Earnings Call: Q4 2018

Feb 28, 2019

Summary

2018 rental revenue and adjusted EBITDA grew strongly, with pricing and utilization gains lifting margins. 2019 guidance anticipates further EBITDA growth, higher free cash flow, and lower leverage through disciplined fleet investment.

Good day, and welcome to the Herc Holdings, Inc. fourth quarter and full year 2018 conference call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star then two. I'd now like to turn the conference over to Ms. Elizabeth Higashi. Please go ahead. Thank you, and good morning, everyone. I'd like to welcome you all to our fourth quarter earnings conference call. Our press release and presentation slides went out this morning, and both are posted on the events page of our IR website at ir.hercrentals.com. Please turn to slide 2. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer, and Mark Irion, Senior Vice President and Chief Financial Officer. They will review the quarter and full year results for 2018, as well as the industry outlook. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer. 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 risk and uncertainty. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to slides 3 through 4 of the presentation for our complete safe harbor statement. The company's risk factors section of our annual report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission this morning, contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2018 Form 10-K via visiting the investor section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. 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 with these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which were furnished to the SEC with our Form 8-K this morning and are also posted on the investor sections of our website at ir.hercrentals.com. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other 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 thank you all for joining us this morning. We are very pleased with the strong fourth quarter and full-year results we reported earlier today. Our strategic initiatives drove volume, improved year-over-year pricing, and continued our fleet diversification. In 2018, we achieved strong rental revenue growth and improved flow-through by controlling direct operating expenses and reducing SG&A. We increased our utilization and adjusted EBITDA margin year-over-year every quarter in 2018, and we expect to continue to improve both going forward. The strong 2018 results are a springboard for the continued organic growth we expect in 2019. Our guidance range for 2019 adjusted EBITDA is $730 million-$760 million, an increase of 7%-11% over 2018. Please turn to slide number six. By now, you are all familiar with four of these five strategic initiatives. Early this year, we added a fifth pillar, developing our people and culture. We have always believed that our people support the achievements of our customers and communities every day. As such, our people are the major differentiator for Herc Rentals in a highly competitive industry. It is important for us to highlight our commitment to the development of our people and culture through a set of priorities outlined here. First, we intend to attract and retain talent, align performance to a shared purpose, create a supportive workplace culture, and finally, expand continuous learning. The major themes of our other strategic initiatives remain the same, even as we continue to refine the elements within each pillar. Within our expand and diversify revenues pillar, our initiative to broaden our customer base consists of two main strategies. First, by expanding and diversifying our fleet, we are focused on increasing our share of our customers' equipment rental spend or budget. Second, and equally important, we are focused on adding new customers within new key vertical industries, which broaden our revenue base and limit our exposure to any one specific industry. These strategies have already resulted in a positive impact with our 2018 annual top line growing at a rate nearly two times the industry growth rate. Within improve operating effectiveness, we have formalized our operational excellence program to advance a company-wide operating culture dedicated to continuous improvement, outstanding execution, and ongoing operational effectiveness. Enhance the customer experience continues to drive ongoing improvement in our back-office systems to better service our customers throughout their interactions with our team with on-time delivery, a quick response to service needs, and timely and accurate invoicing. Throughout the organization, we continue to instill a culture of disciplined capital management, including programs focused on efficient fleet management, improvement in working capital Free cash flow and continuing margin expansion. Please turn to slide number seven. We remain absolutely focused on safety at the center of everything that we do. As I have said many times before, safety awareness is fundamental to how we operate, how we treat our employees, and how we work with our customers. We continue to make excellent progress on our total reportable incident rate, or TRIR. Our TRIR performance has improved 22% since 2016, and almost 5% year over year. Throughout our locations, we focus on the simple concept of a