Q3 2020 Herc Holdings Inc Earnings Call
[music].
Good day and welcome to the hard coating third quarter and nine cents 2020 earnings conference call all participants will be in listen only mode.
Should you need assistance, please six helicopter and specialist by pressing the star keep all that buys zero.
After today's presentation there'll be an opportunity to ask questions.
He's not so bad it's being recorded.
I would now like to turn the conference over to Elizabeth Hitachi. Please go ahead.
Thank you Sarah good morning. Thank you all for joining us [laughter] and welcome again to our third quarter nine month 2020 earnings Conference call.
Earlier today, our press release presentation slides and 10 Qs filed with the FCC and are also posted on the events page of our IR website at IR.
Got hurt that com.
Dot com.
This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mark Uri on senior Vice President and Chief Financial [laughter] review, the third quarter, our view of the industry and our strategic outlook. The prepared remarks to be followed by an open you anyway.
Before I turn the call over to Mary There are few items I'd like to cover first today's conference call will include forward looking statements. These days.
These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would.
I would caution you that our actual results could differ materially from the forward looking statements made on this call.
Please refer to slide two of the presentation for a complete safe Harbor statement as well as the risk factor section of our annual report on form 10-K for the year ended December 31, 2019, and our quarterly reports on form 10-Q.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations of these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials.
Finally, a replay of this call can be accessed via dial in or through a web cast on our website.
Replay instructions were included in our earnings release. This morning, we've not given permission for any of the recording of this call and do not approve or sanctioned any transcribing of default I'll now turn the call over to Larry.
Thank you Elizabeth and if we can start with slide number three where.
2020, we'll certainly go down in the record books as the year, the Herc rentals rose to the challenges of the COVID-19, numerous natural disasters based what the impact of COVID-19 on economic conditions in our markets. Our team has continued to deliver outstanding cost savings and efficiencies. Despite the challenge.
Sales of extra safety precautions relating to social distancing and weren't protective personal equipment, while serving the needs of our customers are inherent strengths and our quick reactions contributed to better than anticipated results in the third quarter and we are cautiously optimistic about the balance of the year.
I'm Gonna Central service, our locations remained open for business and we have continued to provide our customers with rental equipment as and when needed with the exception of our dedicated entertainment business locations.
The top tier we are the third largest rental company, serving North America with ample scale and capital resources to provide a broad range of equipment that supports a wide variety of customers and industries. We have made strategic investments in resources to build our specialty equipment rental business over the last four years. These.
Investments were well placed and have expanded our ability to proactively assist customers in response to the pandemic and weather related events. This year, our strategic customer and fleet diversification and has also helped to offset the cobot slowdown we experienced in certain parts of the business our national account customers.
Our also weighted towards the central services and many remained active during the shutdowns our national accounts represented 44% of our rough rental revenues. These customers are.
Our strategic advantage for her with an average relationship now of over 27 years, we remain committed to providing excellent customer service and providing stability and consistency consistency to the significant portion of our revenue base our.
Our customer centric culture and high priority for safety also provides a strong foundation as we serve our customers and keep our team at community safe as we adjust to this new and challenging environment. The strength of our organization and our business had been more evident than ever we produced our highest EBITDA margins since the spin off.
As we continue to close the gap with our peers, our specialty pro solutions business delivered double digit year over year rental revenue growth in the quarter. We continued to manage rate successfully with positive average rates for the first nine months compared to last year and.
And we prudently manage our balance sheet and are well positioned with ample liquidity and modest leverage to sustain our operations and even the most difficult environment now.
Now please turn to slide number four.
Our weekly fleet fleet on rent and equipment rental revenue increased sequentially from the trough in mid April through the end of September our focus on many of the cost savings initiatives that were introduced last year continued to contribute to our bottom line in the third quarter and we continue to improve our transportation revenue recovery and country.
Our old variable costs.
We also generated approximately $252 million in free cash flow year to date and increased our liquidity to $1.4 billion by the end of the third quarter.
Better than anticipated Q3 results, we've raised our fiscal year 2020 estimates for the full year, which mark will discuss in a few minutes now.
Now please turn to slide number five for a brief overview of our third quarter financial results.
We continue to experience the normal seasonal cadence coming off a low base due to the COVID-19 shutdowns in the second quarter equipment rental revenue was $402.3 million in the third quarter and was reported decline of 12.5% were $57.3 million compared to the prior year.
Our volume improved sequentially throughout the period.
Total revenues in the third quarter were $456.7 million, 10.1% or $51.4 million lower than the prior year, primarily due to lower rental revenue.
Adjusted EBITDA was $196.7 million, an improvement from the second quarter, when a decline of 6.1% compared to the prior year.
We very successfully manage costs and despite the decline in revenue we delivered an adjusted EBITDA margin of 43.1% in the third quarter, an improvement of 190 basis points over the prior year's 41.2% margin as we continue to close the gap with our larger peers.
We also reported a substantial increase in net income to $39.9 million or $1.35 per diluted share in the third quarter of 2020 compared to $9.4 million were 32 cents per diluted share in 2019 now.
Now I'm going to turn it over to Aaron and ask them to pick up from here to discuss in more detail, our third quarter performance and the current environment.
Thank you Larry.
