Q2 2019 Earnings Call
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Good morning, and welcome to the United Rentals Investor Conference call. Please be advised that this call is 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 uncertainties 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 in the company's press release.
For a more complete description of these and other possible risks. Please refer to the Companys annual report on Form 10-K for the year ended December 30, Onest 2018.
As well as to subsequent filings with the SEC.
You can access these filings on the company's website at Www Dot United Rentals Dotcom. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events circumstances or changes in expectations.
You should also note that the company's press release and today's call include references to non-GAAP terms, such as fee 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 over to Mr. Flannery Mister Leonard you may begin.
Thank you Jonathan and good morning, everyone. Thanks for joining us.
Today, we are taking stock of 2019 at the halfway point in giving you our thoughts on the balance of the year I'll start with the quarter and then Jeff will cover the results and we'll spend the rest of the call on Q1 day.
We turned in a solid performance in the second quarter at both the top and the bottom line.
This included total revenue growth of 21% compared with Q2 of last year and over $1 billion of adjusted EBITDA up more than 18%.
Our pro forma margin for adjusted EBITDA was up 40 basis points.
And our EPS was 23% higher than a year ago.
These metrics underscore the upside of the cycle and the earning power of our larger service offerings.
Fleet productivity was bolstered by the strength of rate and mix, but dampened by software time utilization.
This is partly due to a temporary drag from the Blue line integration.
It's our largest acquisition in nearly a decade and while the overall integration is going well, it's taking a little longer than we expected.
As a result, we havent been absorbing the fleet in the impacted markets as quickly as we'd like.
And we'll talk more about this later.
Other areas of Blue lines, such as cost synergies are coming along as expected and most importantly, the teams are working really well together.
Blue line is an excellent strategic move for US one that will drive profitable growth and attractive returns for many years to come.
We gained great people and increased our capacity in key geographies.
And we will update you on the integration progress again in October .
The other short term headwind, we had throughout the quarter with project delays.
Long stretches of heavy rainfall caused a number of large starts to be pushed later, but we havent seen any cancellations. The delays were more about customers waiting out the bad weather before moving ahead.
What we're not seeing I'm happy to say are any indication is that demand is stalling.
Nonresidential construction of core end market for us continues to be strong and our regions broadly site infrastructure and power as major opportunities.
Our sales teams are focused on the infrastructure vertical for several years now.
In addition to a positive trajectory the nature of infrastructure makes it right for cross selling our gen rent and specialty products and we're making good inroads there.
I will share a few additional insights from all regions.
Demand on both coasts continued to trend up in Q2 as it has for the past several years.
Business hubs like the Carolinas are also strong with online retailers building large distribution centers.
Out west the momentum is being driven by data centers and infrastructure, especially transportation.
And power as another tailwind.
The worst of the weather seems to be behind us in the hard hit areas. We expect large projects to start back up in the central us the Gulf the southeast and the mid Atlantic.
And it's important to note that the customers remained broadly optimistic about their business regardless of geography.
Turning to specialty our trench power and fluid solutions segment continues to deliver robust growth.
In the second quarter the segment generated a 45% increase in rental revenue versus a year ago and this includes organic growth of almost 13%.
And embedded in our specialty growth is a significant contribution from cross selling which is a way to strengthen our customer relationships.
It also moves the needle higher on returns.
Customers want to partner capable of solving multiple challenges on the job site and our ability to provide a full range of solutions is a competitive advantage for us.
As we discussed in the past.
Specialty is also key to our commitment to drive superior returns for our investors.
It warrants ongoing investment in acquisitions, new equipment technologies and cold starts.
Year to date through June Weve opened 24 specialty cold starts, bringing that network's total to 351 locations.
And we're tracking just over 30 cold starts by December which is an increase over our original forecast.
Another area, where we're forging ahead is safety.
Three months ago, I told you all that our recordable rate through March was well below one.
Some companies would be thrilled with that rate, but we've improved that again through June and turned it turned in the 18th straight quarter with a recordable rate below one.
And Thats, particularly impressive when you realize a team improved their safety performance during the seasonal surge, while serving customers and working through month multiple integrations at the same time.
It's an indicator that the cultural part of our integration of our acquisitions is progressing faster than anticipated.
And I attribute this to the caliber of our employees and the quality of our training.
Turning to our guidance.
As you saw yesterday, we trim the top end of our range is for total revenue and adjusted EBITDA.
This accounts for the two impacts I mentioned, the pace of the Blue line integration and the weather delays.
We also made good on our promise to exercise discipline in capital allocation.
Our branches have an opportunity to improve the utilization of the fleet. They have in hand, so we lowered the top of the capex range by $150 million.
The biggest takeaway from the guidance is that we remain confident that our full year total revenue and adjusted EBITDA will fall within the ranges we set back in January .
So to sum it up.
Our view on the cycle remains intact.