perfect day, which means no OSHA recordable incidents, no at-fault motor vehicle accidents, and no DOT violations. In 2018, all of our regions recorded at least 85% perfect days, an accomplishment we are extremely proud of, but one we continue to strive to improve upon as we seek to achieve and maintain 100% perfect days for the entire company. As part of that goal and in support of building a robust safety culture, our safety training programs continued to expand in 2018 and will remain a major focus for us in 2019 and beyond. Please turn to slide number 8. Before I review our financial summary, I would like to comment on our final step in establishing Herc as a truly independent public company. Since we separated from our former parent company, we have been diligently working to remediate material weaknesses in our internal control over financial reporting. Some of the prior weaknesses could not be remediated until we had established our own separate IT platform and systems to totally separate from our former parent. We are pleased to report that we have now remediated all material weaknesses, including the redesign and implementation of new controls. I would like to acknowledge and congratulate the hard work and dedication of our Herc Rentals team, both from operations and field support staff, to meet this major public company requirement. Now let's review our financial results. We are pleased to report strong growth in equipment rental revenue and sales of used equipment, which contributed to the 12.7% growth in total revenues we achieved in 2018. Equipment rental revenue grew 10.6% to $1.658 billion. The growth was driven by improved pricing, mix, and increased volume. We reported net income of $69.1 million in 2018, compared to $160.3 million in 2017. The results in both years included net tax benefits associated with the Tax Cuts and Jobs Act of 2017. In 2018, net tax benefits were $20.8 million, and in 2017, the net benefits were $207.1 million. Adjusted EBITDA increased 17% to $684.8 million at the high end of our guidance range. Adjusted EBITDA margin was 34.6%, an increase of 120 basis points over the prior year. Dollar utilization increased 150 basis points to 37.4% in 2018, as we benefited from pricing improvement and diversification of our fleet. Slide 9 illustrates the continuing positive improvement we made each quarter in 2018 over 2017. Mark will go into the details of the year-over-year fourth quarter performance, but as you can see from the charts on this page, we made consistent progress every quarter throughout the year. Annual pricing improved 2.9% over last year, with strong results each quarter and marking the 11th consecutive quarter of year-over-year improvement. Our 2018 pricing performance positions us well for 2019, with a solid base to carry momentum into the new year. Our team's ability to utilize our proprietary Optimus pricing tool has been a major contributor to our positive pricing trends in a strong competitive market. This slide also shows the growth in our average fleet at OEC on a quarterly basis for 2017 and 2018, reflecting the substantial investment in new equipment in 2018 throughout the year, as we continue to improve our fleet mix and age while partnering with premium equipment manufacturers. Our fleet additions in 2018 provide us with a strong base on which to continue to improve the quality of our fleet, enhance fleet efficiency, and improve return on invested capital. Now please turn to slide number 10. The improvement in price and mix continued to contribute to the improvement in our overall dollar utilization. We improved dollar utilization year-over-year throughout 2017 and 2018 and reached 39.7% in the fourth quarter of 2018. For the full year 2018, dollar utilization was 37.4%, a 330 basis point improvement from 2016, which was our first year as a standalone company. Fleet at OEC as of December 31, 2018, was $3.78 billion, with an average age of 46 months, compared with 49 months for the same period last year. Together, ProSolutions and ProContractor equipment now account for approximately $793 million of OEC fleet, or about 21% of our total fleet as of the end of the fourth quarter 2018. That is an increase of 6% in the value of that portion of OEC fleet year-over-year. While the pie chart on the left-hand corner shows the major categories of our fleet, as you can see from the graph on the bottom right, we have changed our emphasis within the categories. The largest percentage of our fleet consists of aerial equipment at about 26%. The mix within aerial has changed, with a slightly smaller percentage of aerial booms and an increase in the percentage of aerial scissors and other access equipment. Earth-moving equipment is now about 14% of our total fleet, and we continue to favor investments in compact equipment, which has a higher dollar utilization opportunity for us. Compact earth-moving equipment increased to 8.5% of our fleet from 7.7% last year. A detailed breakout of our fleet categories is contained in our appendix. Now, please turn to slide number 11. This map has been updated to show the growth expectations by state and province over the next five years. As you can see, the American Rental Association continues to forecast strong growth, particularly in the Southwest and Southeast, with annual compounded growth