Realty to manage our operations and sales in this operating environment highlights the traction of our business strategy and the experience of our operations team.
We have been through downturns before but this year has been a true test of our operating model and the resiliency of our team.
Before I start my discussion of our results I would like to take this opportunity to thank all of our team members.
Continue to effectively serve our customers in this challenging environment and we greatly appreciate all that they do every single day, great job team work now please turn to slide seven.
Liam's improved each week and we began to see the more typical seasonal cadence of activity in the third quarter. We have made great strides in diversifying the customers and business segments. We serve our diversification initiative was put in place to help offset seasonal and or severe economic events. This year that strategy paid off as our growing specialty.
Business, particularly our emergency response initiatives helped mitigate some of the impact of Tobin 19 business slowdown on the general economy.
The expansion of our business in the climate and remediation sectors as well as other targeted industry verticals helped offset the downturn in rental revenue experienced a non residential construction and government spending in step.
In September we responded to the needs of our customers and dealing with the damage sustained by Hurricane is lower and Sally in the Gulf region, which contributed to our improved fleet on rent in the quarter and at the end of the third quarter. Our pro solutions team was there to serve and assist as soon as the storms passed and the floodwaters receded reach.
Finally, I visited our team in Lake Charles Louisiana, and we are so proud to be associated with the tremendous response, our local employees and herc employees from markets all through the U.S. accomplished as they descended to the local market to help the community and around Lake Charles.
Pro solutions team delivered strong growth in rental revenue in the third quarter and recorded a 14% increase compared to the prior year.
Our team has available 24, seven and they are quick to respond to the needs of our customers throughout North America.
Our sales organization has stayed focused in a difficult environment, reaching out to current and potential customers and personnel remotely we pay.
Partner with our customers by delivering reliable equipment service and solutions to assist them and operating efficiently and profitably. Despite the overall economic slowdown in activity. We're encouraged that our new account revenue as a percent of rental revenue remain in the double digit range now please turn to slide eight.
As a provider provider of essential services, our core operations remained open throughout this pandemic to serve and support customers.
We remain focused on our customers needs that continue to adhere to the CDC guidelines, we're pleased with how well our team has adjusted to these additional safety considerations, while balancing the impact of practicing new health and safety standards. Our team continued to deliver outstanding cost savings during the quarter.
We remain committed to keeping our team their families our customers and our communities safe and while we enhanced our operational and safety procedures to operate in this challenging environment all of our regions reported at least 88% perfect days for the nine months of 2020.
Through an acceleration of cost initiatives introduced in 222 2019, we continue to improve adjusted EBITDA margins as we focused on ancillary revenues and the management of variable costs. Please turn to slide nine.
We have a strong footprint across North America and continue to further our growth through the openings of new Greenfield locations and the addition of select fleet in high growth regions of the country. We operate 270 locations across North America, and 39 States and five provinces. This year, we've opened new locations in Fort Lauderdale, Toronto Denver.
And two in Dallas, our goal is to open six to 10 locations this year and depending on the timing of certain city permitting approvals, we expect to fall within that range. We intend to continue to grow with new locations and other high growth urban markets for the rest of the year and into 2021. Please.
Turn to slide 10.
Our fleet composition is on the left hand side of the slide specialty includes pro solutions at pro contractor and now accounts for $853 million Oh, we see fleet, an increase of about 2% over last year's comparable period at about 23% of our total fleet as of the end of Q3 2020 invest.
Once we have made since 2016 and developing our specialty business have really paid off in this current challenging operating environment.
Our core fleet of aerial material handling trucks and trailers and Earth moving equipment are also broken out on the slide our.
Our fleet expenditures that always see were $90 million in the third quarter significantly lower than the 172 million we reported in the prior year's quarter expenditures in the quarter were made up of targeted fleet to meet specific customer requirements.
Well, we see fleet disposals were $124 million in the third quarter higher than the $89 million of what we see we sold in last year's comparable period. The average age of our disposals was 85 months in the third quarter.
Approximately 35% of the fleet was sold through auction with retail and wholesale channels, representing the other two thirds of our channel sales in the third quarter proceeds were approximately 37% of always see ARPU.
Our fleet age for the period ending September 32020 was 47 months and remains young enough to allow us to continue to sweat the fleet a bit.
A quarterly breakout 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 and well still trending lower than last year, our daily always see fleet on rent continues to close the gap with last year's levels, our third quarter rental revenue by major customer segment as shown in the chart on the left side of the slide.
Contractors represented 34% of equipment rental revenue, followed by industrial customers with 29% infrastructure and government represented 18% with other customers that 19% of the total we continue to focus on high growth segments of the economy.
We have a diverse customer mix with many of our large national account customers operating in the central business sectors. They include major industrial customers in utilities, and energy healthcare warehousing and distribution and manufacturing. This segment of business has been a lot more resilient in the COVID-19 slowdown in as a street key strategic advantage for.
Sure.
National account revenue represented about 44% of the total in the third quarter with local rental revenue now representing 56% of total rental revenue.
In the quarter, our industrial manufacturing activity began to close the gap with pre COVID-19 levels and our entertainment services business. The studios that trade feature films TV in commercials also started to return to some normalcy in early September after a nearly six months hiatus.