The macro was healthy in the end markets are strong.
We delivered solid growth in the second quarter, which kept us on track with our outlook for the full year and we have plenty of runway to capitalize on growth opportunities.
At the same time, we're continuing to position the business for enduring value creation.
That's the best way to reward our investors for their confidence in United rentals by balancing short and long term growth within the framework of our strategy.
We know how to manage the business to achieve this balance and in 2019, we will continue to deliver.
So now I'll ask Jeff to cover the numbers and then we'll go right to your questions Jeff over to you.
Thanks, Matt and good morning, everyone before I jump into the numbers on a high level, let me reiterate what Matt said, we've delivered a solid quarter behind a strong market. The team did a great job staying focused on our customers as we managed through some weather delays and as we continue to work through multiple integrations.
We're well positioned heading into the back half of the year.
As with past quarters, when I walk you through our as reported results our pivot at times to speak to our performance on a pro forma basis, which includes blue line and Baker.
Now lets get into Q2 results.
Rental revenue on an as reported basis grew 20% or $329 million to just shy of 2 billion.
The increase is primarily related to the impact of both Blue line and Baker.
On a pro forma basis rental revenue was up in line with our plan at 4.8% for the quarter.
As reported OE, our growth contributed about 262 million of the rental revenue increase ancillary added $59 million and re rent added about eight.
The only our growth of 19% it's comprised of growth in our fleet of 23.2% or about $326 million of additional revenue.
We have the usual headwind to fleet inflation at 1.5% or $21 million and fleet productivity on an as reported basis was also an expected headwind down 3.1% or $43 million.
Now as you consider the quarter's revenue results I think it's more helpful to consider fleet productivity on a pro forma basis, which was up about 70 basis points.
That came from strong rate and positive mix offset by softer time, you as Matt mentioned, we're still working through some fleet absorption, which was the biggest drag on time you in the quarter.
But the team maintained discipline with a focus on profitable growth through the quarter.
Now while were talking about fleet productivity. Just a reminder, that this is the last quarter, we will be giving discrete quarterly rate time and mix details consistent with our previous methodology as the transition to fleet productivity.
You can see all that detail plus calculation supporting fleet productivity on pages 36 through 40 of our Investor presentation, which is posted on the website.
Taking a look at used sales you sales revenue was up just over 25% or 40 million year over year.
The U.S sales environment continues to be strong.
When we look versus the second quarter last year used pricing at retail is up about 2.5% with used sales as a percentage of all we see a robust 58%.
Adjusted gross margin on new sales was 49.2% down from 51.6.
That's largely due to the mix of equipment, we sold in the quarter.
Moving to EBITDA.
Adjusted EBITDA for the quarter was 1.073 billion, an increase of $166 million or 18% versus prior year.
Our adjusted EBITDA margin was 46.9%, which is down 110 basis points year over year due mainly to the impact of bringing in Blue line and Baker.
More importantly on a pro forma basis.
Our adjusted EBITDA margin improved a solid 40 basis points.
Here is the bridge on the as reported changes.
The improvement to know we are added about $150 million.
Better ancillary contributed $25 million and we got 4 million more from re rent.
You sales added about $15 million to adjusted EBITDA.
SGT expenses were a headwind of about $41 million and thats, mostly due to adding the blue line and Baker cost basis net of synergies.
That leads about 13 million of adjusted EBITDA benefit in the quarter, which is primarily coming from better performance in our other lines of business.
Adjusted EBITDA flow through was right around 60% for the core business I'll, let me break that down.
As reported adjusted EBITDA flow through is 42%.
On a pro forma basis adjusting for Blue line and Baker in the year ago period flow through was about 53%.
Add to that the impact of western one and Thompson pump smaller acquisitions that are not in our pro forma results and you get a flow through of about 65%.
To isolate the core from there I will also exclude the impact of new and used sales as well as the benefit from acquisition synergies.
That leaves you with the flow through of right around 60% for the core business and points to a strong cost performance for the quarter and I have to give a shout out to the field for keeping excellent focus on costs.
As for adjusted EPS, a robust $4.74 in the quarter compared with $3.85 in Q2 of 18.
That's an increase of 23% primarily from better operating performance across the business, including the contribution of our recent acquisitions.
Adjusted EPS also was helped to this quarter from some discrete tax benefits and lower shares outstanding.
Now, let's move to Capex and free cash flow.
Through the first half of the year, we've brought in just over $1.1 billion and gross Capex was $872 million of that having come in during Q2.
Have you as you've seen in our guidance update we expect to trim. Our original plan for Capex by about $150 million at the high end. So we expect to come in between 2.05 and $2.15 billion for the year, which compares to $2.1 billion in 2018.
Free cash flow generated through the first six months of the year is very strong up 11% to $796 million.
Just to be clear that number excludes about 16 million in merger and restructuring payments.
