Q3 2020 United Rentals Inc Earnings Call
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District Conference call. Please be advised that this call is being recorded before we begin note that the company's press release comments made on today's call and responses to your questions contain forward looking statements the.
The company's business and operations are subject to a variety of risks and uncertainties many of which are beyond its control and consequently actual results may differ materially from those projected.
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 Companys annual report on form 10-K for the year ended December 31st 2019, as well as two such.
In 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 or publicly release any revisions to forward looking statements in order to reflect new information or subsequent.
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.
Please refer to the back of the Companys recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer I want.
Now I'll turn the call over to Mr. Finery. Mr Partners you may begin.
Thank you operator, and good morning, everyone. Thanks for joining us.
I'll start with some observations that will frame out our discussion about the quarter as well as our customers and our mortgage.
What we saw in the third quarter with a continuing recovery, albeit at a moderate pace.
Our end markets are improving and for the first quarter shifts cobot hit the trends were in line with normal seasonality that said volumes were still down year over year.
Near term we have good visibility.
Good activity looks positive in customer sentiment is trending up.
Longer term.
We expected future events, including a potential vaccine.
Likely to have a significant impact on demand.
I'm pleased that we delivered strong results in this environment.
We have our arms around the things we can control.
And we're showing discipline and agility in our daily operations Yeah.
You saw that in our numbers, where we outperformed our own expectations for the third quarter.
And we can safely.
It's a different world out there right now and every time, our employees interact with each other or with customers or or supplier.
Their behavior is guided by our safety protocols.
And those protocols helped the team turned in another solid quarter with a recordable rate below one that was a hard fought with.
When you factor in the fires in California, or the storms in the Gulf or just simply the daily challenges of coated so.
So kudos to the team for their efforts.
In a few minutes just Jeff will take you through our results, but first I'll touch on a few highlights.
Number one is March.
Rental revenue was about 13% below third quarter last year, but we made the most of it by controlling our operating costs.
I give the team full credit for that because it's their discipline in the field that helps preserve our March.
And that's volumes in the quarter went up at DNA as a percent of revenue went down so clearly we're being vigilant with controlling our variable costs.
Another highlight for the quarter is our free cash flow.
We generated over $2 billion to free cash flow year to date through September.
And our ability to produce significant cash a downturn is a key strength of our business model.
Yes.
The return to normal seasonality isn't enough to offset the impact of pandemic.
But it's definitely in the right direction and it gives us a good line of sight on the fourth quarter.
And based on that current visibility and our third quarter performance.
Update of our 2020 full year guidance to reflect higher targets revenue EBITDA capex and free cash flow.
Looking at our operating environment.
The recovery in North America, it's been fairly broad based.
Customer sentiment continues to trend up.
We see business confidence improving in our old customer surveys as well as many external indicators.
Used equipment sales or another helpful indicator of demand.
Our third quarter revenue from used sales was essentially flat with last year and use pricing held up as well. So demand is holding steady and in fact, we sold 35% more fleet through the retail channel in the quarter compared with third quarter last year.
And that tells us the contractors are buying fleet they feel confident they can put to work.
We're also encouraged by the industry's discipline on supply, which you can see and available third party data and we applaud. This because a disciplined approach will serve everyone's interest said to recover against me.
In July I noted that rental volumes in all of our geographic regions finished the second quarter above the trough for fleet on rent we saw in April.
In the third quarter, we continued to gain ground with rental revenue increasing sequentially in 15, or 16 regions and that one outlier region was essentially flat.
The standout vertical so far have been the ones, we've been talking about our biotech and pharmaceuticals.
And we see solid activity from warehousing and distribution data centers hospitals, and other facilities into healthcare and technology sectors.
And there were some verticals that were little less pronounced but still on a positive path.
Food and beverage is an example of a vertical that adds back the historical levels.
And by contrast, as I'm sure you know all segments of oil and gas remained depressed led by upstream.
Looking specifically at construction nonres markets as a whole chilled mild improvement.
While retail hospitality and entertainment remain largely on pause.
The individual verticals within non retro still a mixed bag, but our core markets all have solid long term fundamentals.
And there's also a broad range of new projects, starting up across our operating landscape.
This was true what our second and third quarters now we're seeing the same thing this quarter.
This activity spans multiple markets, including manufacturing automotive and road and bridge work as examples as well as the other positive verticals I mentioned earlier.
And the team's doing a great job of getting in the door with these projects at an early stage.
One side note worth mentioning is a possible shift to an onshoring strategy by North American manufacturers.
This year was highlighted the vulnerability of the supply chains and I'm sure it could be a way to reduce this risk.
