Q1 2020 Earnings Call
[music].
Investor Conference call. Please be advised that this call is being recorded before we begin not the company's press release comments made on today's call and responses to your question contain forward looking statements the company's business and operations are subject to a variety of risks and uncertainties.
All 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, but more complete description on these and other possible.
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.
No obligation and makes no commitment to date or 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 Companys 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 that reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure speaking today for United Rentals is.
Flannery, President and Chief Executive Officer, and Jessica Christiana, Chief Financial Officer, I will now turn the call over to Mr. preliminary Mr. Plenary you may begin.
Thank you operator, and good morning, everyone. Thanks for joining us.
The sequence of today's call will stay the same as prior quarters I'm going to share My comments and then just will take you through the numbers and then after that we'll go to Q1 day.
But I'm going to skip my usual recap of the financial highlights for a couple of reasons.
First although we had a solid start to the year.
This is performing well until cobot head.
Not much of a barometer for 2020.
Still from January to mid March those first 10 weeks show promise.
And it's possible to take that as a positive sign when the economy gets back on its Pete.
Second we can't predict how covert 19, one pack specific end markets. This year well when those impacts will come and go so like many companies we have withdrawn our guidance until we have more clarity.
To give you an idea how quickly things change or are we see on rent was running inline with expectations actually a little bit head.
Until mid March that's when we felt the impact of code 90.
From that point volumes declined about 15% in the three weeks.
Before stabilizing around current levels.
[music] one thing we have going for us because a lot of flexibility, which in this environment. This crisis.
We've been able to keep almost all of our locations open so where people can continue to serve our customers.
Our teams know that we're in a tunnel and not a whole and that there's light on the other side.
That's why our contingency planning is focused on both the near term in a range of potential future state.
Since early March we've been assessing a multitude of scenarios for how the year might play out.
Each one uses different assumptions about timing and magnitude and duration.
And our analysis confirms that our liquidity is more than sufficient for even the most challenging end market scenarios.
We want to make sure that we not only weather the storm, but also retain the ability to be responsive to the opportunities on the other side.
[music] My main goal. This morning is to talk about how we're adapting our business to the current reality not just our thinking but also our actions.
We're thinking about our covert defense strategy as five work streams employee safety, taking care of our customers.
Capex Opex and our capital structure.
Particularly liquidity.
I'm going to start with the most important part of our company or people.
It's easy to think of United Rentals has an equipment business, but we never forget that were service business.
The safety and well being of our team is always our top priority.
And that can be challenging when you operate everyday at almost 1200 locations, but we're getting it done.
It takes fortitude and also experience and we have both.
Most of the field leaders had been in the equipment rental dish industry for years and many like me for their entire careers.
We know that there are two sides to operating as an essential business.
There's the responsibility that comes with that designation.
And also sense of pride.
Our employees are proud of their role and providing critical services to their communities.
We're working on projects that are a first for all of us like a cold screening area children's Medical center in Dallas and temporary hospitals in Calgary, Seattle, New York and other areas.
It feels unfair to just mentioned a few because believe me the pride is everywhere.
And on the flip side is a natural anxiety that comes from leaving your home going to work under these circumstances.
So huge thank you to all United rentals employees for showing true leadership in the basis so much change.
I want to give you a taste of some of the many actions we've taken to keep our employees and our customers say.
They include guidelines for social distancing disinfecting facilities and equipment as well as providing millions of dollars of additional protective gear.
We've also implemented a contact list strife through option for customers, who want to pick up or drop off equipment that our location.
And our online ordering platform has been a big differentiator here for us.
The customer reserves the equipment online and then drive through especially at the local branch, we won't be equipment, while they sit in their truck.
And if we're bringing the fleet to the job site our drivers follow a new safety protocol, we call last touch when the driver Disinfects, the commonly touched surfaces before leaving like control panels door handles and seat.
I could keep going down the list and at the long one, but I'll cut to the chase.
These measures are working.
And that's critical because it means our team continue to provide continuity of service for our customers and they can do it safely.
All of our branches in North America, and seven out of our 11 European branches or operate.
We've had a relatively small number of branches were in employee tested positive for the virus and when that happens we have the branch professionally disinfected to make sure. It's all state and then with bottle the CDC guidelines on when and how we can resume operations.
And I want to be clear that while cobot, it's obviously impacting many parts of our economy, including the construction and industrial vertical markets we serve.
Our markets remain broadly active.
And this holds true across nonresidential and residential construction infrastructure and industrial production.
And there's only a handful of U.S. states and two Canadian provinces, both Ontario, and Quebec and have put meaningful construction restrictions in place.
And most of those make exceptions for a central projects like infrastructure or emergency medical capacity.
And many of these restrictions that aren't place expected lift in early may.
Overall, our construction markets holding up better than our industrial markets.
Particularly oil and gas, which could be challenged for awhile.
We've also seen industrial customers put awesome plant maintenance and plant turnaround for now.
Eventually this work will come off pause, we think that could happen as early as the back half of this year.
