Earnings Call: Q3 2018

Nov 8, 2018

Summary

Q3 revenue rose 12.8% and adjusted EBITDA grew 14%, as pricing, volume and mix gains lifted results. 2018 adjusted EBITDA guidance increased to $675M–$685M, with positive free cash flow expected in 2019.

Good morning, ladies and gentlemen, and welcome to the Herc Holdings third quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the queue, please press star then two. Please note that this event is being recorded. At this time, I would like to turn the conference over to Elizabeth Higashi, Vice President of Investor Relations. Please go ahead, ma'am. Thank you, Denise, and good morning to all of you. I'd like to welcome everyone to our third 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 two. 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 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 risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to slides three through five 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, 2017, which was filed with the Securities and Exchange Commission, contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2017 Form 10-K by visiting the investors section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. On a related matter, we expect to file our third quarter Form 10-Q later today, which will be available through either website. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for 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 investors section 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. Now I'll turn the call over to Larry. Thank you, Elizabeth. Please turn to slide number 6. Thanks everybody for joining us on this morning's earnings conference call. We are very pleased with the strong third quarter results we reported this morning. Our strategic initiatives drove increases in volume, price, and mix compared with last year's third quarter. We achieved strong rental revenue growth, controlled direct operating expenses, reduced SG&A, and improved flow-through. We recorded our highest quarterly dollar utilization and adjusted EBITDA margin since becoming a standalone public company, and we expect to continue to improve both metrics going forward. Therefore, we are pleased to announce that we have raised our full year 2018 adjusted EBITDA guidance range to $675 million-$685 million. The new range reflects an increase of 15%-17% over the $585 million in adjusted EBITDA we recorded in 2017. Please turn to slide number 7. The four pillars of our strategy, expand and diversify revenues, improve operating effectiveness, enhance customer experience, and discipline capital management, have been the blueprint from which we have focused our efforts to improve ROIC and enhance shareholder value. These strategic initiatives have remained constant and continue to drive our growth. Now please turn to slide number 8. Safety is at the center of everything we do. As I have said many times before, safety awareness dictates how we operate, how we treat our employees, and how we work with our customers. We continue to make excellent progress in our total reportable incident rate or TRIR compared with last year. Our TRIR performance continued to improve with a decline of 6% 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. Each of our regions recorded at least 85% perfect days for the first 9 months of 2018, a very impressive accomplishment. We continue to make investments to improve our overall branch safety programs and have been implementing new training initiatives for our Herc Rentals team and our customers. We promote a culture of safety to encourage everyone to make safety a 24/7, 365-day awareness, and we continue to aim for 100% perfect days within all our branches. We want to make sure that everyone is always thinking safety and that safety is an action, not just a metric. Now please turn to slide number 9. Here we outline the results for the quarter. We are pleased to report that equipment rental revenue grew 8.7% to $449 million in the third quarter of 2018, against some very tough comps of $413.1 million in the prior year period. The growth was driven by improved pricing, mix, and increased volume. Our average OEC fleet grew only 5.5% in the third quarter over the prior year. Pricing improved 3.2% year-over-year, and was strong in both local and national accounts. We also continue to see gains in Canada, which is included in the year-on-year results. We improved our net income in the third quarter by $33.4 million year-over-year, with net income of $46.2 million, or $1.60 per diluted share, compared with $12.8 million or $0.45 per diluted share in the third quarter of 2017. Third quarter adjusted EBITDA increased 14%, or $24.8 million to $201.5 million compared to $176.7 million last year. Adjusted EBITDA margin was 39% in the third quarter, a 40 basis point increase year-over-year and a major sequential improvement from the second quarter's 31.3% margin. Dollar utilization increased 50 basis points to 39.2% in the third quarter of 2018 compared with 2017, benefiting from the 3.2% increase in pricing, as well as improved fleet and customer mix. As I mentioned in my earlier remarks, based on our nine-month results and our expectations for the fourth quarter, we are increasing our guidance range for 2018 adjusted EBITDA from $630 million-$660 million, to now $675 million-$685 million, an increase of 15%-17% from our $585 million result in 2017. We are also narrowing the top end of our guidance range for full year net fleet capital expenditures from $525 million-$575 million to a range of $525 million-$540 million. Now please turn to slide number 10. This slide illustrates the continuing