So we are on track to deliver our full year expectation, which weve increased in our guidance update.
As a reminder, we're now forecasting $1.4 billion to $1.55 billion of free cash flow, which compares to a little over $1.3 billion last year.
Our rate for the quarter also strong, 10.8%, which meaningfully exceeded our weighted average cost of capital.
Year over year tax adjusted ROIC was down 30 basis points.
That expected decline is primarily impacted by the timing drag from our acquisitions.
That's going to going to moderate as we get their operations more fully integrated and synergies from the deals fully fully realized.
Taking a look at the balance sheet.
Net debt at June 30 was $11.7 billion.
That's an increase of about $2.8 billion year over year related to the financing of Blue line and Baker.
Our total liquidity at June Thirtyth was a very healthy $2.15 billion comprised mainly of ABL capacity.
Leverage at the end of the quarter was 2.8 times.
That's down 10 basis points versus where we are where we were excuse me at the end of the first quarter and we continue to work towards ending the year around 2.5 times.
As a reminder, earlier in the quarter, we communicated a lower target leverage range for the company, which is now two to three times net debt to adjusted EBITDA.
And finally, here's a quick update on our share repurchase program, we purchased $210 million of stock in the second quarter on our current $1.25 billion program, which puts us at 840 million purchased to date.
We still expect to complete this program by year end.
I'll also note that our total share count at the end of the second quarter was down about 7% year over year.
When we look at the business pro forma we're pleased to have delivered a quarter of solid growth and better margins as well as robust free cash flow and strong returns.
The integrations are progressing well, albeit a little slower than expected and the team did a great job managing through historically bad weather.
Most importantly, the operating environment remains healthy and our customer confidence measures are positive going into the back half of the year.
So why the change to guidance.
With six months behind US we would typically look to refine our initial ranges at this point in the year.
As we modeled the impact of what was a slower fleet build than we originally expected in Q2, and we assess our fleet productivity for the rest of the year. The right thing to do was to pull back a little on the gross capex.
That's exercising the capital discipline, you expect from us.
As you take that through the TNL the highest part of our revenue and adjusted EBITDA ranges are likely out of play and we want to be clear about what we believe we can reasonably deliver for the year.
We're making a modest trend that still has our full year coming in well within our original guidance and these changes will result in our delivering higher free cash flow than originally expected.
Now, let's move on to your questions.
Jonathan We please open the line.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you might want to yourself from the queue. Please press the pound key.
Our first question comes from the line of David Raso from Evercore ISI. Your question. Please.
Hi, good morning.
Given the quarter at the end of appear to be a little lighter than you thought the integration and or weather can you give us some feel how the quarter starting the the amount that you tweak the EBITDA down.
Doesn't seem to be extrapolating much of the second quarter disappointment into the back half. So can you maybe just update us on what you're seeing and also obviously the ramifications of the capex coming down as well on how you're viewing your metrics the rest of the year.
David This is Matt how are you doing as you know we don't give in a quarter.
Guidance and even though it may be in our favor at sometimes we we still try to keep that all I will say is we're very thoughtful and confident about the guidance that we gave here and here. We are a couple of weeks into the quarter. So you could you can extrapolate from that what you think we more importantly, the disruption that we did see primarily not getting the build we expected at the end of the quarter in June we've identified the opportunities to remediate that to repair that and the change in guidance as Jeff said is really a reflection of where we're starting the second half we see on rent as opposed to any kind of change in the way that we review in the back half of the year.
And.
Okay does that answer your question.
Well, that's I am trying to gain comfort with if the guidance reduction is sort of second quarter related like sort of what happened during twoq, but not much change how you think of the rest of the year.
What are the actions to make us comfortable with that is that because some projects that were clearly pushed from Twoq. You are now showing up in threeq, you or simply the.
The impact of the reduced fleet that you were going to bring to different territories just to put more color of why we think this is the second quarter isolated.
Just a 25 million EBITDA hit at the midpoint.
Sure Theres a couple of things that we've done so first off in the markets that were impacted and we talked a little bit.
We took a look at the data and we realized that there was about a third of our markets that had multiple integrations they've been working through for the last couple of years and what that means to US is a lot of internal focus where you're realigning territories merging branches, making sure you're protecting the revenue that you acquired which the team's done a great job of your little less externally focused on driving new opportunities new revenue. So weve repairs that in those markets, where that was an issue. We've fed the specialty team continues to show robust growth more capital and there has been some markets.
Within whether integration related or not impacted or not that have been showing solid growth. So we shifted the capital little bit overall, we had 13 abort 15, even within these these headwinds we had 13 of our 15 regions.
Geographic regions show positive growth in Q2. So this was more of maybe our expectations of how quickly we were going to move through the fleet weren't set right or maybe we executed a little softer than we wanted to either way. The remediation is what I'm talking about what we're focused on and we feel good that our sales pipelines. The fleet sizes in the appropriate markets are where they need to be for us to deliver the second half.
