All right. Good morning, everyone. Thank you for joining us. We are kicking off here the second day of the Baird Industrial Conference. My name is Mig Dobre. I am the Baird Analyst covering machinery and equipment rental companies. It is my pleasure to host today EquipmentShare. We have Jabbok Schlacks, the CEO and Founder of the company, joining us. Welcome to the Baird Conference.
Thank you for having me.
Look, the way I am thinking we are going to structure the conversation here, I do want to reserve a little bit of time to talk about demand and what you are seeing in the business, maybe towards the latter part of our discussion. I do want to start with tackling some of the more thorny issues that I think investors have been debating and all of us have been trying to work through over the past nine months, and certainly over the past few days following your Q3 report. Maybe one of the things that kind of stood out to me, and I know I have spoken with a number of investors as well after reviewing your report and reviewing the 10-Q, was not only free cash flow but cash flow from operations.
The company has been using cash not only in Q3 but really through the past nine months, with working capital really being a pretty notable drag. We had almost $180 million worth of outflows of cash. Talk a little bit about why this is going on, and more importantly, what happens next year? At what point in time can investors start seeing some working capital efficiency, and you obviously being in what would be a normal position for a rental company, which would be positive cash flow from operations?
Yeah, no, I think it's great questions. I think one, and we talked about on the call yesterday, we see about $400 million of free cash flow within Q4, so standalone Q4. It is the power of the model if you understand how we manage our fleet. To kind of go back to Q3 and the rest of the year, what's interesting on the scale of the company, usually we all look at quarter-over-quarter, year-over-year. If you think of the growth of EquipmentShare from Q3 2024 to Q3 2025, that was about a 36% growth rate, and we deployed about $400 million-$500 million of fleet within that standalone quarter. When you deploy fleet, there's a decent amount of one-time expenses when you deploy that fleet for the first time. That's going from manufacturer, that's getting set up, that's going to new job sites.
There's expenses that do flow through, and they're a drag for that one quarter. Instead of $400 million-$500 million, we did almost $1 billion, about $900 million of fleet deployment within third quarter. So we deployed, if you look at it from a percentage, 32% increase in OEC, 49% growth, so revenue on that base of OEC, and 52% rental core EBITDA. There are one-time expenses associated with that, which will have a one-time drag on cash. So if you're looking at that difference, which I think is helpful, we increased from a higher base 49% on that revenue. Cash flow, I think I'll end with this on that question.
We look at, it's page seven in this deck if anybody's looked at the deck, but you have when we look at the scale that we are today with 420 stores, we've scaled to a point that at any moment, and it's a good thing about our industry, rental is countercyclical in nature. If you stop growing, you stop bringing on CapEx, you produce, and we've seen that in the GFC, we've seen that with very historical downturns, you print a lot of cash. You stop opening stores, you stop bringing in fleet. Customers, instead of buying machines because they don't have security in the future, they rent more. So it's a great business from a harvest mode, to use that example. Today at 420, if we stopped and didn't open a single store, we're printing about $1.2 billion of free cash flow on a go-forward basis.
It's a good model. We're currently in growth mode and serving customers at really phenomenal margins, good cash flow. But there are real costs, and I think that's good to call out. There's real costs when you deploy that fleet. When you deploy about $1.25 billion, there's a real drag within that quarter from a cost standpoint. But the other side is, Q4, we're going to print $400 million of free cash flow, is what we see.
When you talk about $400 million of free cash flow, can you maybe unpack that a little bit in terms of what the CapEx component of that is relative to what cash flow from operations would look like to get you to $400 million?
It would be a combination of both. You will have operations as they scale. You are monetizing the fleet that you have deployed. The second thing is the power of the OWN program. About half our fleet is not on our balance sheet. If it does not rent, we do not pay. You can monetize it when it is good. If it is not renting, you are not paying the owner. With that said, it is a great program. I encourage we have a lot of participants.
Equipment is a really, really good asset class. That allows us to be cash flow positive in fourth quarter. If the macro dramatically changed, we would enter into what we call harvest mode, but you enter into, at scale, printing on a go-forward base over $1 billion of cash flow. It shows the power of the model and really the power of our industry in rental.