positive improvements we are making each quarter over the prior year. Equipment rental revenue in the third quarter increased 8.7% to $449 million against some tough comps that included hurricane activity from the prior year. Our year-over-year pricing increased 3.2% in the third quarter, which marked our 10th consecutive quarter of year-over-year rate improvement. Our rate improvement reflects the success of our proprietary optimal pricing tool, our experienced operations team, and the strong broad-based market demand for rental equipment. This slide also shows the growth in our average fleet at OEC on a quarterly basis for 2017 and 2018. During the third quarter, we increased our average fleet at OEC by 5.5% year-over-year, reflecting the substantial investment in new equipment this year to continue improving our fleet mix and age. Our fleet on rent continued to increase and has improved on a year-over-year basis for the last six consecutive quarters. In the third quarter, fleet on rent increased 3.9% compared with last year. As a reminder, the third quarter of 2017 benefited from higher volume of equipment on rent due to hurricane activity last year. Given our fleet additions this year, we have further opportunity to improve our fleet efficiency and our return on invested capital. Now, please turn to slide number 11. The increase in volume and improvement in price and mix continued to contribute to the improvement in our overall dollar utilization. The sixth consecutive quarter of year-over-year improvement. Fleet at OEC as of September 30, 2018 was $3.92 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 $800 million of OEC fleet, or about 20% of our total fleet as of the end of the third quarter of 2018. That is an increase of 9% in the value of that portion of the OEC fleet year-over-year. As you can see from the chart in the lower left-hand corner, the largest percentage of our fleet consists of aerial equipment at about 26%. Earthmoving equipment is about 15% of our fleet, and we continue to favor investments in compact equipment, which has a higher dollar utilization opportunity for us. Compact earthmoving equipment increased to 8.5% of our fleet from 7.7% last year. A detailed breakout for fleet categories is in the appendix of the deck. Please turn to slide number 12. We have been building onto our broad North American footprint by improving scale in targeted urban markets. Our total number of branches has remained about the same as we have closed about as many standalone branches as we have added to fill out major market areas. The map of North America defined by projected ARA compound annual growth rates over five years from 2017 to 2022 by state and province. As you can see, the Western states, Florida, Louisiana, are projected to grow at a compound annual growth rate of over 5% over the next several years. We recently opened a new location in St. Peters, Missouri, part of the St. Louis metropolitan market, and in Covington, Georgia, supporting the Atlanta metropolitan market. We also opened a new location outside of Seattle, Washington. Our focus on large urban markets also supports the way we have clustered our fleet to provide our customers with a wider range of equipment and categories. We continue to roll out best practices across our regions, learning from those urban centers with the highest dollar utilization and profit contribution. We expect that the secular trend in conversion from rental to ownership will continue as urban customers utilize rentals as a way to reduce cost and eliminate storage requirements and service maintenance staff. Please turn to slide number 13. Our strategy is driving the further diversification of our market customer mix. Local rental revenue grew 15% year-over-year and accounted for about 60% of our total rental revenue in the third quarter of 2018. National account revenue was stable and now represents about 40% of the total. Our rental revenue by major customer segment is shown in the rental revenue composition chart in the upper right-hand corner of the slide. Contractors were 35% of our total, followed by industrial at 27%. Other customers, which include commercial and retail service, hospitality, healthcare, recreation, entertainment, and special events, was 22%, and infrastructure and government was about 16%. Growth in new customer accounts continued to be quite strong throughout the quarter, maintaining a solid pipeline for future potential growth opportunities. Now, please turn to slide number 14. Our focus on improving delivery and fuel recovery, as well as controlling and reducing our direct operating expenses and SG&A began to gain traction in the third quarter. We rolled out our XPO Logistics program to all of our operating branches in the U.S. in August of this year. We improved savings through reductions in cost per mile and improved revenue recovery for delivery. A new online portal enables us to better manage both long distance and local external transportation costs with enhanced back office tools to better track costs related to a specific customer's equipment delivery. Our new transportation quote tools and biweekly reporting activities are helping us recover transportation costs and improve ancillary revenues. We also continue to expand our Rental Protection Plan program as new and existing customers are finding it easier to just say yes. As we mentioned during our last call, we introduced a new bulk fuel initiative, significantly reducing the number of vendors in the third quarter. The simpler process helped us to minimize higher year-over-year fuel costs. Please turn to slide number 15. Key economic and industry metrics remain positive, as