We see further growth opportunities in our end markets as we return to more normal times, Please turn to slide 12.
Activity in the fourth quarter continue to improve and we saw sequential volume improvements so far in October.
We expect to see a return to normal seasonality for the rest of the year with a typical off peak winter months.
We recently realigned certain operations and responsibilities in the us to better position the company to fully utilize the leadership and managerial skills of our talented team and pursuing growth opportunities to broaden and diversify our customer base.
We expect the newly aligned regions, along with our hurt plus a local sales teams and pro solutions experts to accelerate improvement as we come out of this pandemic related economic slowdown.
Our strategy is still the same and we are focusing on a lean cost structure, improving our margins and continuing to provide excellent service and rental equipment to our diverse customer base, we have a fixed cost business model to a certain extent and amount of flow through we generate in good times limits the amount of cost we can mitigate in tough times are.
Proven a both EBITDA and rebid on margin in the third quarter exceeded our expectations. We believe we can continue to manage costs and improve margins for the rest of the year given current conditions well.
Well fleet on rent has increased from the trough in April future business conditions related COVID-19 are still somewhat uncertain. Nonetheless, we estimate year over year fleet on rent in the fourth quarter should likely be better than the third quarter and our our assuming about a 46% decline versus the prior year.
That volume level implies a 6% to 8% year over year decline in rental revenue in the fourth quarter.
Keep in mind that while we benefited from the typical seasonal ramp up in the third quarter were.
We're also starting from a lower base going into the fourth quarter and 2021.
Discussed previously you have taken action to substantially reduce our planned capital expenditures in 2020, our 2020 net capital expenditures are expected to be about half of what we spent in 2019. We are excited about our opportunities and we have the team the network equipment and the strategy to continue to drive further growth and now.
I'll pass the call on to Mark.
Thanks, Aaron and good morning, everyone.
We were very pleased with our performance in the third quarter as we continue to date.
As we continue to demonstrate that we have a business of scale on a resilient business model that has less volatile than many other industries in this challenging operating environment.
Our results exceeded our expectations and assumptions, we use for full year guidance.
We've been really focused on margin improvement over the last couple of years and I'm pleased with how quickly we are able to adjust to the COVID-19 shutdowns by accelerating initiatives are already in place managing variable expenses as well as other cost saving measures to contribute to our margin improvement.
Slide 14 shows the financial summary, third quarter and nine months 2020 results equipped.
Equipment rental revenue declined 12, and a half the sand from $459.6 million to $402.3 million in the third quarter of 2020.
The trends improved throughout the quarter with rental revenues improving sequentially each month.
We will cover some of the rental revenue drivers in the next slide.
Total revenues declined to $456.7 million, primarily due to lower rental revenue.
Sales of rental equipment in the third quarter were 9.9 million higher than last year as used equipment markets began to stabilize and we focused on tightening up the fleet.
We reported net income of $59.9 million or $1.35 diluted share in the third quarter.
Our adjusted net income in the third quarter of 2020 was $39.8 million or $1.35 to be diluted share compared with net income of $43.2 million or $1.48 per diluted share last year.
More details regarding on net income bridge and the non-GAAP reconciliations are included in our appendix.
Adjusted EBITDA in the third quarter of 2020 declined 6.1% or 12.7 million to $196.7 million over the same period in 2019.
Despite lower year over year into volumes in the third quarter, our aggressive management of costs led to a continued improvement in our operating margins adjusts.
Adjusted EBITDA margin improved 190 basis points year over year to 43.1% in the quarter.
And a 250 basis point sequential improvement from the second quarter of 2020.
Revit does $195.9 million and rebuild our margin improved by 340 basis points to 48.3% during the quarter.
As a result of a management of costs decremental margin flow through was only 20.9% in the quarter.
On slide 15, we highlight both pricing and all utilization.
The graph on the upper left illustrates our year over year pricing with the latest quarter, reflecting writes down by only 80 basis points compared to last year were.
We are quite pleased with the fed is right result in the quarter given the dramatic impact rental demand since COVID-19 started to impact the general economy.
The positive pricing momentum we had pre covered.
Our pricing tools and our experienced management team in the field have all helped to mitigate rate decline so far in this downturn.
We remain focused on utilizing our pricing tools and their experience with price cycles to hold rates as much as possible.
And the industry in general has been much more disciplined on price and the current cycle and his team is determined to maintain pricing discipline.
The chart on the top right shows average fleet in the third quarter was down about 4.5% over the comparable period last year.
We picked up the pace about used equipment sales in Q3 as the auction channel began to improve.
We will likely increase disposals in Q4 as part of our normal seasonal fleet management may occur book losses on sales as a majority of the sales volume will go through auction.
Dollar utilization was 37.6% in the third quarter compared to 40.8% last year.
While this quarter saw utilization was lower than last year's comparable quarter. The sequential improvement was meaningful an increase of 680 basis points from the COVID-19 impacted second quarter.
In the lower right hand chart, you can see the average fleet on rent in the quarter was down about 8.8% compared with the prior year.
We experienced a typical seasonal ramp up in volume on rents in the third quarter, but due to the impact of the slowdown in Q2, we are still not close the gap on a year over year basis.