And if that trend pans out it could benefit to areas, where our company is often the first call with customers in industrial construction and plant maintenance.
Also we're worried about our specialty segment, which continues to be resilient overall.
Our power and Atria key business in particular had another strong performance in the quarter.
And all of our specialty offerings are poised to capture incremental demand.
And we're continuing to make strategic investments in the growth of this segment.
First September we've opened a total of 13, new specialty locations and we're on track with our plan for 15 openings for this year.
I want to take a minute to talk about how we look at strategic investments because capital discipline is more critical now than it's ever been.
I've already mentioned that we're controlling our cost to benefit our margins and.
And we've reduced our full year capex significantly, but we haven't gone full stop on investing in the business. We're taking the long view managing our capital to support our customers and to drive long term returns for our investors.
The ongoing expansion of our specialty network is one good example of that and as you saw in our guidance, we allocated some capex for fleet to address targeted areas of demand.
Throughout all the disruption this year.
We kept our eye on the big picture.
When making sound decisions with the benefit of a robust balance sheet.
I'll sum it up by saying all the things we've been doing right. This year, we're still doing right and.
And that's the plan.
Execute well under all market conditions.
Cobot that means first and foremost protecting our people.
Serving our customers running a tight ship and doing all of this without limiting our capacity for growth.
The strong third quarter results, we reported show that the plan is working.
And now we have higher expectations for the fourth quarter than we did three months ago in large part because we have more visibility into the near term.
And we'll see how that plays out as we move into 2021.
I'm going to close with some things that I can say with absolute certainty in what's been a very uncertain year.
As I look around our company I'm proud of the way our team stayed together and it's working safely.
And I am glad that our operations have been able to remain open to serve our customers.
Because communities rely on these projects.
And I'm pleased that we continue to be responsive to all of our stakeholders.
And finally.
Confident that we have the right strategy in place to leverage our competitive advantages and convert our revenue.
Into attractive returns.
Every economic environment weak or strong has its opportunities and this one is no.
We know how to use our strengths to make the most of any market conditions.
We did that on the downside of this pandemic.
And we'll do it on the upside as well.
So with that I'll hand, the call over to Jess and then we'll take your questions Jeff over to you.
Thanks, Matt and good morning, everyone.
As Matt mentioned, we are pleased with our results in Q3, notably rental revenue that track to seasonal trends as expected and the cost management, our team delivered across the business, which was better than expected.
Weve generated significant free cash flow to date and continue to strengthen our balance sheet and I'll speak to both in a bit and also provide some comments on our stated guidance for the full year.
Let's start with rental revenue for the quarter.
Rental revenue for the third quarter was $1.86 billion, which is down $286 million or 13.3% year over year.
Within rental revenue Oh, we are decreased $259 million or 14.1%.
Isn't that a 4.6% drop in the average size of the fleet Wasnt 84 million dollar headwind to revenue.
Inflation of 1.5% cost us another 27 million and fleet productivity was down 8% or $148 million on Boulder volumes.
I'll note that fleet productivity did improve by a healthy 560 basis points from Q2, which is mainly from better fleet absorption.
Rounding out the decline in rental revenue for the quarter was $27 million in lower ancillary and re rent revenue or an 80 basis point headwind.
Let's move to use sales.
Your sales revenue was basically flat year over year at 199 billion.
The retail market continues to be quite strong for us and we sold signet significantly more fleet through this channel through Q3 last year, which we sold up 35%.
Used margins in the quarter were healthy as well adjusted gross margin on youth sales was 44.2% versus 46% in Q3 last year.
That change reflects softer year over year pricing, partially offset by improved channel mix.
Importantly, cash proceeds as a percentage of original cost was a robust 51.4% on fleet sold that was on average seven years old.
Taking a look at EBITDA.
Adjusted EBITDA for the quarter was $1.81 billion down $126 million or 10.4% year over year.
Here's the bridge on the dollar change.
Back from rental was a drag of 162 million.
Well, we are was a headwind of 168 million offset by a combined 6 million of tailwind from ancillary and re rent.
You sales were a headwind to EBITDA of $3 million and other lines of business together were a drag of 6 million.
Year over year ESG today was a benefit to EBITDA in the quarter by 45 million with the majority of that benefit coming from lower discretionary costs, including TNT and professional fees as well as lower bonus expense.
Our adjusted EBITDA margin was very strong coming in at 49.4% up 90 basis points year over year.
This reflects our continued commitment to aggressively manage cost.
It was also benefited by certain one time items contributing about 20 million to the quarter, including an insurance gain resulting from a flood event settled in Q3.