More broadly we could start to see an up tick in a third quarter in local economies a shelter in place orders are lifted and activity resumes.
But it's certainly slower and our team is making sure we're in constant communication with our customers.
We've been utilized as a trusted resource by customers, who have more challenges today than they had a few months ago.
And in many cases, we're working with customers to plan for the time when their projects come off hiatus.
We're also partnering with our larger accounts to help them get the full benefit of our total control technology.
As you've heard us say before total control improves fleet productivity and reduces costs, whether equipments owned by our customer arrested from us and it's always been a major differentiator, but today its value stands out more than ever.
So that covers our first to work stream.
Boy safety and taking care of the customers.
Other three I'd mentioned or Capex opex and liquidity.
Capex is our largest lever to pull and we're pulling it.
For the first quarter gross rental capex was down $50 million year over year, and net rental capex was that zero for the quarter, reflecting our focus on improving time utilization.
What this doesn't reflect or any changes we instituted in mid March to address covert nineteens impact on demand.
The effective those actions will be evident in Q2 with dramatic reductions in the inflow of fleet and the outflow of cash and this is an example of the flexibility I mentioned earlier.
And while our capex level will ultimately depend on how our markets track over the balance of the year.
I could say that our total spend on rental fleet will be down substantially for 2020.
On the operating side, our team is focused on aggressively managing costs.
And while a portion of our costs flex naturally with volume others need to be driven by discrete actions, we're taking those actions as well.
Fortunately, we're laser focused organization and our employees understand the importance of being a fish.
Now, they're looking even higher in wider for more opportunities.
For example, in our specialty segment or powered Athree AC business has historically outsourced all their deliveries now we pivoted to insource using trucks and drivers for more general rental operations to get this work done it's working really well.
Our entire team is doing a great job sharing resources to keep costs down.
And as a result, we've been able to in source a ton of work.
And that's a feeling right now in a lot of very.
We're being disciplined and creative and putting our resources to work across our network.
This allows us to reduce costs conserve capital and most importantly, retain our labor capacity, which historically has been very effective driver for growth.
Now I know just wants to get into our capital structure. So I'll make just two quick points on that.
One is that our business model is a cash generation engine.
Even in this current environment, even if this persist through 2020, we expect to generate significant free cash flow this year.
And the other point is that our balance sheet is extremely strong.
We have almost $3.3 billion of liquidity with no long term maturities until 2025.
We paused our current share repurchase program and will continue to be very cautious with fleet purchases and other discretionary uses of capital.
And as I mentioned earlier, we've done the analysis and we're confident that we have more than enough liquidity to navigate this crisis.
And pick up the pace when demand returns.
And it will return.
Question is how much and how fast.
No one has those answers right now with any certainty.
So let me leave you with a few important things that we do now.
Covert 19 is unchartered waters.
Well our leadership team has been an unchartered waters before.
It helps that most of our field corporate leaders are with the company back in 2008, when the great recession was a massive shock to the economy.
We were able to come through that crisis.
And the experience from that help inform our strategy and our business model.
12 years later, our company has been reshaped by that experience were dramatically stronger today.
More diverse more efficient and more resilient as an organization.
Our revenue diversity is particularly important because our end markets customers and the geographies. We serve don't all have equal constraints.
We can target pockets of demand and help mitigate the drag from more challenged area and that's a real strength in this environment.
So now you know the view from where we said.
Six weeks into covert 19, we batten down the hatches and ask up our partnering with customers.
We understand the things maybe challenging for awhile.
But that's okay, we know how to get through this.
Most importantly, we know that the value we preserve now will be the foundation for the value we created the recovery.
So Jeff over to you were talking about the numbers.
Thanks, Matt and good morning, everyone.
I will cover the highlights of the first quarter quickly. So I can spend a little more time, providing some additional comments on our liquidity the scenario planning, we've done and contingency actions we've taken in response to the current environment.
Rental revenue for the first quarter of 1.78 billion declined slightly year over year down 70 basis points or 12 million.
I think rental revenue well, we are decline about half a percent <unk> 8 million, while ancillary and rewrite revenues combined for a decrease of 4 million.
The 8 million Oh, we are declined included growth in our fleet of 2.2%, which translates into 34 million of additional revenue.
That was offset by fleet inflation at one of the half percent, which cost us 23 million.
As we productivity was down 1.2% or a decrease of 19 million largely reflecting the volume decline we saw in March.
We actually had good momentum monthly productivity to start the year and it was tracking flat versus prior year to the end of February.
You sales revenue was up 8% or 16 million year over year due entirely to an increase in retail sales, which is our most profitable channel.
That represents $38 million more fleet sold at all we see.
Auction sales return to more normal levels in the quarter, which was about 4% of the total sold.
The used market was solid through the quarter volume did slow in the back half of March due to cope with 19.
Adjusted gross margin on you sales in the quarter was 45.7%.
Well, that's down from 49% in Q1 last year it up from 43% in Q4.
Retail pricing was down 5% year over year, and that's flat sequentially from Q4.
Proceeds as a percentage of always see was a healthy 53%.
Taking a look at EBITDA adjusted EBITDA for the quarter of 915 million was down 6 million or 70 basis points year over here Here's the bridge on the change in rental the impact on adjusted EBITDA was a drag of 18 million.
We are with the headwind at 23 million offset by 5 million in better ancillary and rewrite combined.
Used sales helped adjusted EBITDA by 1 million and that's DNA with better by 11 million, what the majority of that benefit coming from lower third party professional fees, which are largely discretionary and lower bonus expense year over year.
Our adjusted EBITDA margin was 43.1%, which is down 40 basis points year over year. They were puts and takes that margin decline and as I mentioned a minute ago in the bridge the dollars are small.
The flow through calculation isn't very helpful. Given the disruption in the quarter. So I'll make a few comments on cost.
Basically.
Operating cost trends were as expected through the end of February.
Soon as it was clear to us in early March, but our end markets would likely be disruptive we quickly took action to manage our costs in response.
Matt talked about our focus on cost management some of the actions we've taken so far have been to reduce overtime bring delivery and repair in house to leverage our capacity instead of using third party and canceled or delayed discretionary spend mostly in DNA, that's clots like TV and professional fees.
The actions we took in March had a small impact on Q1.
The benefits will play out over the rest of the year.
Broadly the few I just mentioned represents savings of about 8% of our monthly cash operating expenses.
But even before we get Q and eight I'll tell you that because a good portion of our costs are variable and will flex with volume it's impossible for us to tell you right now how much these cost actions willing total impact 2020.
Hey to say, though it's a major focus for us.
As we aggressively manage costs, we won't cut so that we risk not having the capacity will need to service customers as the economy opens up there's a balance there.
We will continue to prudently invest in the longer term, albeit at a slower pace than we might have been planning earlier this year.
Cold starts will slow as well some of our investments in building out our services businesses.
Back to the first quarter results and I'll comment on adjusted EPS.
Which was up slightly at $3.35.
That compares with 331 in Q1 last year.
Biggest driver here are lower interest expense and lower shares outstanding.
Let's move to Capex.
Through Q1, we brought in 208 million in gross rental capex.
Proceeds from sales of used equipment. We're also 208 million. So there was no change in net rental capex at the end of Q1.
We've talked with investors consistently about capex being the first and most significant action we've taken our contingency plan.
Right now the environment, it's unclear and difficult to provide a range of where we think will land, but I can tell you. This year's gross capex will be significantly less than what we brought in last year less than half of that number.
And we will continue to focus on selling used fleet in a solid market, but we won't fire sale our fleet if that market turns.
Turning to free cash flow.
We had another robust quarter for free cash flow generating 608 million, if I add back a couple of million dollars and merger and restructuring payments.
Year over year free cash flow was up 25 million.
Our tax adjusted ROI remained strong coming in at 10.3% for the first 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 expect the drag from our acquisition.
Looking at the balance sheet, and our capital structure I, let a little more color than normal given the importance of both these days.
Our balance sheet is the strongest it's ever been and we have no long term debt maturities until 2025.
Net debt at March 31st was 11.1 billion, which is down 470 million year over year, and down 290 million quarter over quarter.
We continue to earmarked free cash flow this year towards paying down our debt.
Leverage at March 31st was 2.5 times, that's down 10 basis point to where we ended at December 31st and down 40 basis points versus the first quarter of 19.
Our current 500 million dollar share repurchase program was authorized by the board in January.
Through mid March we had purchased $257 million a stock.
That included about 175 million of purchases. We made in addition to our normal systematic by given the southern dislocation we saw the stock price beginning the third week of February.
That was soon as a potential severity of the cobot impact on the U.S. in Canada became clearer in March we decided to stop purchases and we paused the program to preserve liquidity.
Speaking of liquidity. It is extremely strong we finished the first quarter with $3.1 billion and total liquidity.
That's made up of L. capacity of just over 2.5 billion and availability on our air facility of 62 million.
We also have $513 million in cash.
As of yesterday, we had total liquidity of 3.3 billion, that's up about 200 million from quarter end.
Maybe I'll facility expires in 2024, and its covenant light with a maintenance has maintenance tests that springs on when were 90% drawn at the end of the first quarter, we had drawn only a third of the deal.
The 364 day, our facility uses our receivable collateral.
It expires in June in the normal course, and we've already started negotiations to renew that facility. We don't expect any issues in refinancing at later this quarter.
Well that's point on liquidity.
Beyond the collateral supporting the HDL and our term loan B, we have approximately $3 billion in excess collateral available to source additional liquidity should we need it.
I'll close with a comment on the scenario planning we've done since we started the pandemic.
Of course, no one knows the ultimate impact from the virus or what the economic environment will be after a restrictions left that's why we decided to withdraw guidance, it's difficult for us to point to one or two cases at this point as most likely.