We expect to continue to close the gap, but are likely to remain down year over year in terms of rental volume by 4% to 6% in the fourth quarter.
The waterfall on slide 16 shows adjusted EBITDA for the third quarter was 196.7 million, a decrease of 6.1% or $12.7 million compared to $209.4 million in the third quarter of 2019.
The bridge shows equipment rental revenue was down 57 million over prior year.
Yes existed managing direct operating cost as cliff with daily down $28.8 million from the third quarter of 2019, primarily due to reductions in re rent personnel related expenses and lower delivery and freight costs.
We also reduced its unique expenses by 17.8 million through lower selling expense control and travel and entertainment expenses and reduced bad debt expenses.
This will lead to an improved adjusted EBITDA margin of 190 basis points in the third quarter to 43.1% the highest quarterly margin since the spin off.
As we've discussed previously we like to focus on rebid as this measure as the contribution from our core rental business without the impact of sales of equipment and supplies.
We believe it provides a better comparison with our industry peers as it excludes the impact of varying depreciation policies.
The importance of Rebids margin becomes especially CLIA when equipment sales activity is not at normal levels.
We have it the I was 195.9 million a decline of $12 million or 5.8% with an improvement in read the damage and up to 48.3% compared to 44.9 sales last year.
We're all very pleased with the whole teams contribution in responding so effectively in this operating environment.
As I continued to deliver outstanding management of operating expenses, while maintaining superior customer service in a very challenging environment.
Both the staff and general rental business and now back full time now field support staff is slowly beginning to come back into the office they've done an outstanding job of working remotely since mid March we continue to remain productive and effective and committed to providing white glove service to our branches and customers.
Please turn to slide 17 for.
For the nine months ended September 32020, free cash flow was 252.4 million.
We reacted quickly to cut capital expenditures as soon as it became clear that COVID-19 shutdowns would impact rental demand and should continue to generate free cash flow for the balance of the year.
Net leverage decreased to 2.5 times as of September 32020 at.
At the low end of our target range of 2.5 to 3.5 times and compares to three times a year ago.
And our credit rating for my time at a solid B, one and B plus.
Total debt was 1.8 billion as of September 32020, or reduction of about 236 million from December 31 to 19.
The actions, we took last year to refinance our balance sheet positioned us well to steer through this challenging time.
We have no material covenants on the senior notes and no material covenants to be tested on the ABL until availability is below 10% or 175 million.
We had total liquidity of $1.4 billion as of September 32020 comprised of 1.3 billion availability on our ABL credit facility 50.
15 million on IR securitization, and cash and cash equivalents of $53.8 million.
With no near term maturities, we have ample liquidity for the year and into the future.
We remain cautious in our capital allocation and we'll apply free cash flow to pay down debt.
On slide 18, we will take a look at the latest industry forecasts coming.
Coming off maybe the worst quarter in modern economic history, the industry forecasts as starting to get more consistent with the outlook for the next few years.
Our forecast for North American rental revenues is probably the best estimation of rental revenue trends taking into account the current macro economic environment and forecasting for North American rental revenues.
The most recent industry forecast for 2020 is 50.5 billion with a modest improvement going into 2021.
This looks reasonable based on what we have experienced so far and 2020 and assuming there are no further economy wide shutdowns. This.
This estimate receipts rental industry revenues back to 2016 levels.
Before turning to close to 2019 levels and 2022.
We need to remember that 2016 and 2017, we certainly not the wishes to be in the rental industry and there will be plenty of rental activity for him to target although.
Although they may need to be a certain amount of industry fleet reduction required to adjust to this level of rental demand.
We said this before our industry's resilience and tends to benefit in some ways and recessionary times such as these when the secular trends of ownership to rental accelerate as our customers conserve capital.
Our industry is also not dependent on any one in my pocket in the fleet can move freely with an a minus both geographically and by end market.
We support industrial customers local governments maintenance and repair customers restoration and emergency response as well as nonresidential construction.
Dodge analytics predicts infrastructure in healthcare Nonres construction spending will be up by 19% and 2021.
Scott was also a strength that is challenging environment hit rentals is the fifth largest rental operator with a long history of established relationships as the capital in the strategy to take advantage of growth opportunities.
We are committed to growing our market share and closing the gap with ALJ appears.
Our leadership team is comprised of seasoned industry veterans and we intend to take advantage of our size and customer service capabilities to continue to expand our footprint and penetrate target markets.
On page 19, with the guidance update.
With a certain amount of stability returning to our business outlook in our better than expected third quarter results. We are raising our adjusted EBITDA guidance for the full year 2020 as.
Assuming no further COVID-19 related shutdowns, we estimate full year 2020, adjusted EBITDA should be in a range of $655 million to $675 million an increase from the previous range of 625 million to 650 million.
We expect 2020 net capex to remain in the same range of 190 million to 210 million.
In this scenario, we will continue to generate substantial free cash flow in 2020, which we will apply to reduce debt.
We are proud of the way the hix team has managed through a rapidly changing and difficult operating environment and we remain committed to making here the employer supply and its been a choice and.
And now I'll turn the call back Larry.
Thanks, Mark and please turn to slide 20, before we go to a few and I'd like to summarize where we are you've seen this slide before it's the blueprint of the five strategic pillars, we develop nearly five years ago to accelerate growth and close the gap in financial performance between Herc and our larger peers not strike.