You talked about expenses, and we can appreciate that dynamic in terms of deploying the fleet, but I think the issue here is not so much expenses, but rather balance sheet accounts when you look at accounts receivables, which you have various categories of accounts receivables. Some of them are directly related to the fact that you are scaling your rental revenue, which that part is understandable. But you have some other categories as well, such as OEM receivables. There is an other receivable category, which I do not think receives a lot of disclosure. These have used a fairly considerable amount of cash. We are talking close to $90 million year-to-date. Maybe you can talk a little bit about that, because there is a question about the efficiency with which the working capital is being used inside the business.
Yeah, I think that is a really important question. It is one you look at and every CEO should be looking at. It is how are you monetizing your cash? We have about $2.3 billion of liquidity today. My WACC is, call it 7%, 7.5%. If I am looking at a return on capital and I am looking at a customer and how I am supporting that, or a receivable or a payable, we are looking at is, what is my risk-adjusted return on that capital?
If I can get a discount or if I can give a little bit better terms and again, give a much higher price, and I can get a return of 25% on 7%, and we utilize that to its fullest extent. Cash flow is extremely important. Liquidity, you have to have as a company. But if I can deploy cash on a risk-adjusted return, we are going to be very opportunistic.
I think on the receivables, when you grow 49%, you are going to have an associated growth of receivables. The interesting thing about our customer base today is different than it even was four or five years ago. The investment-grade nature of our customers, that we have about 92% as regional and national customers. That is a big change, which strengthens from a receivable standpoint, that aspect of the company as well.
Normally what I see with most of the companies that I cover, a bit of a balance in terms of how working capital is actually used, right? I mean, yes, there are inventory builds. Yes, receivables can build when you end up growing. But there is usually a counterbalancing element that occurs with vendor financing or accounts payable. Now, in your case, this has actually been a use of cash on a payable side rather than a source of cash, which sort of leads to two questions. One, has there been any changes in either supplier terms or discounts or timing of payments that you are making to suppliers through the year? Or, if not, why is it that you are so self-reliant in terms of internal capital financing for growth as opposed to being able to actually lean into supplier financing to help fund the growth?
We absolutely. If you think of payables, AR/AP, we are looking at, when I say risk-adjusted return, I think that is the statement that we look, how do I deploy my cash? Do I have enough liquidity for the next couple years of how we are actually growing? If I entered, call it a harvest mode, if the macro changed dramatically, can we go for the next couple decades printing $1 billion of cash flow every year? That is how we look at every moment and every decision.
That is both in AR and AP. If I have payables and I want incredible extended terms, that is a cost on that side. If I have receivables and I get a benefit from us where I am charging much higher pricing, I make a much higher return. We look at every single aspect of the company, with liquidity being the most important for any company. Do I have the cash that I can utilize? If I can use that base of liquidity to make more money, that makes a lot of sense to us.
Before I move on from this topic, maybe one final point. I am going to take you back to your comment about the fourth quarter. You were not specific, which is why I am coming back to this. Working capital, should that be a significant source of cash in the fourth quarter? Working capital, in terms of how it is going to flow through—
Yes.
—cash flow from operations?
Yes.
Okay. More functional and structural to the business model, again, you guys have had to battle through some short reports, and you have come out with your own take on what has been alleged, essentially saying, "Hey, these folks don't have their story straight." I am going to try to maybe ask a couple questions about that, give you an opportunity to comment or clarify. One of the issues that I think folks have struggled with is this idea of related party transactions that exist within the company, have existed historically. So maybe talk a little bit about how things have changed, especially since you have become public and some of the governance structures that you put into place.
Yeah, great question. When we started, I think it helps to give context, and I will do that and try to make it pretty succinct. We started EquipmentShare, just like a lifetime ago, 11, 12 years ago now, with five of us, and it was to solve our problem, us as contractors, with really connectivity, equipment utilization. I really hated rental at the time. It is like, this is nonsense. I have got all this equipment, it is not being rented. We were in the Midwest. You have hot summers, cold winters. You have different types of equipment for that time period. And after complaining for about 20 years, us and other contractors we knew, we finally said, "Hey, we have got to do something about it." 100% of the equipment was ours. And this happens a lot with founder-driven companies.