rates higher than 6% over the next five years. To take advantage of that growth, in 2018, we continued to add urban locations to increase the scale of our operations in targeted metropolitan areas. During 2018, we opened new greenfield locations in St. Peters, Missouri, which is part of the St. Louis metropolitan market, in Covington, Georgia, supporting the Atlanta metropolitan market. Additionally, we opened new locations outside Seattle, Washington and Dallas, Texas. In 2018, we closed six locations in Canada, which were unlikely to achieve our long-term performance requirements. These closures were reflected in the $5.3 million of restructuring costs we reported for the full year 2018. We intend to add approximately four to six new greenfield locations during 2019 to support our urban market strategy. Now, please turn to slide number 12. Our strategy is driving further diversification of our customers and markets, as well as industry mix. Local rental revenue grew almost 17% year-over-year and accounted for about 57% of rental revenue in 2018. National account revenue represents about 43% of the total and continues to grow as well. Our rental revenue by major customer segment for 2018 is shown in the revenue composition chart in the upper right-hand corner of the slide. Our contractor and other customers equipment rental revenue grew the fastest, with an increase of 14% and 16% respectively over the prior year. Contractors represented 35% of equipment rental revenues, followed by industrial with 29%. Other customers include commercial and retail service, hospitality, healthcare, recreation, entertainment, and special events, which represented 19% of equipment rental revenue, and the infrastructure and government sectors posted at 17%. Growth in new customer accounts continued to be quite strong throughout the quarter, maintaining a solid pipeline for future potential growth opportunities for us. Please turn to slide number 13. Key economic and industry metrics remain positive, as evidenced by the Architecture Billing Index, which was 55.3 in January, a substantial increase from the December level of 51.0. Industrial spending was estimated to increase 7% in 2018 over 2017, and spending forecasts for 2019 are showing a slight increase over 2018. Our conversations with industrial customers indicate expectations for continued growth in spending over the next few years. Expectations for U.S. non-residential construction spending for 2019 also continue to be healthy, with expectations for a year-over-year increase of 3%. Longer term, the American Rental Association forecast for equipment rental revenue growth remains robust, with compound annual growth projected at 5.4% through the year 2022. We expect secular trends in conversion to rental from ownership will continue as North American businesses follow the model of Europe and Asia, where space comes with a premium cost. In those countries, urban customers utilize rentals as a way to reduce costs and eliminate storage requirements. In North America, companies prefer the ease and continuity that equipment rental companies provide through service and maintenance of equipment. This service enhances customer productivity and reduces overhead costs associated with maintenance facilities and staff, as well as providing more balance sheet flexibility. Our strategy to focus on urban market coverage should further accelerate the rate of growth that we can achieve as urban customers increasingly use rental to offset space and cost constraints. We are making great progress on executing our strategy and driving improvements in operating performance. Key economic indicators continue to look favorable, and we're optimistic about our future growth opportunities in 2019 and beyond. Now let me turn the call over to Mark Irion, our Chief Financial Officer, as he will discuss our quarterly financial results in more detail, and then I'll summarize at the end before we open the call to your questions. Thank you, Larry, and good morning, everyone. We continued to make good progress this quarter and for the full year. Our journey is still in the early stages, but as you can see from our top-line growth, we are well-positioned to maintain our focus on flow-through and margin improvement in 2019. If you would turn to Slide 15, we will review the Q4 financial summary. Larry has already provided an overview of annual performance. Now I'll focus on some details of the fourth quarter. I'll reiterate a few highlights, then I'll walk you through the fourth quarter year-over-year changes. We are pleased to report that equipment rental revenue grew 8% to $447.7 million in the fourth quarter of 2018, against some soft comps of $414.5 million in the prior year period. The growth was driven by improved pricing, mix, and increased volume. Total revenues increased 10.6% to $543.7 million year-over-year, our sixth quarter of double-digit growth. Net income in the fourth quarter was $33.3 million, or $1.16 per diluted share, compared with $214.3 million, or $7.44 per diluted share in the fourth quarter of 2017. Both quarters included net tax benefits related to the Tax Act of 2017, with $6 million, or $0.21 per diluted share this quarter, compared with the net tax benefit of $207.1 million, or $7.19 per diluted share in last year's fourth quarter. Adjusted EBITDA in the