Q2 2020 Herc Holdings Inc Earnings Call
Welcome to the Hook Holdings second quarter 2020 earnings conference call them, but.
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I'd now like to turn the conference, but what do elephant that gosh.
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Thank you Stan.
Thank you all for joining us this morning, and welcome to our second quarter in first half 2020 earnings conference call.
Earlier today or press release presentations life, and Penske were filed with the FCC.
And are all could sit on the against page of our IR website, <unk> IR got hurt rental dotcom.
This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Erin Birnbaum, Senior Vice President and Chief operating Officer, and Mark area, Senior Vice President and Chief Financial Officer.
Our views in the quarter, our view of the industry and our strategic outlook. The prepared remarks will be followed by an open to any.
Before I turn the call over to Larry There are few items I'd like to copper.
For today's conference call will include forward looking statements.
These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would caution you that our actual results could differ materially from a forward looking statements made on this call.
The first like to the presentations part complete safe Harbor statement as well the risk factor section of our annual report on form 10-K, a bigger ended December 31, 29 team and our quarterly reports on form 10-Q.
In addition to the financial results presented on a GAAP basis, we won't be discussing non-GAAP information that we believe it's useful in evaluating the companies operating performance.
Reconciliations for these non-GAAP GAAP measure the closest GAAP equivalent can be found in the conference call material.
Finally, a replay of this call can be accessed via dialect Workterra webcast on our website replay instructions were included in our earnings release. This morning.
Not given permission for any of the recording of this call and did not approve or sanction any transcribing the call I'll now turn the call over to Larry.
Thank you Elizabeth and good morning, everyone.
Our business like all businesses in North America had to deal with the impact to economic activity in the second quarter, resulting from the mandated shutdowns to mitigate the impact of the cobot 19 pandemic the immediately or the impact on our business as most major metropolitan areas were shut down.
Like any downturn any of us a previously experience.
We had to react quickly to put in place the recession playbook over two weeks instead of the one or two years that it usually takes a recession to play out.
Experience of our management team at both the senior level and in the field has proven that maturity and experience really matter a regional vice presidents averaged 25 years of industry experience and were able to rapidly rollout cost control initiatives and implement new operating procedures. Following the centers for disease control and.
Prevention guidelines for safety.
I was on a central service provider our locations remained open for business and we were able to provide our customers with rental equipment and where needed. We're proud of how our team responded to the sudden and unprecedented challenges that we overcame together.
On the top here, we are the third largest rental company, serving North America with the scale when capital resources to provide a broad range of equipment. That's supports a wide variety of customers in industries.
We've made strategic investments in terms of time and resources to build out our specialty rentals over the last four years and these investments we're well placed in terms of the pandemic response, our specialty fleet grew 4% year over year to nearly $850 million I've always see representing approximately 23.
8% of our total rental fleet.
Our strategic customer and fleet diversification has helped to offset the business slowed down we have seen in other parts of <unk> of the business.
Our national account customers are also weighted towards the central services and many of remained active during the shutdown our national accounts represents 46% of our rental revenues. These customers are strategic advantage for her with an average relationship of over 25 years, we're committed to providing excellent customer service improve.
Fighting stability and consistency to a significant portion of our revenue base.
Our customer centric culture and high priority for safety also provides a strong about foundation as we serve our customers and keep our team and community, saying Oh.
Oh operations began to see any effect of the shutdown in mid March April was the month, what the biggest impact to our rental revenues and we have seen a slow and steady improvement in may and June.
As we are just in this new and challenging operating environment, the strength of our organization and our business has been more evident than ever we are prudently managed our balance sheet and are well positioned with ample liquidity and modest leverage this is to sustain our operations even in the most difficult environments now please turn.
Slide number four.
We continue to follow the CDC guidelines across all of our operations and reinforced handwashing, social distancing and infection control in frequent communication and in contact with our customers and communities were restricted non essential travel and for the most part field support and office staff continue to work.
Remotely during the second quarter, and while we enhanced our operational and safety procedures to operate in this challenging environment all of our regions continue to report at least 89% perfect days and an average of 94% perfect is for the six months here today.
Our team members have demonstrated resilience and professionalism throughout this pandemic crisis and I want to thank each and every one of the herc rentals paying for supporting this critical and a central work of our customers and communities. We're proud of what we've accomplished together as we have been adjusting to the new operating environment.
The health and safety of our team customers and communities remains our highest priority. While we continue to provide the equipment and services required by our customers now please turn to slide number five.
Our weekly fleet on rent and equipment rental revenue increase sequentially from the trough in mid April through the end of June we maintain rental rates during the quarter and results were about flat complete compared to the prior year. Our focus on many other cost saving initiatives that were introduced last year intensified in the second.
Quarter I'm, we successfully improved our transportation recovery controlled employee costs and reduced professional services and consulting fees. We also generated approximately $179 million and free cash flow year to date and increased our liquidity to $1.3 billion by the end of the second quarter.
Sure.
Now slide number six is a brief overview of our second quarter financial results equipment rental revenue declined 19.6% or $80 million to 327.6 million as a result of the impact of covert 19 on business activity in the quarter.