You are solving your own problem, so the related party it is, you are the company, the company is you. As we grew, we brought a lot more people. We had a lot of really good customers. We grew and a lot of employees. We grew from five. Today, we have about 10,000 employees. We have tens of thousands of customers. So we scaled. In about 2022, we ended up owning about 7% of the total fleet. So it went from 100% down to 7%. That was about $400 million, a little bit over that, and we owned it through a family office. What happened was a lot of the investors who were in the OWN program said, "Jabbok, we like it. Sounds amazing.
Seems like a good asset class, but we kind of need you to own equipment too at the same terms." That kind of made sense to me. I think all of us as investors, if we invest in something, we want the principal to say, "Hey, you better have your own money at risk." There better be, if something happens, you have money at risk and you are at the same terms I am. So that made a lot of sense to me. So we tried to be consistent, obviously reduced dramatically how much we had to about 7%. It was interesting when we entered the bond market. Around 2022, we entered the bond market, did our first high-yield issuance, and it was great. We appreciate a new set of investors from that standpoint, the debt side. It was good.
One thing that I did not expect is they said, "We do not want you and Willy," my brother, "owning any equipment in the OWN program. We think that is a conflict with the bond because the bond is covering ultimately secured by on balance sheet." It was odd to me, but we listened to investors, we listened to the bond market and said, "We understand that. We may not agree, but we get the concept because I have the OWN program saying I want you to own equipment."
So we honored that and committed over the next couple years to reduce that to zero. Those, you will see a lot of the company names, the Premiere Group, other companies that were within that family office that we owned equipment. As of Q1, it was about $7.2 million that related parties, us being the majority owned. As of Q2, it was less than $1 million, and we talked yesterday, it is down to zero today. Again, that was acknowledging investors have a different perspective. If an investor has a different perspective, whether it is a bond or an equity, my job is to serve shareholders, and that is a constituent as well.
For sure, but what about real estate?
Real estate, the second one. Great question. Similar to real estate, what was interesting is the bond, high yield didn't care about real estate. They definitely cared about equipment, and we listened there. Real estate, if anything, I think my take would be they saw it as an advantage for the company to have a friendly landlord. And I get that because if you have permitting, if I've got to put electrical line in, if I've got an unfriendly landlord, that might take me six months. If I've got a good landlord, that might take me three days. Like any company, we've gone through and we've been PCAOB compliant since 2022, Big Four auditors since 2020, independent audit committee that covers every single related party transaction, and we think that's incredibly important from a governance standpoint.
On the real estate, bond market didn't care, actually thought it was a net benefit. As we enter the public markets, you'll see in our S-1 and see all the filings, you'll see all the related party, mainly related to real estate because it's a net benefit having a good landlord. All those go through the independent audit committee and then our external auditors. But the public markets had a different perspective, and again, as me being a steward for all shareholders, I wanted to listen to that. So after the first, second quarter, it became very clear that the public markets really didn't want myself, Willy, or any other director-related party having any related parties. So we committed, I think it was second quarter earnings, we had committed to reducing that over time. We've made progress towards that. Again, we don't want to do something—
I mean, where are we on that in terms of you essentially serving as a landlord for EquipmentShare branches? I mean, I believe your 10-Q disclosed a little north of $40 million of founder-related receivables, and those have actually gone up. So, at what point in time do you guys think that you can not only not have that receivable on the balance sheet, but frankly, sort of clean up this aspect of it?
My goal is over the next couple months. I feel what I don't want to do is something harmful for EquipmentShare. I could tomorrow, I could have three months ago done something that I've experienced with 400+ properties. If you get a landlord, I've got managers that we got the best in the industry. If you have a really bad landlord, that can make your job really difficult. We wanted to make sure we got the right transition to the right partner. That just takes time. There's some block and tackling. I expect that to be done completely over the next couple months, and I think we talked about that on Q3. That is my expectations. That's the goal. I anticipate that actually happening.
Okay. Maybe to talk a little bit about the OWN program, which obviously carries its own set of complexities relative to where the rest of the industry operates. One of the things that has been alleged is that there is a first loss tranche in the OWN program that is offered to, that supposedly EquipmentShare would cover for investors in the OWN program. That relates predominantly with the remarketing of equipment at the end of the life of the OWN contract. Comment on that a little bit in terms of whether it's there, how it functions, and if it does exist, why we're not seeing this reflected as a liability on the balance sheet of the company.
Yeah, I think that's a great question. The OWN program, I think for EquipmentShare's standpoint, there's no guarantees of buyback. There's no guarantees of any revenue. If it doesn't rent, you're not getting paid as a participant. Think of like an Airbnb. If your house doesn't rent, you're not sharing revenue because there's no revenue to share. We're very explicit about that. With that said, it's a great program. I recommend. We have a lot of really good participants in it. The OWN program itself, we get some benefits from OEM, so I think that's important to understand. The benefits we get is really three different ways. On the front side of it, we're one of the largest buyers in the world, so we get about 20%-30% discount.
Most of those economics we're able to pass through to the participant themselves, so that owner has a really good equity position day one. The second thing, on warranty, maintenance, support, technology, those are things we do guarantee. We're guaranteeing we're supporting your equipment. We're guaranteeing your connected equipment. We're guaranteeing that service. A lot of that support is passed through from the OEMs, so we're able to get really support as a large buyer, as a good partner. The last part of it is, with about half of the OWN program, there is residual value support, and that caps at 10%, and we're able to pass that through on the backside when they enter into a remarketing agreement, and that gives us a ROFO or a ROFR on that equipment. At the end of life on the equipment.
I'm sorry, who provides the residual value support?
We're passing that through from the manufacturers.
Is this the manufacturer?
Yes.
Again, the assertion here is that since this is a support tool that they're using, it does not belong on your balance sheet.
I think there is two mechanisms when you are looking at that. Yes, to answer that question. The second thing is, the likelihood is very remote. You are two deviations from a GFC from a setting of your residual value guarantee. The accounting reconciliation from that is the likelihood is remote. The second thing is, if it happens, that is covered and supported from the manufacturer. You have two kind of mechanical things going on.
Presumably, KPMG, your auditor, has looked into this mechanism and is, please confirm, and is comfortable with the accounting treatment on your end for this potential liability.
Our auditors look through all of our agreements, yes, and sign off every quarter, every year on our financials.
Okay. Also related to the OWN program, and it is interesting, you provided this slide. It was in one of your decks, maybe the prior quarter, in which you had a breakdown of cash flows associated with the OWN program itself. This is kind of a point of debate with investors. What sort of cash flow does the OWN program actually generate for EquipmentShare shareholders? Because clearly, the OWN program is generating additional revenue growth, right? With the add-back of the OWN payments, it is generating EBITDA growth. But the question is, does it actually generate cash flow growth, right?
And you presented a total figure in which we really were not seeing a whole lot of cash generated from the OWN program for EquipmentShare, but you also had a breakdown in terms of what you consider to be mature versus growth sites, if you would. Talk a little bit about the actual cash that you expect the OWN program to generate as it matures, and compare it to what you have as it relates to equipment on a balance sheet itself.
I think for us, similar to what I always use if I am kind of explaining it to somebody, think of an asset like a car. You either buy the car and you have interest and depreciation, or you are leasing the car, and that payment you are paying for that car is essentially interest and depreciation. That is your cost of capital to use that car. At the end, you either sell it and you get the money, or you return it, and that would be the value of it. We try to be relatively simple, and what I think is always good to know is, this is a true cash cost. When I am paying an OWN participant, I am not saying, "Hey, I am adding this back." This cost us money. This cost us money. The same way interest costs us money, depreciation costs us money.
You can kick depreciation down the road, but that is a true cash cost at some point in time. For us to provide the best transparency, and I think if you think of EquipmentShare, there is only two things that are different. One, I am organically growing. I start from zero, and we do it about seven times more efficient. Then two, to your question, we do have the OWN program.
We think it is a phenomenal program, not only for the OWN participants, but for EquipmentShare as well. But there is a cost. There is a true cash cost. What you are getting is the depreciation interest, and that value at the end, that is the cost if you sell the equipment, or that would be the cost. And that is how you figure out, what is my depreciation? What is my cost of capital? And that cost of capital is 7% today.