fourth quarter of 2018 improved 11.6% to $198.4 million over the same period in 2017, and increased 17% for the year-to-date period. Adjusted EBITDA margin was 36.5% in the fourth quarter, a 30-basis point increase year-over-year, and an increase of 120 basis points to 34.6% for the full year. We continue to focus internally on REBITDA, which measures the contribution from our core rental operations without the impact of low-margin sales of new and rental equipment. As we pointed out last quarter, we are primarily a rental business, and a keen focus on improvement in our rental operating margins will add value to our business over time. Different depreciation assumptions than others in the industry has an impact on margin on the sales of rental equipment we report on our financial statements, and as such, there is likely to be a 400- to 500-basis-point gap in our adjusted EBITDA margins that are structural in nature rather than performance driven. For this reason, we will focus on managing our REBITDA margins and flow-through and have the goal of closing the gap versus our peers over the next couple of years. For the current quarter, we are very pleased with the progress we made in terms of improvements to our core rental business as measured in REBITDA. Due to a strong flow-through of 62.5%, our REBITDA margin rose to 42.3% during the fourth quarter of this year, an increase of 160 basis points from the fourth quarter of 2017. For the year, the improvement of REBITDA margin was also 160 basis points and reached 39.6% in 2018 compared with 38% in 2017. There is a reconciliation of these measures in the appendix, which I think you'll find useful in evaluating our operating progress. To summarize the operating metrics at the bottom of the slide, our average OEC fleet grew 4.4% in the fourth quarter over the prior year and was up 4.8% for the year. Pricing was good in the fourth quarter, improving 2.9% year-over-year, up across both local and national accounts and in all of our regions. Dollar utilization increased 100 basis points to 39.7% in the fourth quarter of 2018 compared with 2017, benefiting from the 2.9% increase in pricing as well as improved fleet and customer mix. Slide 16 focuses on the changes in total revenues for both the fourth quarter and the full year. In the fourth quarter of 2018, total revenues grew 10.6%, or $52 million, to $543.7 million, compared to $491.7 million in the fourth quarter of 2017. Excluding currency, rental revenue was the main contributor to revenue growth and increased $35 million or 8.4% compared to the same period last year. The higher year-over-year equipment rental revenue results reflects the 2.9% increase in pricing, 2.3% increase in volume with the remainder from improved mix and other. The improved mix is partially due to the revenue growth from local accounts and the ProSolutions and ProContractor lines of business. In the fourth quarter of 2018, sales of rental equipment increased 30.2%, or $18.8 million excluding currency, and reflected our ongoing focus to improve fleet mix and to maintain the age and quality of our rental fleet. The largest portion of our sales went through auction channels, which accounted for 48% of the total sales volume in the fourth quarter of 2018, compared with 22% in the prior year. We generated proceeds of approximately 42% of OEC in the fourth quarter due to the large concentration of auction sales during the quarter. For the full year, our proceeds also totaled about 42%. Please turn to slide 17 to review the Q4 adjusted EBITDA bridge. Adjusted EBITDA for the fourth quarter was $198.4 million, an increase of 11.6%, or $21 million, compared to $177.8 million in the fourth quarter of 2017. The bridge shows that the largest contributor was the improvement of rental revenue with growth of $35 million. Direct operating costs increased $9 million over the fourth quarter of 2017 as a result of the higher rental equipment activity and related costs, such as fuel, transportation, as well as payroll and payroll-related expenses. Those costs were partially offset by an improvement in maintenance expenses. Selling, general, and administrative expenses increased $8.1 million in the fourth quarter, primarily due to increases in variable compensation incentives supporting revenue growth. A number of initiatives that were rolled out in the third quarter to reduce and control expenses should continue to add value. While we are making good progress towards flattening out our operating expenses, we are committed to maximizing flow-through and to improving our EBITDA margin with flow-through targets of 60%-70%. If you turn to slide 18, net income in the fourth quarter was $33.3 million, compared to net income of $214.3 million in 2017. As mentioned previously, the largest impact on net income was the change in income taxes, which decreased $198.2 million over the same period in 2017, driven by the net tax benefits related to the 2017 Tax Act. Interest expense for the fourth quarter decreased $4.2 million, primarily due to the reduction in interest expense of our senior secured second priority notes through the partial redemptions made in March and October of 2017 and in July 2018. These savings were offset by the higher average interest rates on the revolving credit facility during the quarter compared with the prior