Adjusting for the nonrecurring benefit adjusted EBITDA margin was flat despite a 12% decline in total revenue year over year.
Flow through as reported was approximately 42%.
Again, adjusting for those onetime benefits, the resulting flow through of just under 49% evidenced the flexibility we have in our business model to respond quickly on cost through.
Through the third quarter, we continued to bring delivery and repair in house to reduce the use of third parties. As a result, our overtime increased versus Q2, but continued to be down versus Q3 last year.
And we continue to avoid discretionary spend where possible mostly in GNS.
A quick comment on adjusted EPS, which was $5.40 that compares with $5 or 96 cents in Q3 last year the year over year decline is primarily due to lower net income the lower revenue.
Let's move to Capex.
For the quarter rental Capex declined 49% to 432 million, bringing our year to date spend to $785 million in gross rental capex.
Year to date proceeds from sales of used equipment were 583 million, resulting in net capex of 202 million.
85% lower than net Capex at September 30 last year and reflects our continuing focus on capital discipline and fleet absorption given current rental volumes.
Like remain strong coming in at 9.2% for the third quarter and that continues to meaningfully exceed our weighted average cost of capital, which currently run about 7% year.
Year over year Lake was down 150 basis points driven by the decline in revenue.
Turning to free cash flow, which through the end of September is a record for us we.
We have generated over $2 billion of free cash flow year to date, an increase of over 900 million year over year.
With the majority of our cash flow dedicated to debt reduction this year.
Balance sheet continues to be the strongest it's ever been.
Net debt was down $1.5 billion to 9.9 billion at September 30.
Leverage was 2.4 times down from 2.6 times at the end of 2019.
Liquidity remains extremely strong.
Finished the third quarter with over $3.4 billion in total liquidity, that's made up of LTL capacity of just under $3.1 billion and availability on our eight our facility of 165 million.
We also had $174 million in cash.
On October 15th we use to the ABL to redeem our $750 million four and five eight senior notes due 2025.
Our decision to do so included our views of continuing strength and liquidity and extends our next maturity on long term note out to 2026.
Total liquidity as of yesterday October 20, Eightth with over $2.8 billion, and we expect that to increase to the ended the year consistent with our free cash flow guide.
Speaking of guidance I'll close with a few comments.
We've tightened and raised at the bottom of our total revenue range as our visibility increases and we expect to see a normal seasonal trend in demand in Q4.
We also expect to use sales will remain solid.
We've tightened our adjusted EBITDA range and have raised our expectations for the full year in part from the strength of Q3's results.
Our gross Capex guidance of between 909 hundred 50 million, it's higher than our prior guidance as we manage fleet mix in support of customer projects.
And finally, our free cash flow update continues to signal the strength and resiliency of our business model as we plan to generate over $2.2 billion in free cash flow this year and in turn plan to use the majority of it to reduce our debt.
And with that lets 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 move we sell from the queue. Please press the pound key our first question comes from the line of David Raso from Evercore ISI. Your question. Please.
Good morning, Thank you for the time.
Trying to think about the fleet for next year, how should we think about.
The thought base case as of right now how do you think about sizing the fleet versus the size of the fleet that you expect to end this year and maybe remind us the mix between how you view a replacement capex.
It really is related to that.
What kind of used equipment sales would you look for.
Sure. David This is Matt so what what do we think about next year and timings.
Hopefully because we're in the middle of our planning process right now, but as we think about next year, we as a starting point, we expect to sell about the same amount of used equipment that we well this year and then from there we're going to look at the man been saying all right. We replaced all of that fleet hopefully that answer is yes, and then if so how much extra capacity do.
We have in our existing fleet to serve any incremental demand.
And then depending on how robust the demand is will be if we had to get up in the growth Capex now the good news for US timing wise is as you saw this year. We can we can be very flexible to how much we can flex up or down depending on the demand environment. As you saw by just cutting over $1 billion. This year when we.
We really didn't get a peek into that challenge until mid March. So we'll do the same thing this year, we'll take a look in sometime in the spring we'll have to start to make some decisions, but I think by then we'll have a lot more clarity on what demand looks like so that flexibility gives gives me a lot of gives us a lot of hope.
And that the environment will be there, but also the ability to react if its not so no bet yet on on 2021, but if this if it's healing of the macro continues we feel we we don't expect to not replacing use fleet that we sell at a minimum and then we'll see when demand goes from there.
And if that's the case unless there is a radical change in what you get for use values versus the whole we see of that equipment, that's being sold.
If your base case, not thinking about shrinking the size of the fleet one at that speak to gross Capex billion six or so weve spoken in the past roughly that's a replacement type number anyway.