Total revenues were $368 million, 22.5% or $107.1 million lower than the prior year, primarily due to the lower rental revenue and lower sales of used equipment.
We reported net income of $2 million or seven cents per diluted share in a second quarter 2020, compared to 9.7 million hours worth 33 cents per diluted share in 2019, adjusted EBITDA declined 14.6% to $149.4 million.
On the second quarter of 2020 compared to the prior year.
And the successful management of cost despite the decline in revenue contributed to an adjusted EBITDA margin of 40.6% for the second quarter and improvement of 380 basis points over the prior years, 36.8% margin.
Now I'm going ask on birnbaum to pick up from here to discuss our second quarter operating performance and the current environment. Aaron. Thank you Larry Please turn to slide eight.
We remain committed to keeping our team their families our customers and our community safe I would like to thank our team members as they have pushed through this past quarter to serve our customers.
We've been through downturns before but this was an exceptionally unusual period and continues to be so our ability to manage our operations in sales outreach initiatives in this challenging operating environment reinforce our commitment to our business strategy. We are focused on our customers' needs operating efficiently opening greenfield and specialty.
Locations and enhancing sales initiatives to generate new business, a new revenue streams, you're getting good at virtual meetings and many of our senior leaders have joined our sales teams and strategic sales meetings with our customers virtually.
We strive for it to diverse customer base as a broad base of customers industrial segments served can help offset severe or seasonal effects at all times, our diversity and growing specialty business are helping to mitigate some of the impact of the Kelvin 19 business slowdown and we remain focused on managing our fleet and.
Controlling costs to improve our return on capital Please turn to slide nine.
All our branches are open and operating a normal weekly schedule, but to control costs, we continue to make adjustments to our hours or operations on a branch by branch assessment, which controls variable costs such as overtime [noise].
Through a continuation and acceleration of cost initiatives introduced in 2019, we also dramatically reduced transportation travel and other variable costs in the quarter compared to last year.
We are regularly reviewing branch rental volume transaction activity rental revenue trends fleet utilization and other key metrics and we'll continue to adjust our operations as necessary sunbelt markets and branches have returned to or surpassed March 22, or even 2019 on rent levels.
When we reported to you in the first quarter, we had approximately 10% to 12% of our workforce on some form of reduced work or furlough at the center of the crisis, but today only a small group of operations are on furlough and those are predominantly in our entertainment operations. We monitor these trends closely and have the flexibility to adjust <unk>.
I think activity improves.
Please turn to slide 10.
Specialty includes pro solutions and pro contractor and now accounts for 848 million Oh, we see fleet, an increase of about 4% over last year's comparable period and now about 23% of our total fleet as of the end of Q2 2020.
The investments we have made since 2016 and developing our specialty business have really paid off in this current challenging operating environment.
Our pro solutions business grew 19% in the quarter and has proven to be a key strategic advantage and providing support solutions in white glove service to many of our key customers as they navigate the challenging environment and their various end markets. Our core fleet of Ariel material handling trucks and trailers and earthmoving are also broke.
Going out on the slide.
Our fleet expenditures at always see were 88 million in the second quarter significantly lower than the prior years quarter expenditures were made up of pre coded orders and some targeted fleet to meet specific customer requirements.
Well, we see disposals were $83 million lower than the $123 million of what we see we sold last year.
Disposals were down as part of our strategy to minimize replacement capex and avoid the auction markets.
Approximately 20% of the fleet was sold through auction with retail and wholesale channels, representing the vast majority of sales and the second quarter proceeds were approximately 38% of always see.
Our fleet age for the period ending June 30, 2020 was 47 months and remains young young enough to allow us to continue to sweat the fleet a bit.
The quarterly break out of this information along with a rolling balance of our total fleet is also in the appendix.
Please turn to slide 11.
Business activity is slowly improving from April, but still trending lower than last year construction sites that were shut down in March and April began to reopened as municipalities and states started to implement stays reopenings by the beginning of June most of the fleet that had been let idle on construction sites was back on rent.
Our pro solutions business stood out in the quarter as we improved average fleet on rent and revenue year over year, the expansion of our business to serve the health care and certain other industry verticals helped offset the downturn in rental revenue experienced a non residential construction and government spending.
The entertainment content part of our business the studios that create film network and cable productions started to pick back up in early July after nearly four months hiatus.
We have a diverse customer mix with many of our large national account customers operating any essential business sectors.
Locations remained open through the quarter and our team has on the ground looking for opportunities to support our communities.
We enhanced our sales CRM model in Q2, providing your salesforce with improved customer activity, New project data and mapping to drive efficiency. Anna activity. We also launched a new lead share program through our CRM at the ended the quarter connecting sales opportunities across.
Our north American landscape.
Our second quarter rental revenue by major customer segment is shown on the chart on the left sided slide.
Contractors represented 34% of equipment rental revenue followed by industrial customers with 31%.
Infrastructure and government represented 18% with other customers at 17% of the total.
National account revenue represented about 46% of the total in the second quarter with local rental revenue now representing 54% the total route.