year. Spinoff costs in the fourth quarter declined $4.3 million to $3.9 million from $8.2 million and are expected to be minimal in 2019. If we turn to slide 19, we have broken out our fleet expenditures and disposals on an OEC cost basis and have provided a rolling balance of the OEC value of our total fleet. A quarterly breakout of this information for 2019 and 2017 is also in the appendix. Total fleet at OEC was $3.78 million as of December 31, 2018. The average OEC of our rental fleet during the quarter increased 4.4% over the prior year quarter. For the fourth quarter of 2018, fleet expenditures were $84 million, and fleet disposals at OEC were $193 million. The average age of our disposals in the fourth quarter was 84 months. We reduced the average age of our fleet to approximately 46 months at the end of the fourth quarter of 2018, from 49 months in the comparable period last year. If we take a look at slide 20, total debt was $2.2 billion as of December 31, 2018, which was about the same as the prior year. Net cash flow from operations for the year ended December 31 improved from $349.1 million in 2017 to $559.1 million in 2018, or a $210 million increase. Net fleet capital expenditures increased for the full year from $341.3 million in 2017 to $499.1 million in 2018. Actual net fleet CapEx for the year was lower than the guidance we provided on our third quarter conference call because we decided to take advantage of the strong used equipment market and move more fleet than we had planned through auction channels. Non-fleet capital expenditures for the year totaled $77.6 million, up slightly from $74.6 million in 2017. Free cash flow for 2018 was negative $7.9 million, an improvement in comparison to negative $60.9 million in 2017. We were pleased with the progress we made during the year to improve working capital and reduce our DSO. A reconciliation of free cash flow is also in the appendix of the deck. We had ample liquidity of $668 million as of December 31, 2018, and we're continuing to focus on a disciplined financial strategy to reduce leverage and fund organic growth opportunities with our operating cash flow. On slide 21, as Larry mentioned earlier, our guidance range for 2019 adjusted EBITDA is $730 million to $760 million, or an increase of 7%-11% compared with our 2018 adjusted EBITDA of $685 million. This year, we expect to spend $370 million to $410 million in net fleet capital expenditures. The reduction in capital spending over the prior year, along with the expectation of improved EBITDA, should contribute to a reduction in our net leverage ratio by the end of the calendar year as we expect to generate strong free cash flow. Our overall strategy is expected to continue to provide ample liquidity and the financial flexibility to fund our strategic growth, to improve our operating margins, to serve our customers, and to create value for our shareholders. Now I'll turn it back to Larry. Thanks, Mark. Before we move to the Q&A portion of the call, let me summarize where we are in our journey. Please turn to slide number 22. We are very pleased with the results we reported today and our outlook for 2019. Our strategic initiatives are expected to continue to drive growth in revenue and dollar utilization. We expect to maintain EBITDA flow-through of approximately 60%-70% throughout 2019. Our adjusted EBITDA guidance is expected to be 7%-11% higher than our 2018 results. We expect dollar utilization and EBITDA margins to steadily increase. Now we look forward to your questions. Operator, please open the lines. Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open to ask a question. Please state your name before posing your question. Again, press star one to ask a question and star two should you wish to remove yourself from the queue. We will take our first question today. Please go ahead. Your line is now open. Yeah. Hi, Neil Frohnapple with Buckingham. Congrats on a great quarter and year. Thanks, Neil. Maybe starting off, a question for Mark. Just wanted to drill in on direct operating costs. They ticked up a little bit in Q4 versus Q3. Just curious, looking out, what is embedded in the EBITDA guidance for direct operating growth in 2019? As a follow-up, could you just talk more about the initiatives to reduce direct operating costs? Are there still opportunities for improvement here? If so, can you highlight some of these initiatives? Yeah, sure. I think our general goal, as we stated, is just to sort of have DOE running flattish, I guess, which isn't a very technical term. There's going to be a bit of noise in there just with the certain amount of variability with revenue induced costs. I'd say the sort of guideline there is somewhere around 5%, is something that we should be able to achieve that would generate the flow-through that we're looking for. The initiatives that we rolled out involved some XPO Logistics in terms of sort of consolidating the spend of outside hauler and similar initiatives with regards to fuel. Those are in place, gaining traction and creating sort of savings in terms of the increase, not necessarily absolute savings. We continue to focus on the logistics of the business. There are opportunities, we think, for additional efficiencies there as we go forward. The general goal is a flattish sort of DOE and SG&A to drive the