evidenced by the Architecture Billings Index, which remained over 50 through September. Industrial spending forecast for 2018 remains solid and have continued to increase as the year has progressed. Growth is now expected to be 8.2% in 2018 over 2017. Expectations for U.S. construction spending for 2018 continue to be healthy in both residential and non-residential segments, despite shortages of construction workers. Longer term, the ARA forecasts remain robust, with compound annual growth projected at 5.6% through 2022. The continuing secular shift from ownership to rental is expected to drive growth in the equipment rental industry over time. Our strategy to focus on urban market density should further accelerate the rate of growth that we can achieve in urban markets, which are more likely to be constrained by space and cost requirements that encourage rental versus ownership. 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. Now let me turn the call over to Mark Irion, our CFO, and he will discuss our quarterly financial details in much more detail. Then I'll summarize before we open the line up to questions. Thank you, Larry, and good morning, everyone. I'm excited about the progress we made this quarter as we continue to improve our top line and began to better manage direct operating expenses and reduce SG&A. We know we are in the early stages of a margin improvement journey, but are pleased with the progress we have made this quarter with a refocus on flow-through. If you turn to slide 17, we will review the Q3 financial summary. Larry has already provided an overview of our key metrics for the third quarter. I'll reiterate a couple of highlights, then I'll walk you through the third quarter year-over-year changes. In the third quarter of 2018, equipment rental revenue grew 8.7% year-over-year to $449 million, while total revenues increased 12.8% to $516.2 million. We reported net income for the quarter of $46.2 million, or $1.60 per diluted share, compared with net income of $12.8 million, or $0.45 per diluted share in last year's third quarter. The improvement was primarily due to better operating results this year and a $15 million tax benefit as we continue to analyze and finalize our initial estimates of the impact of the Tax Cuts and Jobs Act that we booked in December 2017. Adjusted EBITDA in the third quarter of 2018 improved 14% to $201.5 million over the same period in 2017, and increased 19.3% for the year-to-date period. Internally, our key focus in terms of our margin improvement process is around a term we refer to as REBITDA. This is a concept that I would like to socialize here and on future calls, as this is the way we will define success and margin improvement going forward. REBITDA basically measures the contribution from our core rental operations without the impact of sales of new and rental equipment to better analyze the rental profitability and margin improvement of our rental business. We are primarily a rental business, and improvement in our rental operating margins will add value to our business over time. We may also utilize different depreciation assumptions than others in the industry, which will impact on the margin on the sales of rental equipment we report in our financial statements. 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 internal goal that we will be able to close the gap in terms of our REBITDA versus our peers over the next couple of years. For the current quarter, we are very pleased with the progress we have made in terms of improvements to our core rental business, as measured in REBITDA. Due to strong flow-through of 68%, our REBITDA margin rose to 44% during the third quarter of this year, an increase of 210 basis points from the third quarter of 2017. For the nine months, the improvement in margin was 170 basis points to 38.6% in 2018, compared with 36.9% last year. There is a reconciliation of these measures in the appendix on page 28, which I think you will find useful in evaluating our operating progress. If we turn to slide 18, we can see that the total revenues in the third quarter of 2018 grew 12.8%, or $59 million to $516.2 million, compared to $457.6 million in the third quarter of 2017. Excluding currency, rental revenue increased $37.7 million, or 9.1%, compared to the same period last year. The higher year-over-year equipment rental revenue results reflect a 3.2% increase in pricing, a 3.9% 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. We continue to grow our local account revenues and reported an increase of 15% in the third quarter over last year and improved our local revenue contribution mix to 60%, as Larry pointed out earlier. In the third quarter of 2018, sales of rental equipment increased about 81%, or $22.8 million, 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 and accounted for 45% of the total sales volume in the third quarter of 2018, compared with 22% in the prior year. We generated proceeds of approximately 40% of OEC this quarter. Please turn to slide 19 to review the Q3 adjusted EBITDA bridge. Adjusted EBITDA for the third quarter was $201.5 million, an increase of 14%, or $25 million, compared to $176.7 million in the third quarter of 2017. The bridge shows that the largest contributor was the improvement of equipment rental revenue with a growth of $37.7 million. Direct operating costs increased $6.3 million over the third quarter of 2017 as a result of the higher rental equipment activity and related costs such as payroll and payroll-related expense, as well as fuel, which offset an improvement in maintenance and transportation expenses we achieved year over year. Selling, general and