So we brought numerous cases, each with varying levels of severity and to the duration in part to ensure we have adequate liquidity to meet our needs and we do even in the most severe scenarios.
We also generate significant free cash flow in those scenarios.
These cases help us to home the timing and level of action will need to take those will vary too as we look to maintain a balance between the short term financial impact in the next quarter or too with longer term support for the business.
Well continue to tighten these scenarios until our view to the year is clear and we can update our guidance.
With that let's come back to your question Jonathan would you open the line.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your touched on telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound key we'd like to ask you. Please limit yourself to one question and then one follow up you may get back in the Q as time allows our first question comes from the line of Tim Duncan from Citigroup Your question.
Please.
Hi, Good morning that was first question is just on on the fleet that came off Brent.
If and when the these projects do ultimately, Brazil, or how should we think about the cost that you would expect to incurred and to put it back on ran a I don't know there's it makes sense for delivery that wouldn't be involved and then I get more importantly, well those would you expect those rate yet to get really.
Negotiated or just how should we think about that from both at a cost as well.
That's it.
Sure Tim Good morning, it's Matt so.
When we think about that billions of have put on the chart. There's been a portion of that about a third of that that we actually put on suspend and what we did there was any one of our key accounts you had to be a key account for us the off of this to you. We asked them where you got anything you just doing this because your access has been turned off or they close the job.
Down or you're going to need it back when they turn on the job day, one but the answer is yes, we left the equipment. There we put a new system, but more casing in our operating system and put it on suspend that's that's going to turn on immediately with no lack for the customer at no additional operating costs for us.
The other let's call it roughly $2 billion. It came off I mean, there's churn going in every day and if you look at that chart that we put in the investor deck on page 35 or in the press release, you see that we've been bouncing up since that three week, if we hit that three week trough and that's the net of what's still is a lot of activity.
Going on a both offering and already so.
I wouldn't necessarily take that that that billion is not going to go back on rent. They just didn't meet the requirements. We had to put a lot of suspend we wanted to make sure we weren't believe or it might not have been in the secure place. So that was the other council customer said, you know and get a need a back but I don't want to deal with the security Evan I don't know how long were going to be out of there. So so for a portion of that there will be no.
It'll be zero incremental costs and then you know for the rest of it it's just going to be.
Business with our customers as usual they asking we respond.
Okay. That's helpful and then Matt from but from an end customer perspective, one of the the point that <unk>. After boots attributes of your eye over time, it's been a you've grown that the national account, they and when we do get to that downturn that that in theory.
Should help cushion the BLA with it the perception that that customer base, maybe like Nicole Coleman and traditional local accounts and you just hearing how that.
Early days in it but is that kind of played out.
What you've seen from a from an activity and overall rental perspective again split between your your large versus more traditional local account. Thank you.
Sure. Thank you and you're right. We have that has been part of the strategy when I talked about we experienced a big disruptions back and the great recession and no wait no no I had part of our strategy going forward, what's the folks on large accounts both projects large plants and that has been holding true. So as you guys know.
You know somewhere around two thirds of our business over 60% is with our key accounts the national accounts or about 45% just that demarcation and they've all held up stronger than what we'll call our territory or transactional accounts whatever level you're at so the strategy is working and we're very fortunate for that.
I think the other big issue is the value prop that we have for those accounts is real important in and creates a unique value that we can bring that maybe not as many competitors in the space can bring such as technology investments diversity of fleet diversity of footprint. So all that plays into why our national accounts are holding up better.
Thank you aren't next question comes from the line of Rob Wertheimer from you is research your question. Please.
Hi, Thank you and good morning to everyone.
[noise] so obviously.
You are saying your capex is going to be half or less depends obviously, how things turned out than last year. So you're willing to see the fleet age out indoor shrink, that's obviously substantially less than than replacement.
I think is is a positive in the industry is in the leaders industry.
Leaders the industry are going that direction.
A lot of questions I mean, what happens to fleet in the field what is the average competitor the smaller competitors or not and maybe that's not limited, but the biggest couple does if we tend to be older and does it tend to be that nobody's buying does the fleet really age out and shrink in the year or two so if we do end up with.
Economy, that's five or 10% smaller that you can age it out that fast or do you think it it just sort of hangs out there for potentially longer than that thank you.
Thanks, Rob So a couple points there first off as far as fleet age.
We haven't actually managed our fleet age as we've talked about numerous times to a place where we feel comfortable we have a year plus worth of headroom in different products have more headroom. If you think about aerial products right you can age them out a little bit longer if you think about dirt and gazing products, maybe not and all that pulls into our rental useful life calculations.
And when we target disposal, but weve left room, there very very intentionally for rainy day and unfortunately, it maybe uranium outside so we're taking care of that but as far as fleet side I don't think you're gonna see a meaningful change.
Given a middle of the rate scenario lets say because we've got much scenario planning, but you're not going to see a meaningful change inside the fleet upward down this year, we're gonna managed to the Newfleet coming in for replacement to also matched the man I think the real point, we're making there as we've talked about our flexibility and art.
