Q3 2020 Nesco Holdings Inc Earnings Call
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Thank you for standing this is the conference operator.
The NESCOE Holdings' third quarter 20 between earnings calls.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
During the question queue, you May press the one followed by the four on your telephone keypad should you need assistance. During the conference call you May signal, an operator by pressing star and zero I would now turn the call over to Mr. Preston pardon now at NASSCO Investor Relations, Sir you may begin.
Thank you operator, and welcome everyone to NASCAR <unk> third quarter 2020 earnings Conference call yesterday afternoon, we issued a press release announcing our third quarter results and filed an earnings presentation to accompany our prepared remarks.
Of which are available and that's because investor relations website, <unk> investors dofasco specialty dot com.
I'd like to remind you that managements commentary and responses to questions on todays conference call May include forward looking statements, which by their nature are uncertain and outside the company's control.
These forward looking statements are based on management's current expectations and beliefs actual results may differ materially.
Gosh, if some of the factors that could cause actual results to differ please refer to the risk factor section of our filings with the FCC.
Additionally, please note that you can find reconciliations of historical non-GAAP financial measures discussed during our call in the press release issued yesterday.
I will now turn the call over to not go Chief Executive Officer reject them said wait.
Thank you pressed and welcome everyone to Netscouts third quarter earnings call I'm pleased to announce that the third quarter marked the beginning of a recovery for NASSCO, while the affects of coal would have lasted longer than we would've liked our team has performed extraordinarily during these challenging times I.
I would like to highlight the contributions of our workforce, who kept us operational with virtually no interruptions to anywhere locations throughout this pandemic their adaptability, new safety protocols and operating procedures and its certainly uncertainty in the business environment enabled us to deliver essential services to our customers further strengthening our relationships as.
Trusted specialty equipment partner.
Our culture focused on quality reliability and safety was reinforced through this time of crisis.
We were measured in our response to evolving conditions and NESCOE is well positioned for success. Both in the short term and the long term, we execute a disciplined cost cutting and reduced capital investments to preserve liquidity and provide flexibility through economic and market uncertainty, but were careful not to cut so far that would impact our ability to pivot quickly as.
A man recovered.
With improving market conditions as strong demand outlook, we are focused on executing for our customers and investing for the future growth of Nessco.
We reported solid financial results in the third quarter, despite a challenging operating environment for the first two months of the quarter compared with the same quarter last year, our revenue increased 11% to 69.3 million and our adjusted EBITDA decreased 9% to 28 million our revenue increased as a result of improved equipment sales and the acquisition of truck utilities.
But the profits earned on these revenues were not high enough to offset the impact of the decline in our higher margin core rental revenue.
Our EPS rental revenue declined 9% or 4.3 million as a result of lower fleet utilization caused by cold related project delays or.
What we see on rent and utilization hit yearly lows in July before beginning to improve in late August we see on rent recovered by the end of September to 489 million up more than 10% from the start of the quarter approaching pre cobot levels NESCOE capitalized on positive trends experiencing the typical seasonal uptick in August in addition to a release of.
Some of the pent up demand from the second and early third quarters as some projects previously delayed due to covert resumed.
In addition to delayed projects coming back on line and normal seasonal factors. We also benefited from increased storm activity in late August and early September further increasing demand.
These trends resulted in a significant ramp up in new projects and demand into distribution transmission and telecom end markets real was relatively stable throughout the quarter.
These positive trends have continued into the start of the fourth quarter with current Oh, we see on rent of 512 million.
As we progress through the year and that's what our customers have gotten smarter about operating safely and the cobot environment well.
Well. This year has taught us that we cannot take anything for granted we're cautiously optimistic that the worst of cobot is now behind her company and industry.
Our customers are not cancelled many projects only put them on hold.
Those delays are expected to provide incremental future demand as these projects continue to ramp up.
As we look longer term our customers continue to have record or near record backlogs in market demand drivers remain intact and significant capital projects and transmission and distribution are in the pipeline, which will support grid maintenance fire hardening and alternative energy and telecom to increase conductivity and rollout.
To fiveg.
During the quarter, we continued to improve our financial flexibility through cash management and cost discipline.