flow-through, and that's sort of what we're looking to focus on through 2019. Okay. That's helpful, Mark. The net fleet CapEx outlook obviously implies less growth CapEx this year than in 2018. Can you just talk about your confidence in achieving higher time utilization on like for like equipment, higher rental rates this year in order to deliver, I guess, greater than 5% revenue growth in order to leverage the DOE? Right. Yeah, no, we've made substantial investments in our fleet over the last couple of years, and we're sort of coming to a point where we're looking just to maximize our utilization of those investments. Putting less new CapEx in on top, just sort of human nature and efficiency and just the focus, will allow us to improve our time utilization. We see markets very strong across our footprint, and the demand opportunities are there. 2019 becomes a self-help year in terms of just taking advantage of the investments that we've made historically, maximizing the utilization on those, focusing on rate, and focusing in on efficiency just to get our margins improved and to improve the business performance. Okay, thanks. I will pass it on. Great, thanks. Thank you. We will now move to our next question today. Please go ahead. Your line is now open. Hey, good morning. It is Seth Weber from RBC. Good morning, Seth. How are you? Doing fine, thanks. How are you? Terrific. Good. I have a couple questions. The OEC on rent, the volume number, 2.3%, was a little bit lower than what we were looking for year-over-year growth. It is the lowest it has been in a while. Was there anything going on there that you would call out, or is that sort of the right way to think about it going forward? First question. Thanks. Hi, Seth. This is Bruce. I would tell you that there is some room for improvement there, and we are focused on it, as Mark stated. In our net CapEx guidance, we feel there is room for some improvement in our time utilization, and we see that as opportunity. Sure. Was there something in the quarter that you consciously pushed rate for volume? Was there something in the quarter, though, that you would call out that made that number a little bit light? No, I wouldn't say other than some- Or was it- I wouldn't say other than some fairly tough comps year-over-year, but nothing in the market overall. Okay. You were not surprised by the number, I guess. No. There was some opportunity there, and we are focused on that. But as Mark stated, across all of our geographic markets, we saw strong opportunity and growth and really a good, healthy environment for pricing. Okay. Sorry if I missed this, but did national account revenue grow in the quarter? I know it was up for the year, but was it up for the quarter as well? Yes. It was up for both the quarter and the year and continues to grow, albeit at a slower rate than our local accounts. Sure. Okay. Then just lastly, we are 2 months into the quarter here. We have heard some chatter that weather has not been helpful in the first quarter. Is there anything you would call out with respect to weather in the first quarter, or is it kind of business as usual? No, I would tell you, whether it was the fourth quarter or first quarter here, could the weather have been better? Sure. But we are staying focused on our diversification strategy in the fleet and the customer in the urban market footprint. So, weather shouldn't be an excuse. Okay. Thanks very much, guys. Appreciate it. Thank you. Thank you. We will now go to our next question today. Please go ahead. Your line is now open. Hey, it's Rob Wertheimer, Melius Research. Hey, Rob. How are you today? Good, thank you. I think you've answered the question somewhat, but I wanted to just probe a little bit on your CapEx outlook for next year. You remain, I assume, fairly confident the market demand is there, and that's not the driving reason for spending a little bit less than you otherwise could. Are you more confident that you can drive up time utilization through improvements that you made? Are you more focused on the balance sheet? Maybe just a little bit more on what your decision framework was. Yeah, look, we are absolutely confident in the markets and the strength of the markets that we came out of 2018 with, and we're just being more prudent in our capital. As Bruce mentioned, we have some room for improvement in our time utilization. We've added quite a bit of fleet over the last couple of years. We think we can squeeze a little more out of that fleet and uptick it by being a little more disciplined with the capital on the one end. Look, we're always going to be disciplined about looking at the balance sheet equations. At the same time, we feel we have ample opportunity to squeeze some more time out of our existing fleet before we add. Look, still adding $400 million worth of fleet is a lot of fleet. It's not like we're not adding to the fleet. We're just being prudent about where we put it. Perfect. If you wouldn't mind, obviously there was a lot of consternation in Q4 about where the economy was going and so forth. Could you just give us a walkthrough of your end markets? Are you seeing anything that's particularly weak or maybe could you just characterize the end markets? Thanks. No. This is Bruce again. We're seeing kind of strength across all geographic areas, including Canada, and all segments of our customer base and kind of product mix. Like I stated earlier, it's a kind of strong enough market that we're seeing a healthy environment for pricing, and we feel comfortable that will continue into 2019. Yeah. To add to that, you got to remember where our strategy is. Our strategy is focused around large urban markets, urban centers, which are going to continue to have ample work going forward. We are not really seeing anything that would give us any level of concern across those markets. Okay. Thank you, gentlemen. Thank you. Thank you. We will now go to our next question today. Please go ahead. Hi, good morning. This is Ben Rudon for Jerry Revich at Goldman Sachs. Hi, Ben. Morning. Morning. Could you guys help us think about what level of price increases are embedded within your 2019 guidance, particularly in the context of the 2.9% price and growth you reported this quarter? Looking at a back of the envelope based on your EBITDA and CapEx guidance, it would appear that 2019 pricing growth of mid 2% range is embedded. Is that kind of the ballpark we're looking at? We're not providing any specific guidance on pricing. We've provided the guidance on our net EBITDA, which includes all our thoughts on revenues and pricing. There's been a consistent high 2s. We did 3.2% in Q3, which you can see on the slide on chart 9, and we don't expect any change in direction in terms of our ability to generate pricing growth through 2019. All right. Then you've commented on wanting to get ProSolutions and ProContractor up to 25%-30% of the fleet over the medium term. With the pair at 21% today, can you help us think about how that will evolve over 2019? Can you give us an idea how accretive that specialty grouping is as a whole, particularly year-over-year in 2019 versus 2018? Yeah. So this is Bruce again. You're correct. We've always stated over this kind of five-year journey that we'd like to get that portion of our business into that 20%-25% of fleet. We're continuing to invest in the business. We see opportunity. I spoke a little bit a couple of quarters back about the absorption of the fleet that we bought for that we've put into that business. So there's still some room there, and it does drive a better return than the other parts of our business. We will continue to invest. Just a point of clarification. Was it over the five-year plan, is it 25%-30% of the fleet or the 20%-25%? No, it's 25%-30% of the fleet. Got it. Would you expect the return profile to improve year-over-year in 2019 versus 2018? Correct. Yes. Got it. Thank you. Sure. Thank you. Thank you. We'll now go to our next question today. Please go ahead. Your line is now open. Hello? Hello. Good morning. Morning. This is Jordan Hymowitz from Philadelphia Financial. Thanks for taking my question. The free cash flow guidance next year, because CapEx is going to be less, what is the net fleet capital expenditures as opposed to the gross number? In other words, what's the free cash flow number you're expecting next year? What range? Jordan, we're not really providing explicit free cash flow guidance. You can sort of walk through, I guess, your own estimates based on the main point of the guidance that we've given. So there's adjusted EBITDA. Then just some broad brush strokes, if you take out interest expense, whatever the expectation is there. Net CapEx, as we've guided, is $370 million-$410 million. That's net fleet CapEx, so there's also non-fleet CapEx, which you can look at what we did last year and come up with a number. But certainly, there will be a big increase in our free cash flow, in 2019, just given the increase in cash flow coming in the form of EBITDA and the decrease in net fleet CapEx, which is the main expenditure that we incur. It seems like it could be several dollars per share in free cash flow versus basically break even this year. Is that crazy? It's not crazy. Not crazy, no. Okay. The EBITDA margin next year is 730-760 basis revenue. What REBITDA or EBITDA margin does that assume? Again, we're not really explicitly guiding on REBITDA. That involves another couple of numbers in our guidance that we're not comfortable putting out. But we do anticipate an increase in our REBITDA and an increase in our REBITDA margins through the year. As you sort of fill out your model, I'm sure you'll be able to put that together. It was about 160 basis points this year. I would assume it is at least that amount next year because you will not have the changeover from the Herc system next year as well, correct? Correct. Some of the spinoff costs that we incurred in 2018 and some of the consulting costs that we incurred in 2018 with regard to remediating the material weaknesses will all go away in 2019. Do you have a sense as to how much that was, the margin? 50, 60 basis points? We are early in the year. We are just providing general guidance along the lines that we have put out, Jordan, so I cannot really get too much more specific there with you. All right. It just seems like 2019 could be a phenomenally strong year for a margin acceleration and much greater free cash flow, which hopefully will be recognized by The Street. Yes, and that's implied in the guidance that we provided. So we continue to see the strength that we ended 2018 with. We're going to continue to build on that and focus on margin improvement for 2019, focus on improving our rates for 2019, and continuing the journey that we're on. Hey, Jordan. We've got a whole bunch more folks who are lined up to ask questions, so we're going to probably talk to you later. So if you could just do one short question really fast, and then we'll move on. I'm sorry, you're done. Okay, next one. Thank you. We'll go to our next question. Please go ahead. Your line is open. Hi, everyone. Brian Sponheimer. Hey, good morning, Brian. Mark, a little reeducation about your depreciation of equipment. You may not need to get too much into a comparison mode, but just how you look at it before you sell it. Well, I think it is in our K, in terms of our depreciation policies. If you feel like digging through Ks and comparing them to other rental companies, you can sort of see there is a bit of a distinction there. The primary distinction being in our depreciation policy tries to have a zero gain on equipment sales at the end of the life. That is what it is, and you can see that there is a big distinction in our used equipment margins when we sell it. There is not a big distinction in the proceeds that we get as a percentage of OEC, so we are getting the same proceeds. It is purely a function of the depreciation schedule. That is sort of the main distinction that we have, and that is why we are sort of focusing our attention and our internal focus and trying to communicate to you guys that REBITDA is the real way to sort of measure our performance, just given that distinction and depreciation. Right. Certainly. What I am trying to get at is, if you start to sell less equipment in 2019 and 2020 because you have refreshed the fleet, just for those that are looking at the EBITDA line as opposed to the REBITDA line from a margin perspective, that should be less impactful and less negative for you at that line, correct? That is correct. If you sort of just mathematically took your used equipment sales down to zero, then you are left with REBITDA, and you have a clean comparison between EBITDA and REBITDA at that stage. Right. Well, congratulations to all of you. Look forward to talking to you after the call, and best wishes for 2019. Thanks, Brian. Thank you. We'll now go to our next question. Please go ahead. Good morning, guys. This is Steven Ramsey at TRG. Thinking about greenfield locations this year, made a few last year. Can you talk about how you're targeting cities for this year, and are those connected to existing branches? Will the fleet in those greenfields, are they more weighted into the pro category in the targeted range of that 25%-30%? Well, look, I'll maybe start with your last question first. Generally, when we look at adding a location, we tend to look at primarily a classic location that most likely would have ProContractor product and may have a smattering of ProSolutions equipment in it. So it wouldn't necessarily be targeted for those as a standalone per se. They would be perhaps contained within that business. Our main focus continues to be rounding out and filling out our urban markets where we can add capability and also improve our operating effectiveness by having additional facilities in urban areas that allow us to move and transfer fleet and maintain fleet to be more accessible to our customer base in large cities and large urban markets. Perhaps, Bruce, you want to add to that? No, Larry, I think you covered it well. We're just focused on the large urban markets, large MSAs within the kind of footprint that we're already covering and filling in those markets to gain better efficiencies of our fleet, better utilization. We will add some ProSolutions specific locations in those markets. We call it kind of a green and growing market. Once we have that, we can layer in a ProSolutions business, a specialty business that kind of benefits from dealing with the existing customer base and gaining more wallet share from that customer that we're already serving. Great. Thanks. Thinking about CapEx that's non-rental in the mid $70 million, high $70 million range the past couple of years, is that where the greenfield, where we would see most of that on a CapEx basis? Should we see, since you're talking greenfields in 2019 being similar, should we see some ballpark range in the $70 million-ish on non-rental CapEx? That line includes, the greenfield leasehold improvements and build-out are included in that line, but the main driver in there is delivery vehicles and delivery fleet. The greenfields aren't really a significant amount in that number. I think for 2019, you can probably look at that as reducing similar to our sort of net rental fleet CapEx. You'll probably expect that to sort of drop down a little bit going into 2019. Great. Thank you. Thank you. Thank you. We'll go to our next question. Sir, please go ahead. Hi, just a quick follow-up. Seth Weber. Just a clarification, the 60%-70% flow-through number, I think, Mark, that you cited, is that EBITDA or REBITDA? REBITDA. Okay. Super. Thank you guys. Appreciate it. Sure. Thank you. Thank you. We have no further questions at the moment. Okay. Well, thank you all for joining us on the call today. If anyone has any further questions, as always, please don't hesitate to call me. We look forward to seeing you all soon. Thanks a lot. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.