Cash resiliency and that was really more of the point, though that we can cut we put a ceiling on our fleet purchases. This year up half 2019, because it really can help people get comfortable about how are these guys going to generate robust free cash flow in any scenario well, that's the left and where that ends up between the 200, Nathan we spent in Q1.
And let's just call it roughly a billion that weve feeling we put on it is going to depend on how fast the markets return to normal.
Hi, Thanks, that's very helpful and then.
Yeah as far as a small players I apologize if forgot that part of your question I think they're probably in a position where they would want age their fleet, even more and everybody starting off their own baseline and some folks you know this is all about capital constraints I, just got there's probably varying levels of capitalization within that other.
Three quarters of the industry that doesn't report public and I think they're all going to be managing to conserve capital on I under imagine eating their fleets gonna be a big part of that.
Okay. Thank you.
Thanks Trevor.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.
Hi, good morning, everyone and welcome to your older well.
Oh I'm wondering if you if you could talk about what proportion as youre come in order to duty.
April or late March was digital because that's an area, where you can somebody who invented over the you invested over the years when I'm wondering.
Now the point, we're gonna see a good benefit.
Yeah.
More efficient ordering mechanism <unk> mr. bound.
Yeah, it's still relatively small portion it's grown significantly, but it's still a relatively small portion of our overall revenue stream, it's less than 5%, but I think them more important thing is.
We're all going to have to realize what's changing in a post covert world and does this accelerate customers adoption for it and when it does I do believe it'll be a sea change.
More importantly, as the leader in the industry, we have to be at the forefront of technology. So we've had this procure to pay system seamless system touchless system for a couple of years now.
And there was up it's a very.
Fair question, it's something we're watching carefully is will the current environment change People's.
Acceptance of that opportunity and and we think this could be an accelerant, but early days here, it's still small piece for the overall business I would say that the rest of our technology enhancements of touchless systems are probably getting more adoption internally and externally, but we do think this is just a matter of when not yet.
And that in your prepared remarks, you spoke about lessons learned from their great recession and you know.
Something that's come up for with folks within the company is that United rentals at the time was less disciplined on pricing.
Then anything lumpy people thought the company should be no few degree without attachment and then today given the growth into key accounts business National accounts business day total control I'm wondering if you could talk about public companies approach to pricing.
With the mid cycle will be different or it.
[noise] step two different hopefully then what we saw nice cycle.
Yeah I I.
The let's push less disciplined I think that's probably fair to say about the industry. Overall, there was less information. So therefore it when you only have information your work on fear and I think there's been a lot of change consent, both for United rentals, but for the industry as a whole where there's much more information access whether it's the public companies having to more public companies reporting information the right.
Data that represents more than half the industry right now so there's real data to help and I think that in itself helped the industry overall, but I also think our go to market strategy changing with customers that value or needs and we're not a me too supplier and we think back to the early days as United was role of companies and building.
We didnt have the diversity of customer base, who were very much relying on non resin, even specifically the commercial retail part a non resin and.
It was a very very volatile all end market at that point in time and there was a very crowded space. So that's how this strategy has informed us where I think will be much more resilient from a pricing perspective at least on that two thirds of our business. That's very targeted for us and who are doing business with and what products and services were offering them. So I think we'll see a better outcome.
I think the industrial do better job quite frankly.
I appreciate from Scotia, Thanks, what thanks Gerry.
Thank you. Our next question comes from a line of Joe O'dea from vertical research. Your question. Please.
Hi, good morning.
First first just as we think about current demand trends that you've shown I mean, if we just run that kind of scenario and a steeper than normal decremental given that the cash flow or the capex range, you've talked about and we could look at free cash flow that might be actually flattish year over year.
And so the question is just.
Thoughts on on that and then in addition, how you think about.
Cash deployment would that potential and when you could be back in the market and does your thinking about deployment change at all in terms of a mix of debt reduction and and buybacks.
So I'll just touch on the demand part first let's just talk to you about the a capital deployment. So.
The truth is you know when you look at that that truck that I referred to earlier, we don't know how fast and how high that Black line has got to climb, but we're happy to see that client.
And and hopefully as restrictions lift will get into a more normal seasonal pattern and that it should have a tremendous impact on the two big levers of free cash flow. How are you going to shakes up and how much capital, we said, but in either one of those are going to be in some sort of balanced and I agree with you were going to generate significant free cash flow. So I think the depiction of.
That is accurate without taking a number on it it's why we're comfortable saying significant and then just good together have very much sure absolutely more in jail. So you know based on where we are right now we as you know we paused the share repurchase program and as we look forward not knowing exactly where the business.
Going to go month restrictions lifted and how the end markets will set up on our focus is going to be to use free cash flow generated two to take down the debt.
What what we'll do is we'll reassess one things open up and we have a better feel for that demand curve, whether or not it makes sense based on what we're seeing as far as our liquidity position, what we're seeing as far left forward scenarios at that point to determine the share repurchase program back on upper right now our priorities liquidity.
