Q4 2020 Herc Holdings Inc Earnings Call
Good day and welcome.
For her Holdings, Inc. Fourth quarter 2020 earnings conference call, all participants will be in listen only mode. The do you need assistance wasting the old pumpkin specialists the pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
For your question you May Press Star then one of your touched on the trial.
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Please note. This event is being recorded I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.
Thank you grant and thank you all for joining US. This morning, welcome to our fourth quarter and full year 2020 earnings conference call.
Earlier today, our press release presentation slides and 10-K were filed with the SEC and are all posted on our IR website at IR dot her grandchildren Dot com.
This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mark <unk>, Senior Vice President and Chief Financial Officer.
We'll review the fourth quarter and full year, our view of the industry and our strategic outlook.
The prepared remarks will be followed by an open the Q&A.
Before I turn the call over to Larry There are a few items I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties.
I would caution you that our actual results could differ materially from the forward looking statements made on this call. Please refer to slide three of the presentation for our complete safe Harbor statement as well as the risk factors section of our annual report on form 10-K for the year ended December 31 2020.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations for those non-GAAP measures for the closest GAAP equivalent can be found in the conference call materials.
Finally, a replay of this call can be accessed via dial in or through the webcast on the website replay instructions were included in our earnings release. This morning.
We have not given permission for any of the recording of this call and do not approve or sanction any transcribing of the call I'll now turn the call over to Larry.
Thank you Elizabeth and good morning, everyone first of all I'd like to thank everyone on the hurt rentals team for their tremendous efforts in 2020, our most challenging year on both the personal and work related levels.
Hopefully getting the pandemic under control is in sight with COVID-19, vaccines, becoming more readily available around the country.
We hope will make 2021, a bit brighter for our communities are customers of our hersey rentals team.
Please turn to slide number for.
Kirk rentals continues as one of the leading rental companies in North America with ample scale and capital resources to provide a broad range of equipment that supports a wide variety of the customers and industries.
With the history of over 56 years, and the equipment rental industry or 4800 employees are focused on serving our customers safely efficiently and effectively.
Our specialty equipment rental business continue to expand in 2020, as we proactively assisted customers in response to the pandemic and weather related events. This year.
<unk> solutions revenue increased by 22% in Q4 when industry rental revenue declines were of the norm.
Our strategic customer of fleet diversification helped to offset the COVID-19 slowdown we experienced in certain parts of the business with the stability of our national accounts business, helping to offset the declines in local customer revenue.
Our customer centric culture and high priority for safety also provides a strong foundation as we serve our customers and keep our team and communities.
As we adjust for this new and challenging operating environment.
The strength of our organization and our business are more evident than ever.
We currently operate 277 locations across the United States and Canada in 39 States and five Canadian provinces. We were excited to have recently announced our first multi location acquisition. Since we became a public company in 2016 for locations in Houston, We are excited to add the.
Champion rentals team to the <unk> family now.
Now please turn to slide number five.
Our full year 2020 results ended up exceeding our COVID-19 revised expectations as we maintained positive pricing. Despite the decline in volume related to the COVID-19 business slowdown.
We overcame the challenges of the prospect for lower demand by responding quickly, while continuing to deliver outstanding cost savings of efficiencies. Despite the extra diligence and cost of implementing new safety precautions relating to disinfecting equipment, social distancing and wearing protective personal equipment.
Since the spin we have been focused on organic growth and self help initiatives and we've demonstrated a solid track record in achieving these positive results as our industry and the economy continue to climb the steps out of COVID-19, economic impacts we look forward to moving into a growing economy, where we will be.
Well positioned to accelerate our growth.
We've made significant improvements in our operating efficiency over the last two years and now intend to focus on accelerating top line growth through both the addition of new locations in major metropolitan markets and by driving utilization of more fleet through our network of branches.
And we prudently managed our balance sheet by reducing net capital expenditures early last year, we generated approximately $425 million in free cash flow and increased our liquidity to one for $4 billion by the end of the fourth quarter, our carefully disciplined capital approach ample liquidity and modest.
Average position us to accelerate our growth in 2021 as the business environment returns to a normal cadence.
Now please turn to slide number six for a brief overview of our full year financial results.
While we continue to experience the normal seasonal cadence in the fourth quarter. We also continued to show positive momentum from the double digit percentage of revenue rental revenue declines we experienced in the second and third quarter as Mark Harry on likes to say, we took the elevator down in Q2, and our revenues have been taking the step back up.