Seems to triangulate to that sort of the base case, that's a fair assessment, we think of the size of the fleet.
Yes, I think that would be the right way to think about a base case and then from there would be everything else would be demand base now in an environment like this year, we didn't even replace all the U.S sales that we had because we had extra capacity existing so we took that opportunity to take the fleet down as you as you saw but but we're not anticipating that next year and.
Once again, we won't have to make those decisions till the spring and we'll react to demand environment.
All right. Thank you very much thanks, David.
Thank you. Our next question comes from the line of Tim <unk> from Citi. Your question. Please.
Oh, Thank you and good morning, Matt you started talking about the near term visibility.
Im curious maybe if you can just expand on that a bit is too.
As you speak to the branches what what can you can you help us in terms of just their overall visibility levels and then potentially you know how how does that compare to this time last year is that any kind of benchmarks you can provide just to get a sense for <unk>.
Obviously, the big question Mark regarding as we work through this project pipeline, what's there to fill it up beyond that so maybe just speak to what you hear from the branches with regards to project activity and just overall visibility it would be great. Thank you.
Sure Tim So as I mentioned in my opening remarks.
We're hearing to sink feedback that we're actually experiencing from our field leaders and that is that activity continues to incrementally improve with normal seasonal patterns. So they're seeing that the visibility question frankly, if they thought they have more visibility that so Q1, I would say I would worry about it.
Anyway, and they're not pretending to it all depends on how the macro environment responds to this winter and I think we'll have a much better take on that come January but near term that visibility is strong which is why we've had the confidence to change our guidance and I think beyond that we're going to take the time, we have between now and January to get a better look at how the.
A world, but more and more specifically for us how this how do you ask encana respond to Covidien and I'll say that we're hopeful that this healing thats going on in the macro environment that we're seeing through green shoots in new projects that were seeing through outside.
Outside of oil and gas most verticals and to be fair, probably probably lodging and travel most verticals are showing some growth or are maintaining the growth that we've seen since the the trough that we talked about in Q2. So they are encouraged I'd say cautiously optimistic so the best way to think about.
Okay, maybe I'll sneak one more in in and that was just on the operating cost and <unk>.
You know is as to what you what you've learned this is through this this period this year in terms of.
You talked earlier about cutting edge as it wasn't a theme in the second quarter call in terms of some of the third party costs and delivery and the like what how much of that Matt do you think you can extend.
Presumably as volumes do improve I guess the question is how much are these these cost benefits can be sustainable and obviously some of the more ti any in some of the discretionary things presumably at some point come back, but it's really around that kind of the longevity. The sustainability of some of these operating cost benefits you free.
So this year.
Yes, so I think that the term of necessity is the mother of invention is appropriate here right. So as we thought about how we really wanted to hold the team intact. When we get on the other side of this this covert tunnel as we've been calling it to make sure we have the ability to respond.
And we've been able to do that through the in sourcing that you referred to just.
Just to give a data point, our head count year over year is only down about 3% and as you see our margin for the I mean, our our revenue volume for the quarter was down about 13% and the reason we were able to do that without having to sacrifice margin is because we took some of our most expensive call costs like outside Hall third party repairs.
And we in sourced so this way we are keeping our people busy and frankly employees during a very difficult time, but to have capacity to be able to respond quickly as projects and markets continued to heal and grow so.
Thats something like six for silver lining I was just hoping that were going to utilize in the future. We haven't put math to it to what extent has one of the variables there and how fast is the magnum growing how can you keep up with it. So I think that's a key learning for us that that this insourcing opportunity is a great way to not only have control of that.
Terrible, but to actually do it in a more efficient way as far as any and all that.
We absolutely hope it comes back because that means the world's healing and our people are out there with our customers and our employees. So that's less of an impact and then the rental operating cost as you can imagine, but we'd expect some of that to normalize might even increase a little bit here in Q4. So that's the way we're looking at the world right now.
I appreciate it thanks, Matt Thanks.
Thanks, Tim.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.
Hi, This is Joe on for.
Jerry Revich, 51% recovery rate in this utilization environment was a pleasant surprise what would you attribute to strengthen these markets why did the U.S market recover ahead of industrialization in this cycle.
Hi, there. So this is jessica.
What I would say is.
A strength that we have here at United Rentals is that a large portion of our used sales are in a retail market that are essentially sales to our customers and we continue to see shrank through that retail channel as a matter of fact as I mentioned earlier, we had.
35% more volume move through that channel this Q3 versus last and and so the strength of that is really indicative of our customers needing that equipment and the continuing recovery that mass also mentioned that were that were seeing a pretty broadly across the majority of our.