Yeah, but maybe to double-click on this a little bit. If we are looking at the way the transaction in the OWN program actually functions, right? You are selling equipment to the OWN program itself, right? So there is a transaction that happens there. The equipment is marked up relative to where you are buying it. So in theory, that is cash that is coming into your business. But from there on out, as you say, you have cash expenses that are going to the OWN program participant that you have to make on a variable basis, but you actually have to make quarter in, quarter out.
If it rents.
If it rents. Maybe to frame it this way, other than the initial cash that you are getting at equipment sale, and maybe at the end of the program when you are remarketing equipment for OWN, do you actually generate any incremental cash flow for EquipmentShare as that machine is being used in the OWN program itself? Is there a margin, a cash margin that you are generating as that machine exists in the OWN program?
Yes, significant cash flow we generate, which is reflected in ROIC because this is not on our balance sheet. There is significant cash flow generated. We do think, again, the best way to look at it is it is an interest and depreciation cost. Depreciation can be, there is cash, and once you are in a steady state as a company, that is an actual cash drag. That can be delayed and give a false impression of a company. The OWN program is a truer representation of how much cash you are actually generating.
We have about three minutes left, and I want to maybe focus you on the next couple of years. Look, you talked about having $2.3 billion worth of liquidity, but as we discussed, cash flow from operations has been negative. You are talking about pretty aggressive expansion plans, which means more CapEx. Frankly, it is not clear to me that $2.3 billion is sufficient over the next couple of years to generate the to achieve the sort of investment plans that you have worked out. I guess the question that I would ask of you is, how do you think about it?
How do you think about striking the right balance between growing and accepting some of the signals that you're getting from the markets, whether it's on equity or debt, in terms of pacing that growth to make sure that you are getting a little bit closer to becoming self-funded and reaching that point of free cash flow stability?
It's a great question. I think history has shown, I know we've only been 10 months in the public market, and I've been company for over a decade, 10 years. Absolutely, my job is to serve shareholders. We're tackling what I think is one of the largest problems we have globally today. If we think of a large industry, construction, $15 trillion. There is still about a $2 trillion gap every year just from basic productivity, which is fixed by having a common operating system. We've seen this in every other industry. We just lag every other industry. So, that is the goal we have. That was very clear, obviously, as we went public. We intend on doing that. With that said, I want to be and absolutely listen to my shareholders, listen to, I'm part of that.
I want to listen to the bond market, listen to the market. Just like on the equipment ownership, bringing that down to zero for related parties. Like on the properties, it's not something I thought it was good to own properties, good to have a friendly landlord, but I want to make sure that we are listening to the market. I think the same thing from a cash flow. Cash flow is the lifeblood of a company. When you're growing, that is future cash flow, and you want to make sure you have liquidity to get there. You'll see that in fourth quarter, we expect $400+ million of free cash flow. If the macro or the market or something changes, we absolutely still will have the long-term goal, and I know we're going to get there. This is a decade. This is two decades for me.
I'm not sure that this is about the macro, right? This is—
The short term is what we're looking at. I agree with you.
Right. Leaving the macro side, the question is, does it make sense under the current conditions that we're all observing to have a more measured pace of growth into 2027 in order to alleviate some of the concerns that exist surrounding negative free cash flow for your business?
Absolutely, it makes sense to make sure we grow within the ability we have. If the world stopped tomorrow, make sure we have enough liquidity, enough cash on hand. Free cash flow is important. We will have a measured growth in 2027. If you think of how we're growing, we will meet customer demand. Today, I say no to a lot of customers. There's more demand that we have the capacity or the ability to serve. That's great because you have a really good pricing environment and you can make more cash. You saw that with less fleet deployed. Helps free cash flow, helps on a go-forward basis. Yes, we will have a measured approach as we go in 2027. Again, keeping our long-term goal of 2030 and beyond in the industry.
All right. Very well. We're going to have to end it here. If you'd like to continue our conversation here, we're going to have a breakout session. Jabbok, thank you so much for being here.
Thank you. It's been great.