And and so our priority is going to be the continued to take down debt with free cash flow.
Got it thank you and and then just a question in terms of end markets and whether you can you parse it out a little bit by regional trends or end market exposure trends, but to understand where you've seen and of the steepest declines and then in the early days of seeing some.
Moving off the bottom sort of the concentration of some of that improvement.
Sure Joe I'll talk a little bit about that lets just let's ice let's use that 1.5 immediate three weeks declined as a proxy for and we think about that the heaviest areas. There are places it shouldn't surprise anybody which is think about Pennsylvania, which is one of the most restrictive states on construction all the way up to Boston, We're all.
All the news cycle and everything going on the Boston and state of Massachusetts, overall, so that whole corridor Philly P.A. New York.
Connecticut, Massachusetts got got hit hard.
And the one that May surprise people is up in Canada, Ontario in Montreal, both had pretty restrictive guidelines here and those guys hit harder than even I would've expected once we got underneath the numbers not as big a part of our business has that.
These corridor, but still I was surprised and then go all the way to the West Coast and think about Northern California up for Washington, which was on the news as well very very very hard hit when you think about that's maybe.
Somewhere less than 20% of our overall market. It was over 50% of the things that we had to put us spanned big part of that decline. So use we'll use that as a proxy as far as acquired buckets, it's been pretty broad base and a outside of the Gulf States, where oil and gas is really really really in a little bit of.
Trouble right now right very very quiet you'd see pretty much broad based the rest of that climb and activity and that's why we're able to key.
No.
What did it 1100 77 locations out of 1100 81, all but four locations open and operating is because there is brought activity.
Thanks very much.
Thank you. Our next question comes from the line of Ruskell already from Bank of America. Your question. Please.
Hi, good morning, guys.
[laughter].
I wanted to sell some of your area.
It's helpful washed through some of them.
On them and Matt you're saying this increase is going to would simply be flat.
Billion, the only up to $1 billion I realize you might not right now.
So we just sold last year I calculate your fleet I know, we see is down.
5% to 6% by the end the year, assuming you're selling its like 50% of or we see so are you planning on.
The best thing a lot less and you're basically scenario relative to last year.
So a couple of things first of all we do not plan on at all diminishing our efforts on retail so think about that is 60% plus normal base case of or you said.
But when we think about auctions, we think often forget hit pretty hard right. Now. So we're not we're not going to participate we don't need to participate in that area. So we're not going to participate so think about auctions being that down and then if we don't spend as much capital you can think about our trades being down so the retail portion, which has been holding up pretty well here even us.
Even as we sit here in April is what will be focused on so that would naturally if we if we de emphasize the other two avenues of trade and auction. It would bring a natural decline and then you have to think about just overall, what does activity going to be so.
It's 200 million gap 300 million gap on a base of 14 plus billion I would call that not a huge move but it's going to its going to depend tremendously on what the capital spend is and what the retail sales or to your point either way I don't find the moves to be what I would say signal.
Okay. So just a follow up on that so it's flat.
And demand you know by the time of year is over its negative.
It's not going to not to the KONI an assumption I don't think I mean time, you is mathematically down going into 2000.
21, so can you describe this scenario that.
Triggers not only.
Capital spending reduction, but also.
You are right the fleeting more aggressively and what are you looking that.
When do you make that decision to de fleet more aggressively if you need to.
So for us to get to a place where we would de fleet aggressively.
It would have to be a significant demand drop and we do have gotten some scenarios, but it's not something that we're betting on a calculated but we would have that opportunity then there's a whole other question of the end markets when you're gonna give us a return and I don't want to go here because I actually think we're starting to see signs that will end up on the on the good better side of our scenario planning.
If I went to the darker side, we've said before we would not be Firesale fleet, we wouldn't need to we would just disposal sleep that should have natural disposal and we would focus on that and that would be that would be our focus. We we wouldn't actually say I have to be fleet by 5% and I'm going to take.
20 cents on the dollar liked like some people might have done because they needed the liquidity. We're in a fortunate position, we don't need that liquidity and as I said at the end of my prepared remarks, we know that the value we present or coming out of this is the foundation that we're going to week from going forward. So I think that's a real important delineation burst people that may have.
I have liquidity issues and may need to get the cash sooner, maybe maybe they'll have a different disposal actions and then we would.
Could you keep gross capex of 1 billion or below for into 2021 as well if you need to work.
Well that.
Could we yes, I would be very disappointed if thats what were limited but could we.
Certainly good.
That's the lever that we have to pull even if we decided we're going to put a little bit more or an ever reefer. It's I mean, there's so many options are so much flexibility and optionality and that decision will do what's right for the liquidity and the purpose of the business, but I mean, we're not even given your guidance for the quarters it'd be silly me talking about what I think we're going to and 21.
Thanks, Matt.
Thanks.
Thank you. Our next question comes from a line of Seth Weber from RBC capital. Your question. Please.