Our the branch closures related to the acquisitions now behind us our the change in sales territory and account coverage done. We're just trying to get a sense of you now are facing you're busy season coming up historically running all the way through October and we're just trying to get comfortable with the integration is behind US and of course Baker Corp. anniversaries this quarter, maybe third quarter.
And Blue line in the fourth quarter. So we get the mathematical benefit but operationally is what we're trying to gain comfort comfort with what is actually truly behind us and done and what is still left to be done.
Great structural changes are all gone.
Sales territories are all done customer merges organizations are all done so all the structural work is done now just turning the focus about outwardly focused after doing all that heavy lifting and so all there is no more distractions teams on board.
Projects are starting up where we expected to start up and that that's what gives us the confidence for this guidance.
All right. Thank you.
Thanks, David Thanks.
Thank you. Our next question comes from the line of Ralph Nicoletti from Bank of America. Your question. Please.
Yes. Good morning, guys. Thank you hi, good morning.
Matt do you have a sense as to how the year on year change in your time you'd compared to.
The rest of the industry and.
Kind of along with that.
Has the narrative changed at all to defending price versus versus raising price through the seasonally strong.
Period of the year.
Yes, I don't want to comment on competitors' numbers, but you could imagine I'd pick one reported in April they were down a percentage point you can imagine the project delays had some temporary impact on utilization for some companies. If they were operating in those impacted areas. So I would expect that I don't know it for certain what I can say is a fit was extreme warfare was something that was.
A bigger concern we would not have been able I don't feel we would've been able to achieve that rate improvement that we did and I don't think the industry's rates will be showing up for our our Intel that we had it looks like the industry is doing a good job of managing rate. So maybe a little bit Rawhide, just don't I don't have the detail to speak to it.
Okay. Thanks, and then could you elaborate a little bit on the used pricing up 2.5%.
At at retail I mean, theres theres been a lot of anecdotal commentary on what's happening with used in analyzing the U.S market from afar can be tricky because you never know if you're looking truly an apples to apples, but.
That seems a little bit better than the overall perception of the market can you comment at all on how thats actually been trending over the last several quarters and give any granularity on that earthmoving versus aerials.
Any additional color would be helpful.
Sure as you know a largest portion of all extremely large portion of our fleet will be aerial related right and I'll put reports in that category, where over 50%. So thats a good part of our U.S sales pricing has held up very strong there I think the only place where you heard any dampness the pricing at auctions, which is not a channel. We utilized was on some of the large sir I don't know what drove that but that didnt impact us whatsoever.
We're seeing across the board that 2.5% that Jeff quoted remember is.
Like asset to like asset we see this as a very robust new sales end market and we think that points to the demand that we still see in the marketplace.
I think our channel mix gives us an advantage over maybe others in the industry, where we're very focused on retail.
And that certainly gives us a higher margin achievement.
Got it and then you the 13 to 15 regions are up can you comment on which regions weren't up and how big a drag they are and whether or not you think that was just truly weather.
If those yes, the regions delivered positive.
Sure the regions, where we where we have where we didnt get the growth and they didnt. They didnt fall off the cliff there. They just didnt get year over year growth were impacted by both weather and integration. So think about the Gulf States down there, where we had a lot of concentration of acquisitions over the past couple of years and they really got hit hard with weather I think their job starts should look good there is still a lot of work on the books, we didnt as I pointed to in my comments, we didnt see or hear cancellations, which that would be a different vied for us. If we were hearing that we didnt see that so I think those folks are drying out no.
And they'll they'll get back on track for the back half of the year.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question. Please.
Thanks, Good morning.
So.
Investors always get more confidence when they see some of your key metrics.
Going the right direction. So I guess do you think the conditions in the market and your strategy will be important as supportive of an improvement in fleet productivity in the second half of the year.
And is there any sort of directional color you can give us on on some of the key underlying components.
Sure Stephen Yes, we absolutely feel that fleet productivity, we'll get back to over one and a half in the third quarter and that's what our expectation is that's what we're driving to when I look at the components of fleet productivity as we've always said raking time or always going to be big drivers rate was a good guy this quarter and we feel really good about the rate performance mix was as expected and it was the withdrawal we spend a lot of our time both in our prepared remarks and here on the call talking about the time, you and we feel once we get that in order you will see the fleet productivity that we'd like to target.
Okay, Great and I Wonder if you could just talk a little bit maybe about.
WP, specifically supply demand it sounded like maybe you had some concerns about some excess capacity in certain places.
Can you just talk a little bit more about what's going on with that product line, where.
How extensive is any overcapacity, how do you think that plays out in the.
Second half of the year.