Our national accounts are primarily considered essential businesses as they include major industrial customers, such as utilities and energy health care warehousing and distribution. This segment of business as well as our government business has been a lot more resilient in the Kobin 19 slowdown and is a key strategic advantage of park.
Our sales organization is staying focused on a difficult environment, we invested in new sales training programs to assist our sales organization in new virtual sales techniques. Despite the overall slowdown in activity. We're encouraged that our new account revenue as a percent of rental revenue remained in the double digit range.
Hours as it relates to ship and solution business and via the virtual meeting or phone call. Our sales organization is focused on staying in touch with our customers and reaching out to new potential customers. Despite any shelter in place mandates and now ill pass the call on to Mark.
Thanks, Aaron and good morning, everyone.
Slide 13 shows the financial summary of our second quarter 2020 results.
Generally pleased with outperformance in the quota Im pleased to demonstrate we have a business of scale with the resilient business model that has less volatile than a lot of other industries in the current challenging operating environment.
Despite a 20% dropping rigs revenues in the quota we were able to rapidly adjusting our cost structure and actually grown our EBITDA margins and rebid damage.
This is a testament to the heck team and that business strategy.
We were already focused on margin improvement in adjusted to the Cobot 19, shutdowns, but quickly accelerating a lot of the initiatives that were already in place.
In addition to implemented Filos overtime control and other cost saving measures.
Equipment rental revenue declined 19.6% from 407.6 million to 327.6 million in the second quarter of 2020.
April was the toughest month in terms of the year over year decline and rich revenues in volume on rate and rental revenues have improved sequentially. Each month since then.
Okay with some of the rental revenue drivers in the next slide.
Total revenues declined to 368 million, primarily due to lower rents revenue and lower sales of rental equipment.
Markets for the sales of used equipment, including the auction channel were impacted by the cover 19 shutdowns in live interest in auctions remain close.
Our liquidity a sufficient that we can choose when we want to go to market without used equipment, and we will wait to market conditions to stabilize before moving on normal volumes back to auction.
We have the ability to ideal fleet without incurring substantial increases in maintenance cost and this is planned for the next couple of quarters.
We reported net income of $2 million will seven cents per diluted share in the second quarter.
Our adjusted net income in the second quarter of 20, 27.3 million or 25 cents per diluted share compared with net income of 16 million or 55 cents per diluted share last year.
Well details regarding net income bridge and the non-GAAP reconciliations are including enamored NRP index.
Adjusted EBITDA in the second quarter of 2020 declined 14.6% or 25.5 million to 149.4 million over the same period in 2019.
Based with key metropolitan markets effectively shut down for much of the quota and the resulting declines in revenue, we turn to aggressive management of our costs wherever possible and as a result X really improve margins adjusted EBITDA margin improved 390 basis points year over year.
To 40.6% in the second quarter.
Rebid Rebid dollar was 145.7 million and rebid damage and improved by 260 basis points to 44.2% during the second quota.
As a result about cost control initiatives decremental margin flow through exceeded our expectations there was only 31%.
On slide 14, we highlight pricing in dollar utilization.
The graph on the upper left illustrates a year over year pricing, but the latest quarter, reflecting right that were flattish with last year.
Despite the challenges we faced with low demand. We were pleased that we were able to maintain pricing for the quarter, where the marginal decline of only 30 basis points year over year.
The pricing environment is likely to remain challenging with rate of demand still impacted by the residual effects, we fixed the cobot 19 related government actions.
However, we remain focused on utilizing our pricing tools and their experience with price cycles, the whole price wherever possible.
The industry in general appears to be more disciplined on price.
Team is focused on maintaining right discipline in the current cycle.
The chart on the top rights as average fleet in the second quarter was about flat over the comparable period last year down about half of the state.
We had a decent amount of can't big delivered by been match before the impact at the show from place initiatives became apparent as you know we kept most of the Capex that was scheduled for Q2 and the rest of the year and we're continuing to expect 2020 net fleet capital expenditures to be somewhere around half of the 414 million.
Capex, we incurred in 2019.
In the lower right hand chart, you can see rental volume in the quarter was down about 16.1% compete with the prior year.
Richard volume began to train more positively in May and June there was clearly below prior years results. We are currently experiencing a seasonal ramp up from current levels, but as we go into the back half of the yet with the lower base of rental volume, we are likely to remain down year over year in terms of rental volume.
The impact of the Cobot 19 slowdown was evident in this just sticking quarter dollar utilization, which declined to 30.8% from 38% last year impacted by lower time utilization and flattish rates.
The adjusted EBIT da waterfall on Slide 15 shows the second quarter was 149.4 million a decrease of 14.6% or 25.5 million.
Compared to 174.9 million in the second quarter 2019.
The bridge starts with lower equipment rental revenue down 79.1 million over prior year.
Now successful efforts to manage our costs a clear with direct operating costs down by 44.4 million in the second quarter of 2019.
Primarily due to strategic reductions in freight and delivery rerated fuel and personnel related costs.
In a expenses were also well managed down by 14 million as we reduced sales expenses personnel related costs and professional fees over the prior year.
As we have discussed previously we'd like to focus on rebid.