End market. So the strength that we're seeing a new sales I think is directly attributable to that same recovery pace that we're seeing across the business.
I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Seth Weber from RBC capital markets. Your question. Please.
Hey, guys hope you're doing well.
I just wanted to go back to the the expenses and cost question again.
You know really really good job on the quarter here, but if I'm looking at the fourth quarter it for.
It looks like margins are going to be down EBITDA margin is going to be down quite a bit year over year kind.
Kind of based on the midpoint of your guide I'm, just trying to tie a couple of these things together, where you're talking about.
Some of the insourcing as a permanent change and stuff like that but.
It looks like margins are going to be kind of down meaningfully year to year, even though they were just about flat year over year. If there is any anything I'm missing there. Thanks.
Hey, Thats.
So two things that I mentioned, so first I know you've heard me say this before but I think it's really important this quarter not anchor to the midpoint and we've done a lot of work at possibilities of how the revenue could come in and what that means in terms of EBITDA and even some of the cost trends and.
So I'll I'll give that question again about not issuing to the midpoint of that the other thing that I'll mention is in in the fourth quarter of last year, we had a tailwind in bonus expense and so the impact that that's going to have on the fourth quarter. This year from a margin perspective is going to be somewhere if I use.
Midpoint revenue is going to be somewhere around 50 to 70 basis points of drag.
Okay. So that's going to play through Q4 as well.
Sure. Okay. That's that's helpful.
And then just a follow up on the specialty business as you know we've been hearing more.
Other other national players have been talking more about getting bigger in the specialty space can you just kind of characterize what you're seeing in this specialty market as far as.
You know more competition or just you know.
Asset valuations going up for M&A, just kind of characterize what what's happening in that market. Thanks.
Sure Seth where this is Matt we're continuing to feel very strongly about our specialty business the performance as well the resiliency of the.
Businesses have been doing great different forming better than the business. Overall, all this was part of the strategy and expected.
We do hear a lot of people talking about getting into the specialty business I understand what that dynamic could cause I'll tell you that we still are seeing positive trends in specialty and I would say that the performance.
Tells us there's more penetration opportunity or the competition is not moving as quickly as as maybe it may sound like but either way. We're very pleased with what we're doing for especially from a specialty perspective, and as you recall last year. They had some transient issues with margins that we talked about they're also doing this in a tough environment with.
Improved margins.
Got it okay. Thanks, very much guys I appreciate it.
Thanks Ray care.
Thank you. Our next question comes from the line of the debris from Baird. Your question. Please.
Thank you good morning, everyone.
I.
If we can't I'd like to go back to the guidance I'm, just trying to understand the moving pieces here as well.
Let me comment on how you're thinking about the equipment rental revenue specifically.
From a sequential standpoint.
So for the industry.
Yes. It is your question from a year over year comp perspective, or what exactly you want to get that mix.
I'm trying to understand how.
How you are thinking about revenue sequentially, rather than year over year right.
I recognize that you commented on seasonality, but.
But obviously there are a lot of moving pieces here as you know we are dealing with yet another big spike in infections and activity is choppy in some end markets like you called out so I'm trying to understand specifically you're are you thinking that this line item could be can be flat sequentially, maybe a little bit down how do you think about it.
So we would expect Q4 in any environment over Q3 to be sequentially down and you've heard us talk before once we get around mid November we start to see what we lovingly and I use that tongue in cheek call. The Turkey drop so for the 30 years I've been in this business I've never I've never quite gotten comfortable with it but we'll see a lot of fleet come off rent during that.
Last half of the quarter. So therefore, we always expect sequentially that Q4 revenue will be lower than Q3 revenue by a little bit and when you look at our our change to our guidance. We're actually overall for total rent revenue for the year in revenue for the year feeling better than we did a few months ago. So I would think that that said.
Quite Joel.
Is it would be normal seasonality and part of what we've been talking about is that normal seasonal trend nothing out of the ordinary for US matter of fact, if you think about the fact that we just raised capex. That's for specific projects that are coming out of the ground here in Q4 and specific opportunity so that that in itself, we view as a pause.
Is it a sign that rent revenue will continue to trend with normal seasonal pattern.
Okay I appreciate that and then the follow up on on on the cost side, given to where you're kind of thinking about equipment rental revenue.
As far as the cost of equipment rentals sequentially.
Should that follow revenue as well or are there some inflationary items that can.
Impact the fourth quarter.
I would say that just tactically right as a lifelong operator.
One of the one of the interesting things that you force will all that play comes off rent you are still have enormous amount of activity, although you're not increasing your volumes of billable revenue because we're going to get all that back and you're going to repair. It when you get it back so they're a little bit cost disconnect in Q4, so that dynamic, but nothing out of the ordinary nothing that.