Yes, we're not concerned about aid WP overcapacity in the market broadly overall, when you think about where we are not absorbing the blue line fleet as fast as we want in a few of those impacted markets you can imagine the fleet that they have an absorber. His prize blue line was 70% error. So theres some excess we have in stores, but we don't view this as a macro issue. We don't think a WP as a whole is and we're still growing already WP as a company. So we don't think A.W.P. as a whole is is a problem for the industry.
Okay terrific. Thank you.
Thank you. Our next question comes from the line of Tim time from Citigroup. Your question. Please.
Great. Thank you. So the question is on the interplay between timing and rate it's.
Pretty a typical if you look at the history of you are going to have this this sort of magnitude declines in you pro forma utilization.
And still get rates that are at or above the rate of underlying inflation. So I'm. Just curious Matt just maybe more of a kind of a high level thoughts in terms of.
What do you think is enabling that is that something that that you've done at the branch level.
Isn't something even maybe a change in the industry structure or.
Something else and it just maybe your thoughts in terms of how you're able to get positive rates is pretty significant year on year declines in terms of from a percentage standpoint in terms of your time.
I think it's a continuation of the strong end market and demand thats driving that rate I think industry discipline is to give credit to the others not just us industry discipline is so much improved in this cycle from the last cycle and I think those are two big factors.
And I also think that drawing the timely time utilization were down because of demand than maybe you would see a different issue. We don't feel our time as we've talked about a lot here is a result of demand we think there's a little bit of delays and then.
We bought $1.5 billion of Fleeted in November .
From a blue line acquisition that wouldn't be a normal cadence that we would do so we think it's more a result of the timing of the integration and working that through the system than any kind of demand issue and so they they really aren't into playing as normal because of time was not caused by a lack of demand.
Okay got it and then maybe from a.
End market standpoint, just your views on on the energy patch more broadly is that.
And your expectations are in terms of your model for that for the full year is that has that changed at all just.
Amongst the different components across energy.
We're doing fine overall in energy, but when you think about upstream.
So we've been saying for the past couple of quarters that every vertical we track.
I was showing positive growth there the upstream.
The rig count in the upstream throughout the first half of the year I think rig count from January one to the end of June is down about 9%. So we track very closely to that so we did see as decline similar to that in our upstream business remind everybody that still less than 5% of our overall business, but to counter that and energy our refining business, our downstream business still very strong still seeing growth in midstream. So so we're overall energy is okay upstream did have a little drop in the rig count which impacted revenues a little bit.
All right thanks for the color.
Thanks, Tim.
Thank you. Our next question comes from the line of Joe O'dea from vertical research. Your question. Please.
Hi, good morning.
Can you just expand on what it is that thats driving some of the slower than expected integration.
With Blue line.
And I think you relative to seeing even though the pro forma utilization thats down year over year, yes.
Even if you were tracking kind of behind maybe we could see that perform a little bit better. So I'm just trying to understand some of the drivers of that slower progress and then even the pro forma declines and utilization.
Sure Joe So when we think about that 2.2 pro forma reduction is about half of it that we had modeled and we knew it was going to take some time to work. Some of these some of this fleet through the system.
As I said, we Wouldnt have bought brought in $1.5 billion worth of fleet in November in a normal cadence. So about half of that was expected half of it unexpected when we think about that unexpected we did a deep dive on some analysis of where we either needed a couple who is that dependent on market right. So we did it market by market deep dive in some markets, we weren't getting enough new business in the pipeline. So we have the team addressing that we load opportunities in RCR CRM. This is just normal operational blocking and tackling in some other markets. It was it was more about sales coverage, we needed to add sales reps, we address that so nothing magical just normal operational work that we did in and.
Maybe our expectations of this large deal larger steel we've done in quite a while of working through this quickly maybe our expectations were off I don't know, but either way. The tactics that were taking to repair are the same that we would have done regardless.
And do some of the actions that you take now and you stepped down growth Capex I mean does not even include going in and sort of assessing where some of these pockets of underperformance or does that enable redistribution of fleet. So you can actually serve other regions with some of that and in effect that that will help bring the overall utilization up.
Yes, absolutely so I put that in the expected portion so where we did expect.
That capital that we normally would have put in those markets as they absorb required capital we put into other markets fleet specialty has has gotten more capital throughout the year. They continue to use that well we've had a couple of geographic regions pick up the pace and they got a couple of a little bit more capital the cut to the top end of our capital was directly correlated to that other 1% that was unexpected. So if you think about we just had latent capacity that match that 250 million that we kicked off the top but we just thought it was prudent to use that but it doesnt change the slope of our growth in the back half of the year. If you follow me just the starting point and we just thought it was prudent to not spend the capital on that let the team use the dormant capital to fill that demand that we expect in the back half of the year.
And then last one just how his customer retention experience been.
As you walk through the process of navigating Blue line rates in line with your eyes.
Is there any impact on on customer retention that winds up showing up that utilization.
No no. We we always model some leakage will say right in every deal that we've ever done sure I think the challenge on this one was that we had your seasonal churn which is natural when you don't do integrations as you get into the winter and then some integration share and in a few of these markets just didnt fill fill the top of the funnel so to speak in backfill that fast enough. But this churn is just is natural we we model it never integration, we do but nothing nothing extraordinary nothing thats outside of what we expected.
Got it thanks very much.
Thanks.
Thank you. Our next question comes from the line of death Weber from RBC capital markets. Your question. Please.
Hey, guys good morning.
Hi, Seth.
I just wanted to tie together a couple of the answers that I've heard so far I think to Steve's question you talked about.
Fleet productivity being above one and a half in the third quarter, which I think suggests the blue line issues are kind of in the rearview, but same time, Matt I think I think you're saying like.
It sounds like some of this stuff is still in process and as you know its going it could bleed into third quarter. So I'm I'm really just trying to understand the cadence of.
How quickly you think these.
These integration issues can get will get fixed or are they fixed already I'm just trying to tie. These two different data points together is productivity going to be above one and a half in the third quarter I guess.
So we were never very good at forecasting rate in time, so we stopped doing that a couple of years ago. So now I'm going to.
Try to forecast the interplay of rate time admit.
I could say that what we've seen in the repairs of markets that would challenge and then the growth of markets that we fed more fleet to make us feel comfortable that our target of 150 of 1.5 is in play.
We don't want to get into the business. So starting to forecast because then I would mind will forecast rate and time to the to the to the 10 Bips and we don't want to do that but I think more the color of the demand environment. The preparations to the to the handful of markets, where we had challenges we feel good about where we are trending and Thats why we gave the guidance that we gave today or last night.
Okay. I thought you specifically said to Steves question are you thought it would be above.
The 150 as all so yes that that if you if that played with art if you mess around with the midpoint of our guidance it would it would end.
Come out with that implication but.
Okay, not going and we don't want to forecast a number.
Sure, David Hey, Seth, It's Jeff I, just want to add just one thing that we're that.
1.5% that we talk about kind of goes back to when we introduce fleet productivity. The concept is that we want to make sure that we're being as productive as possible with the fleet, but at least covering about 1.5% of inflation right. So our goal in any quarter is to get that fleet productivity to be greater than the 1.5% inflation that we expect is going to come on the fleet just.
Yep.
Make make sense totally thank you and then maybe just for you.
I appreciate the color on the the adjusted pull through.
60%, excluding synergies and.
You know some of the headwinds and things like that but you know as we think about 2020 I mean, it seems like.
These issues should be.
You know in the rear view so is there anything that we should think about.
That would not allow a 2020 pull through margin to be in that 60% range.
So so there is nothing right now that that we can see we're going to start the 2020 planning process.
Call It late August .
And obviously work through but but to your point a lot of what you see as adjustments to that 60%. It is the acquisition dynamic.
That plays against that number absent that.
There is there is nothing that we're seeing right now that would take us off 60% on the core business.
Okay Super Thank you very much guys appreciate it.
Thanks.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.
Yes, hi, good morning, everyone, Hi, 40 here.
You folks had really strong free cash flow performance given the.
Negative EBITDA religion, I'm, just wondering how much more room do you have to pivot capex lower if you need to how far out.
Are you committed because Matt to your point earlier on the call in terms of latent capacity, given where utilization was in the quarter you have to go back a while before we see utilization at these levels and into Q. So presumably.
I would imagine you folks can turn harder on capex.
If you find that as you heard through Threeq you.
The ramp is at the low end of expectations can you just talk about please.
Well as we've talked about before we have we have a lot of flexibility.
In our capital spend.
We were very well aligned with our partners and and that's what's allowed us to make this trim relatively easy we're it's not nor calculus right now to go lower than the range that we're in we want to reiterate we feel good about the demand environment and the opportunities that are there. So once we absorb the extra 1% that we didnt expect and then work the rest of the fleet through our system. We think this is the right capital allocation for the for the end markets that will be will be working in for the for the rest of the year.
So.
Is the opportunity there in a different environment, yes, but I don't want anybody to take away that thats, where our heads are at.
Okay and in terms of how we calculate shifted at all in terms of what's the optimal level of utilization, we're trying to work towards given the changing fleet mix has that evolved at all as you know as we look at the actual time utilization reported for the quarter given all of the difference as we've seen in terms of the move towards specialty in the business should we be thinking about a different calculus. When we're looking at maximizing returns as it relates to what utilization that ultimately translates through.
Jerry that that's an excellent question and thank you for asking it because the change in the calculus is really the shift for us to fleet productivity and it's less about targeting a particular time utilization number or particular rate number or particular mix number even but rather you know the going out in the field and getting as much rate as we possibly can and utilizing the fleet to the highest level, we possibly can in a way that makes sense.
And to the point, you're making about specialty continuing to optimize mix that would come through.