This metric manages the contribution from our core rental business without the impact of sales of equipment.
And supplies.
We believe rebid that provides a bit a comparison with their industry peers as it excludes the impact of varying depreciation policies. The importance of EBITDA margin becomes especially Korea, we anticipate equipment sales activity is not at normal levels.
EBITDA was 145.7 million a decline of 25.1 million or 14.7% with an improvement of EBITDA margin to 44.2% compared to 41.6% last year.
I'm very pleased with the whole teams contribution to quickly react to a dramatic change in the operating environment with effective management of operating expenses as well as maintaining superior customer service to the 80% of the business that was not affected.
I want to thank the operations team for such a great job managing expenses as well as supporting our customers and communities in an extraordinary environment.
Field support team for their contributions and forgetting, Arizona out in a seamless and timely manner.
You will note that we now report two weeks earlier than we did last year.
Most of that field support staff has been working remotely since mid March we remain productive ineffective and committed to providing why subsurface 12 branches for customers.
Please turn to slide 16.
For the six months ended June 30, 2020 free cash flow was impressive at 178.8 million.
Business model is resilient reacted quickly to cutting out capital expenditures as soon as it became clear that covered 19 shutdowns would impact Gary markets.
Net leverage decreased to 2.6 times compared with 2.8 times a year ago at the lower end of a targeted range of 2.5 times to 3.5 times.
In addition, our credit ratings from maintained at a solid be one and B plus.
Total debt was 1.9 billion as of June 30, Twentytwenty reduction of about 132 million from December 31, 29 team.
No near term maturities, we have ample liquidity for the and into the future.
The actions, we took last year to refinance up on balance sheet positioned us well this year through this challenging time, we've not material covenants on the senior notes nonmaterial covenants, we tested on the IPO until availability is below 10% 475 million.
We had total liquidity of 1.3 billion as of June 30, 2020 comprised of 1.1 billion availability on our ABL credit facility 13.4 million on areas securitization and cash cash equivalents of 83 points familiar.
Our business model is resilient and as a result of the adjustments, we made to fleet capex and reducing our variable expenses. We are not a significant consumer of cash and should be able to continue to generate positive free cash flow in the final quarters of 2020.
We remain cautious and have capital allocation and we'll apply free cash flow to pay down debt.
On slide 17, we take a look at the latest industry forecast.
Coming off the worst quarter in modern economic history forecast is still a bit fluid and subject to more than the usual amount of estimation and supposition.
The updated IRA forecast for North American rental revenues as probably the biggest estimation of rates revenue trends taking into account. The current macroeconomic environment. We're forecasting forward Twentytwenty North American rental revenues to be down by 15% to 49 billion.
With everyone looking to the off a bit the latest shape the downturn in the recovery North American rental revenues from 2019 to 24 look a little bit like it Mike Swish.
This looks reasonable based on what we've experienced so far in 2020, assuming there are no further economy wide shutdowns in the back half of the year.
This would receive rental revenues rental industry revenues back to 2016 levels into 2017 levels in 2021 before turning to 2019 levels in 2022.
Yes, 2016 in 2017, we're certainly not the which she has to be in rental industry and there will be safety of rental activity for him to target. Although they will be a certain amount of fleet reduction required to adjust to that you environment.
Our industry is resilient continues to benefit in some ways and recessionary time, such as these when the seculert trends of ownership to rates will accelerate as customers conserve capital.
Our industry is also not dependent on anyone in market in the fleet can move freely to where the demand is both geographically and by end market, we support industrial customers local governments maintenance and repair customers restoration and emergency response as well as non residential construction.
Vega is also better in a challenging environment and hit renewals as the third largest rental operator with a national footprint and a long history of established customer relationships has the capital to take advantage of growth opportunities and we'll be able to grow shift.
We have a leadership team of seasoned industry veterans and we intend to take advantage of as scale and customer service capabilities to expand our footprint and penetrate a target market.
On slide 18 strategy remains the same.
The cobot 19, and juice market shutdowns develop so fast that was so broad based analogy I've heard is that like taking the elevated down and taking the steps back up.
It looks like we experienced the worst impact topline in April have been steadily increasing rental volumes and rental revenues in the month since then.
Strategy is still the same however, we will focus on a lean cost structure, improving margins and providing excellent customer service and rental equipment throughout this customer base.
We are fixed cost business model to a certain extent and the amount of flow through regenerating. Good times limits the amount of cost we can mitigate in tough times and improvement in both EBITDA and rebid the I imagine in the second quarter exceeded our expectations. We believe we continue to manage margins for the rest of the given current conditions.
Well fleet on rent has increased from the trough in April.
Future business conditions related to covered 19 are uncertain. Nonetheless, we estimate fleet on rent in the second half is likely to decline approximately 8% to 15% year over year as typical seasonal ramp of starting from a low base going into the balance of the.
As a result, we estimate equipment rental revenue in the second half will be down about 10% to 15% year over year.
As discussed we've taken action to substantially reduce on April net capital expenditures and plan to reduce 2020 capex. So about half of what we spent in 2019.
On page 19 on slide 19, we have a guidance update.