We we haven't managed for for years here and nothing to call out specifically, but it is just to think about it sequentially, saying the cost would drop to the same level. The revenue is usually not quite accurate in that in Q4, but nothing nothing to call out nothing out of the ordinary.
Okay understood and if I may one more.
If we're looking at your.
And your fleet.
The actual number of units came down maybe call. It 30000.
Through 2020, and I'm just curious can you can you provide some perspective in terms of.
What the mix of of of these units were I mean was there maybe a little more concentration in earthmoving Ariel in anything that you'd call out here would be helpful. Thank you.
Yeah, I wouldn't say that the fleet profile has changed significantly overall, we continue to outspend.
Outspend, Norway in specialty products first gen rent, but outside of that the mix within Gen rent.
Are you a little bit dependent on projects and needs but.
Nothing nothing material that I would call out.
All right. Thank you.
Thanks, Thank you.
Thank you. Our next question comes from the line of Steven Fisher from do be EPS. Your question. Please.
Hi, Thanks, Good morning, I just clarify.
Refining I would be what the base case, you talked to David Raso about reflects in terms of.
Market activity year over year next year does that base case assume.
A modest decline in the market or flat or some modest growth are really it doesnt assume anything at all for the marketing you'll just as a rule place.
Place whatever you sell.
Regardless of what the markets are just wanted to clarify that please.
Sure. So the latter to be clear right, we'll use the replacement capex as a starting point then that will flex to meet demand.
Right well first full demand with existing capacity, let's say for example in this year without existing capacity. We had was greater if we had more opportunity that told us that we didnt need to replace all that would be going one direction or the other direction as we fill any incremental demand that was beyond the existing fleet size.
Right thinking about that starting point being keeping fleet constant.
Whatever gap, we couldn't filled existing capacity existing fleet, we would then get incremental capital. So it's not a it's.
It's not a forecast usage tool. It's just to think about in a continue where you continually improving macro environment. Your starting point, if we didnt need to shrink the fleet would be to start at that at that replacement capital number that's really what that will sell straight.
Got it and then when do you could just talk about the lessons learned in the post election period in 2017, and how you manage the fleet and I know.
Macro environments are always a bit different but.
Curious you know we're going to be coming.
Up against another post election period, there may be some optimism on infrastructure.
Anything that you learned last time that you're trying to incorporate now and over the next few months as you kind of plan for what what you may or may not need to do.
I would say from from a political perspective outside of some type of infrastructure funding, which I think has bipartisan support the issue. There is how is it going to get funded outside of that we're not we'll keep a very close eye on that as we have we're not we're not really watching that political environment from a macro.
For perspective too much we understand there may be winners and losers in certain sectors, but the impact on our business will be will shift the assets to the to the winning verticals and that's part of the resiliency of our model is that flexibility of very fungible assets personally I think how we get through the pandemic, we'll have a much bigger impact on how.
That's the economy recovers then the then the political environment, but once again, we have the time to wait and see and react.
Okay. Thanks, a lot.
Thanks.
Thank you. Our next question comes from the line of Chad Dillard from Bert.
Steve Your question please.
Hi, good morning, guys.
Good morning.
So it's probably fair to assume that we're going to see a shift from non residential construction or.
Away from kind of the commercial side, probably more towards data centers renewables warehouses.
I'm just trying to understand like how your equipment you change.
Good color on the classes of equipment the mix between general specialty mix, obviously were helpful.
Yeah, I would say that shift right within non res would not be as pronounced that maybe you'll get a little bit heavier to some some some larger scissor products for smaller electric scissors, maybe move a little bit of reach fork and but these are businesses in end markets that we've been supporting for quite some time and.
So I wouldn't view a huge profile change from our asset base as far as specialty that's all about penetration.
I would see infrastructure being a major area I would see as turnarounds come back and refineries that could be more opportunity for our specialty business as well as our gen rent. So I wouldn't say that shift within nonres as making huge fleet profile change I think more would be industrial change.
Is that what that would give us some some maybe out weighted opportunity for our specialty products because the industrial end markets tend to use the sole sourced broader fleet usage for us.
Got it and then just in your industrial part of your business can you talk about the pace of recovery that you're seeing right now how far below normalized levels is that business.
Looking specifically on the Petrochem, we're finding sites.
Yep Petrochem is really been a challenge this year led by by upstream when you think about I believe that rig count for Q3 was down 73% for upstream. So that's been the biggest challenge within a challenging overall petrochem environment. The good news for us and our our.