Energy has really delivered now on.
Now on slide 21, since the 2016 spinoff we've made substantial progress.
As you can see from this slide from 2016 to 2019, we achieved 8% compound annual growth rate for rental revenue all through organic growth with improving efficiencies each year, we increased adjusted EBITDA and even a faster CAGR of 11.4% in the same period.
In 2016, we set a goal of closing the gap in adjusted EBITDA margin with our larger peers as you can see we've made substantial progress.
We were burdened with high debt at the time of the spin off and with disciplined capital management, we've reduced net leverage from 4.1 times in 2016 to 2.5 times as of the third quarter of 2000 each morning.
We've accomplished all of this with a consistent and steady strategy that delivers results are.
Our business model is resilient with a strong balance sheet and improving free cash flow, we have the flexibility to continue to invest in our fleet, particularly in our specialty businesses and to take advantage of other opportunities for growth through SaaS.
Through solid execution, we intend to continue to improve value for our shareholders customers and employees in the long term and now I would like to have the operator open the line for questions. Thank you.
Thank you we will now begin the question and answer session.
You ask a question you May press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
So what's your your question. Please press Star then team.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Jerry Robbins with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Good morning, Jerry.
Really pleasantly surprised by the fleet on rent progress we've made over the course of the quarter and beyond.
The outlook for the fourth quarter, which looks like implies a sequential increase in fleet on rent, which.
Is better than normal seasonality I'm wondering if you could just talk about which end markets are driving that sequential improvement.
Into the fourth quarter.
And the trend that so obviously better than we normally see in the fourth quarter.
Hi, Jerry this is Aaron in the third quarter, what drove that was.
The stronger come back to the Nonres commercial markets that we participate in as well as the the markets for the emergency response, such as it down the Hurricanes and those are the bigger drivers. We also saw just our industrial manufacturing segment start to pick back up as we mentioned it was starting to close.
The gap on the pre covered levels.
Okay, and then in the fourth quarter. So it looks like based on the year over year comments you made on fleet on rent you are looking for sequential increase in fleet on rent Fourq versus Threeq, which which is very good versus normal seasonality. Jay can you comment on what's driving improvement into the fourth quarter.
Yes, I think the same the two of the three are growing specialty business. The commercial markets still are trying their best to improve we're participating in that.
And we see our industrial manufacturing come back to emergency response piece that probably won't repeat but we do see the fourth quarter as long as there's no other coded.
Impacts.
Closing down of.
Cities et cetera, we can we continue to see improvement in the fourth quarter. Yeah. Jerry We're also seeing a slow beginning of improvement in our entertainment, especially the primarily TV and film as that slowly comes back as those content.
Users dip back.
Yes, yes, I think we all look forward to that content coming back and in terms of the EBITDA guidance for.
For the fourth quarter, you know your margin execution has been really outstanding this year and I think the guidance.
Rents to margin compression in the fourth quarter compared to normal seasonality and Im just wondering is that just because we're so early in the cycle. There is a lot of uncertainties or do you have any costs that are coming back.
Can you just give us a bit more context there.
I mean, I think Q3.
Q3 is typically the seasonal peak in margin as it is and rental revenues and rental volume.
We are looking to see some losses on equipment sales in Q4, which may have an impact on on Q4, EBITDA margins and other than that just just I think conservative forecasting the environment still it's becoming clear, but it's still a little bit cloudy out there as to which way.
Things are going to go.
Okay I appreciate the color. Thank you.
Thank you Jerry Thanks Gerry.
Our next question comes from Mick Dupre with Baird. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question here.
So I just kind of want to follow up on the discussion. If my math is right then cleaner ending OE is down call it 5.5% versus the prior year.
Excluding exiting the third quarter and.
You're also saying here that you're going to.
Further tap the auction channel and sell a little more equipment in the fourth so in theory that should put.
Pressure on lead yet again so.
I'm thinking about that and then I'm looking at your comment that the guidance is embedding a fleet on rent decline of 46%.
Okay.
Should we interpret all of that and utilization being flat year over year in the fourth quarter.
We don't really guide to utilization over time.
Time utilization.
Thanks, I mean, I think the best way to phrase it as we've seen a massive WACC.
Whack to rents with the mine in Q2, we saw.
We're still struck we're still working on catching back up to year over year labels and Q3 and Q4, so closing that gap, but there is still a gap.
And within that there is room to adjust our fleet so.
I think running a reduced fleet size in that environment is completely appropriate we typically take down sales in Q4, and any sort of normal year.
So to just working our way back to that normal fleet management in Q4 of this year.
Right I understand you don't you don't guide to utilization, it's just that that's sort of to me what the numbers would imply and really the essence of my question is more along along the lines of it.
Equipment supply and demand versus where you see current market levels of market activity and frankly, what that implies on a go forward basis in terms of equipment in batsmen beyond the fourth quarter.
So thats really kind of what I'm trying to get at I'd appreciate some color there.
Yes. So we are looking to close the gap to 2019 as fast as possible. We are looking to increase our.
Rental fleet on rent.
The actual size of the fleet doesn't necessarily control that so we can increase volume and take the fleet size down.