We generated positive free cash flow for the second consecutive quarter and maintain liquidity of approximately 69 million. Our operational focus continues to be adapting to rapidly changing business conditions I credit the entire NESCOE team and our company culture for the successful implementation of these initiatives and the ongoing adherence to safety protocol.
Sales.
We learn to adapt to a hybrid way of working with our customers and with each other utilizing technology to meet virtually we continue to manage expenses working capital and curtailed capital expenditures in the late second early third quarters, we reduced fleet repair expenditures by servicing the limited numbers of units required to meet demand as we progress.
For the third quarter and market conditions improved we pivoted quickly to rapidly get units rent ready and deployed to meet increasing demand.
Even as activity returns, we're seeking to obtain maintain much of the savings from cost cutting actions taken to address cobot.
The cumulative effect of these initiatives undertaken would be approximately 5 million per year. While some of these cost savings are temporary related to lower rental activity and the elimination of most travel we are targeting maintaining at least 50% of these cost savings indefinitely.
We also expect to reduce our net capital spending for 2022, approximately 30 to 35 million as we slowed capital outlays and focused on selling underutilized units in our fleet to preserve flexibility and maximize returns. We are currently engaged in a returns based capital planning exercise to develop a 2021 capital expenditure.
Plan that will maximize or growth in cash flow.
By focusing our investments on end demand units with attractive economics, we expect to drive top line growth EBITDA margin growth and free cash flow growth through calculated capital allocation decisions with many customer projects expected to come online in 2021, we expect there will be plenty of opportunities to deploy capital with high return.
Turns.
In summary, cobot has not impacted our fundamental business strategy, where the positive growth outlook for our end markets. We will continue to focus on critical infrastructure end markets offering a young specialized fleet rental units. We expect continued strong end market tailwinds with an increasing number of capital projects in each of our markets.
Altered by the ongoing secular shift from ownership and toward rental housing that's goes north American customers.
We believe NESCOE is the market, leading pure play rental company in the electric transmission and distribution Telecom and rail construction end markets. We operate in very attractive end markets with significant growth ahead.
NESCOE has created significant barriers to entry with its young and broad fleet specialty rental equipment and National service network, the harder and trust of our customers and our reputation for reliability.
With recent additions to our management team, we have the right team in place to make the most of near term and longer term opportunities. This is a very exciting time to be at Nesco.
With that I will turn it over to our CFO, Josh Boone for a more detailed discussion of our financial performance Josh.
Thanks, Lee and good morning, everyone.
At least said, we reacted and performed solidly during the quarter, where we saw or are we see onrad swing significantly due to the pandemic followed by the start of a recovery.
Our revenues increased 11% to 69.3 million.
Our EPS revenue increased 5% to 54.2 million.
Core equipment rental revenue declined 9% to 42.6 million, primarily due to a 4% decline in Oh, we see on rent to 464.3 million and.
In the fleet utilization declined 7% to 72.1%.
The utilization decline was primarily a result of project delays and the distribution and telecom end markets in July and August in the late seasonal uptick in the transmission market.
Average rental rate per day held up well decline and a modest 27% on a consolidated basis to $137.
Ers equipment sales, which can vary quarter to quarter grew 147% to 11.6 million driven by customer specific projects during the quarter.
PJ segment revenue increased 39% to $15.1 million.
PJ rental revenue grew 10% to 3.5 million.
Primarily due to investments made in 2019 to establish a national footprint for PJ.
PJ sales and service revenue increased 51% to 11.6 million, primarily as a result of the acquisition of truck utilities.
Most of our PJ revenue stem from new project starts and many new projects were delayed due to covance.
We began to see improvements in P.D.A. during August aligned with new project activity and the ramp up in electric transmission.
These improvements accelerator through September and into October.
SPG revenues grow we expect to experience significant operating leverage from our Nupedia locations, we believe future revenue growth and higher margins on incremental revenue will drive strong EBITDA growth in this segment.
Adjusted EBITDA declined 9% to $28 million during the third quarter.
The decline in adjusted EBITDA was primarily due to a combination of lower utilization, which resulted in lower equipment rental gross profit.
Rental gross profit, excluding depreciation declined 10% to 33 million. This.
This decline was partially offset by increased sales and lower margin equipment sales.
Reduced SG today, and the acquisition of truck utilities.
Our disciplined expense management and cost cutting initiatives during the second and third quarter helped drive SDMA down 12% compared to the prior year and 22% sequentially from the second quarter.
Our free cash flow improved 29.8 million 2.5 million in the third quarter 2020.
Compared to negative free cash flow of $29.3 million in 2019.
This improvement was primarily result of curtail capital expenditures as well as increased used equipment sales.
Operating cash flow decreased point 3 million year over year.
Negative 4.8 million, primarily due to working capital outflow.
We expect this trend to reverse and working capital be a source of operating cash flows in the fourth quarter.
Cash from investing in improved 31.8 million year over year to a 5.4 million net inflow.
This was the result of significantly reducing our capital expenditures there were spots to covance as well as a concerted disposal of underutilized rental units.
We plan to continue to spend less on cash flows from investing in the fourth quarter and now estimate full year 2020, net capex to be between 30 and 35 million.
For the first nine months of the year total net capital expenditures were $30 million.
We expect the combination of reduced capital expenditures and working capital management will drive strong free cash flows in the fourth quarter of more than 20 million, resulting in positive free cash flows for the year and further improving our liquidity.
We have ample liquidity of approximately 69 million at the end of the third quarter. This.
This includes $1.6 million in cash on hand, and 67.4 million availability under our asset based lending facility.
At the end of the third quarter, we had net debt outstanding of $765 million and no significant debt maturities until 2024.
In the coming quarters, we will remain focused on targeted capital investments with accretive returns cash flow generation debt reduction and de levering. The business. We are committed to achieving long term leverage levels in the range of three to three and a half times.
We expect to achieve our long term leverage target through strategic growth and disciplined capital allocation.
As Lee said, we have enhanced the financial rigor of our fleet management and investment analyses.
We expect our 2021 fleet investments will generate even stronger asset level returns than they have historically and drive incremental revenue income and cash flow growth.
We have also increased our focus on divesting underutilized assets and assets with lower turns to free up capital and streamline our operations.
We will continue to prioritize maintaining positive free cash flows and paying down debt as we resume newfleet investments heading into 2021.
This will result in deleveraging through both debt Paydown and EBITDA growth.
I Echo lease sentiment that is an exciting time to be a NESCOE. The third quarter marked an inflection point for the company.
All of the pieces are in place to drive long term shareholder value.
We have phenomenal end markets, a strong management team and a winning business model.
Looking ahead to Q4 2021, we are seeing positive growth indicators in our end markets.
And pent up demand as projects delayed by the pandemic or reschedule our customers are at near record backlog levels and continue to reiterate their spending plans if anything covert is likely to accelerate the decade's long shift to renting versus owning equipment at our customer focus on capital preservation with that I would like to turn the call back to.
Lee for closing remarks Lee.
Thanks, Josh I will conclude by saying that my confidence in the future of NESCOE is at an all time high with the recent hires we've made we have a world class management team and deep bench of talent with multiple layers of expertise and every function.
These individuals are elevating our level of analytics decision, making and operational expertise to ensure we have not been in before at the same time, we have maintained all of the dynamics that have made NESCOE a great company.
We have a young portfolio rental equipment and a suite of ancillary services, specifically geared towards serving very attractive end markets. Each of our end markets have strong growth drivers that have proven very resilient through challenging times.
Can't think of any business condition that can be more unprecedented or disruptive than the co would slow down we just experienced arkon and are continuing to navigate.
We now think we have seen the worst of the pandemic from a business perspective, and despite this challenging environment, we were able to generate positive free cash flow by curtailing our capital spending our end markets held up despite the cobot slowdown and now we are seeing a recovery and pent up demand on the other side.
We are very well positioned to capture this demand with limited additional investment.
Capital investments made during 2019 in early 2020, I mean that we have available capacity and young equipment to serve rising customer demand and drive revenue and EBITDA growth in 2021, we're now formulating plans for incremental capital investment to accelerate this growth as we invest we will continue to manage costs and target generating positive.
Free cash flow to maintain financial flexibility our focus is on continuing to make strategic decisions and investments to support long term growth strengthen our competitive advantages and enhance our fleet portfolio.
With that I'll turn the call back to the operator and open the line for questions.
Thank you if you would like to register for a question. Please press Star one followed by the four on your telephone you will hear rich we told the problem to acknowledge your request if you.
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And our first question is from the line of Stephan US Chris with CJS Securities. Please go ahead.
Good morning, Liam Josh.
Good morning Steph.
First I want to talk about utilization can.
You may be give us some more color on how utilization.
Yes through Q3, and what that's looking like into Q4.
We continued into August July and then succeeding into August.
A really to the low level the trough for the year.
And then very late in August we started to see the seasonal uptake that we'd anticipated we progressed to the.
Mid seventy's by the end of September we've progressed past that and at this point in time, we're approaching the level that we typically call out is within our sweet spot of of utilization overall somewhere high seventys to low eightys and we see a good sustained run of this through you.
Your end.
Our expectation actually is it will have a more modest.
Holiday off.
Take than is usual and that's just the continued pent up demand projects people are trying to get things done and we'll see spillover of that into Q1.
So it it.
Has the opportunity to be a really solid start.
Start to our Q1 demand as well hey.
Hey, Steph and just a follow up.
Think about Q3 like we communicate it really was a tale of two quarters.
Realization hit that trough in that July or early August time period, and really dampened the quarter from an overall utilization and revenue perspective, we exited Q3, Italy as we talked about at $489 million of OE see on rent and we're at today at $512 million of what we see on rent relative to 638 million in our fleet at the end of <unk>.
At the end of the third quarter and so as we really progressed through Q3. It was sequentially better really week by week when we hit that trough in late August or late July early August and we continue to see that momentum in the back half in the here in the first half of Q4 and as Lee talked about the sweet spot of of utilization we talk.
How about in the last call we.
We felt like we could get back in the high Seventys to low eightys from a utilization perspective in Q4, and really leverage that momentum going into next year with the backlog of projects and the delays and postponement related to co bid and I would say, we're well on track to do that right now.
That's great color. Thank you.
And as we see utilization improved.
How should we think about gross margins going forward.
Yeah on the equipment rental side gross.
Gross margins were impacted due to utilization in Q3, a little bit of fixed cost our service centers, but the.
The big driver of equipment rental gross margin decline was we get whipsawed from all the off rents coming in in the first part of Q3 spilling over into from Q2, and then having to get those units rent ready very rapidly as we saw demand pick up very quickly and so Q3 margins gross margins were really depressed.
Due to that in the third quarter as we look at Q4, we have a much more normal normalization of off ranch in on rents as we approach more normalized utilization levels and so we should see sequential improvement in gross margin on the equipment rental side.
Jumping over to PA as well just from a gross margin perspective, we hit an inflection point on P.T.A. consistent with the ramp up of the equipment rental in the transmission side in September and so with that inflection point on P.T.A., we should realize operating leverage there as well in Q4 and expand our gross margins both on the equipment rental and on the PA.
Which ultimately drive combined with our cost cut EBITDA margin expansion in Q4 relative to Q3 sequentially quarter over quarter.
Great and if I could just squeeze one more in.
So maybe give us a little more color on how the end markets are progressing and maybe any major differences, you're seeing and how they've been affected by covance.
Sure.
I think the one consistent thing across the end markets is delay.
But that does not equal cancellation. So the plan project activity is there it's actually likely to be a scenario, whereas we finished the year a great deal plan project activity from 20 is kicked into 2021 and 21 we.
We believe is always been planned to be a very solid a robust year.
If you break down the markets transmission. There are several large scale projects, which we haven't seen enough off for a few years that are kicking off in this fourth quarter or may spill into Q1 that will be extremely helpful. These are multiyear projects.
Two three years, and our terrific projects to allocate and deploy equipment to to make sure that we're in a position of sustained utilization.