With a certain amount of stability returning to our business outlook. We are comfortable reissuing guidance for 2020, assuming no further economy wide coated 19 related shutdowns. We currently estimate adjusted EBIT da being a range of 625 million to 650 million in fiscal year 2020.
As we had previously discussed 2020 net capex is expected to be about half of what we spend of 2019 in the range of 190 210 million.
In this scenario, we are likely to continue to generate free cash flow, which we will apply to reduce debt.
We are proud the way that the hit team has managed for rapidly changing and difficult operating environment, and we remain committed to making it the employer supply at an embarrassment of choices and now I'll pass the call over the Larry.
Thanks, Mark before we go to Q and let me summarize where we are today on slide number 20.
Throughout this challenging period, we will stick to our purpose and that as to equip our customers and communities to build a brighter future.
We intend to support our customers in this challenging environment with the team that has committed and dedicated in a safe and healthy environment.
Our business model is resilient and we're committed to the strategy, we laid out four years ago.
We believe our response to this chart changing environment has been swift and executed well, we have taken steps to cut costs and reduce capital requirements.
We have a solid balance sheet with ample liquidity as mark outlined with no near term maturities, we're sticking to our stated goals through solid execution, and we intend to improve improved value for our shareholders customers and employees in the long term and now operator, we'd like you to open the lines for question.
Okay.
Thank you.
We will now begin with the question answer session.
Asked a question you May press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble level stuff.
First question comes from the line of Ross Gilardi from Bank of America. Please go ahead.
Thanks, Good morning, everybody.
Good morning.
Thank you yeah, congratulations on the very resilient performance this quarter I'm glad you're all well.
Your capex guidance seems to imply that you finish 2020.
With fleet on how we see about flat year on year at about $3.8 billion first of all agree with that.
Yes, I mean, it's going to trend down slightly with limited capex coming in for the back into the year.
Okay.
Yes, I'm going with this year, you're saying that demand is probably down.
Eight to 13 or fleet on rent site to 13% in the second half and I guess first of all what's what's the.
Broadly speaking the composition of that down 18, 8% to 13% in Q3 versus Q4 are you.
More down like 15% in the third quarter on down five in Q4 or you down.
Roughly that.
Well for the second half and what I'm really trying to get out is.
What your implied exit rate is on time utilization into 2021, because the fleet it's flat.
You are still running down on on obviously on fleet on rent the map with the suggest that go into 2021 way with.
You know with high utilization down a fair amount and trying to get to get a sense is what that implies on pricing and capex in the next year.
Thanks.
Right. So I think the commentary is that we're coming out of a hole in Q2.
We are ramping up.
With that normal what with with typical seasonality, but we're coming off a low base. So I will be closing that gap.
Yeah.
Steadily between now and the ended the year and have a lower gap at the end of the going into 21 than we currently do.
And then we're likely to have a Q3.
Okay, Great got it got a March.
And then pricing, you're calling fleet on rent down 13% in total revenue down 10 to 15 is the residual mostly pricing or is it mix or just some other type of adjustment and just curious what you're seeing month on month.
On on rental pricing what was that what was the exit rate coming out of second quarter.
So most of the gap is due to mix a much more than mix and pricing.
Which is coming out of some of the specialty business just with the the changes in volumes there and some of the year over year changes.
So, it's mostly mix related as opposed to as as opposed to pricing.
Okay got it and just just lastly, any comments on Florida, Texas, California, the Big States that have seen.
Fights in.
Covina cases in the last month have you have you seen activity level off and any of those days. What are you hearing on new project activity and deferrals in 2021 any color there would be really interesting.
Yeah Ross this is Eric.
Beginning of the.
Well the crisis some of the market's behave differently as they went down but as we've been coming back out and even with the reset resurgence of some cases all markets really are up behaving the same way right now and pretty balanced at all gradually moving back upwards. So in other words, the recent cases in Texas and Florida, It really hasn't.
Slowed our are.
Rebound from the trust.
Okay got it thanks, very much I'll turn it over.
Thanks, Ross Thanks for us.
Thank you.
The next question comes from the line of Jeff from Goldman Sachs. Please go ahead.
Hi, Good morning, everyone. Good morning, Jerry area.
Doing well, thanks, and you Larry.
That's fine were safe and sound.
[laughter] good lumpy here and.
I'm wondering if we just start on the cost structure side, it's not often in your business that we see.
Operating costs down more than revenue in a downturn can you talk about how much of operating cost decline was by furlough and travel temporary actually get it come back versus any parts of that reduction that should stay with us.
Right, Yes, yes, no Jerry it was a really good quarter on cost control, we're very happy with with the results. We got the thank a lot of the tools.
We are already out.
So as part of an acceleration of the strategy that we're always we're already working on so we didn't really have to sort of.
No go to the bulk of work at what to do we just had to accelerate what we were already doing so a lot of that cost control does continue to roll through the year.
The Filos, where something that will go away going into Q3 Q4. So that's.
Yeah, we won't continue these sort of decremental margins in that 30% sign.
More likely to sort of trend back towards 50% to 60%.
So maybe half of the cost control came from from the field low and sort of dramatic changes to the way, we operated and about 50% will likely to continue.
Is that part of asked a culture going forward.
And as we look at gross margin seasonality Mark typically you have a big step up in Threeq.
Versus Twoq you just based on normal seasonality and we're talking about an inflection in fleet on rent, yes based on what you laid out earlier. So it sounds like we should be on track with meaningful improvement in margin sequentially with cost coming back now withstanding, but I'm wondering if you just confirmed.
That.
We got that cadence right and there are no other moving pieces, we should keep in mind.
Yeah, we I mean, we have focused on maintaining magazine margins going forward.
I mean, there were some one offs in Q2 that will widen the way off in Q3 Q4.
But directionally, we're looking at maintaining margins on the way through the balance at year.
Okay, and then from a pricing standpoint.
Can you talk about if you're implementing normal seasonal rate increases, obviously utilizations pick up sequentially, but it's not at a very high base. So sorry are you getting the normal seasonal rate uplift that you would normally get in July August.
There is there's not much normal out there and the current environment. Jerry So we're focused on holding right.
And so to it as a challenging rate environment with volumes down.
The industry does seem to be a lot more focused on right and maintaining right. This time around and that's the focus of our management team is really to to hold rights and minimize any declines.
Okay and lastly.
Obviously too early to talk about 21, a much detail but.
With.
Fleet on rent still declining year over year through the fourth quarter.
Utilization hold steady.
Those levels entering 21 should we be thinking about in that scenario Capex next year looking similar to this year and potentially moving up.
If demand moves higher or.
How should we think about your replacement needs.
Any color there would be helpful.
So yes, it's still very early and we will then a lot over the next couple of months in terms of sort of with 2020 ones looking.
But I would say 20, twentys buttoned down real tight just about as tight as you can get.
2021 will be buttoned down high, but probably not as tight as 2020, so probably somewhere in between 2020 and 29 team would be we start off thinking.
We've got flexibility to adjust capex it demand comes in stronger than the than we expect.
So we could go in with a conservative capex.
Program and flex up if necessary.
Sort of environment.
Okay I appreciate the session if thats okay.
Okay. Thanks, Eric.
Thank you.
Next question comes from make due from.
Go ahead.
Yes. Good morning, Thank you for taking my question.
I guess I'm looking for a little more color on on how business, it's trended through the quarter on what you're seeing into three Q My recollection is that.
In April Youre, seeing rep rental revenue down 20% to 25%.
I mean, what you posted here is down 20, so so obviously things have gotten better, but I'm I'm sort of curious at the pace.
In June versus versus May and then as I look at your second half guidance for call. It down 10 to 15.
You know, it's it's a market improvement from from what we've seen in Q2, So how do you think about.
Getting there.
Three versus versus Q4, and what do you.
What do you see in live in the markets right now to give you confidence that this outlook is appropriate.
All right I think I mean, I think the right analogy is as we took the elevated down.
We hit the basement and April and we've been taking the steps back up so it's a slow steady incremental improvement.
As you know more businesses open people work out how to get back to work and the economy starts to just sort of re reopened.
And that's kind of what we've experienced in May and June and into July and that's kind of expectation going going forward. So we've got seasonality in our favor it's coming off a low base.
This is operating similar.
In terms of a seasonal trajectory than it usually does but just off a low base. So a slow steady.
Improvement from here on out of their expectation through into.
November and December when the Seasonalities that slow and often and we hit into the winter.
I guess not to put two finer point on that but as you're looking at the month of July or exiting.
Two however, you want to define it.
Are you close down 10% to 15% or does that require we had an additional step up in activity. Because this number is year over year right I mean that we're not talking seasonality here as the year over year number.
Yes, now you're right so.
The the steady sequential improvement in all the Madrid.
Through the through the yet that we expect but we would coming up against last year's seasonality.
So that Jay.
And then get continues to close as well so.
I think both both trains the sequential growth and the year over year.
Okay continues to shrink as we go through the yet.
Understood then my last question for me.
I'm looking for a little more clarity on on DNA. If you would obviously really good performance in a quarter I for one expected that line item to be perhaps a little less flexible. So as you think about the back half a year or can you give us a sent that do what's embedded in this line item as far as.
The contribution to your overall EBITDA guide thanks.
[noise], we sort of been focused on.
You know flattish.
Yes, DNA has kind of being out guidance pre and post I think it remains post quite good.
Some of the line items that were not to the second quarter necessary going over cure.
So you can maybe average out Q on Q2, just so to get to a feeling for how they sort of trends through into Q3 Q4.
Just to be clear I are you talking about averaging the dollar amount for Q1 in Q2 or the year over year progression.
Fixed fix dollars right. So our our approach is flattish just holding it flat.
The next Nick flip a flattish for the next couple of years, just to sort of improved the margins in that direction.
Understood. Thank you.
Thank you.
The next question comes from the line of Brian Sponheimer from Gabelli funds. Please go ahead.
Hi, good morning, everyone.
Good morning.
Another great job they put yourself in position for some real flexibility as you come out of this and I guess along those lines you said the cash flow go towards debt reduction Im just curious whether there or any other.
Opponents from an M&A perspective purchasing some.
Some some yards that may.
We need a little help from operational standpoint.
Any thoughts on more external growth as opposed internal improvement.
Look I would say that we have not done.
Really focused on M&A as part of the overall strategy.
We will maintain our direction relative to greenfields.
For the year, we are still on target in that six to 10 range.
From a greenfield opening perspective.
And we'll continue our focus in that area. We you know we have completed.
During the last quarter, the sale of our Chinese business.
And.
So that's off the off the table now and we really have a clean operating environment and North America, we'll certainly look at any opportunities that might present themselves as we go through the balance of the year in terms of.
Geographic footprint within our.
Defined area that we want to grow which as large metropolitan areas over well over a million people are more we'll look to add density and if there are opportunities as a result, because it will certainly.
Certainly jump on them, but.
Quite frankly, it's.
At the moment.
First on our mind first in our mind is operating the business as we've been doing for the last quarter and putting forth results as we've demonstrated.
[noise], if you're thinking about your.
Fleet on rent or the fleet in general that goes towards film TV live event et cetera.
What's the thought on 21 at this point as you're engaging with us.
Customers there, obviously a lot of planning goes into that Coachella isn't.
Are there other events of the world.
So just just any any smell thought any any thoughts on that definitely everybody business.
Yes, we like that segment I would say I'll break it into parts this as Aaron Brian.
From the TV production feature film side, it's starting to percolate back as we said at the beginning of July So that volume is starting to come start to gradually come back were taken the stairs back there on the events or the music events side I don't we don't expect that to return.
This year it always be surprised if it happened and don't have really have good visibility on how that's going to work in the first half and next year. So.
We've prepared for it if it began to come back on the event side, but really the TV.
Commercial side is it's bigger part and that has started to percolate backup.
Right. Thank you very much and look for the back half there.
Thank you.
Thank you.
Our next question comes from.
From me.
Hey, good morning, everybody I'm exceptional results, so very impressive to see.
Thanks, Rob and thanks for the book.
You're welcome hope you enjoy it.
I had two questions really in the first one do you guys have a clean look at what Vince industry revenue is like in the quarter.
You revenues are kind of where we forecast, but I'm wondering if there might be a little bit of upside. So I didn't know if you're a little bit below on the entertainment mix or on operational disruption or anything else. It did you lose share in the quarter not for that matter at all times I'm just curious operationally if that was the case.
We don't really have a good look into industry revenues.
Yeah, our entertainment make too and this is in film stuff is probably a little bit heavily weighted more weighted than the industry in general.
And we have a look into sort of industry volume and I think at trades where were generally in line.
With what we saw what we sort through the industry.
So maybe mix Oh, Okay fair enough and then the question is do you guys had given a nice in the past long term look at what you're doing that margins and you mentioned a couple of times on the call. Some of the actions you took this quarter might have been accelerated or may have been more permanent. So could you just like give us a narrative around what you did that you think is more.
Or is going to stick with us in the 21 22, and what was accelerated just kind of actions that you do you think are permanent and thanks.
Well, the furloughs and those sort of dramatic capex in hours worked and operations at the branch where a good example of an action that happened in the quarter that will join though.
Going into Q3 in Q4 terms of impact terms of maintaining outside delivery expenses and some of these external spins we were concentrating on on cutting them back as proportion. So they were reducing as a percentage of our.
As our revenues going into the covered shutdown with the big dramatic dropdown in volume based took an additional couple of steps down.
That will come back as we go into Q3 Q4, so maybe half of those costs savings were my going forward as we just more efficient with how we run our operations.
But the.
The volume comes back some of those costs will what were too yeah. I know in addition to that Rob probably.
Our use of external repair versus internal repair was adjusted to where we used our own labor force.
More slip more exclusively during the quarter some of that will probably remain as well as a continued focus on reducing our re rent activity.
That will be our intention.
Keep minimizing the re rent and utilizing our own fleet.
Okay.
Thanks, I will try it again thank you.
Okay. Thanks, I'm looking forward to reading your book.
Thanks.
Thank you.
The next question comes from the line, Steven Ramsey from pumps and as such.
[music].
Good morning, everyone.
Steve.
I guess to focus on specialty first you know you decided how it has helped mitigate some of the.
Demand draw down due to the virus what drove that in Q2, what kind of projects in market demand drove that maybe pricing and volume and then maybe how a specialty takes you into Q3.
The type of projects. This is Aaron I can answer that part pretty clearly so it was the initial wave are responding to the healthcare sector. The government needs for climate control temporary power all across.
North America, there was a lot of specialty equipment deployed for that and continue to stay on rent through the quarter and even some other remains today.
The.
Thank you are the part of the question was what part of that drove the volume wallet Mark take that one yes. So I mean typically an increase in volume and then Todd really to respond to the pricing and mix I'm question without getting too granular.
It really depends on the size of the customer that is going out to and whether there's a contractual price or where they're at spot pricing. So.
My takeaway is just big increase in volume.
Big positive to us as a strategic.
Growth out of the business and something that we continue to focus on and that should benefit us and in Q3 Q4.
Great and then on on New accounts, you guys talked about.
The addition of new customers can can you talk to what in markets, where these in was it totally driven or majority driven by.
Healthcare on a temporary basis or other customer types that that is driving.
Well, we've been focused on generating new accounts.
For four or five years and.
The strategy is so the weekend positive growth revenue, but also replenish any kind of attrition that goes on in the business with accounts you know.
Jobs, finishing and allows us to stay pretty healthy so as far as segments of new accounts, it's really across the board, but I would say, it's mostly in the local accounts or what I'd call like like regional type accounts versus big.
Industrial Big Big accounts.
Great and then to dig into again on special.
Entertainment.
Side of the business.
No if there's any way to quantify maybe I would guess Q2 revenue there was almost zero, but do you expect the second half.
Back pretty quickly and get to.
Half of last years.
You know sit sales into that.
Segment and is entertainment the majority of the mix impact to rental revenue or are there other sectors.
The entertainment business was probably one of the only segments that went to zero during the second quarter and it is stair stepping back up.
It's hard to predict where it's going to go but every week is strengthening and I would imagine.
As we get closer to the end of year as long as there's not another shutdown in North America to to covert that will be closing the gap pretty rapidly on kind of where we were a year ago.
Great Thanks to the color.
Thanks, Dave.
Thank you.
The next question comes from.
From RBC capital markets. Please go ahead.
Hi, Good morning. Thanks. This is trying to non for Hsas are related to your utilization I guess I was wondering was that mainly lower because you were walking away from maybe deals that were aggressively priced or is it more of a case, where they were just simply no deals because of everything that was going on.
I would say it was a case of no deals because of the shutdown, particularly in a large metropolitan market areas. When the cities across North America got shut down so did our volume and not affected our utilization. So I don't think very much of it was as a result of any aggressive deal.
So that we walked away as we know we maintained our pricing pretty well and.
We really didnt changed a lot of miscellaneous activity, we focused on our strategy to.
Attract type of customers that want to have the type of service and solutions that we provide.
Okay. Thanks, so it sounds like it but I guess just to confirm I you haven't really seen many players lowering their rates are acting irrationally, new markets still on the pricing side acting pretty rational we at this point.
Okay. That's had a market generally is acting rationally, there's always deals here in there that.
That tend to be.
Competitive mostly by what I'll call, either local or smaller players.
But you know amongst.
The majors I think everybody is as rationally behaving in the marketplace.
Okay, great. Thanks.
Oh.
Thank you.
The next question comes from the line of Jade <unk> from Goldman Sachs. Please go ahead.
Yes, hi, thanks for taking the follow up I'm wondering if you could talk about a year of fleet mix.
Based on the Capex.
You outlined.
Do you anticipate continued meaningful shipped in specialty.
Over the balance of a year and you know as we look at specialty mix now you're getting right up to your 25% target and I'm wondering if you have any updated thoughts on what specialty as a mix of business.
It should look like going forward what are you finding as you grow that part of the fleet.
Yes.
Thanks Jerry.
We set our stated target was going to be somewhere between 25, and 30% of our fleet wide.
Sort of a level that we wanted to go and then we'd evaluate it after that.
We'll continue to invest in the specialty gear around power generation or actually a C.
Filter equipment and things that support.
You know I would say the medical you know environment and the cleaner environment.
That we've had an opportunity to participate in here over the course of the last quarter. So that's where the focus will be and.
I look if we if we see the demand to take it you know above the 25% approaching that 30% range. We're prepared to continue to invest in our specialty businesses. It's great business for us It allows us to provide a solution rather than just the product.
And enables us to be more important.
To our customer base.
Okay. Thanks, and then.
If you look at the business or the whole can you just talked about visibility you have today on projects compared to a year ago.
Presumably.
You booties pretty good considering your reinstating guidance, but I'm wondering if you can comment on that directly.
And only when you look at the landscape of our our North American our regions of the jobs that they get temporally shut down or back to work. We're seeing jobs that were postponed that now are starting and then from a.
Some capex guide items that we follow like the index, it's clear that the it started to rebound.
In June from the prior month, so activity seems like it's bouncing back a pipeline long term is remains to be the question.
Okay, and you know I'm on that note.
If you think about your fleet flexibility into 21 can you comment on how you would allocate resources in the discretionary private nonresidential and his team for signing 21, how would you allocate resources in that environment.
Well the I mean their fleet isn't necessarily the opinion on any one end market and the strengthened.
Other end markets, we this weakness and construction behalf so.
And then environment, we've got a big industrial base of customers that would continue to get the fleet. This year we saw.
The Capex that we didn't cat went into the specialty.
Lines. So we will continue to invest in those going into next year and it's it's really.
Just the level of expenditure as opposed to targeting any it markets. The volume works its way through to wherever the demand is.
No I appreciate the conversation Thats.
Thanks, John Thank you Terry and I think we've come to the end of our Allison. Thank thank you all for joining us on today's call and obviously as always if you have any further questions. They can have to date that gives me a collar email me. We look forward to talk with you all Tim Thanks, a lot. Thanks Andrew.
You're welcome.
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