administrative costs increased $2.8 million, primarily due to increases in sales personnel and sales-related commissions on increased revenue growth. Larry mentioned the progress we made regarding a number of initiatives that were rolled out in the third quarter to reduce and control expenses. This quarter represented good progress towards flattening out our operating expenses in order to maximize flow-through and to improve adjusted EBITDA margin improvement as we go forward. Please turn to slide 20. Net income in the third quarter was $46.2 million, compared to net income of $12.8 million in 2017. Income taxes decreased $6.8 million over the same period in 2017, primarily due to a $15 million benefit related to a revision to the one-time transition tax estimate under the 2017 Tax Act. We now estimate our effective tax rate for the full year 2018 to be approximately 2%. Interest expense for the third quarter increased slightly, primarily due to approximately $5.4 million of costs related to the partial redemption of our senior secured second priority notes. Interest expense was partially offset by a decrease in interest related to lower average outstanding borrowings on our notes during the third quarter of 2018 compared to the prior year. While we benefited from the redemption of the notes, the average borrowings of the revolving credit facility increased, as did the average interest rate of the revolving credit facility during the quarter compared to the prior year's quarter, as our floating rate is comprised of LIBOR plus 1.75%. Spinoff costs in the third quarter declined $8.6 million to $1.7 million, from $10.3 million in the prior year, and are now expected to be just about $12 million to $13 million for the full year, a decline from the $20 million we had estimated earlier in the year. The all other category reflect our improved operating results and accounted for an improvement of $26.7 million. Details of the components are also included in our appendix. On slide 21, we have broken 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 2018 and 2017 is also in the appendix. Total fleet at OEC was $3.92 billion as of September 30, 2018. The average OEC of our rental fleet during the quarter increased 5.5% over the prior year quarter. For the third quarter of 2018, fleet expenditures were $171 million, and fleet disposals OEC were $126 million. The average age of our disposals in the third quarter was 82 months. We improved the average age of our fleet to approximately 46 months at the end of the third quarter from 49 months in the comparable period last year. Total debt was $2.3 billion as of September 30, 2018, an increase of $91.8 million from year-end 2017. Net cash flow from operations for the nine months ended September 30 improved from $253.6 million in 2017 to $375 million in 2018, or a $121.4 million increase. Net fleet capital expenditures increased in the third quarter from $234.7 million in 2017 to $428.4 million in 2018. Free cash flow for the nine months of 2018 was negative $108 million compared to negative $35.4 million in the same period in 2017. A reconciliation of free cash flow is in the appendix of the deck. We had ample liquidity of $565 million as of September 30, 2018. Our strong financial position enabled us to proceed in July with redemption of $61 million in aggregate principal amount of the 7.5% notes due in 2022, and $63 million of the 7.75% notes due in 2024. To fund the partial redemption of our notes, we borrowed on our revolving credit facility, which has a rate of approximately one month LIBOR plus 1.75%, and will result in annualized interest savings of approximately $5 million. In September of this year, we also closed on an accounts receivable securitization facility with an initial commitment of $175 million and a maximum limit of up to $250 million. We are continuing to focus on a disciplined financial strategy to reduce leverage and to fund organic growth opportunities with our operating cash flow. As we have said previously, we expect free cash flow to turn positive in 2019. Net fleet capital expenditures are anticipated to be lower than 2018, as we have made major strides in repositioning our fleet this year. On slide 23, as Larry mentioned earlier, we are raising our guidance range for 2018, adjusted EBITDA to $675 million-$685 million, or an increase of 15%-17%, compared with our 2017 adjusted EBITDA of $585 million. Also, with our narrow projected net fleet capital expenditures range of $525 million-$540 million this year, we expect a continued reduction in our net leverage ratio by the end of the calendar year. 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. Thank you, Mark. We were very pleased with the strength of our top-line growth. We increased pricing 3.2% in the quarter, continuing our run of 10 consecutive quarters of year-over-year price increases. We also increased ancillary revenue 17%, drove higher volumes, and improved mix over the prior year. Our cost control programs began to achieve results, and our adjusted EBITDA margin and dollar utilization reached the highest levels since we became a separate, stand-alone public company. Our average fleet increased 5% over last year as we carefully continued the diversification of our fleet with ProSolutions and ProContractor OEC fleet growing at 9%. We continue to execute on the five-year plan we laid out a few years ago and are focused on rate-driven revenue growth and margin expansion. Now we look forward to your questions. Operator, please open the lines. Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing star, then two. The first question will come from Neil Frohnapple of Buckingham Research. