Q4 2020 United Rentals Inc Earnings Call
Good morning, and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded before we begin note that the company's press release comments made on today's call and responses to your questions contain forward looking statements the company's business and operations are subject to a variety of risks and.
TS many of which are beyond its control and consequently actual results may differ materially from those projected a summary of these uncertainties is included in the Safe Harbor statement contained and the company's press release for a more complete description of these and other possible risks. Please refer to the company's annual report on form 10-K.
For the year ended December 31, 2020, as well as to subsequent filings with the SEC you can access these filings on the company's website at Www Dot United Rentals Dot Com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions.
Forward looking statements and order to reflect new information or subsequent events circumstances or changes and expectations. You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow adjusted EPS EBITDA and adjusted EBITDA. Please.
Refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer, I will now turn the call.
And all over to Mr. Flannery, Mr. Flannery you may begin.
Thank you operator, and good morning, everyone. Thanks for joining us.
As we look back on the past year I feel the 2020 was of proving ground for our company.
And it gave us the opportunity to prove the resiliency of our business model and the disciplines, we've engineered for more than a decade.
Things like capital management cost management operational agility, and the willingness of our teams to embrace change.
We've demonstrated these capabilities during shopping periods and the past the last year was wasn't just the downturn it was a sharp and significant economic disruption.
And we stood up to those conditions, while keeping our people safe.
Streamlining our operating costs.
Aggressively flexing, our capex and managing our excess capital to reduce leverage.
In addition, we kept our full year adjusted EBITDA margin to within 50 basis points of 2019, despite significantly lower market demand and we generated record free cash flow.
And now the thing.
You are getting better.
Most of our end markets have been on a steady path to recovery since the third quarter and we saw that continue in Q4.
These factors helped us narrow the gap and rental revenue year over year from being down over 13% and Q3, the down just 10% and Q4.
And as you saw yesterday, our fourth quarter results were better than our guidance for total revenue adjusted EBITDA and free cash flow.
I was also pleased that throughout 2020, we stayed laser focused on execution, while remaining flexible and agile and a very fluid environment.
And most importantly, we never wavered for more fierce determination to take great care of our employees and our customers.
We didnt resort to reactive cuts and our service capacity that would hormone customer service or slow us down and the up cycle or impact our long term earnings power.
Early on we committed to keeping the key and the ignition on capacity. So we can start the engine up at any time.
And as we enter 'twenty, one and this has proven to be the right decision.
The execution of that decision rests squarely with our people and they have consistently delivered the.
They are the reason why our safety recordable rate remained below one for all four quarters of 2020.
And it's a credit for their professionalism and our Covid protocols were adopted so quickly companywide, allowing us to serve our customers safely.
And the financial results you saw yesterday and <unk>.
Generated by the talent and commitment of our people all working together as one of the war.
It's an exceptional team and I'm very proud to work beside them.
Now, let's look forward to the current year.
Covid isn't a traditional cycle, but it's the cycle Nonetheless, and we believe it will continue to have an impact for the foreseeable future.
As our guidance indicates we will continue to gain ground and 'twenty one as we work our way back towards pre COVID-19 levels.
Our sentiment echoes the majority of our customers and our recent surveys the <unk>.
Comments, we hear from the field and other external data points we've collected.
We're optimistic of the year, while being realistic that visibility is still somewhat limited.
What our guys and doesn't show is the cadence of demand this year.
And once we lap the first quarter, our toughest comp will be behind US and then we expect to return to growth as we move through 'twenty one.
And we base this on a couple of factors.
The recent spike in Covid cases is projected to settle down and the coming months, which should help reactivate some projects out of temporarily halted.
And as the vaccines and rolled out business confidence should continue to improve and this will provide a tailwind for both capital projects and the MRO spending.
And as demand trends up and we're well positioned to be first call for our customers.
And before I get into our operating environment.
One of mentioned our fourth quarter revenue from used equipment sales.
It was $275 million, almost 13% higher than prior year and it was driven by healthy retail demand and as.
As you know we look at the strength of the used equipment market is a key indicator for the rental industry.
And one of the retail market is favorable it tells us the contractors of projecting needs for that fleet.
Another positive indicator is that our industry overall showed great discipline on the supply side and 2020 and this is a good place to be as activity ramps up.
Looking at our operating environment, there are some encouraging signs.
The verticals, we called out as most resilient on our last call and are continuing to lead project activity and markets like power.
Health care the.
Distribution and technology.
Within these verticals, we're looking at a range of jobs, including data centers hospitals, warehouses, and and even power plants.
On the other side of the ledger pets.
Petro Chem continued to be soft and the fourth quarter.
The good news is that we're seeing light at the end of the Colgate total and <unk>.
We expect this sector to do better this year led by scheduled turnaround activity and downstream and chemical processing.
Within non res, which is our largest revenue base of number of new projects broke ground and the fourth quarter and other playing the startup this year.
These include some big stadium projects that were postponed when Covid hit.
And the same is true of airport construction and renovation, we see a number of these multiyear projects back on the table.
And to a lesser degree road and bridge work, which generally has remained steady.
Infrastructure has been topical since the election.
And while the details and the timing are unknown at this point.
President Biden has been clear that this will be a priority for his administration.
And as the economy continues to heal the United rentals, and a strong position to benefit from any increase and end market spending including infrastructure and we've invested for years and positioning the company for this type of scenario.
Our specialty segment had another good quarter led by our power and HVAC business, which generated fourth quarter same store revenue that was higher than the prior year.
It underscores the importance of our ongoing investments and specialty operations.
In total we plan to open another 30 specialty cold starts this year, which is double the number that we opened last year.
And this will bring us close to 400 specialty locations by the seller.
Here's the main point of my comments this morning.
You may recall, our mantra that the bigger doesn't really matter unless we're constantly driving for better.
And the way we get there is by doing what we say we're going to do.
2020 hit his first the challenges on that.
But we came through for all of our stakeholders.
And the learnings we gained from that experience have been incorporated into our operations.
And we'll leverage these learnings as we returned to growth.
Finally.
We said, we would fulfill our responsibility to investors by protecting the long term earnings power of the business and we're doing that too.
The takeaway from 2020 isn't what went wrong and the external environment.
It's what went right when we committed to of course of action and met our goals.
Yesterday, you saw the results of that commitment and today, we're telling you that we intend to deliver again in 'twenty one.
So I'll stop here and ask Jess to take you through the numbers.
And then we'll go to Q&A, the Jeff over the years.
Thanks, Matt and good morning, everyone.
Our financial results and the fourth quarter were better than we expected with rental volumes continuing to recover and strong used sales activity at retail and more on both in a minute.
Costs were in line and supported by supported solid margin in the quarter for.
Free cash flow for the year also exceeded expectations and our leverage at year end was down versus 2019.
And that's all good news as we move into 2021 and.
I'll provide some color on our 'twenty one guidance before we get to Q&A, let's start now with the results for the quarter.
Rental revenue for the fourth quarter was 185 billion, which was lower by 208 million or 10, 1% year over year.
Within rental revenue decreased $190 million or 10, 9%.
And that of five 6% decline and the average size of the fleet with the $98 million headwind to revenue.
Inflation of one 5% cost us another $25 million and fleet productivity was down three 8% for a $67 million impact sequentially fleet productivity improved by a healthy 420 basis points, mainly from better fleet absorption.
Rounding out the decline and rental revenue for the quarter was $18 million and lower ancillary and re rent revenue.
As I mentioned earlier used equipment sales were stronger than expected and the quarter coming in at 275 million, that's an increase of $31 million or about 13% year over year, driven almost entirely by an increase and retail sales.
And it reflected OSC sold up 35% year over year and the retail channel for the second quarter and of route.
Used margins and the quarter were solid at 42, 5%.
Notably these results and use reflect our selling over seven year old fleet, and just shy of 50% of original cost.
Let's move to EBITDA and <unk>.
EBITDA for the quarter was just under one point O 4 billion of decline of $117 million for 10, 1% year over year.
The dollar change includes a $143 million headwind from rental and.
Oh, we are made up $140 million and ancillary and re rent together with the remaining $3 million.
Used sales were a tailwind to adjusted EBITDA of $11 million, which offset a $3 million headwind from our other non rental of lines of business and.
And SG&A was another benefit and the quarter of $18 million with the majority of that help coming from lower discretionary cost mainly Fannie.
Our adjusted EBITDA margin and the quarter was 45, 5% down 150 basis points year over year and flow through as reported was about 66%.
I mentioned two items to consider in those numbers.
First you sales made up of a greater portion of our revenue this quarter, which was the headwinds to margin and flow through.
Second I mentioned on our Q3 call back in October that we had a benefit and bonus expense in Q4 2019 that would cause a drag of this Q4.
Adjusting for those two items implies a margin of 46, 1% and flow through for the quarter of just over 56%.
Both the results were largely as expected and pointed to continuing cost discipline even of certain operating costs started to normalize.
A quick comment on adjusted EPS, which was $5 and <unk>.
That compares with $5 60, and Q4 last year.
The year over year decline is primarily due to lower net income from lower revenue.
Let's move to Capex.
For the quarter rental Capex was $176 million, bringing our full year spend to 961 million and gross rental capex, which was 55% less and what we spent in 2019.
Proceeds in 2020 from used equipment sales were $858 million, resulting in net capex of $103 million.
ROIC remained strong at year end coming in at eight 9% that continues to meaningfully exceed our weighted average cost of capital, which currently runs about 7%.
Year over year of ROIC was lower by 150 basis points, primarily due to the decline in revenue.
Turning to free cash flow, which was a record for us at over $2 4 billion and 2020.
This represents an increase of over $860 million versus 2019.
As we look at the balance sheet, our having dedicated the majority of our free cash flow to debt reduction and 2020 resulted in a $1 9 billion or almost 17% decrease year over year in net debt leverage.
The leverage was two four times at year and down from two six times at the end of 2019.