Stream business was down 56% in the quarter. The good news for US is it's kind of bottomed out.
<unk> dot 2% of overall revenue, so we're not counting on or expecting any recovery there anytime soon but if it comes well measure how quickly will react and how will react with really just specific customers that have bigger value for us and not and not chasing the oil Russia I don't think I see us doing that again.
Downstream is totally different ball acts and they as well have been challenged but we're very well positioned with these refineries and I think.
As the world opens up again and the need for for their output increases, we're going to be poised very well poised for that to be a future opportunity whether that happens at what period in 2021 that happens, where we don't have a position on yet I can tell you that fourth quarter.
Turnaround to shutdowns have been delayed again as these as these people are really conserving cash and trying to do everything they can to control costs, but.
Well be patient and I would see that as an opportunity, but when you look at Petrochem overall, it's about 12% of our overall business and.
And challenged right now industrial when you take that out.
Actually bid.
Been flat been moderating so it's been better story once you take that petrochem headwind out of it.
And you know I talk a little bit about potential for offshore and the potential for manufacturing opportunity here and that's something we're keeping a close eye on because that could be another leg of growth that we could look forward to to kind of offset some of the some of the challenges in the industrial end markets.
Thanks, I'll pass it on.
Thanks Keith.
Our next question comes from the line of Rob Wertheimer from Melius Research Your question. Please.
Thank you.
Matt I wanted to ask if I could one short term and one long term question and the short term is.
Not a lot on downside flexibility in the cost structure in industry pricing has held up quarter on the PPI and so forth based.
Based on prior downturns when do you think you're kind of you can put the stamp on it. So yeah. This. This this really has worked differently maybe price should have already collapsed housing. So its already there maybe wait till spring maybe longer I'm, just a little bit curious about how you feel about when that is sort of finally proven out.
My structural question if I may is.
Midst all this.
Should we expect that you're continuing strategic activity and if you look out three years or you can be in a couple of new specialty verticals and is there any underlying progress on what you might be looking at there. Thank you.
Sure. So on the first part of your question that is a wildcard right. This is where our lack of visibility of trying to time out when this dislocation downturn and then Nick.
Use your term when it ends we really.
I think we really have to wait and see how we respond specifically in this winter and how things go up and how how the government municipalities state and really the population responds to it. So this is a bit different than any of the other downturns I've been in my career. So I would say that that's a that's still an open ended question for us.
But I think we've been seeing the signs of resiliency through.
Through this and I think that whether its the new sales volume holding up whether it's that we're still seeing new project start here in the fourth quarter as as there is still a lot of concerns about when the broader economy is going to accelerate so.
We feel I'll repeat cautiously optimistic we're seeing some some some good signs they could all pause and go back we don't know, but I think we're positioned as I talked about our flexibility for either way.
So there is no no template no boiler plate for pandemic related downturn that I think that I could pull out of the drawer.
But at the same time, we are seeing activity pick up which I view as a very positive sign from an M&A perspective.
We continue to be focused on.
Any M&A pipeline activity that we think makes sense for us strategically and then it goes through the rigor on does it make sense, it's timing right and most importantly doesn't make financial sense. So admittedly for the past six months it hasn't been a large area of focus but you know the pipeline still keeps working our M&A team arpus betting.
Okay picks inbound call still keeps working and will continue to do that with a lean towards anything what we can do.
Serve our customers with more products and services to broaden that as you've heard me talk about that competitive moat to help do more solve more problems. We think is just part of our whole value prop. So there will continue to be that lean to any new products that we can bring to market with our existing customers.
On our existing project is something we're focused on.
Okay. Thanks.
Thanks, Rob.
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question. Please.
Yes, thanks, very much good morning, everyone and I guess I'm curious on your fleet productivity metric.
You just.
Give us some high level thoughts on on cadence of that into action and some of the considerations, perhaps how how you're seeing smaller competitors behave in this environment that we're in Texas.
Hey, Scott hides Jess so yeah I mean, we're we're encouraged as we think about fleet productivity in an environment, where the healing continues and the recovery this moderate recovery extend.
Into 2021 that we've talked about fleet productivity getting better right and starting to turn.
Particularly in the back half of next year right may come a little sooner depending on how that recovery works through but we are encouraged that with a focus on continuing to lot to have better absorption with each with each quarter the palaces.
Definitely productivity is going to is ticket is going to get better for US is 2021 goes on.
He comes to US and then as you kind of just aren't on the sweet aging.
We're we're in that type of environment.
Just curious your comfort level, how high you can go on average I know, it's an asset by asset consideration, but also efficiency efforts and investments you've made in repair and maintenance over the years that makes you comfortable on you know in this in the chicken business and demand.