We are seeing 2021, I mean, you look at the macro the macro stats.
As looking flattish up 2020, we're looking we've probably going into 2021.
Relatively balanced.
In terms of our capex sort of expectations and we can adjust that as necessary. So if we go in with a small fleet.
We can adjust.
To the actual demand that we see is that shows up during the year and react accordingly.
Understood then my last question since you brought up that slide 18.
You know I understand that these forecast that you have on this slide are not yours theres sourced from third parties, but as you kind of think about the industry.
If it stay front than the nonresidential building star forecast for 2021 is correct.
And industrial is obviously recovering.
Should the North America, and North American equipment rental market to be flat in 21 versus 20, how do you. How do you think about the moving pieces there.
Yeah, I'm not really thank goodness, calling them as to be able to sort of put it together myself.
I think that there has been a big impact to the US economy this year for sure.
That's going to have an impact on 2021 that we really don't know.
Thank you our end markets are probably more resilience in better shape than than a lot of the end markets, but as.
But as I said, you know I think we'll just positioning our fleet.
As normal in Q4, and we will be ready to react to the activity that we see and 20 2022 in one I think it's going to be a bad year, there's going to be challenges in certain end markets and that is going to be opportunities in certain end markets.
All right. Thank you.
Our next question comes from Ross Gilardi with Bank of America. Please go ahead.
Okay.
Thanks, guys good morning.
Hey, Ron Ron what are you doing.
Oh, great. Thank you.
I just wanted to ask I think I asked a similar question last quarter, just with Q4 your fleet on rent down 4% to 6%.
In Q4 in your your rental revenue down six to eight.
The delta more rental rate erosion or is are those mix or other impacts you lap elaborate on that.
I would say, it's it's more mix and other impacts rather than rate, where we're seeing positive movement in rate and will continue to drive rate was as aggressively as we have been over the last.
16, or 20 quarters, and so I think it's more than other areas.
Got it and then.
Your resi and all that where do you where you exit the year on a quarterly basis because of some of the other questions alluded to.
While revenue certainly seems.
Barry.
Q4, if not a little bit counter seasonally positive but.
My math is correct I think you've still got EBITDA down like 20%.
Okay.
On a year on year basis in the fourth quarter is most of that just DNA coming back in the day.
Whatever you do in Q4 should we view that as sort of an appropriate run rate for 22.
2021 at this point.
Well I'll, let mark comment to the.
Specifics, but we are having people back out traveling.
Back I'm seeing customers.
More things are happening so its natural to assume that.
Our ASG M&A will cost will pick up.
Same with the L. we.
We will begin to ship more gear as we begin to utilize.
Utilize the different types of services that maybe we were able to contain and completely turned off.
During the high peak of Covance, but as we return to normalcy.
I would expect.
Some of those.
Categories to also to return to more.
More normalcy that said, we've been able to.
From a figure out some new things adjust our business model learn some new ways to contain cost and we will expect to continue.
We continue focusing on those.
New methodologies to keep costs down, but mark you may want to comment on is specific request.
I think I mean, there will be some costs coming back as the volume increases we are.
We are focused on margin improvement and I think you'll continue to see margin improvement as a result of that so some of these cost changes are permanent and I are.
Permanent and I are just utilizing operating leverage as or as revenue base comes back. So we will look to give you a 100 to 200 basis points of rate with our improvement.
Over the next couple of years.
It's going to be a little bit challenging to sort of keep on running at this sort of cost 300 basis point pace.
We will continue to sort of.
Look for 100 to 200 basis points each year.
Got it. Thanks, Thanks, Mark and then just lastly can you guys elaborate a little more on the pro solutions up 14.
14%, that's obviously pretty impressive in this environment bonds.
The number look like.
May be stripped out the emergency.
Response tied to call them on the Hurricanes.
Well, we've invested in the pro solutions business for the last four years with fleet, but.
But brett across North America, opening up new locations, adding in tech.
Technical expertise and professional sales people.
People into the business. So we we've invested more.
More rapidly than our general Gen rent business. So we do have expectations for it to continue to grow.
Faster than the rest of our business and I think this year that.
That model is proven out in the Navy anytime there is a emergency.
Disaster like we saw with the Hurricanes you know they do have relationships, where they can move in and it really solve the problems those communities pretty quickly and so we like that part of our business very much.
Is your capex in that part of the business actually trending up yet at this point and.
Certainly seen given that given the growth there that that.
That's that's probably on a bomb I was wondering if you agree with that and what types of equipment with that.
Entail if that was the case.
Well that's true when we gather together when they co that situation began in March we decided where should we reduce our capex and where should we not and we did not pull back on our pro solutions Capex.
Okay. Thank you.
Yes.
Our next question comes from Brian Sponheimer with.
I believe from please go ahead.
Personally I don't really hi, Ryan.
Good morning, Brian.
Look another great quarter I am just curious about them.
About the visibility you have on the entertainment business and to the extent that you can.
If you can kind of dimension, what you expect to come back and.
But still.
Whether it's the festivals or things like that would still potentially a concern for for 2021 yeah.
Yes.
I think our visibility on TV and film was pretty good in terms of what we see coming back and where thats coming back.
In the what I'll call the pure entertainment area.