We're also seeing distribution projects under M. essays being let to our leading distribution contractors and were in a position to participate in those and again those are multiyear projects to three even more years as those msas are rolled over an extended and that again is a great opportunity to.
Realize sustained.
Realization at all we see on rent and telecommunications.
I wish I could say when is fiveg is really going to become real anyway.
Anybody who stands up on their soapbox and talks to strongly is still guessing and we do think though that 21 is going to see reality to it yes.
If you certainly look at the simplest thing.
The retail manufacturers of the phones themselves they've got the equipment out there isn't that kind of create enough Paul that the.
Telecom companies finally themselves get their act together and and then a sneaky way Cove. It has been a deterrent to some of the momentum that I think all the carriers would like to realize.
The most simple thing how do you get a permit out of a city or a county.
Basically has got all its workforce at home.
That's a point of friction that we said we expect to see diminish.
On an ongoing basis and that will turn loose the carriers to engage the contractors and engage nessco and supply of equipment.
From a rail standpoint, our market there remained steady and has been a great surprise over the course of this difficult time, and we don't see any issues with continued demand in that market space.
Okay.
Perfect.
Thank you, both and I'll jump back.
Thanks, Steph thanks.
Our next question is from the line of Tim Thein with Citigroup. Please go ahead.
Hi, Thanks, Good morning, So just to circle back on the utilization point earlier.
As you think about the sequential change last year, obviously very different environment in backdrop in many ways, but.
Yes.
Pointed as you think about kind of where you exited three Q.
Versus what you've seen thus far and given the visibility you have for all the the pent up demand do you think that 82% utilization numbers as a good one for us to kind of anchor around four in the fourth quarter.
Hey, tennis Josh.
I think 82% and a true normal state is definitely realizable for sure. That's I mean, let me talk about our sweet spot high Seventys low Eightys I would say 80, 82% gives us enough flexibility to work the work in process with our fleet and make sure we had the demand to meet our customers.
To hit 82% in Q4, it's definitely achievable you know, we're knocking right there with where we're at today.
In the high Seventys to low eightys to sustain that for the quarter at 82% for a blended average.
Got to think we are ramping up sequentially as we exited September into October and to where we're at today at 512 million of what we see on ramp versus 49 at the end of September so 82% blended for the quarter.
Yeah, maybe a little higher than where we would expect to achieve but we definitely think we could touch 82 at any point during the quarter.
Okay, all right good and then Josh maybe just to come back to the comments on how you're thinking about.
Fleet investment.
Kind of balancing.
Delevering and while also trying to target EBITDA growth, just given that that 30% to 35% spending level. This year.
And then combined with the visibility and some of the Big project activities and runway you see how should we.
Any any help in just in terms of I know, it's early you're still in planning, but how are you thinking about directionally.
Capex for 21.
Yeah. So if you think about capex, we incurred curtail capex related to covert here in Q2 into Q3, and we want to be very disciplined in our capital allocation strategy going forward.
Disposing of underutilized underperforming assets, we're going to take those cash proceeds and look to either one pay down debt and de lever the business or to redeploy that capital back into the business as we think about 2021.
Spend 80 million of net Capex in 19 pretty considerable amount and even a significant amount and 18 as well we're going to spend 30 to 35 million in 2020, I think as we think about 2021.
We're taking a very targeted focused effort on look at the asset level returns on the fleet that we're investing we want to make sure we invest in the right fleet with the highest asset level returns with high utilization combined with what we think said are going to be in demand with the market trends and sell for 2021. You know you could think of a capex number higher than 2020.
But probably from a net capex perspective, not at 19 levels, yet and so what that's going to do it's going to allow us to continue to reinvest in our fleet to grow our fleet keeper. It keep the age at appropriate level, but we're going to balance that we're generating free cash flow.
Reduce debt and de lever the business and ultimately we're going to de lever through both EBITDA growth.
And reduction of debt and those two aren't mutually exclusive we feel like we can do both with a disciplined capital allocation strategy in 2021, and really executing driving this business for next year.
Okay very good and maybe just one last one for me.
The whole discussion of renewables and listening to some of your larger customers.
And that record backlogs that you referenced.
It seems like they're referring to or.
Pointing to some renewable energy driven transmission activity.