Sure Scott So when we think about.
How much we sweated the fleet.
Use the term that's in use.
Frequently the great news is because of the U.S sales volumes that we've had this year and the ability to continue to get out what we call argue well rental useful life fleet and manage this cradle to grave of these assets.
We actually think we picked up on a year over year basis, only about five months of fleet age and.
Considering what we've gone through that that's less than we thought we would have quite frankly, so we've always talked about that we have 12 months of head room at least in any particular cat class, we haven't even had to use half of that and what's been a very challenging year. So not that I want to speak this into anyone's future. If we had to wash rinse and repeat.
2020, again in 21, we'd be able to do it from a fleet age perspective without any meaningful increase in our net so that's the way we view that we're very comfortable with that and.
Once again, it's important the way that we manage assets cradle to grave. The exit part of this is a big part of keeping that fleet age healthy and have the ability to get through winning any part of the site.
Is it.
Thanks.
Thank you our final question for today comes from the line of Cody companies from Morgan Stanley. Your question. Please.
Hi, good morning, guys.
If we could just go back to the insourcing discussion.
It sounds like overtime has been ticking up this quarter, you haven't really reduce the headcount it all pretty almost.
Almost flat year over year can you just help us understand how much more in sourcing can you do it without having to raise on the.
The headcount to to do that and if you can just help us quantify at.
At all how much that opportunity could be maybe what you spend on third party last year versus the increased overtime to be this year and then also how many more systems in place that will help you manage that head count maybe a little bit better.
Done it historically.
Hey, good morning, Seth so the headcount actually has gone down.
So on a year over year and even as we think about the head count from let's call. It the middle of March when the pandemic started we had some natural attrition in the business, where our head count has declined and we have leaned on that overtime that I mentioned did go up in the third quarter, we have leaned on that overtime not.
Just to support that insourcing effort that we're dealing with repair and delivery, but also to support you know just the fact that that head count is down across the branches. So as we think about continuing to to really manage through the opportunity of bringing that premium third party costs.
In house.
It's it's a learning that we've had through the cold period of having a better balance are around how much full time headcount do we won how much overtime can we use as a flex for when seasonally the activity will peak in AD and how we can.
We continue to use third parties, where we need to but really focus instead on using our own capacity to be able to support the activity now if we think about that from what's that worth financially frankly, I don't think the business has normalized for enough of a period of time, where we can put a number on that.
But I can tell you as one of the primary learnings we had from an operational perspective.
There's definitely opportunity for us to continue to tweak how we use our inside labor to be able to support the business I couldn't tell you right now exactly how much that sports, but it's definitely something that could drive productivity in the future. According to just for me to add on it's one interesting point, you've made sounds like me to.
And in a in a business review with the with with the team in the field. When you talked about how can we haven't managed to headcount earlier asked I think we might have what we're learning is we may have overmatched, it and using headcount as profit for costs and what insourcing as part of us and I think a future opportunity is is you can keep your heads heavier and get rid of high.
Higher per transaction costs through the outsourcing, which we used to look at as the opportunity for seasonal spike. So these are some learnings that we'll be looking at and Jeff and team will be will be will be turning.
Through and you know great great opportunity for the future.
Thanks, that's helpful and then just on the step up.
However, slight it was in growth Capex.
We can.
You just share with that largely just more replacement or was that more focus on specialty you know and it just any thoughts about the increase that you saw this or was it really just to cut utilization.
Trended better than you were expecting.
Yes. This was really a mix of both things that you had you had mentioned certainly some specialty and we've mentioned how power sent a real strong year. So certainly some more capital than we had expected going there, but also even within our gen rent product lines. There is some categories that as we sat here at peak season in October.
We were we were I don't it's hard to believe when you think about that fleet productivity and volume still down year over year, but every dollar capex not created equal there are some assets out there that we needed to go purchase to support some big customers on some projects coming out of the ground and that's what that raise was about bye.
By definition, if you think about replacement Capex being dollar for dollar we won't replace all the fleet that we sold this year, because our spend will be significantly less than the oh.
Well, we see value what we sold so really wouldn't wouldn't be a tied to replacement.
Okay. Thank you.
Thank you Cory.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Matthew Flannery for any further remarks.
Thank you operator and to everyone on the call. We appreciate your time, thanks for joining us Im glad we had well we feel positive story to tell and our Q3 investor deck has the latest update including some key ESG data from our new corporate responsibility report that we released last week. So please take a look at that and as always if you have any questions.
Feel free to call Ted So until we talk again in January stay safe have a good holiday season, and look forward to talking to you soon.
Operator, you can end 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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