More profitable fleet.
And more profitable fleet, that's going to consistently meet the demands of our customers. So that calculus shift. This is lee productivity and really the interplay that's going to come from continuing to optimize that profitable growth and return that were that were after.
All right. Thank you.
Thank you.
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question. Please.
Thanks, Good morning, everyone.
Matt it's.
Interesting, we haven't talked too much about the macro and it sounds like that was pretty solid in some of the issues. You had were largely integration and weather related so somewhat unique to two to the company.
Could you address it sounds like you feel pretty comfortable with the back half of the year, but the abiomed has been a little bit soft you mentioned.
Some of your customer discussions that sounded sound solid. So this is more of a 2020 question, but what lends comfort, particularly non res, but overall.
Well, we as Jeff had mentioned, we're not we haven't even started our 2020 planning process, but when you look at the even even the contractor backlog out nine months right. So theres theres Theres still work there when you look at construction employment numbers I think highest of all time, you look at other indicators, including our customer confidence index and the feedback from our 1200 locations out in the field the managers in the sales reps they get paid to do this every day, we feel good about the end markets how much that plays in and where that ends in 2020, we'll spend a lot of time in the fall taking a look at and obviously that will be influenced our guidance, but but we do feel good about the anymore.
Hi, Thanks, I appreciate that and then and then just on from that from the early June press release about the the leverage level and you touched a little bit on it again today, but how should we consider the M&A pipeline.
Given this new targeted.
Any any material changes do you think you're going to slow down or might you might there even be expansion in looking internationally, perhaps just kind of the big level picture on on on on M&A from here in that in that light.
Sure Scott, it's been pretty consistent with the way our thoughts have been and we talked about at the end of Q1, whereas we're in much more of a absorb and leverage mode. In the general business. As you can see we spent a lot of time talking about that today, but we certainly have a leaner for specialty if the right deal comes up were very very interested in any kind of specialty acquisition that can meet our threshold right very high bar, both culturally strategically and most importantly financially, but we really like the space and if we can get some new product or build out of the footprint that we think it would be more efficient for us to do it through M&A versus and add that to the organic growth, we're showing what I would say, that's where our lean would be internationally. We're still we're still moving very slow we've got we've got a great team. That's there we are international now with the 11 stores, we got from the Baker acquisition, they're doing a great job, but we're going to continue to take a watch and learn.
Mode before we go tied to the deep into the pool and we'll we'll update folks once we feel that theres a pivot from that position.
Thanks very much.
Thanks Scott.
Thank you. Our next question comes from the line of course, the active honest from Morgan Stanley . Your question. Please.
Thanks.
Curious, how cross selling with boring quarter relative to your expectations. It sounds like a lot of the comments on the integration happen, we're really about protecting the heart.
Such a secret.
Good cross selling performed in line.
Yes, we did we saw double digit growth in cross selling still still strong performance.
I think thats one of the areas, we can pick up.
As as part of the revenue opportunity that we have we've got obviously, some new reps on the team that weren't as familiar with the full offering and thats part of the training that we've been focused on here in the in the in the past quarter to get folks trained on what the full value prop that we have as we've added new players to the team whether they be just growth or through M&A and kind of the only thing I'd add there is that's a that's a big component of the leveraging of the acquisitions that we've done.
Is is to really focus on cross selling and bringing that broader breadth of product and service to our customers.
And then along the same lines you guys increased your specialty cold starts from 27 to 31, if you could just comment on how the the mix of gross Capex plans than all occurred because of your reduction if it's going to be more focused on specialty our pending separately capex was reduced.
And then also just what what's the Capex impact from additional cold starts.
Per unit.
Yeah, there's not a big for the additional three cold search is not a big change in the Capex, but we did increase specialty.
As a whole number and then obviously as a percentage because none of the none of the cut regardless of where we end up in that range is going to come out of specialty we actually up their capex for the full year based on the growth that they show.
Okay, Great and then just lastly, I think you just talk about some of the train associated with the sales force.
As part of the territory.
Realignment can you just give us a little bit.
More color on what specifically.
Thanks to return this elsewhere.
I couldn't hear you too well.
She said training of this just say training Courtney yeah yeah.
Okay, Yes, I mean ongoing we have we have a very broad and deep curriculum of training for both new employees and then for higher level sales professionals. So we have a training tailored to the mall I would just say that part of the.
Part of the biggest opportunity that folks new to the organization, even if they were in the business before is a breadth of products that you have to sell and how do you use.
Yes, and the product specialists, we have to solve more problems for your customers to get more share of wallet deeper penetration. That's that's more of what our focus is.
On a go forward basis and part of why we continue as you brought up your first question such strength in cross sell and growth in our specialty business.
Oh Im sorry, just one last one.
In some markets, where you could do an acquisition have you become the sole provider and is that having any impact on customers who might want a second provider.
Yes.