Hey, guys. So everybody is doing well good morning. Thanks.
So you just want.
Wanted to ask another I guess another fleet question I think in response to call appearing on robs question earlier, Matt I think you said you could age.
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The fleet like another year or something or maybe it was just some areas. But are you are you, saying that repair and maintenance cost would not go up here in this scenario where.
You know where you're eating the fleet or can you just try and help us.
I think through that puts caught put puts and takes around higher repair and maintenance costs.
In a scenario for your where where you are aging your fleet. Thanks.
Sure. So so how we think about this we feel we can age the fleet at a minimum three year without any significant foreign M costs right. So without really any change if we decided that we wanted the length and if you wanted to go down what Ross was just talking about you wanted to let you need to lengthen a couple of years me. When we were all independents keep quite a bit longer because you didnt.
All these all these a liquidity challenges you didnt have all these issues and you weren't serving these large national account, we need to keep our fleet fresh and whether we decide that to do that with national rotation to our rental useful life and fleet repurchases or more aren't as a decision will happen we won't have to make that decision for at least.
Another year, which is what we mean by having a year Oh hedging rule monarch fleet age.
So hey, Seth it's Jeff I, just wanted to add one thing that's not to say that the and the maintenance and repair expenses won't be naturally higher but as we look at that headroom that we've built intentionally into our are you all calculation, it's not something that would be significant increase right and it would be highly dependent Catholic by Kappa.
And what would be required to keep that fleet add though at a maintenance level that that's right for us.
Okay. That's that's helpful. Thanks, and then just clarify.
Your response to Ross's question, Matt are you seeing them.
Fleet OE see.
It's going to be flat in 2020 versus 2019 is that what I heard.
No I'm, saying that.
Relatively so whether we end up it's going to depend on yourself demand and fleet, which are going to dictate fleet purchases, So where we end up in that up to a billion range and where we end up and you sell saying if you're if you think at least for me as I think about logically I don't think that movement of whether it's 200 offers 200, Dan I think that's the range. We're talking I don't think were.
Seen meaningful changes in the fleet size for when we had 2019.
2020, just not seeing that.
And when we talk meaningfully and we're talking relative to 214 billion dollar base exactly not the you know year over year change necessarily.
Okay.
And then sorry, just if I could just one other follow up can you just.
On the specialty cold starts are they basic are they going forward interest at a reduced level here or.
Are you, putting putting all that under under review.
Yeah.
So so they they are moving forward we have a few that are going to continue you know they absolutely makes sense. When we do review them, even given the current situation. The current environment what the what we expect is we're going to slow the pace of the 25 or so that we said we were going to do.
Because to your point exactly right, we're going to make sure to take a I really deeper look given the the environment post restrictions lifting and make sure that those.
Our still a cold starts that we want to do in the very short term.
Okay I appreciate guys stay safe thanks.
Thank you. Our next question comes from the line of Steven Fisher from U.P.S. Your question. Please.
Thanks, Good morning.
So curious.
As a how sustainable is it to do the in sourcing that you're doing now is that going to change the way you do business in the long term and then I guess more broadly what do you see as the longer term lasting impact of this.
Are you hearing some contractors that are planning to increase their system their mix of rental just because its seasonality.
Proven that they can just shut that on and off pretty easily.
Yeah. So I'll take the second part first <unk>, which is well, especially my minus the penetration play we do think it could be an opportunity for secular penetration. After this if we think about anytime there's a disruption in people's capital situation or there's constraints where there's.
Fear or whatever term you want to use.
People that normally wouldnt use rental channel and we learned this very much so coming out of a great recession start to turn to rental channel and once people start turning to the rental channel they realize the flexibility and all the soft costs being eliminated that you would have from owning the math works right. That's why that's why penetration is usually going only one way we haven't seen.
Titration this industry for the for the 29 years I've been an ever go back. So I do think this could be an accelerant don't know for sure, but it's it's a strong hypothesis and we'll be ready for that opportunity as far as the in sourcing there's going to be a lot of silver linings that we take out it is cloud that we're dealing with right now and.
And that's one of the ones that I think we're going to find I think how we can be more creative and work more efficiently is one of the opportunities that we're going to learn about and when you think about insourcing.
Stuff that we were outsourcing, which is one of one most expensive ways and we had to do it at our peak periods, because that's how we feel that capacity yet without there too heavy on head count. The fact that we were able to in source that is is a great way to take out capacity when volumes down without having to take out your future capacity in that opportunity to turn.
Back on first overtime and then if you needed to win a peak period outsourcing any so we think this is something that will stick and something that will probably be able to they've got a lot of positive learnings from to use in the future.
Great and then just a follow up is anything changing on the capex mix within that $1 billion of Capex feeling that you have you have been obviously favoring specialty versus generate over the last.
A couple of years does that concept still generate Holden.
2020 or does it maybe even intensify.