Ill focus on.
You know even some.
Battery projects and hydro development.
Some solar project side, how do you see I don't Madden, you're you're picking the offshore wind category, but just maybe talk about how NASSCO plays in that.
You know just in that world of an increasingly.
Renewables focused.
The world. Thank you.
You know we absolutely welcome any change in our sources of generation.
Particularly renewables.
Any renewable energy source generation source is so highly likely to be put in place in a low geographic location that is not served by the existing transmission substation and breaking it down to distribution infrastructure as a result.
Any of those renewable generation sources coming online.
Our our followed by or concurrent with is the development of transmission activity and as each of the major contractors as commenting they expect a significant level of investment in renewable support over the next decades I believe the count is now up to somewhere in the 35 range of state.
What's that have mandates to blend traditional generation sources with now renewables escalating all the way to 100% with California, I believe that's either 2040 or 2050, so a tremendous amount of conversion from historical to renewables, we participate fully in all of the transmission does.
Element and we do participate in that construction.
Solar fields.
Wind farms and so on it's it's secondary to the intense.
Contribution of participation and transmission line construction, but its still a plus and obviously what the political result that appears to be the case, we will see first off a.
Joining again, the Paris climate accord that should be followed by continue.
Continuation of the tax incentives around both renewables, but both forms of renewables primary wind and solar and again.
We love a change in generation and renewables will probably be something that that comes to the forefront over the next several years.
Very good thank you.
Thanks, Thanks, Dan.
Our next question will be from the line of Mike Shlisky with Colliers Securities.
As a reminder, if you'd like to register for questions. You May press. The one followed by the four please go ahead Mr. shlisky.
Okay. Good morning, gentlemen.
Right.
Maybe want to start off by asking about rental rates.
Two there was down a little bit in the quarter over the over the prior year wasn't huge but.
Did you see any.
Sounds back here in Q4, so far for the rental rates.
Mike I wouldn't say that weve seen a bounce back, but we saw very isolated.
Pricing challenges over the timeframe of significant decline and the rebound in demand has been quick enough. So we think thats really the end of it.
In our industry tends to first focus on availability and who they're getting equipment from from our responsiveness standpoint price falling fairly far down the list.
Lastly, with the soft demand around the pandemic impacts there was a little bit of pricing challenge and have to acknowledge we we did face it and we made decisions to adjust where we want to retain the business and not where we didnt put.
But it's pretty modest and its impact and again, it's moved solidly to the background around availability is paramount exactly when you're going to have availability.
And how are you going to support me in the field so.
We're we're I think at a steady state and next step will be the opportunity to take a look at increases.
Mike the other.
One component I'll add is price what we show for price blended for the quarter is also a function of mix and if you look at Q3 transmission market was down for us in the quarter, a bounce back pretty rapidly latter part of August and September but overall, that's the most expensive equipment and the highest rate per day.
And the market actually perform the greatest.
As rail and that has the least expensive equipment and the lease rate per day. So the elements within the quarter on kind of isolated pricing challenges that we had commented on.
Was maybe an impact I would say the biggest impact in the quarter related to price wasn't necessarily pricing challenges. It was more a function of mix for the transmission being down quarter over quarter.
In rail and distribution being up and those have just less expensive equipment and less rate per day.
Got it got it thanks for that color.
Wanted to turn to your Capex budget for this year and how it's gone so far I'm kind of curious to get a sense that competitors are making some of the same adjustments to their fleets that you are making.
I think certain ones are the position there.
They are.
They are running out units, but there also.
Manufacturing their own units so.
We had done the same things that you've done or have you gotten maybe one step ahead of the competition here given the other companies challenges out there.
In our primary competitors in.
Two of our leading markets, our manufacturers or final stage manufacturer.
And they use their rental fleet clearly to support steady state manufacturing processes, the obviously curtailed their manufacturing.
A reasonable degree.
But at the same time.
They've got existing inventory in the pipeline and so on we did not see any.
Any flood equipment into the market new.
We did see everyone looking to transact some other more used equipment and different approaches.