These are all at will contracts other than when you do three bids in a buy for like a large petrochem plant or anyone none of our customers are beholden to any of us in the industry to be a sole provider. So even if someone told me. They were I don't know that I could tell you definitively on a lot of call that we are the only provider, but but we are fortunate that because of the breadth of our.
Product offerings, and our network Theres very few.
Areas of North America or pieces of equipment that we can't quite to our customers. So we think that gives us a really strong share wall.
Thank you.
Thanks Courtney.
Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question. Please.
Good morning.
Thinking about.
Specialty.
Adding much fleet to the Baker Ranch is in house fleet absorption Baker and and as the integration.
On pace there.
Yes, the integration for Baker's doing well in addition to our fluid solutions team. We added Thompson pump. So you could imagine where we're pretty well set with pumps already Baker was already the leading tank provider in the industry. So what were adding to that or additional products and services like filtration and really building a comprehensive fluid solutions business as we pulled together a great pump business integrate tank business.
Great and then also the leverage range at this juncture, where we are in the cycle.
Your optimism about the cycle in the free cash flow profile what at this point when things are good would cause you to lean to operating at the low end of the leverage range.
Well, we've talked about when we made the change to reduce the range to two to three times.
Two things. The first was we were still planning to come in somewhere around two and a half times by the end of this year. So that is.
Coming down from a call it three times on a post the Blue line deal at the at the end of last year. So we have made conscious decisions to continue to get that leverage down through 2019, as we look forward into 2020, we're going to continue to focus on on moving more towards the end of a of our new leverage range I'm not sure exactly where we'll fall, but it will be a focus for us as we think about the on a free cash flow in 2020 that we expect will be again, another robust year free cash flow generation as we think about how much of that will go to leverage it will be a a priority for us to continue to take the leverage down.
Excellent. Thank you.
Thank you. Thank you.
Thank you. Our next question is our final question for today and that comes from the line of Chad Dillard from Deutsche Bank. Your question. Please.
Hi, good morning, guys.
Hi, Chad.
Oh, sorry.
Dead horse here, but just want to go back to the.
The under absorption of 1% and just wanted to understand what's baked into the balance of the year. So I think you talked about a year.
Plus on more than 1.5%.
So to speak squeeze productivity number for Threeq you.
I just wanted to figure out if that's actually contemplating back as well as like the back end of the guidance and to kind of get.
That under absorption take in terms of its the case that some of the pent up demand from Twoq here with the delays.
Come through and take care of that or is it more about some of the most of the sales force that was more inwardly facing on.
The integration moves for art, we are currently facing in any store might work.
Sure. So it's both and in addition to the absorption into markets, where we needed to salesforce to fill the top of the funnel as I say.
To utilize that Dorming capacity. They had is one fixed but it's also shifting assets to the markets, where we have robust growth and where we have opportunities and not just specialty but other geographic markets, where they weren't as impacted we talked about the California in the first quarter and then we talked about how the rebound where they are real slow start to the first quarter, they've they've had robust growth on the west coast here in the.
Second quarter, and we forecast that to be beyond so it's really just management of our business is normal cadence for us. The only reason we called out the specific drag just because they were abnormal and and the opportunity to repair them exist because the demand that's out there. So that's a real good news otherwise if we weren't in a strong demand environment. There will be a different play called all together and just want to reiterate the strong demand environment strong rate the opportunity for growth in the back half of the year that we that we are guiding to is is is our opportunity to remedy that and then the output will be that fleet Proto we that fleet productivity target that we talked about.
That's helpful.
And then you mentioned at the top of the call that infrastructure was a source of strength.
So just trying to understand I guess.
How much bigger does that part of the business grow as we were public tours like the balance of the year and 2020 and like how do you think that potential mix shift impact.
I guess like all else equal.
Yes, I'll leave it there.
So I think first of all the infrastructure growth isn't so much that theres great tailwinds, although the end markets growing its also our focus on it. So we started focusing on infrastructure as a vertical and tailor to go to market strategy for that as well as product strategies. Because we knew there was just such demand for and need for infrastructure improvements throughout the country. So we that's paying off and this is a great example of opportunities where even as end markets may have slower growth as we vertically focused our sales teams and our product offerings to end markets, where we think our offering benefits more than the competition. We could we could actually swim upstream in some of these markets and we did that for a little while and infrastructure and now there's some tailwinds how much it ends up what size of our business isn't really the focus it's more of we have the core products like trench like fluid solutions to go along with our Gen rent products to really support that cost.
Summer base.
Great. Thanks, I'll hand, it back.
Thanks, Chad Thanks, Jeff.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back for any further remarks.
Thank you operator, and thanks, everyone for joining us today and to remind everyone. Our Q2 investor deck is available for download and as always please reach out to Ted Grace our head of Investor Relations. If you have any questions and we look forward to talking with you again in October .
Good bye.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.