I think at a minimum it'll it'll hold and then you know there's some of the specialty businesses like powering trench that are holding up really well right. Now so if I had a lean I'd say increase but it's really going to depend you know we're gonna be real rigorous on capital spend it's going to depend on how that how that pipeline.
Goes throughout this year and as everybody works through.
The other side to covert 19, and that will dictate what we spend but if I have lean I would lean it'll probably probably increase the blend of specialty as overall spend.
Great. Thanks, a lot guys.
Thanks, Steve.
Q. Our next question comes from a line of course, the younger bonus from Morgan Stanley. Your question. Please.
Hi, Good morning, guys I can you gave some color just geographically before but can you also just help us understand kind of some of the trends that are more isolated to nonres construction versus maybe some of that MRO activity on the industrial side are you seeing kind of a reduction in both aspects of the of the business.
And then if you can also just comment a little bit on on the specialty business, obviously that was much more resilient and maybe what.
On my trends look like for that business any problem.
Sure. So when we think about that's a vertical markets that we serve as we as we kind of denoted.
Industrials, a little bit more challenged and just thinking about you know I made a mistake of say in oil and gas couldn't four to fall upstream couldn't far to fall off a low school I think the legs are gone. So I think thats down to a floor plans right now so that's really challenging the industrial space I think downstream you're gonna see a little bit challenge, we all know the demand for there for their output to their entry.
It's really been challenged with travel restrictions, so I think temporarily.
I don't know whether temporarily means a quarter two quarters they'll have to decide.
I think that will eventually come back, but they stop their capital spend you could imagine that our MRO radar on sexual these inside the gate couldn't be more highly utilized because if they are liking. The lives of of the assets that are driving their volume, they're probably going to need to put some maintenance and repair and its and that's we're well positioned for that.
So I would say that space pretty good when we think about.
The non whereas.
Yeah, I think we could all gas, which ones are apart the ones that are struggling right now right entertainment.
Travel any kind of hospitality hotels, there, they're all struggling as people are not moving around greatly in and that May continue specifically entertainment. One may continue for a while but then there's others like infrastructure that are doing really well, so I would call overall nonres holding up better.
But with puts and takes in each one and then your point about specialty, especially has been holding up to think about immediately after covert 19 hit some of our specialty businesses got a chance to participate immediately in adding more resources, specifically power and H.B. I see trench as infrastructures grown I, you know the little bit of trap.
I have been doing I've seen road work everywhere. We go I know a trench team is participating in that as well as our gen rent teams in the market. So specialties definitely been holding up better and I think I.
I think we'll continue to expect that going forward.
Great. Thanks, and then you gave us some really good color on that we see on rent, but just you know as we're modeling. This off if we productivity can you just help us think through if there's any other big impact that we should be thinking about unable to.
Great side relative to that down 15 that Louisiana.
Yeah, well, we think about please productivity, we think about Iraq that would have on fleet productivity in the near term is absolutely condensation and the net of raising mix, we're not really expecting to be anywhere near the variable that we haven't and in time utilization. So that is where our focus is right now we.
You know rates always a something that we're going to manage to optimize and to make sure. We're getting a good return, but but that's not the area that's going to show. The most numerical change is 100% probably for the bounces here, we've got to be the time utilization impact the fleet.
Great. Thanks.
Thanks, Thank you.
Thank you our final question for today comes from them I know Stephen Ramsey from Thompson Research. Your question. Please.
Good morning, I'm thinking about especially the equipment that's been deployed hospitals temporary side.
I would guess a fairly small portion of the total fleet on rent, but can you you have any indication from those customers how long that we will be deployed.
I don't think they know now we you know if your local here in the near Thats Palton area, you hear that summer coming down, which thank God, Great News had never be so happy to have a piece of equipment called offering in my life as those dealing with that the Javits center for that temporary hospital. There. So I don't we don't really how.
It's going to be it's going to vary based on what they're dealing with in the market. So we haven't really gotten much color on that your point, it's not it's really more of an opportunity to help support the community than necessarily anything that's going to have a huge numerical change on our on our results. So don't I haven't really don't have any color on that share with you.
Great and then secondly quickly talked about using free cash flow to paying.
Down debt would also be interested or does that mean direct reduction in debt outstanding or is there a near term interested in building up.
Pass it on the balance sheet in the near term, maybe just how you're thinking through that.
Sure sure Hey, this is Jeff.
It would be a we would take down the aisle.
It would not be to focus on increasing cash reserves, we actually have a little more cash in the bank right now than we normally do we.
You can you can assume that the free cash flow will be debt reduction again Cabo.
Great. Thanks.
Sure.
Thank you. 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.
Thank you operator and.
I'm glad we had this opportunity address everyone's questions. I mean, we know that every piece of information health set something at a very uncertain time like this hopefully also got an opportunity to look at our Q1 investor deck, you can download that on line and if you want to talk before our next call. Please reach out to Ted.
We hope the business World in a world in general is in a better place in July when we get to speak but for now. Thank you everyone for being on the call and most importantly Stacy.
Operator, you can in the call.
Thank you and thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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