Overall, there has been a relative state of stability within the competitive landscape I guess, the short way to say that nobody appears to be dumping equipment, creating chaos, well that's pricing around rental pricing around used equipment sales.
Mike I would just add that you know lets curtailing capex is not at the expense of of growing the business. We have a very healthy fleet healthy age we've invested significantly in 2019 of $80 million of net Capex, we front loaded our capex this year and so as we are disciplined with our capital spending here in Q2, Q3 and Q4.
We are positioning the organization to be in a solid financial position as we exit 2020 to then put forth a disciplined capital allocation strategy, that's going to invest in the rightfully that drives the highest returns and higher utilization and so it's just a little bit of a transition here as we're navigating through what we see on the backstage of coping related to our business, but that's curtailing capex in this environment, we don't believe its.
At the expense of growth in the business, we still have plenty of upside and momentum within the fleet that we have today. In addition to what our planned investments are for 2021.
Got it got it thanks for that.
Maybe lastly, turning here too.
Hey business.
Do you have any goals.
For the penetration of P.T.A.
As a percent of rental revenues for 2021 or is it still too early to figure out how that might have that might turn out.
It's still too early to identify a precise goal, but we certainly anticipate a solid growth and outperformance number.
We've got the infrastructure in place across the country with the Super regional locations.
We're in good position from the standpoint of being able to grow our strong alliances with.
Are the major contractors, the super regional contractors across the company.
Countries skews with them.
And so we think we will see a really solid growth on that on a multi year sustained basis.
Our our goal in the intermediate term is literally double the scope of that business and that will put us in a position of looking at the next step of additional locations, but until we've doubled plus we really don't have that need and so it's a it's an attractive place to invest in rental fleet, it's an attractive place to.
Invest in the right team to develop the business because there's great upside in it.
Great maybe Josh Thank you I'll pass it on.
Thanks, Mike.
Our next question from the line of acute with Jefferies until please go ahead.
Hey, guys. Thanks for taking my questions.
They have already gotten to most of them, but the one question I do still have here is that you guys were talking about your fleet on rent being down 4% rate looks like it was down about 1%, but your rental revenue was down 9%. So what drives that difference there is that mix related or is it something else and how do you expect that to trend as you go through Q4.
And into Q1 next year.
Yeah. This is Josh is going to be mix related we talked about transmission being down significantly in the supplemental presentation. We provided highlights transmission down 14% in the quarter and really didn't snap back until the September timeframe, and thats going to be the largest driver of the raid and largest driver of our OE c. and so thats really going to impact the revenue side.
Things as we think about Q4 going forward, we expect that mix to shift we've seen a shift in September and we and we are experiencing a shift now in October and November were transmission ramping up considerably which should.
Help will flip that the other way.
We've got a clear visibility to participation in some of the most significant transmission projects.
It will be executed in the latter part of this year or starting in 21, and continuing really 22, even 23 and.
So we're we're in a great position to supply equipment to those long term projects and just overall that is the big the that is the big gear with the high rates and we're excited about that opportunity that we've earned.
Got it that makes sense and for those projects I guess do you guys have a sense of the magnitude of that we see that would be going into that to the extent that you guys are able to participate or do you have do you have to buy more equipment to actually participate in those projects you already have it.
As we progress through the sequence of some of the large projects coming online first opportunities simply to deploy what we've got in the fleet to really get our utilization and transmission to where we typically are and where we expect it to be and as you look at the remainder of.
21, then you will see us purchase to address some of the additional opportunity we've got a pretty discrete list.
List and in several cases of the equipment that is going to be needed and we're we're keenly focused in our planning for 2021 to match supply to that that clear and obvious demand.
All right great. Thanks very much.
Okay. Thank you.
Our next question from the line of Yilma Abebe with Jpmorgan. Please go ahead.
Thank you. Good morning, just one quick one from me it looks like in the quarter, the borrowing base decline to little bit from the June quarter at September quarter end.
What's what's the driver behind that and I guess, maybe related what's the seasonality on the borrowing base.
Yeah, Hey, this is Josh.
