver but to your point.
The the back half of Q4, and what we call that lovingly called the Turkey dropped by 29 years I never get used to how much we drop after Thanksgiving little bit steeper.
Then we usually do that was transient oh, we feel comfortable that repairs as we sit here and guy here.
Today, we obviously feel comfortable that that'll repair and.
That was that was those were the two major contributors. What we're encouraged about is that you see the you see that the the Oems backlog seem to be as the industry is responding to that little bit of a slower growth. So think about everybody for building their fleet for this high single digit double digit growth.
It's appropriate for people to take a pause in absorb so that really shows me good.
Discipline from the industry overall, and I think that's a big big part of the confidence we have that we'll be able to repair the time utilization twice.
And that's just a question on the fleet productivity because it.
My impression from your comments there is that.
It wasn't a matter of you might have been a little bit more disciplined on the rate side of things and suffered on the utilization side of things that the industry at large would probably be trending with the kind of rate experienced that you had.
I I don't really know I can't tell I don't want to say that they don't know that answer what the industry is doing what I can say thanksgiving or the opportunity to reiterate our opportunity to drive time utilization is because we're going to drive it through one or two ways more fleet on rent were better discipline on the inflow, it's not because we're getting change in strategy.
We're going to trade off any kind of rate to get higher time utilization that that is not the goal. All we think it's important to continue to have rigorous rate management to go forward with as we absorb inflation. So I think this is just more about as the growth decelerated too.
Lower single mid single digits, it's just appropriate that that pace the industry paces and I think thats, what I was referring to the backlogs that you're seeing from the Oems being down year over year isn't good response.
I appreciate it thank you.
Thank you.
You are next question comes on line of Jerry Revich from Goldman Sachs. Your question. Please.
Yes, hi, good morning, everyone.
I'm wondering if we're just expand on those specialty discussion I you know its especial today I think we spoke about 32 cold starts plant for 20, which you know if we look at the midpoint of the Capex guidance range. The entirety of 300 million a growth capex would be accounted for by specialties. So I just want to make sure that.
We have those pieces right and if there any other moving pieces, we should keep in mind relative to what we spoke about its especial today.
I would love an update thanks.
Yes, so glad you glad you viewed that I heard that was very wisely and broadly I enjoy some from the investment community and Paul and his team did a good job I would say, we got that number right now take for 25.
Whether its accelerates will have a lots to do with actually Capex will be the last part of the second we are we getting the facilities that people that we need to accelerate it to maybe a goal of about 30 as we did frankly in 19, we increased the amount that from what we originally bought so this is no change in the overall strategy, but just to be clear the number that we're focused on right now is 25.
Cold starts plan for 20 and that May lessen that capex need more to the two 200 million dollar range.
As a way we're thinking about right now that will be prioritize because as I said in my prepared remarks. This is a differentiator for us and solve one more customers problems. We think there's a real real part of why people do business with United Rob. So no change in strategy, just numerically might be a little bit less than what you. What you may remember from the specialty.
Okay.
Okay. Thank you and then.
Folks have a use more and more data analytics can you just talked about the decision for Capex for 2.49 team to come in at the high end of the prior guidance range. Because you know if we have capex at the low end of the guidance range time, you would be 50 60 basis points stronger and you know.
Obviously, you folks maybe those decisions in the field on a case by case basis, but any comments that you can make and I appreciate the seasonality Thomas post Thanksgiving, but any additional contracts because given the time you pressure I guess.
We would've thought capex would be a the loan if we guide.
Yeah. So unfortunately, we joke about this internally a little bit I can't I can't cut up 60 foot boom and create generators in light towers I will tell you that when we look at the fourth quarter, Capex, which we manage very tightly we had a significant amount almost 25% of that was just outright yes.
So.
You know between heaters temporary power stuff like that so that probably would be in the range of what the massive said 50 100 million less.
It was just if we weren't bringing in assets that where we had some time utilization opportunity. It was more the mix of assets that we're bringing in from the different business isn't the sport. That's your question earlier on specialty growth and some seasonal items as well.
Okay, and lastly on the cadence as we look at the time you in the second quarter of 19. It was call. It hundred 50 basis points lower than normal seasonality versus the first quarter. So it does look like you could potentially turned a corner for fleet productivity in second quarter of 20, I just want to make sure we're not up over our skis would that thought.
Process any comments that you can share on that.
Well I think you're going to Directionally correct, how the mix comes in right. We talked a lot about time, the mix will be a component of it as well, but as long as.
We do think that we have that opportunity and we think our guys kind embedded that but as I've talked about I think it was a question that we had earlier on we regardless of where the number is we do believe that we expect that will accelerate throughout the year because of the tough comps humid.
Thank you.
Great. Thanks Terry.
They do you aren't next question comes in line of Kodiak components from Morgan Stanley . Your question. Please.
Hi, Thanks for the question.
So just back on the comments about oil and gas being down another 10% just wanted to clarify that that is for the full year 20, not an incremental time off of the fourth quarter and secondly, you know when you're thinking about the guidance for next year I know you've talked about kind of to.
Slowing environment, but are there any other end markets do you see you are baking into your guidance to be down next year, either for the first half or for the full year.
So first on the on this on the oil and gas.
Probably flat from year end, so that 10% would be the deceleration. That's already continue to think about that is flat. It's just the impact full year of that back half of the year decline right. So not not an additional.
And then.
When we're thinking about other end markets as you heard me say in the opening remarks industrial markets a lot of puts and takes right are we talked a lot about upstream and then even mid stream were down downstream was great downstream was it was a good yet chemical processing was down power was up.
So there's a lot of puts and takes so then it which is why we're looking at industrial overall is flattish and embedded in our guidance is that expectation.
If something happens in industrial Oh picks up and does that would help push us toward the higher end of the guidance, but we're really relying more on a continued strength, even if it's a little bit slower growth in our not in the construction verticals right Nonres specifically.
Got it and how would you characterize MRO activity, that's where I think you've historically talked about you know close to half the business in industrial being a MRO have you seen any impact from some of those puts and takes you mentioned.
Nothing that we couldn't quantify we certainly have heard some some delays from the field team about turned around here in Q4, so that could have impacted that sluggish Q4 result, whether they pick those up from Q1, we'll try to stretch into Q4 next year, who knows I was unusually time periods when they would do.
Turning around that would be the only MRO thing that that was a little bit lagging. We don't think it was structural or continual just so push off that we had he'd seen specifically in the in the Gulf Coast.
Okay, great. Thanks, and then just lastly on the that he down I think you know based on your guidance that should be can you guys close to two times exiting next year.
I'm just curious how we should be thinking about your targets from there and you know whether any of that can you talk about you know seen construction markets. You know off at least through 2021 is any of this kind of planning that you could possibly see some EBITDA decline.
You know the on 2020.
So I'll, let me take the first part first the debt reduction that we have targeted for 2020 that billion dollars. We feel comfortable is going to continue to get us yeah I'll call it into the middle of the lower half of our range.
Looking out to 2021, it's little too early for that right now I mean, we've talked about prioritizing leverage reduction in and working toward two times at the peak we're going to.
We continue that path in 2021 that but the quantum of it I just don't know yet Courtney So I don't want to go too far on that.
I mean as far as EBITDA going forward again, that's that's 2021 isn't just a little too far out at this point.
Okay, great. Thanks.
Okay. Thanks.
Your next question comes on line of Tim Duncan from Citigroup. Your question. Please.
Great. Thank you good morning. So the first question just on the then latent capacity to.
Hi light either in the focus on driving an absorption how does that how should we expect that plays into our deliveries I'm kind of move through the here I'm just thinking from standpoint of.
Oh, ending or we see sequentially I would assume you have a we should assume a bigger than normal seasonal decline from from where you ended 19 that that fair I.E. you sell more we can you bring in.
So when you say deliveries Tim I'm, assuming you mean capex inflow, yeah, yeah. Yeah. So I think you could expect us to see pretty close to a normal cadence.
Q1 will be a little bit softer, but it's a small number right. So when you know when you're talking about whether its 50 or $75 million smaller on the on on a 15 billion dollar base not meaningful, but but technically a little bit softer in Q1, and then the rest of the cadence and really the meat of our Capex spend is it.
Then that Q2 and the first in the beginning in Q3 range, where we really are in the peak build season of our fleet on rent and that will flex.
Directly correlated to how we end up doing with time utilization fleet absorption whatever term you want to utilize so that's how we're thinking about it hopefully that answers what you were looking for yeah, yeah, Okay, and then Matt just on.
On the kind of the interplay between fleet age and and operating costs are in R&D costs, you spend a lot of discussion during the last.
It was in the second half about elevated R&D costs, and I I get that a lot of that was moving stuff in and out of that well you asked regions and reposition fleet, but at a you know almost 50 months do you does that start to put some pressure on our anam or or is that I mean, I know you sale.
In Europe , so, presumably that's somewhat a response to that but he just maybe maybe speak to that in terms of that interplay.
Yeah on the margin right and you can pick apart how much of its inflation how much of its just fleet age, but it's on the margin the real.
Opportunity and what you pointed to is that take advantage of a strong.
Used market strong retail market to make sure we continue to manage that fleet age because when that market is not there whenever there becomes a downturn. We're not we're not we don't know how to predict that but we're not predicting that certainly for 2020, we're going to need to its definitely and then there may be some trade off for our NAV as you age it a year and your.
Really turn off the inflow for a while that's when you make you a little bit more of an impact on all of them, but the trade off between that and having too much fleet and the positive free cash flow is the way we plan to think about long term, which is why it's so important we drive you sales here. So we're not aging fleet to quickly while they're still growth to be huh.
Okay, Alright, and then maybe last one Matt just on the large project pipeline, what's that what's the feedback in just in terms of that the quoting levels and you know just a size in there that's the pipeline in terms of what you're hearing from the national account team.
Yes, though as the still good I mean, if things don't still feels really good specifically about where we're aligned strongly with our national accounts in our large accounts and large projects as you know that's a that's especially for us strong and buy more importantly, we're not hearing of any cancellations. So that's that would be a sign of something different.
Well, we think overall most of the macro indicators as well as our internal intelligence from our managers have customers is that they're still growth from 2020. So big projects. So we'll continue to play a big part.
All right. Thanks for the time.
Thanks, Kevin.
Your next question comes on line of Steven Fisher from Yes. Your question. Please.
Thanks, Good morning, just maybe to follow up on that last point there just curious how much visibility you feel like you have for the business.
That as you think about the second half and the growth you forecasted and curious how it compares to that second half visibility that you've had at this point in the in the year over the past few years.
So I wouldn't say, it's any better or worse and over the past few years.
And it's not just for more customers, but obviously from the macro indicators as we say all the time, we talked about a customer confidence index being higher than it was in August we think it's turned a little more positive than maybe what it was full year.
Our customers and really for for most industries outside of maybe industrial. So we think that's a general indication of 2020 admittedly we are skewed by large customers and large project. So as I was answering tim's question to realize the local customers the part where maybe our visibility isn't as long as opposed to larger customer.
Larger projects, where just the pipeline and the supply chain of what it takes the build these large project if you inherently more visibility.
Okay. That's helpful.
And then for Jess what's the right way to think about SGN a over the course of 2020 is it a dollar level is it a percentage of sales how much focus do you have on that number.
Yes, the percentage.
Morning, Ah that's great question the percent of sales is definitely the way I would recommend you think about it the the number might move a little here or there, but it's really a we're managing it more so from a from a percentage sales perspective.
And what do you think that percentage of sales is did you have a target for that.
Kind of quantify that.
Yeah, there's no target per se, but you know we as we as we recognize the benefit of the synergies from the deals that we've done right, where we're pretty comfortable with the present that we're running with right now the biggest mover in that because you know what is total s. DNA is what.
Happens with stock comp and the that's really going to be dictated on whatever happens with the stock price right, but in terms of the components of estimated that that we're managing it.
The pace that we've got right now is we're very comfortable with.
Okay terrific. Thank you.
Thanks, Steve.
Your next question comes from the line of Scott Schneeberger from Oppenheimer. Your question. Please.
Thanks, very much good morning in in specialty and nice trajectory in the in gross margin, certainly improving and I'm talking about getting synergies there.
As well, but had just could not could you delve into <unk>.
Cross selling how that's progressing how you're integrating things like like total control its food solutions, perhaps and and can we see perhaps positive gross margin.
Maybe in the back half of 2020 and especially.
Yeah, absolutely and I think also the maturation of what what's been a lot of cold starts for the last few months as well as as we continue to get the whole fluid solutions team.
Continuing to get momentum for me to separate companies right, our pump business and Baker and how that continues much like I talked about the Blue line integration how that matures over time is another opportunity to get margins up in the specialty business. So.
We absolutely feel good about that and the cross sell opportunities is as I said earlier something that we.
You as a real differentiator and something we spent a lot of time with all of our leaders in Minneapolis and workshops on selling that selling that continued value because we're big believers that we expect that to contribute to margin expansion for specialty as well.
Well, that's just I'll just add one thing there when you look at the specialty margin right now they are burdened by acquisition activity right. So to the extent that we continue to absorb and leverage the scale me opportunity in those acquisitions, that's gonna help margins over the long term as well.
[music].
Great. Thanks, just and then as a follow up in it and its follow up to a the to the prior question on SGN, a would you covered pretty well, but I wanted to delve into a bad debt would you called out in prepared remarks that that you got that 15 million lower that that was impressive and I don't recall, you calling out bad debt before so a a kind of what was happening in the fourth.
Quarter, and then B, how does that play into the SGN a consideration 2020. Thanks.
Sure. So that 15 million is actually need to break that down theres about handled that 15 is just better bad debt expense <unk> expense experience right doing better on collections. The D.S., so coming down just the actual bad debt activity that we had this quarter versus ly.
Last year.
5 million to the 15 is actually a change we had a change in the accounting standard for revenue.
That moved 5 million out of Gionee and actually moved it up Contra revenue right. So that's actually a burden in all we are.
[music].
Understood. Thanks.
Sure.
Thank you. Our next question comes from the line of Stephen Ramsey from Thompson Research. Your question. Please.
Good morning, I wanted to what did talk on upstream longer term somebody that's not your control I know, but it's been when upstream picks up again rigs are active.
Would you move fleet back end to take advantage or doesn't last month's change your perspective permanently on how you manage suites in upstream areas.
I think we were believe it or not we were a little more.
Cautious of how much we moved into this last cycle from the one previously you remember this used to be.
10% of our business, we met and they over I think almost 11, we managed it down to about five I think you'll see us come.
With that same caution again, and it's not that the business full cycle isn't profitable just if we don't need to its just a little to variable. So it'll depend on what's going on in other markets. If it's a place where we need to put latent demand will then ethics all tests in the world, but if you're talking about how you make your choices between each one of these.
Cyclical challenges as upstream and the volatility certainly informs how much bigger we're going to next month.
But typically we also it is still profitable business throughout the cycle. So it's not something we would.
Emanate altogether, but we would look to optimize existing capacity first and foremost even if we're pushing the limit a little bit there rather than throwing going do we source.
Great and then just thinking about.
I understand what you're saying non rental capex.
Should we expect that to continue moving up based on cold starts digital investments et cetera, even though rental capex.
You're being more disciplined on that line.
No not really when we're talking about investments were not just talking Capex. We're talking about you know and that's why we really talk about so maybe the word investment you know is it's not the.
Balance sheet form of investment, but investing into into the costs that with a fixed costs and the additional cost that we have to support more tax for our service business or to the build out the shops to do more work or trainers for safety training. Those are the service business, we're talking about where we're investing more costs into as far as.
The hard asset capital investments, Yeah, there will always be some incremental to cold starts you need to put new trucks in there do you need to do you need to do some of that stuff but.
That's not anything extraordinary that we would call out.
Okay. Thank you for the Gulf.
Thank you.
Thank you. This does conclude the question and answer session of today I'd like they had to proclaim back to Mr. plenary for any further remarks.
Thank you operator, and thanks, everyone for joining us today, and just a reminder, that our Q4 investor debt and 2020 guidance are available online and as always you can reach out to Ted with questions here in Stanford. So thanks, and we look forward to our next call. Operator go ahead and the call. Please.
Well, thank you ladies and gentlemen for your participation in todays conference. This does conclude program you may now disconnect good day.
[music].