Since then.
The equipment rental revenue was $154 billion for the full year of decline of nine 3% or $158 million $1 compared to the prior year.
Volume trends continued to show positive momentum in the fourth quarter over the third quarter.
Adjusted EBITDA ended the year of higher than our expectations and outside the higher band for our previously stated guidance at $689 $4 million.
We very successfully managed costs and despite the decline of revenue we delivered an adjusted EBITDA margin of 38, 7% for the full year, our best annual adjusted EBITDA margin since the spinoff and we continue the close the gap with our industry peers, our focus on many of the cost savings initiatives from where.
Introduced in 2019 also continued to contribute to our bottom line throughout 2020, as we continue to successfully reduce direct operating costs, selling general and administrative cost and interest expense.
The result, we reported net income of $73 7 million or $2 51 per diluted share for the full year 2020 now.
Now I'm going to ask Aaron Birnbaum, our chief operating officer to pick up from here to discuss in more detail our fourth quarter operating performance in current environment. Erin. Thank you Larry before I start my discussion of our results I would like to take this opportunity to thank all of our team members. The companys results speak to the team's outstanding focus in execution.
<unk> in a challenging year, we effectively served our customers and controlled expenses, while operating with safety as our foremost priority. We greatly appreciate the contributions of each and every one of our team members and I want to say great job teamwork now please turn to slide eight our diverse customer base, both by industry and geography helped mitigate the full impact of COVID-19.
The business slowdowns, we continue to see positive momentum in our rental volume in Q4 with steady improvements from the pandemic trough. We saw in Q2. Unlike previous economic downturns. We continued to successfully hold rates the only a slight decline in the fourth quarter down just 80 basis points compared to prior year and for the full year of 2020.
We're actually up 10 basis points.
Solid performance by our team accelerated pro solutions rental revenue in the fourth quarter with an increase of 22% over the prior year aided by both weather related and emergency response activity.
Now please turn to slide nine for our safety results as a provider of essential services. Our core operations remained open throughout this pandemic to serve and support customers, while balancing customer service with the impact of practicing new health and safety standards. Our team continued to deliver outstanding safety results during the quarter and for the full year, our total recordable.
The incident rate, which we report annually declined to <unk> 86, a ratio that has been declining over the last several years as you can see from the chart on the left.
One of our major internal safety programs focused on perfect days that is days with no Osha recordable incidents no at fault motor vehicle accidents and no dot violations in 2020 on a branch by branch measurements our branch operations reported 98% of days is perfect. He.
The commitment to safety means continuous focus through communications and training and in 2020, we conducted over 58000 hours of safety training New employees go to three of rigorous safety program. When they are hired and we require annual safety training of all of our employees, including those in office settings, such as the field support center and call centers.
Please turn to slide 10, where.
We have a strong footprint across North America, and continued to invest in our future growth through the openings of new Greenfield locations and fleet investment in high growth regions. During 2020, we opened new Greenfield locations in Fort Lauderdale, Toronto, Denver and two in Dallas.
At the end of December we completed the acquisition of champion rentals in Houston champion rentals for locations for contractors and industrial customers in the Houston Metropolitan area. The integration of the new locations is going well and we're pleased to welcome the champion team into the <unk> family Houston was a market we wanted to grow faster than the champion.
<unk> allowed us to do that infill in the geographic footprint, we desired in that market. We intend to continue to implement our growth strategy with new locations planned in other high growth urban markets and are currently targeting between 10 and 20 new locations in 2021, Please turn to slide 11.
Our fleet composition at OFC is on the left hand side of this slide, especially includes pro solutions and pro contractor of now accounts for $833 million of what we see fleet about 23% of our total fleet as of the end of Q4 2020.
The investments we've made since 2016 and developing our specialty businesses have continued to pay off in this environment for the core rental business was under pressure from the pandemic shutdowns.
By year end 2020, total fleet was reduced by approximately 6% to $3 $5 9 billion as we focused on optimizing the utilization of our assets in an environment, where demand was impacted by COVID-19 shutdowns.
Well, we see fleet disposals were $234 million in the fourth quarter higher than the $188 million of always see sold in last year's comparable period. The average age of our disposals was eight five months in the fourth quarter with our used equipment channels operating closer to normally Q4, we targeted a reduction in older less desirable fleet.
Given the COVID-19 impacts on demand during the year with average fleet down by 6% in Q4 compared to prior year Q4, we believe we of rightsize the fleet to the current environment and have more than enough capital to invest in the key markets and fleet categories in 'twenty 'twenty, one wherever we see an opportunity for growth.
Similarly, 51% of the fleet was sold through auction with retail and wholesale channels, representing the other half of our channel sales in the fourth quarter proceeds were approximately 36% of OFC. Our fleet age for the period ending December 31, 2020 was 46 months now please turn to slide 12.
We continue to climb the steps back out of COVID-19 impact and during Q4 of our rental volume, although we see fleet on rent continued to close the gap with last year's levels minimal volume was down by 6% in Q4, which represents positive momentum and a steady improvement from the bottom in Q2.
We have the diverse customer mix with many of our large national account customers operating in essential business sectors. The include major industrial customers and utilities and energy healthcare warehousing and manufacturing and general construction. These national account customers have been a lot more resilient to the COVID-19 slowdown in our key strategic advantage of her.
National accounts revenue represented of about 44% of the total in the fourth quarter with local rental revenue now representing 56% of total rental revenue.
We are focused on high growth segments of the economy and steep further growth opportunities in our end markets as we returned to more normal times.
Please turn to slide 13.
Current expectations for the equipment rental industry as outlined by the AIA suggest flattish overall equipment rental revenue in 2021 for all of North America, we intend to outperform the industry forecast by sticking to our strategy.
Mark will discuss our financial guidance for the year, but those expectations are based on the following initiatives. We will continue to focus on the well being of our team by investing in training and operating a safe environment for our employees customers and communities. We will continue to focus on investing in fleet growth in fast growing urban markets to drive top line growth.
We plan to drive more fleet through our existing network of branches and improve utilization, we plan to expand our network by 10 to 20 Greenfield locations.
The end to invest aggressively in our specialty businesses, we shall continue to deliver a lean cost structure and improve margins and we remain committed to providing excellent customer service and premium equipment to our customers.
And now I'll pass the call onto Mark.
Thanks, Darren and good morning, everyone.
Our fourth quarter results continued to demonstrate that we are of a business of scale and a resilient business model that is less volatile than many other industries in this challenging operating environment.
We are really pleased with the outperformance in Q4 and for the whole of 2020, considering the challenges we face.
Our results exceeded our own expectations and the top end of the guidance we provided in Q3.
Our focus on margin improvement over the last couple of years is paying off we are pleased with how quickly we were able to adjust for the COVID-19 shutdowns by accelerating initiatives that were already in place.
Managing variable expenses and other costs to contribute to our margin improvement for the year.
Slide 15 shows the financial summary of our fourth quarter and full year 2020 results equipping.
Equipment rates of revenue declined six 5% from 457 million to $427 3 million in the fourth quarter of 2020.
With less bad being good in this environment, we came in at the lower end of our guided range for a decline in rental revenue of 6% to 8% in the quarter.
Total revenues declined three 6% to $520 4 million, primarily due to lower rental revenue.
It was partially offset by a $10 $8 million increase in sales of rental equipment in the fourth quarter. As we took advantage of some stabilization in the use of equipment market and focused on tightening up the fleet.
Despite the challenges of COVID-19 on our top line, we remained profitable with our adjusted net income in the fourth quarter of 2020 of $40 2 million or $1 35 per diluted share compared with adjusted net income of $38 9 million for $1 33 per diluted share last year.
Adjusted EBITDA in the fourth quarter of 2020 declined eight 8% for $18 8 million to $195 6 million for the same period of 2019.
Adjusted EBITDA margin of 37, 6% in the fourth quarter was 200 basis points lower than the 39, 7% in 2019.
Primarily due to a decrease in rental revenues and the impact of increased flow margin sales of rental equipment compared with last year.
EBITDA was 197 million and Rebit margin declined by 80 basis points to 45, 8% during the fourth quarter.
Despite the decline for EBITDA margin for the fourth quarter of 2020, we still the third quarter since the spin.
And for EBITDA margin for the full year of 2020 expanded by 150 basis points to 44, 2%, which we consider to be an excellent result, given the challenges of COVID-19 placed on our operations and results during the year.
On slide 16, we highlight pricing and utilization trends for the quarter.
The graph on the upper left illustrates our year over year pricing with the latest quarter, reflecting average rates down by only 80 basis points.
As we have already discussed we are quite pleased with the nominal decline in Reits that we manage for the last three quarters. Despite the dramatic impact of COVID-19 on our rental volumes in fact, thanks to the positive momentum coming into 2020, we managed to record positive rental rates for the full year of 10 basis points all in all excellent results.
The far exceed any previous downturn and were fixed on the professionalism of our sales team. The improved tools. We now have any of our fingertips and the continued maturity of the rental industry. The.
The industry in general has been more disciplined on price and the current cycle than previous downturns and the <unk> team is determined to maintain rate discipline in 2021.
While the utilization was 46% in the fourth quarter compared to 45% last year.
While the slight increase.
Year over year in this environment is a bit of of when the sequential improvement from Q3 to Q4 was also a meaningful <unk> increase of 300 basis points. Despite the normal seasonality we experienced in Q4.
The chart on the top right shows the average fleet in the fourth quarter declined about 6% over the comparable period last year.
Net rental fleet fleet closed the year of $3 6 billion and is now close to the 2016 year and OTC level.
With the vigorous sales campaign in Q4 of 2020, we believe we have right sized our fleet to address the expected demand of nearly 2021 and they have plenty of capital available to deploy growth of eight to 80 markets with segments of the key at heart and justify a basement.
In the lower right hand chart, you can see the during the fourth quarter average fleet volume on rent was down by 6% compared with prior year the.
Chuck also highlights the steady improvement we have made in terms of closing the gap to prior year comps created in Q2 with the COVID-19 shutdowns.
The waterfall on slide 17 shows adjusted EBITDA for the fourth quarter was $195 6 million a decrease of eight 8% for $18 8 million compared to $214 4 million in the fourth quarter of 2019.
Adjusted EBITDA was primarily impacted by the reduction in rental revenue, which declined to $29 3 million over prior year.
The OE decreased $8 6 million compared to the fourth quarter of 2019.
Savings and re rent personnel related expenses and lower freight costs with significant and only partially offset by higher insurance expenses.
We reduced the SGA expenses by $3 1 million, primarily through lower selling expenses personnel costs and travel expenses.
Adjusted EBITDA margin in the fourth quarter was 37, 6% of decline of 210 basis points year over year, primarily due to lower into the revenues and losses incurred and the sales of used rental equipment.
Please turn to slide 18.
We reacted quickly to cut capital expenditures as soon as it became clear that COVID-19 shutdowns would impact rental demand in Q2, and then stepped up sales of used equipment in the last two quarters of the year.
As a result, we preserved capital extremely well and have generated exceptional free cash flow of this year of $425 million.
This is the has taken consecutive year of positive free cash flow since going public and we more than doubled the $176 million we reported in 2019.
Our net rental equipment capex came in at $152 million well below our guided range.
Our collections team also remained active and productive in our receivables balance remains healthy with the quality day sales outstanding of only 52 days.
We continue to reduce net leverage which decreased to two four times as of December 31, 2020, compared with two eight times a year ago.
We are now below our previous target net leverage range of two five times to three five times and we will adjust debt target down to a range of two times to three times.
And of credit ratings were maintained solid.
We maintained a solid b, one and B plus.
Total debt was $1 7 billion as of December 31, 2020 of reduction of about $415 million from December 31 2019.
The actions, we took in 2019 to refinance our balance sheet position us well to navigate through this challenging time.
We had total liquidity of $1 4 billion as of December 31, 2020.
Comprised primarily of availability on our ABL credit facility and cash equivalents of $33 million.
With no near term maturities, we have ample liquidity for 2021 and into the future.
We remain cautious with our capital allocation and we'll continue to apply free cash flow to pay down debt and invest in new locations and fleet growth.
On slide 19, we share the latest industry forecast.
Coming off a couple of the worst quarters in modern economic history of the industry forecast, the stabilizing and becoming more consistent.
The array forecast for North American rental revenues is probably the best estimation of rental revenue trends.
King into account the current macro economic environments and forecasting forward North American rental revenues.
Most recent industry forecast for 2021 51 billion a modest increase from 2020.
The overall market is forecast to improve over the next couple of years to $62 billion by 2024.
As you can see from the chart of the current.
Estimate reset rental industry revenues back to 2017 levels in 2021 before tuning the previous peak levels in 2023.
On reflection 2017 was a decent year for the rental industry and as I mentioned earlier, we have reset our fleet to 2016 levels. So we believe we are well set up to be able to respond to demand in markets.
Our industry is resilient and tends to benefit in some ways in recessionary times such as these when the secular trends of ownership to rental accelerate the zale customers consume capital.
While the industry estimates of current rental versus ownership is about 55%. Many categories of equipment. We offer is still well under the penetration level, which provides us with an ability to grow faster than macro end markets.
We are cautiously optimistic that we will be able to return to our previous peak levels of profitability in 2021, which will be included in our guidance.
We are not dependent on any one end market and the fleet can move freely to where the demand is both geographically and by the end market.
Scale is also of strength in the challenging environment rentals as third largest rental operator and has the long history of established relationships, we of the capital and the strategy to take advantage of growth opportunities in select markets and for select equipment.
Our leadership team is comprised of seasoned industry veterans, we intend to take advantage of our size and customer service capabilities to continue to expand our footprint and penetrate our target market.
Our goal for 2021 is to outperform projected industry rental revenue growth as we believe the we have plenty of rental activity for who to target.
We're committed to growing our market share and closing the gap with our largest peers.
On slide 20, we have our guidance update.
We are cautiously optimistic with our outlook for 2021, we have positive momentum from our Q4 results and despite a little headwind from the pre Covid comps early in 2021, we look to continue growing our rental volume as we returned to a normal operating environment.
The current COVID-19 impacts continue to lighten up in the north directly impacting a lot of our customers and end markets and the dramatic fashion.
We anticipate we are of good chance of exceeding our pre Covid 2019 profitability in 2021 and that is reflected in our guidance range for adjusted EBITDA of $730 million to $760 million.
With the return to a more normalized operating environment, we expect to increase our net capex with the focus on growing our fleet and strong markets and customer segments with net rental equipment capex in the range of 400 million to $450 million for the year.
With 2020 behind US, we believe with the lessons learned on our cost structure and a focus on growth target is the key market. The fleet categories, we are well positioned to accelerate our growth in revenues and margin expansion into 2021.
And beyond.
With that I will turn the call back to Larry.
Thanks, Mark now please turn to slide number 21.
This slide shows how far we've come over the last five years from closing the gap with our industry peers.
Our adjusted EBITDA margin has increased from a low of 33, 4% in 2017 to 38, 7% in 2020.
Our EBITDA margins are even better and of cleaner comparison with 2020% EBITDA margin of 44, 2% an improvement of 150 basis points over the prior year.
As you can see we've improved our net leverage substantially since we went public in 2016, reducing net leverage from four one times to two four times with.
With 2020 behind US, we intend to focus on top line growth and to continue to control incremental cost to improve margins. Our strong free cash flow provides flexibility for new growth initiatives and will continue to add new greenfield locations, and we will seek accretive M&A and select geography industry verticals and <unk>.
Thank you for your time this morning, and now operator, please open the line.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
The whole speakerphone, please pick up your handset before pressing the keys for.
Through all of your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Mig <unk> with Baird.
Please go ahead.
Alright. Thank you good morning, everyone and congrats to.
Of all your team for how they handle the 2020 very challenging year.
I guess, where I would like to start off maybe with the shorter term question here trying to understand kind of what's baked into your 2021 outlook.
We share the color on EBITDA can you maybe give us a little bit of context of how youre thinking about.
The equipment rental revenue growth kind of what's underpinning.
This guidance.
I would also.
We share a little color on how youre thinking about growth capex.
And in 2021.
Yes, hi, Thanks, Mike.
The guidance for 2021, we've been really looking at continued momentum in terms of closing the year over year GAAP in rental volume in Q1 and the.
And we're running into sort of year over year of growth in volume in Q2, and Q3 with soft comps from Covid and looking towards sort of stronger growth running into Q4, so we sort of pushing back.
Back towards 2019 levels.
But I really think we'll get there in terms of rental revenue, but we should get close.
We've got room to improve the EBITDA margins with the cost structure staying relatively light.
As we sort of.
Just pushing the lessons learned during.
During 2020, so we don't see the cost structure getting back towards 2019 has room to improve.
EBITDA margins on slug of lease rental revenue.
So if I understand is you are saying that rental revenue is going to be up but not quite the 2019 levels, but I'm presuming, it's going to be up higher than what the AIA.
<unk> is forecasting.
For FY 'twenty one.
Yes, I think we sort of mentioned net in the commentary that we've got we see an opportunity to grow faster than the overall market in general just given some of the strength in the business.
And on the Capex component.
And between sort of 2019 and 2020 level. So we've got a healthier environment, we're going to advanced.
And the growth in the fleet, we took a lot of fleet out in Q4.
Just dry powder available with the free cash flow of the regenerated last year to be able to invest in any areas of strength for equipment categories, where we're seeing positive demand for it.
Greenfield Brian.
Yes.
Alright, well so so that's that's kind of of the thing that got me scratching my head a little bit as I was looking through your slides right Youre talking about 10 to 20, new locations. This is give or take 3% to 6% growth in footprint, but obviously, you're exiting 2020 would your fleet down 6%.
If youre going to be opening these new locations youre going to have to have some fleet in there. So I'm sort of trying to think as to what exactly would be implied in terms of gross capex because of my mind that biomass right.
If your disposals are anywhere near what you've done in 2020, then we should be looking at something close to give or take $800 million in growth Capex.
Am I off or is this kind of how you guys are thinking about it as well.
Yes, I mean, we're kind of looking towards.
And as I mentioned somewhere in between 2020 and 2019, so we havent touched on $800 million with the.
Gross capex.
For a long time and I think you made it might be a little bit often tubes of how much.
Fleet of Greenfield consumes.
They don't necessarily all of it at the beginning of the year, we can move fleet around the sort of support the Emma doesn't all have to be.
Growth fleet.
And I think.
The number might be off on in terms of the disposals that we made most of the changes that we see necessary in terms of fleet size. During Q4 of 2020 and I think we've got a massive disposal.
Need going into 2021.
That's very helpful. And then my final question is sort of a sort of of longer term question.
You talked about penetration of the rental industry as it is.
The long term driver, but I'm sort of curious as you.
Looking at the next cycle here.
And you look through the next year of business contractors industrial infrastructure government other.
Which one of these verticals do you think has the most opportunity to see increased penetration and what does that mean for.
Capital deployment of awards.
The business strategy as you look.
Three to five years out thank you.
Yes, good question.
We kind of believe we are well diversified across our industries and across the customers that we serve.
Quite frankly, we're pretty optimistic about all of the industries that we're in.
Or we wouldn't be there if we if we felt it wasn't space.
Ample room for for our growth regardless of whether the the industry was going to grow which means we would be taking share we probably wouldn't be there. So we're pretty pretty optimistic about the markets on the verticals that we play in and for the growth opportunity both in and of itself the industry or our ability to take share.
And grow within those industries.
I appreciate it thank you.
Thanks Meg.
Our next question will come from Ken Newman with Keybanc. Please go ahead.
Hey, good morning, everybody.
Congrats on the solid quarter.
Thank you.
So first question for me I'm curious if you could just talk a little bit more about the champion deal that you announced.
I'm curious if you could just talk a little bit about the market opportunities for M&A as the year progresses.
Given the fact that you did lower your net leverage target. So just trying to balance out the priorities for capital deployment as of the year progresses.
Yes, good question.
The champion was was a business that we looked at that expanded our capability in Houston, focusing on local contractors, whereas our more traditional business focused on our national accounts in government business in that marketplace also had added significant geographic coverage footprint.
The portions of the Houston market that we didn't believe we had ample coverage. So that was the rationale and the reason for that.
I'll remind everybody that we're primarily an organic growth company. However, we will look for opportunities in M&A, where we have gaps in our coverage units not easy or readily available to find real estate to open up for Greenfield that would be our preferred approach would be of Greenfield approach. We will also look for opera.
<unk> and verticals of our new products.
That gives us new capability and gets us.
Some additional customer coverage opportunities on the result of a new product offering.
For our new vertical where vertical that we'd like to go into.
<unk>.
There are opportunities for M&A, we are very selective in what we looked at and.
And we will identify those but again our primary focus is going to be organic growth through greenfields.
Right.
So the fact given.
Given the fact they are in Houston, obviously, we've seen some some headlines about severe weather in the area of maybe just any color on the impact that you've seen over the last week from severe weather and what's kind of embedded in your longer term view from a potential.
The opportunity after everything falls out.
Yes, Ken this is Aaron I can comment on that yes.
Yes, it was a crazy weather weak we have.
35, or so branches in Texas.
And we of branches in Oklahoma, So they got hit pretty hard some branches couldn't open for a day or two days.
The talk to a regional Vice President recently last night and day.
Trying to get some of those branches that had trouble back open.
It was mostly because of the power outage work for coming back online.
Well it was.
In the event that affected the activity for the week, but I think we'll just bounce right back.
Our specialty business, our pro solution business, that's really what they are built for us to respond to those needs with power generation and drawing equipment. So they have been very very busy during this time and.
I know there'll be very busy in the coming days to respond to to the.
The weather related issues that you see on the news as well.
Right makes sense.
One last one if I could just squeeze one and just going back to the <unk> earlier question. I think you made the comment about improving margins on on the better cost structure.
Can you just remind us are there any returning cost actions that we should be aware of in terms of the new EBITDA guidance and.
Help us kind of understand how youre thinking about the embedded flow through for EBITDA margins as the.
The year progresses.
Right, Yes, Ken good question.
Obviously.
There are costs coming back in the dramatic sort of cost cutting that we did in Q2 and the.
Curtailment of a lot of activity those cost start coming back so.
TNA start getting back some of those stats normalizing I guess in the back end of the year, the payroll costs and the cost of the fear of loads and stuff that we had in place for Q2 will resume so theres a couple of weeks.
But there's a couple of of sort of divergent sort of impacts of CSI Theres room for the EBITDA margins to increase we don't anticipate the same level of losses on equipment sales in 2021 that we had in Q4 and during 2020.
For EBITDA margins should remain flattish so that going to be some of those other sort of non.
Operating those operating costs come back so flattish for EBITDA margins and flow through sort of running towards the sort of lower in <unk>.
The only talking about 60 to.
70% flow through.
And of normal environment, but just given some of the the impact of the 2020 comps we could be down below that the.
The Laurie the net range during 2021.
Very helpful. Thanks, a lot.
Sure. Thank you.
Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, This is the show because of the Mohan on for Jerry Revich regarding 2021, EBITDA guidance at the midpoint what level of price increases. So does the guidance embed and how is that tracking in the first quarter.
I mean, we don't really speak specifically to pricing I think you can sort of see.
If you sort of look at the chart all of them.
Page 11.
Yes.
Page 14 of 15 16, a year ago.
I mean, it's been pretty we've got really good job in terms of managing price. So we havent dropped below weighted.
The 90 bps for the last two quarters, we've seen sequential improvement since Q2.
We're running into sort of normal seasonality in Q1, so it's typically a challenging price environment.
But we certainly are looking to rajiv to positive pricing during the course of 2021.
Something that we've exceeded the industry on consistently.
Got all the tools in place to be able to continue to excel in terms of our pricing.
And we're looking to move that from a sort of pretty pretty minimal down.
And the last couple of quarters to some sort of improvement during the course of 2021.
Great and you mentioned the plan is to invest aggressively in the pro solutions business from 2021, how should we think of the.
Business and its potential.
And then the meaningful growth in 2021.
Oh.
We will continue to invest in our <unk> solutions and specialty businesses.
Yes.
On a just a normal quarterly cadence, we expect very strong double digit type.
Year over year.
Rose there as well and then when there's events like we're seeing this week or for natural disasters right total.
Respond to that and you could get some.
Some of the higher growth.
Growth rates in those environments.
Great. Thanks.
Our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.
Hey, good morning.
Maybe to start with.
Some additional color on the <unk>.
Flow through but can you talk to.
The expenses.
With SG&A and from.
From branch openings and bringing on champion how that.
Factors and of the expense base in 2021.
I think I mean, neither of them have a material impact.
In terms of percentage of ramps or actual gross dollars.
We're looking at say mid to single hybrid.
But the single sort of.
Mid to high single digit if I can get my words at right.
The growth the Doe and SG&A.
In 2021, as we sort of move back towards a normal cost.
Or more normalized cost environment, but keeping both of those below 2019 levels as I sort of wait for it. So there is an opportunity for us the.
Sort of maintainer of bit of margin profile going forward.
Excellent and then also to understand.
Net leverage targets being lowered.
Maybe kind of go into more details on why lowering it.
Especially in the midst of.
An increase in Greenfield openings.
Our openness to.
Doing acquisitions.
Thank you.
Really just the continued improvement in our sort of free cash flow profile, you've got a big pay down this year in 2020 with the reduction of net Capex and we really just don't see any.
Banks need.
And the sort of medium term for for any usage of cash. So we're going to continue to be free cash flow positive, we see ourselves staying.
Below sort of in this new guidance range with the ability to grow fast.
In terms of flow.
The expansion.
<unk>.
The markets turnaround and showed some strength.
And also in terms of Greenfields that any opportunistic acquisitions that come along.
I mean, the guidance range doesn't anticipate a big acquisition.
Something of scale came up.
We would communicate.
And at that stage. So it's really just anticipating kind of bolt on acquisitions of continued acceleration and greenfields.
Now, Steve will keep us well within that new leverage guidance that we talked about anything that we either.
The forecast or plan to do.
Great and then one more to quickly follow up on this topic is.
Thank you mentioned keep.
Cash excess cash flow in absence of acquisitions.
And outside of general Capex going to debt reduction already near the low end of the range.
I guess I'm, just sneaking with with the EBITDA and operating cash flow coverage of interest expense.
Is there much interest or.
Willingness to repurchase shares at these levels.
Yes look.
This point, we believe the best investment for.
For with free cash flow in this business is to invest in the growth of the company whether that be fleet on the lumpy new branch openings or some bolt on M&A and I think.
Inc.
Our liquidity position on our cash position sort of reflects that and that's what we'll continue to do.
Great. Thank you.
Okay, unless you'd like to ask the question today. It is star then one.
Yes.
Grant Thank you Kevin.
On line.
So would you like to take philosophy.
Yes sure absolutely.
Okay. We have a question from Ken Goldman.
Please go ahead.
Hey, Thanks for squeezing me in.
For the for the follow up here I just had one more qualitative question here and I'm just curious of.
You see the guidance.
It looks pretty optimistic here for 2021 in terms of the EBITDA can you maybe just talk a little bit about what's giving you confidence on that outlook or just provide any color on some of the conversations youre, having with your customers in terms of the.
Their outlook for securing projects in the near term.
Sure Ken This is Eric again.
We finished out last year.
Sequentially, the relative to the quarters, we got stronger and stronger.
So we can see us kind of getting even during 'twenty, one and then when you look at our end markets.
Some projects that were just postponed.
Last year, we anticipate are going to be coming online.
We operate in a very diversified end market, we've got industrial.
They do plan shutdowns preventive maintenance turnaround projects. They delayed those last year, we know that they need to do those of those will come on line.
Primarily when they can get their people back to work related to the pandemic, but that needs to be done.
So we're seeing.
Large construction projects continue on and in new ones.
Fill up on our all of our forecasting tools, such as Dodge and IRR and our entertainment business.
Where he was really down decimated points of the year last year is now.
We're really getting stronger.
As we come into this quarter, it's part of that 80% of where it normally is and then another segment that we we'd like to participate in is the targeted at the energy segment of our renewables and that's a big demand and we continue to.
Work with our customers and see it along the pipeline on those projects. Then you got data centers in all of the health care opportunities that we see government. So we're diversified we are optimistic.
Our customers are telling us that there is the.
Workers comp.
Coming down the Pike and he has got to get through I think another couple of quarters before it really manifest.
Right.
You mentioned the Alt energy of renewables, obviously think.
Potential for infrastructure, whether it happens or not is that a lot of people's minds.
Any commentary or color in terms of how you're thinking about.
The capital deployment actions or any actions you might have to take if something is passed.
Yes, Ken look.
<unk>.
No.
I've been a.
Net.
Net reluctant even to sort of include adding infrastructure bill or spending.
And anything that we are narrowing and I really don't think we have any of that forecasted <unk>.
Our 2021 plans.
And the for Bill was fortunate enough to get through on this new.
Congress and administration.
Theres really no shovel ready projects that are going to hit the ground in 2021, and it would be well into 2020 to be for that funding passed in 2021, well maintenance of way to the market. So.
We're not holding our breath.
On the cooperative Congress to get that done. So we don't really have any of that forecast and into our business as we know, it's gravy and we'll deal with it.
When and if it happens.
Who doesn't want any gravy.
Thanks for joining us for.
Okay.
Thanks, Ken and seeing that there are no. Other further questions I'd just like to thank you all for joining us on the call today, and obviously things that any other questions. Please feel free to just give me a biased my contact information of the back of the backing off on the website.
We look forward to talking with you soon and thank you all for joining us today.
Yes.
The conference has now concluded thank you for attending today's presentation.
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