So we have plenty of liquidity with where we sit today 69 million and that's kind of how we think about the business from a liquidity and cash flow perspective, we exited Q2 at about 80 $485 million of liquidity. The decline there is going to be a twofold. The timing of working capital in Q3 with the timing of interest payments is pretty small.
Cash outflow offset by pretty significant cash inflows in Q4, which is what we're planning for here.
From the borrowing base perspective, it's really a function of depreciating the asset that's just a time based element to it as we progressed through the quarter. So there's no seasonality from the borrowing base its going to be a function of a pretty standard appreciate up depreciation element through the quarter, but when we don't have significant capital spending we're not really adding to.
That borrowing base and so.
Peaked at 80 45 in Q2.
From a liquidity we're down to 69 in Q3, which is plenty of liquidity to navigate with where we're at today and we expect to add significant liquidity in Q4 from an exit perspective in 2020 entering 2021 as expected generate more than 20 25 million of free cash flow in the fourth quarter.
Thanks, very much that's all I had.
Thanks.
Our next question will be from the line of a blended with Stifel. Please go ahead Sir.
Good morning, most of my questions were answered by just to have one left.
So it looks like your current leverage is.
Sixthree Ano stated goal of three to three and a half times and you mentioned, you're going to achieve that through repaying debt and EBITDA growth.
Maybe just how are you.
See that progressing over the next couple of years few years, and maybe the timing to kind of reach your goal. Thank you.
Yeah. This is Josh.
So we're going to de lever the business like we talked about through both EBITDA growth and balancing our capital investments back into the business to drive that EBITDA growth generating free cash flow to reduce debt. Those two elements are exclusive we think we can generate higher returns moving forward into 2021, as we dispose of Underutilize.
Lies underperforming assets and reinvesting that capital and the right fleet the right mix with the highest level of returns and so by doing that we think we can amplify and drive exceptionally EBITDA growth.
And we're going to be disappointed that capitalized we allocated as you think of the sequencing and the cadence of that Delevering. We think over the next three to four years is a reasonable target to get to that leverage estimate of a range of our goal of three to three and a half times I think is going to be a slow step down as you think of 20, 21% to 2022 and 22.
Many three hopefully sequentially improving every quarter, but for sure is sequentially improving every year, we saw leverage tick up just a little bit here with LTM EBITDA on the decline, but as we talked about we really hit an inflection point in September in the latter part of Q3 and that inflection point has carried us through Q4 as well and so we're really capitalizing.
On this momentum that we have in Q4 and expect that to carry forward into 2021.
Thank you.
Thanks next question from line of Robert Rose with Deutsche Bank. Please go ahead.
Hi, This is Robert roads on for Sean Wondrack. My question was just answering but I.
I mean, do you guys mentioned hitting a longer term debt target through due mostly debt reduction or EBITDA growth.
One of the other night just test.
I appreciate it.
Yes, I would say.
If you think about the ability to de lever the business. We have tremendous earnings power, we have tremendous earnings power in our fleet that we have on hand, we have tremendous earnings power of allocating the capital and high return assets high utilization and capitalizing on our end market that we believe have phenomenal tailwinds here in Q4 and 22.
21, and beyond so what that earnings power and our equipment rental combined with the PPA potential, which Leah talked about you know that we would like to double that penetrate penetration rate.
In the near term and ultimately can double the revenues out of the PC business without expanding our footprint as we've added eight facilities now with a super regional national footprint, and so would that tremendous earnings power that we have I would say that you know if you had to wait one to the other it's probably going to be EBITDA growth.
That outperforms debt reduction from Delevering the business that we think we can do both we think we could have a disciplined capital allocation strategy. We can do both of those and really hit our leverage target over that time period.
Perfect. Thank you very much.
Thank you thanks.
And it appears we have no further questions at this time I'll turn the call back to you may continue with your presentation or closing remarks.
Okay.
That concludes our call today, thanks, everyone for your interest and ESCO, we look forward to speaking with you on our full year 2020 earnings call in the meantime, if you have questions. Josh can be reached at investors at NESCOE specialty dotcom have a great day.
This does conclude the conference call for today, we thank you all for your participation and kindly ask that you. Please disconnect your line.
Good day everyone.
Yeah.
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Okay.
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