Liquidity remains extremely strong and we finished 2020 with just under $3 1 billion and total liquidity. That's made up of ABL capacity of just over $2 7 billion and availability on our AR facility of $166 million, we also had $202 million and cash.
Let's shift to our 2021 guidance, which we included in our press release last night.
Our view to total revenue include the return to growth and rental revenue with the season starting in April.
We look forward to getting past the challenging comp in Q1, as we lap the start of the pandemic and move to delivering rental growth for the rest of the year.
Our guidance includes a range of outcomes, given our seasonal patterns and assumptions, we've made on the pace of continuing recovery across our end markets.
We're planning for another strong year and used sales and we will look to increase our capex spend to replace that fleet.
Within our guidance that reflects over $1 9 billion and replacement Capex.
Beyond that we continue to be focused on absorbing the fleet, we own and will adjust our growth capital Accordingly, with total spend planned at pre COVID-19 levels.
Our range on adjusted EBITDA considers not only the volume growth, we expect and revenue, but also our continuing to manage costs tightly.
And we'll leverage what we've learned in 2020, using our own capacity to support our customers with less reliance on third parties.
And our business continues to recover we will also see a reset of costs that ran low and 2020, such as <unk> and bonuses.
Finally, one of the best indicators of the strength of our business model is the resiliency of our cash flow, especially as we invest behind the growth.
In 2021, we expect another year of generating significant free cash flow and that's after considering of returned to over $2 billion and Capex spending will continue to use our free cash flow to pay down debt and reduce our leverage.
Now, let's get to your questions. Operator would you. Please open the line.
Certainly.
Ladies and gentlemen, if I can ask the question at this time. Please press Star then one on your Touchtone telephone you for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
First question comes from the line of David Raso from Evercore ISI. Your question. Please.
Hi, Good morning, Thank you for taking my question.
With the guidance the leverage at year end net debt to EBITDA is targeting about two times given that is the very low end of your targeted range of two to three can you take us through your thoughts of the year plays out I don't think of it.
Exiting the year on the year into 2022, and the leverage that low.
Hey, David It's Jeff Yeah, So from our perspective right now as we think about the free cash flow right and.
And that's obviously after the Capex.
And going to continue to focus on strengthening the balance sheet and continuing to pay down the debt as the as the.
The year moves on our focus is going to be.
First and foremost from the capital allocation perspective.
The growth and being able to fund the growth that we see.
First and foremost organically and then in smart M&A that debt.
May happen for us and so and it's for US it's not about having you know, let's say and arbitrary target of getting to two times by year end, but more of being able to continue to focus on growing our business and strengthening our balance sheet to better position us for that growth.
And just taking that answer.
And would you be willing to do something proactively during this year before you got down of two times I'm just trying to frame it for me.
The math seems like we're ready to lean forward.
Some of the economic backdrop, obviously.
And to dictate if that changes, but especially if we did get an infrastructure bill.
And that could even make you lean for it even more and I'm just trying to level set where people's heads are on looking at the leverage and if we did get an infrastructure Bill and how does that also influence when you think of the size of fleet and where you want to be positioned.
Yes, David this is Matt.
And your point of dead on right now.
Just coming out with guidance and we understand visibility isn't as clear as it would be in the normal year and.
And we're not all of the way through the tunnel, yet, but we absolutely feel and we get for the back half we're going to see growth.
Once we lap the comps for Q1, as we've discussed and off release and exiting 'twenty. One I think thats when Youll will really start to see what the economic and markets look like and where the growth opportunities are but where we're certainly positioned for it and we're not afraid to lean in as far as M&A specifics.
<unk> and suggests touched on it we always worth of pipeline quite frankly, and we work the pipeline through Covid.
And the past six to nine months it hasnt necessarily been of focus for Jeff and I. We've been we've had bigger fish to fry, but we're always looking for ways to better serve our customers and we're going to focus on organic because that's what we can control, but if we have and opportunity for smart M&A, we're always looking at that and once they get through our bar.
We certainly know how to integrate and we have the dry powder to do so just not in the immediate folks and loss.
Quick question I assume the evolution of your Capex planning, obviously just takes place through the fall into early winter can you just take us through how you evolve the decision.
I assume it was lower three or four months ago, how we got to the 215 billion gross Capex mid point some of the milestones you saw the it.
Contractors customer surveys and how they were thinking about the projects you already highlighted the way of used equipment markets Act can help influence your thought around your ability and willingness to sell and sell used and by new for replacement of things that drove the.
The size of the desire to add $200 million of growth Capex I'm. Just curious how you went through the milestones where you went through the planning process and come up with that number and all.
And I'll leave it there. Thank you sure. So so we build it up from the ground. The right. So we have a very robust planning process and I'll say the <unk>.
We started that process late for probably September October and then we deal with it and November December up here at corporate but the field was.
And pretty much where we are early there and now they're a little bit closer to it and at some point, we thought maybe they were getting a little too excited but as we started the look at the trends and the opportunities for us market by market going through the planning process. We.
It is where we ended up but this wasn't a light switch right because we beat consensus. This was this was the bill that's been coming for Q3, and Q4 and getting that feedback from from our field leaders and say, we're going through the planning process I don't know of Jesse had anything to add no I think that's it yes.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question. Please.
And how do you everybody.
Making the part and this is a little bit of the bigger picture question just on your growth trajectory. If you look at past several years <unk> been I don't know, maybe half and half acquired fleet versus organic fleet growth and just given.
How much of the industry is consolidated and your sales growth, maybe acquisitions, and maybe a little bit less.
And the future of him and the past couple of three years anyway, how comfortable are you.
Putting out more fleet organically over the next several years and.
And then.
When you might when you might.
See the market and balance of enough to really start thanks.
So I'm going to start with the end of your question first we actually see the market and balance.
Most almost all the way there already which is really exciting and when I think about how the industry has responded to this downturn specifically compared to the old non downturn, which was quite a different scenario l'oreal status tells us that we're almost in balance already from of days and fleet days on rent and we're not quite there yet, but a heck of a lot closer.
And then I would of thought so I think we're already and pretty good shape and now it's just about the opportunities that we can lean into and we do see growth headroom over the next few years this year may be.
A little less than what we'll see and the future years.
But I'll also say that this this this headline growth and just use the midpoint of three and 5% is a little bit misleading because it's.
Moving to absorb what is the tough comp in Q1, and when you model that out and you see the quarters two through four actually significantly.
Higher than the $3 five average per se so were already leaning into growth and we feel excited about it for 'twenty, one and beyond.
Okay.
Thanks, Matt.
Thanks, Rob.
Thank you. Our next question comes from the line of Nick debris from Baird. Your question. Please.
Good morning, Matt and Jessica Thank you for taking the question.
And I guess I'm going to go back to your outlook again and.
Is that mix of your mix on slide seven I'm wondering what sort of general assumptions have you baked in for <unk> and industrial debt underpin your revenue outlook for 'twenty one.
Okay.
So I think we all see the macro data points.
There are prevalent we're all looking at the same stuff and and Theyre choppy Youll see some some of more positive than others and whether youre looking at the Dodge momentum index or whether you're looking at APC backlog contracted backlog and so we're all looking at the same data set and Theres a couple of things I'd point to.
First of all and within non res and there are certainly winners and losers and.
And the ability we have to and we're planning for this to outpace the and market growth is by using those fungible assets and moving them from the weaker markets for the stronger markets. So that's always been our mantra and I'd say the rental industry overall, usually has the opportunity and the ability to outpace the market.
And you'd see that historically.
And would also say that and the industrial side, although there is still some negatives and I pointed to oil and gas.
They're off of pretty pretty deep floor, right now and we see there could be some opportunity and specifically downstream and chemical processing. So we feel good overall about the backdrop stabilizing and we think with the scale and size.
And that we have that we'll be able to outpace the and market growth.
I see.
Yes.
And then also looking at your Capex.
You're obviously planning on spending more than kind of placement in 'twenty, one and I guess Im wondering how youre thinking about the progression through the year at what point in time do you expect to have.
Fleet stabilize on the year over year basis.
Is this the second half event do you think it can happen a little sooner and that how are you thinking about it.
Yes so.
We will be so were down about 5% and fleet as we and as we entered the year and that will I wouldn't use of interest.
Stabilized that that negative will decrease throughout the year, our cadence to think about our cadence has been our normal capital spend cadence, maybe a little lighter and Q1 as you can see for more fleet productivity and we still have some extra capacity to absorb but when we get into the peak seasons, starting Q2, and Q3, and that's where we typically spend.
75% to 80% of our Capex in the year it.
It's also important to note that we plan on selling $1 $7 billion worth of fleet and 'twenty, one because of the robustness of the end market and that's a great way to not only take care of our customers that want to buy fleet refresh our fleet. So when you inflation adjust that.
It's $1 95 billion of.
Of replacement capital so dependent on where we ended up and the range you have anywhere from 50 million for $350 million of growth capital and we'll meter and then as we earn as we absorb it and we see the opportunity.
That's very helpful. And then lastly, maybe for me.
I guess, maybe a little more color on the tenure of the business through the quarter.
Early versus late quarter, and the fourth quarter looked maybe a little bit different because obviously the COVID-19 cases have progressed.
Not linearly.
And the quarter developed thank you.
Yes, the breakpoint on the cases and the positivity rise it didn't really impact the business. They were one province had some issues and maybe two markets had some delays related but very very small and the big scheme of things. So the cadence was pretty steady.
As you saw throughout the quarter.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question. Please.
Good morning, guys. Thank you.
Matt I was just wondering.
You talked about some of the.
Can you hear me okay.
Yes.
And I hear you Ross how are you doing.
You can okay, sorry about that.
When you talk about the winners and losers on the non res side is the port is it possible to.
It's kind of breakout the portion of the business that you classify as non res is actually growing NAV and the portion of it do you think will grow in 2021.
Yeah.
I won't give the proportion of each vertical and the churn market because that gets a little bit too competitive for me to do on the open Mike, but I will tell you that get outside of the Gulf space, which is obviously, a little more weighted towards Petro Chem, which we've called out as a challenging area.
The winners and losers are spread out geographically right. So all end markets have the opportunity geographically, but it's just thinking about things that are struggling like as you could imagine.
Anything travel related anything entertainment related lodging and I'm, certainly not expecting us to be on any hotel projects as we get through 'twenty, one and then even retail right. So I'm a little worried about retail, but on the flip side of that and when we get back to the winners.
Distribution and warehousing and logistics for our hot right now because that's how the consumers buying process. So.
That's just an example of where we can move of our fleet out of what might be retail growth and into warehouse and distribution growth and this is the the flexibility of the model with the very fungible assets and geographically broad and I think we can all talk to the the market center that are winning and losing health care.
Technology.
Pharma.
Probably one of people may not realize the power has been strong.
Conventional power plants, but even solar and wind so.
And there's plenty of work out there we feel to the fortify the Scott.
One of you said the view.
For the non res activity that we're seeing now is largely just the completion of existing projects.
The pipeline of new projects is drying up I mean, you even explain.
Some of the pickup you're seeing and rizza.
<unk>.
And of airport activity.
And the deferred maintenance and so forth. The do you feel like there's enough completion that needs to happen with your customers to just carry you well into 2021 late 'twenty, one 'twenty two without the necessarily a big pickup and new project starts.
Well.
That's a.
And that's a difficult question to answer because I don't believe there won't be new project starts in order to our customers guiding us there what the new project starts and so our guidance implies first of all yes, we feel that the trend of stability and to your point, finishing up resuming some other projects. There is a portion of that that will carry us through the first half of the year, but then we're also.
So seeing green shoots and some of the end markets and I talked about so it's not like we haven't had a new project, we've even had new projects throughout the back half of 'twenty. So it really just depends on on what end market vertical youre, serving so we absolutely feel comfortable if there'll be enough new work to support the business.
Got it okay. Thanks, I'll turn it over thank you thanks Ralph.
Thank you. Our next question comes from the line of Tim Thein from Citigroup.
Great. Thank you and good morning, and just first I just wanted to follow up on the earlier discussion on capital allocation and.
And just given the decline in your cost of capital over the past couple of years does that impact your thinking on hurdle rates and the the returns you'd potentially target for M&A and and maybe how you think about the tradeoff between buying your own stock versus the M&A.
I guess and taking the fed and its word wood.
But at least seem to suggest rates are likely to stay low for quite some time. So I'm not sure of this is the transitory thing but.
And then I'm just curious how you look at this.
Hey, Tim and Jeff, Yes, there is.
Actually no no change for us.
We think about the.
The process that we use to complete deals and do M&A.
It really is sort of of well honed.
Set of of considerations.
The considerations that we have across strategic cultural and financial hurdles those hurdles havent changed outside of I would say the financial hurdle of getting a little bit higher less so as a result of the lack of but more and more so as a result of continuing to fill capacity with every additional deal that we do.
But as we look at it and we're looking at the merits of the deal itself and looking at it across those three categories our.
Spending that capital towards the deal that we know ultimately will be a better owner of.
Okay interesting alright, and then the second question is just on on the the components of fleet productivity and maybe how that shakes out here in 'twenty one.
And my assumption would be maybe it's wrong, but that maybe absorption is less of an opportunity and it was and in 'twenty.
And maybe we can start with that's right, but and then I guess part two is just that the how rate and mix would potentially and or interact should we see a backdrop and which youre industrial markets.
Grow faster and then construction and.
And maybe that's a wrong assumption, but.
Again, I would really just for the question of the spirit of the question is kind of that debt rate and mix dynamic and an environment, where you know oil and gas, maybe as and shrinking and you get some pick up and those larger industrial end markets. How those two what's kind of interact thank you.
Sure Tim So I'll start with the first part of your question I'm.
And I'm glad you said, maybe you're wrong, because we think we still do have opportunity and kind.
Utilization for the first time.
Yeah, So we're not kind of.
We're not going to the breakdown.
The the individual components, but absorption was a great opportunity for us and remains an opportunity for us and that's that's the main driver was the driver and our sequential improvement Q3, and Q4, and it's what's kind of turn out positive.
The second quarter next year, we will we will still have negative fleet productivity here in Q1.
We've already told you guys about about the tough comps.
So think about that and.
High single digit range tough comp in Q1, and what that Portends and then once we get past the comp for Q2, you model out against our midpoint of three and a half and you see some significant growth and that will play through fleet productivity of the similarly, so we think that debt.
That all portends too great opportunity and absorption remains of our opportunity. Once we do that will start to meter and the growth Capex as I said earlier as far as mix mixes and output right for what.
What the customers and up renting from us to your point, we could have more broad usage and Petro Chem if that comes back and maybe we had this year and that could help but the interplay of of mix and rate. It's more of an output of what products. You rent then really of designed outcome, which is why we don't forecast.
Okay, and then just sort of unclear Matt that the high single digit.
Range and first quarter was the net was that direct you to absorption and that you're not referring to the fleet productivity no actually referring to we've talked a lot about the comps so just to be direct for everyone. When we think about.
Even with the good trajectory of the business and you think about a normal seasonal build of our revenue. This year, it's going to output and of high single digit year over year negative revenue for Q1, and that's really because we want people up and we don't want to give quarterly guidance, but we want people to understand the three and 5% headline growth of the <unk>.
Points of little bit of a misnomer and and that looks like their fleet productivity we have.
We have one for example, we have one less billing day and.
And Q1 because of leap year that'll have an impact of fleet productivity oddly enough of it but there's always little nits and nats better tough comps once we get through them, we feel really good about the growth prospects for for 'twenty one.
Very good okay. Thanks for all the time.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.
Yes, hi, good morning, everyone.
Thank you for Jay.
And just I know you and the team had been focused on delivering the strong performance in a downturn.
Thousand 20, now and the books can you just talk about how you and the board.
Thinking about the strategy over the next cycle since you proved out with the performance can look like at the downturn. So if we can count on.
Mid Forty's EBITDA margin at the trough, how does that impact how you're thinking about things like capital allocation.
Leverage and.
Potentially restarting the buyback program in light of the performance.
At the trough and I know you addressed the near term buyback question earlier and I'm just thinking about.
As we think about United over the next.
For five years.
And what should we be thinking about given the performance of your proved out in 'twenty.
Sure I'll start and I'll, let Jeff speak to some of the great work and the team has done and putting us in this position.
We are 100% of board with aligned we are 100% aligned with our board of I get my word that and Mike now that we are focused on growth.
We've done all the hard work to build out the strategy coming out of <unk> to make sure we were resilient and that we could do and we could generate positive free cash flow through the trough now what are you going to do it. So we're excited about that opportunity now that we have given the chance to prove it and 2020 and there is no lack of alignment issue for growth and why.
Other that comes through organic growth, which is the part we can control or opportunistic inorganic growth, adding new products, whether they be specialty products for new products to the sites that we don't supply and right now.
And at less than 15% market share of there's ample opportunity for us to grow and the coming years, Jeff anything to add yes, I think the one thing I'd add is really the beauty of what is the resiliency of our cash flow and as we think about you know looking forward near term and even longer term.
<unk> the opportunity to continue to to support the growth that we believe we're going to see.
And then as we think about the free cash flow that we'll have choices frankly with right. The opportunity of that we'll have to continue to manage our leverage optimally and then look at additional opportunities to return excess cash to our shareholders. As you mentioned Jerry right now we're comfortable.
<unk> to pay down debt with that free cash flow, but it's the topical conversation with our board and something that we review with them officially several times a year and so that's always.
And we're talking about growth is the priority.
We're also talking about the actions that we take and capital allocation that are.
Also going to be value generative for the after the shareholders.
Okay. Thank you and then just the shifting gears.
Fleet productivity is down about call it seven and 8%.
Off of the highs and.
Most of the utilization so as we look at the sales guidance.
And 3% growth and 21 and with some level of growth Capex can you just talk about how much of that who you look it's early and the year were coming out of them.
Pandemic, so if we deliver upside for the sales guidance great.
That part of the conversation or is it the type of fleet that we are allocating funds to have lower utilization rates and so there was a mix factor we should be thinking about there can you just.
Expand on that and those two pieces. Please.
The impact of lot of it here, but I think I think I got it.
I'm, assuming you're asking about the rate of our growth and which fleet productivity and output right. So that'll be part of the growth story, So I'll touch it and a couple of pieces.
As I said earlier Q1 will have the tough comps and that will play through and Ah.
Fleet productivity and overall revenue number that will still be negative right. We don't expect to go backwards from where we were in Q4, but youre not going to get that continued progression and linearly linear limit of linear progression in Q1. Once we lap that frankly, we're going to of an easy comp for Q2 so for.
Fleet productivity is going to turn positive revenue is kind of turned positive. So you call those two netting.
Netting out to a normal seasonal pattern.
And the growth opportunities in the balance of the year. After we get the Q2 is higher than that three and a half I don't want U S y of where given that little lean of of guide and the headwinds in Q1. So people don't look at the 335% of the midpoint and make its underwhelming fleet productivity is going to be the big driver of that and as I answered.
For the 10th question earlier.
And we feel absorption is one of the big opportunities there.
Hopefully I cover.
0.2 and get it.
Yeah. Thanks, Greg.
Great. Thanks, Jack Shang.
Our next question comes from the line of Ken Newman from Keybanc capital markets. Your question. Please.
Hey, good morning, everyone and thanks for taking the question.
So I just really quickly wanted to touch back on the inflation question from earlier you know it was good color on the cost side.
But obviously the steel has increased at a faster clip in recent months and I think.
One of your suppliers yesterday with highlighting some impact for the next couple of quarters, So and.
Any color and how youre thinking about inflation flowing through the revenue growth number whether that's on the rate side or the of used equipment.
So.
And we'll guide everyone and I think I don't think we did it yesterday, but.
We're going to plug the same one 5% right as our as our.
Inflation for fleet, we purchase just to be clear that's not of pricing inflation. It's the replacement inflation of the assets. So when you hear us talk about the $1 7 billion, we sell and there's going to cost of $1 95 to replace it's not the pricing increased 15% of this year and so the aggregate of cell and seven year old fleet.
We bought it for years ago. So that's that's the only point of inflation that we've actually guided to your point about just overall natural inflation that comes in through all of the business.
And how do we outpace it it's got to be and fleet productivity and that's why we set that net net.
For all of.
And that hurdle rate to make sure that we continue to drive fleet productivity and efficiency in our operations to overcome the natural inflation of the business.
Depending on the end market it can show up and rate that could show up and inefficiency. If youre really we're going to go after it and manage it through all functions of the operations to make sure that we can we can offset our inflationary costs and I don't know if you had a bigger point.
No that's helpful and then.
That's good color.
The follow up here and you.
You talked a little bit about.
And Youre Petro Chem markets kind of expecting to remain weak.
And I did want to touch a little bit and just give some color on the the midstream portion of your business I know you've done lots of deemphasize that and recent years, but just what the headlines we've seen about Keystone permits getting canceled just how you think about that and market and the exposure today.
Yes, so midstream would be the smallest of when and where they go through upstream downstream midstream right, where we're down under 2% midstream.
And we're disappointed because it's not good for the sector, but overall oil and gas even when you count the downstream is only 8% of our business and midstream being the smallest part of that 8%. We picked downstream will still be in good shape. This could have some knock on effect on upstream, but we're not really we're not banking on a bunch of <unk>.
And <unk> projects coming up this year, so it's already embedded and our guidance.
And we're not happy for the sector, but it's not a meaningful issue for us overall as the company.
Thanks.
Thank you Ken.
Our next question comes from the line of Steve Fisher from UBS. Your question. Please.
Great Thanks, and good morning.
I'm wondering if.
How much growth are you guys anticipating deriving from the specialty cold starts in 2021 can.
Can you quantify that and it's just generally the the difference between say growth and your revenues and flat or slightly down and then as you look beyond 'twenty one based on the experience you have with all of the cold starts you've done already what's the typical of kind of year to revenue ramp on those that we can kind of think about acceleration of that.
The 22.
We haven't really broken it down like that Steve I think the important thing to remember is we're just leaning in to continue to lean into specialty we continue to have white space. There and this is important because of the more products and services, we offer to our customers right. The.
The more value, we add to them. So the one stop shop, especially for our larger customers is something that's really important to us and that's why we're going to keep filling the gaps wherever you have them, whether thats by geography of whether that's by product penetration and that's really what the 30 cold starts are about as far as your one year to revenue as we havent disclose.
So that type of information.
Okay Fair enough and then I think and 2020 mix and rate within your fleet productivity were generally offsetting each other to what extent is that something you would anticipate and in 2021 as well.
As I said to the earlier point of it's really an output and it depends on what we read and that's why we bundled these together and fleet productivity, we're anticipating the needle mover to be more of absorption that being said I also told you that we feel really good about where the industry has done and how they respond.
Debt to the sharp decline that we had this year and purchases. So the supply side is good and responsible management of fleet productivity and all the components. So.
And how it how it shakes out we don't we don't really try to predict you can just rest assured that we manage just because we don't disclose we manage the end of individual components of rate and time.
A very very much so.
Daily basis, all the way down through the branch level.
Got it thanks, a lot thanks, Steve.
Okay.
Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question. Please.
Hi, good morning.
The start with in sourcing.
And just any more detail you can provide on the benefits being greater key gen rent or specialty fleet now or if that changed for the future.
And that's what I'm trying to get at thinking of 2021 and beyond the in sourcing provide.
Greater margin benefit to gen rent or specialty.
Hey, good morning, Steven So, we we haven't gone as far as to calculate exactly what that benefit looks like.
You really have to get into a situation, where you've got normal levels of activity to be able to really understand the financials behind what that benefit could look like right just thinking about the learnings as they developed in 'twenty and 'twenty and our continuing to to take those learnings forward into the way that we're managing the business.
And for US it's less about.
And the finite calculation of what the impact is.
And as much as it is continuing to optimize the way that we're managing the ebbs and flows of activity through each of the branches.
No.
And as we're thinking about that going forward, it's a benefit that and our business has impacted the gen rents and the specialty.
So it's continuing to be of focus for both.
I don't have a number I can share with you now that quantifies either by segment or for the businesses as of <unk>.
Hole that benefit in 2021, and even going forward, what we would expect that safe to say that we're focused on making sure that those learnings are something we're continuing to lean into.
All of this year.
Yes, Stephen Thank you.
And what's giving the army.
Yes.
Okay. Just a quick one on the specialty cold starts to follow up on that are the new openings. This year similar flavor and the past as far as.
Location of Densification, and and then at 400.
Cold start for specialty locations now.
And one third of total location how high do you think that can go over time.
That's a little bit too competitive for me of share.
Steve and I can just say that we continue to feel that the.
And the overall business once again were less of a 50% market share, but the specialty business, specifically not as broadly penetrated as our gen rent business.
And certainly has headroom to grow but we believe the whole business has headroom for growth so what.
We went and we're not going to give the individual components of that but thanks for your question.
Thank you. Our next question comes from the line of Chad Dillard from Bernstein. Your question. Please.
Hi, good morning, everyone. Good.
Good morning chip.
So it sounds like your revenue cadence and solvent.
And more backend loaded the unusual.
So just curious to get a little more color on like.
Like what's driving that is it more of the industrial or the not only of the construction.
And that would drive that above seasonal growth.
Yes.
And maybe clear so that and I didn't confuse anybody the cadence just not really going to be too different than what we expect and certainly not back end loaded it's all about the comp.
If you remember Covid hit Us mid March.
Last year, it really didnt have much of an impact on Q1. It had a significant impact really of Q2, specifically April billings was the largest by far.
And we also got off to a really good start so in January and February of 'twenty. So I just.
The actual cadence of the progression of the of the improvement of the business seasonally.
It's really we don't plan on that being two different this is all about the comp on the previous year and that's the one the reason why we guided people to that to explain the thats three 5% at the midpoint is really a bit of misleading headlines.
Got it that makes sense the check yes.
Yes, no that's helpful.
And then just the.
Used equipment market and is this proved the a lot more resilient and this downturn versus prior years.
Why do you think that's the case.
How sustainable is this and maybe you can talk about.
And what the average ages of equipment that you plan to sell and this coming year versus last year and if I can just like the tack on one of my question about just how youre thinking about repositioning cost of given that you guys and I guess shifting fleet around between the end.
And markets.
Sure so.
First off on the.
The retail admittedly it surpassed our expectations, but on new sales and it was driven by retail and the reason the that's very important because I've been doing the 30 years I will promise you. There is no contract and Thats been the buy a piece of equipment to sit and then as you are so it underlies what we're seeing and our customer confidence index.
What we're hearing some of our teams that our customers are going to have work. So that's first and foremost I think what we've done. That's unique is we've built that retail sales and the rest of the customers versus relying on trades or auctions and and that's really benefited us.
We are pleasantly surprised as well as far as the viability of it or is it just grew this year the back half of the share was 35% over a very robust 19.
I don't see how it would continue on as activity picks up as demand overall picks up so we feel good about the resiliency there and it's a great great way to refresh the fleet.
The repositioning.
And it's what we did we manage the business as part of the advantage of having a very broad and markets that we serve.
And.
And a very broad geography, so we don't have the move because of our network. So that we don't have to move equipment across the country. So the repositioning it happens on a daily basis, and it's really just moving it to where the customer needs and it's not something that we're calling out any exceptional costs or anything like that for.
Great. Thanks, I'll pass it on thanks.
Thanks, Chad.
Thank you and our final question for today comes from the line of Nicole <unk> from Deutsche Bank. Your question. Please.
Yeah, Hi, guys. Thanks for fitting me in here.
I actually only have one lab, because I feel like we've gotten into a lot on this call. So I'll keep it quick I.
And I guess, maybe could you guys talk about the drop through that you've implied in 2021 is a bit lower than you would normally see in the course of a recovery and I know obviously there is the <unk> dynamic, but can you maybe talk about what you've embedded with respect to some of these temporary cost actions coming back and to and.
And maybe bonus accrual and to what extent you have kind of like more.
Exogenous headwinds impacting drop through.
Hey, Nicole yes, sure I'll actually use the midpoint, even though I usually my standard is not the anchor to the mid point I'll use that for I'll use the midpoint right now for just to walk through if I, if I think about flow through at the midpoint for guidance is 31, 5%.
The one of the biggest cost that will reset and the business and 2021, our bonuses and that is going to be about a $50 million headwind at target and that translates into about 50 basis points of margin. So absent of that bonus reset margin at the midpoint year over year with.
Actually be flat and the.
And from a flow of new perspective, if I adjust for that same 50 million is the flow through ex bonus of about 50%.
So that's the largest one factor I would point out the the other.
Factor I'd point out is the resetting of some of the other costs. So we mentioned teeny and I would also say some of the variable costs that will flex with the increase and the activity and and just getting the business back to a normal flow of of operating costs that that's also built into the.
The guidance and the flow through that you see and we haven't quantified or really identified beyond some of some of the obvious ones right like teeny and some of our professional fees, we haven't quantified what that looks like.
And built into our range of expectations of some of those costs coming back and slightly higher piece and then the overall revenue growth and the year.
Got it thanks, Jeff ill stop there.
Thanks, Paul.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.
Thanks, operator, and thanks to everyone for joining the call today, you'll find our updated investor deck online. So please take a look at that and as always Ted's available for your questions and we look forward the sharing the progress on our call in April so with that operator. Please go ahead and and the call.
Certainly thank you and thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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