Live live events.
Thats, probably little more cloudy at this point no certainty as to when that might come back.
In terms of any great strength.
Until we have more visibility on the path.
The pandemic and that.
That diminishing or there being some kind of a vaccine.
You can just watch on sports.
Sports and things that you're watching on TV you know there's not many people that these these venues today so.
That's a little more cloudy the TV and film is slowly coming back aren't any more color on that.
Yes during the five months after the other co that began they went.
From drilling pretty well to zero and the month of September we have started to come back to life. As we said you know, maybe it's 25 or 30% of normal, but we believe we believe from talking with our teams that.
It will continue to pick up pace and maybe sometime in the first quarter. If nothing else comes along that disrupts business, we'll be getting a lot closer to what it was on the fly the bed business I think there might be a slower term that's how we kind of divide our entertainment into film TV commercials, and then by that.
That satellite advance.
Have to wait and see I know there is things being planned for next year and our customers are talking about needing equipment that we'll have to see how much of that materializes.
Thank you. That's that's really helpful and just this is about a low to mid single digit business. When it's normalized as a percentage of total revenue.
Yes, Thats correct, yes, okay.
All right well best wishes for another another good quarter and thanks.
Thank you very much for answering my questions.
Hey, Ryan.
Our next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Good morning.
Thanks, Dave.
I guess you have to start with on the unique factors.
For Q3 results.
Like energy a hurricane.
Hurricane and then entertainment coming back online.
If you add those up.
You know what the rental revenue do maybe.
Those items.
I think thats, a little bit granular.
For us to really be able to respond to.
I mean it.
As Aaron alluded to that the entertainment business was coming off of zero. So that might have had a beta percentage increase but I think just in general as you know the economy was shut down and the economy to reopen so most end markets grew at a similar sort of pace outside of that outside.
It may be that.
Entertainment and film, which was really locked out.
And to give you a little bit more color bill the number are there.
The revenue attributed to the Hurricanes and the fires was only about 1% of our third.
Third quarter breads.
Gotcha, Okay, and I guess.
Maybe thinking how.
Some of these unique factors hurricane and entertainment coming back online.
How does maybe that carry over for Q1.
I know, there's generally a sequential decline from Q4 into Q1, but given this an odd year in those starting to come back.
Well that seasonality.
Change much up from Q4 into Q1.
Yeah, I mean, I think we'll see the normal seasonality.
It's been an unusual year, but there's still going to be on winter.
So it will drift off towards the end of Q4 as it normally does and continue to sort of drift down into January and start picking up again.
Hey, Paul.
But the question you know the real you start to see the real impact to or the real strength of 2021 and that sort of spring season.
And we'll be working our way through the winter.
And the and.
Keeping a keen eye on just activity sort of kicking back into the spring.
Great and then last question from me on on pricing specifically for the entertainment.
Market as that business comes back on.
Pricing similar to what it was three pandemic as you put that we back out.
Yes, I think you can see from our results.
In the third quarter with with all the businesses coming back in that pricing has been relatively stable.
Great. Thank you.
Hey, Steven.
Our next question comes from John Healy with Northcoast Research. Please go ahead.
Thank you.
Hi, Congrats again on just a strong year to date performance. Despite everything that's been going on I'm just one.
Just one question for me.
When you look at kind of the change in revenue in Q3, I imagine you have a better handle on it versus what you saw in Q2, but if you just looked at kind of like the industry on the non res customer activity.
How would you describe that.
The breakage in revenue is it is it projects that are delayed is it projects that are canceled is it.
Limitations in terms of the.
Pasadena in which these customers can act and I'm just trying to understand the composition of the revenue decline that you guys are seeing in the business kind of more of.
How.
How in <unk> and the <unk> and the Tangibilitate, how its developed sure.
Sure.
Don is Aaron.
To break it down a little bit on the industrial side of the business. We've seen projects delay early on right after March and now coming back.
We believe that that work has to get done so whatever doesn't get done this year. They will probably happen next year, we've seen some industrial projects actually get delayed indefinitely.
We read one yesterday that was related to that.
The vaccine in the pandemic and they were just delaying and it definitely but on the commercial side, we've seen our national customers on the non res commercial side hold up better than our local customer business and the way I would describe the nonres commercial business is just the projects that were in place are coming back in.
They're going back to work and.
We'll see next year, what the pipeline really it looks like that they're just getting back to work on the nonres side on the industrial side, they're delaying more or less but.
As we get into the latter part.
The latter parts of the third quarter of 2020 in fourth quarter were seeing them those delays actually starting to kick back in and there is there is some impact relative to the availability of workers of construction workers of trade skilled trade.
As a result of the pandemic with.
There being no breakdown.
Breakouts and things like that on various projects that are certainly impacted.
Numerous projects across the nation so.
I think thats part.
Part of the part.
Part of the delay in part of the issue relative to that returning more quickly.
Great. Thank you guys.
Thanks It ticket.
Our next question comes from Seth Weber with RBC capital markets. Please go ahead.
Hey, good morning, everybody.
[music].
Good morning, I guess, maybe for Mark.
The fleet age is up to 47 months I think it was up from 44 I mean can you just talk about.
Your ability to continue to sweat the fleet.
Further at what point does repair maintenance become prohibitively.
Expensive or you know how much.
How much more room do you feel like you have to sweat the fleet. Thanks.
Well have you been to Krishna.
Krishna Aaron but I, yeah I do.
I don't have a problem sales.
Trading fleet, so all of the beta for a CFO.
The.
The maintenance does not even really get prohibitively expensive I mean, we've got you.
You've seen it pushed out the 50 150 355 months.
And now the fleets before that you pick up maybe one or 2% off of maintenance of incremental maintenance costs.
Which doesn't really.
It cost you a lot in terms of the replacement capital the fleets gotten beta.
Then it has it has been in terms of manufacturing quality and ability to age.
The rental customer the rental hold is maybe 30% of the actual life of that fleet. So you know once we sold it theres another to organize probably so it's not it's we're flexible based on on market conditions, but.
But you know these downturns don't tend to go past two years. This one looks like it's going to be real shortened shop Uh huh.
44 is not a problem at all and I will.
We'll be flexible as we go forward, but it's it's not a fleet age doesn't provide an issue. It's really just the economic environment that we are dealing with that what's what's most of the challenge on.
Okay. So you.
You wouldn't be opposed to pushing it back into the low fiftys is that what is that what you're saying no.
Not at all but Eric and jump in summer along the way here. So yes go through the last downturn 810 years ago, Yeah, I wouldn't be concerned about going 50, 153 months, if we had to but our our fleet makeup is a lot different and this company than it was back then again the specialty business.
Fleet has a lot longer life. So the average is look a little different but I wouldn't sweat 51 to 53.
All that said you know.
Our preference would be let's see where this downturn is if we see an end to it will we'll bring the age of the fleet to damp down again.
Methodically over a period of time to make sure that if we encounter another downturn, we'd be able to sweat the fleet again.
Sure. Okay. That's that's helpful. And then I guess just the follow up to that would be you know you're kind of entering that time of year. When you start to have your negotiations with the Oems is it fair to think that you might be more cautious.
Even in your discussions initially you know to start on how you're thinking about capex for 2021, and just sort of in a relative to sort of.
Relative to your traditional cycles or traditional years you might have.
Hold off on putting orders in until you have better line of sight. So maybe that happens early next year instead of late 2020.
Well look I think we're a little early in the game for US you know.
For the really sort of comment on next year's capital.
But I think we do.
We do have some categories that will get a jump on where we know we'll have the opportunity and.
I think most of manufacturers.
With their ability to respond quickly would be readily available to supply gear, when and where needed.
Okay Alright. Thank you guys I appreciate it have a good day.
Yep. Thank you.
Rob.
Our next question comes from Rob Wertheimer with Lilly's Research. Please go ahead.
Okay.
Hey, good morning, everybody can you hear me now Yeah, Hi, Rob.
Hey, So obviously I'm really excellent results on cost control and the management General just a couple of questions on that and I know you've gone into it but did you pull any levers more this quarter are you like you know maybe in the S.J. line, we can see some and the rest of the business and then if we look at U.S. DNA line, how much of that sales.
Weve should we expect to sort of indoor permanently versus bouncing back up in the fine you find efficiencies from our operations and the rest in the rest of cost structure.
I mean, it's a little bit hard to sort of get too granular on it. They were in Q2 and Q3 there were some really unusual if DNA savings just given the amount of the the shutdowns. So it is going to come back a little bit I think you can probably run it at the same percentage of rental revenues.
I'm going forward. So we'll continue to try to lock down the the margin impact.
But on an absolute basis, they will be cost coming back into the business as the volume improves.
Okay, perfect and what about the rest of the cost structure. I mean is there is there a lot of extraordinary stuff in there driving this kind of margin gains and pricing wasn't help it has been for you obviously will be again.
The margins are great. So just a little bit of question at its maturation of all the efforts you've been doing or whether there was any any onetime lumpiness no.
Pulled cost out and as you know this quarter outside of us. Thanks.
Again, not really so the deal we we've been we've been working really hard on a lot of those line items in terms of just.
Maximizing operating leverage so that will continue I suspect that the same sort of level of rental revenues and I think.
I think maybe some of these questions are coming around in terms of the guidance for Q4, and it's more I think the EBITDA margin.
We're sort of guiding towards is as being impacted by equipment sales. So you're not going to see the same reduction and rebid our margins going into Q4 as you on that EBITDA margins, So that's not going to pop.
That's not going to pop up in your cost lines, it's more in the used equipment.
Losses that were factoring in.
Thanks that was helpful answer my question more just structurally I mean, youve improve the cost position materially this year in a tough year side I was just trying to sort of keep a hold how much was most permanent and.
The result of ongoing ongoing efforts versus price.
Crisis related but anyway, thanks for the answers yes.
Yes, no you got it then I think I mean margin you will see margin improvement or we are definitely focused on continued margin improvement in 21 and 22. After this sort of 2020 levels that you're seeing.
Okay, and that's about it.
Thanks, Rob and operator, we'd come to pass an hour I said, which is typically when we end. This so my apologies for the others that are lined up to take cost, but we can give me a five and we'll try to follow up with you. Afterwards. So thanks again, everyone for joining us and we look forward to speaking to you all.
Yeah.
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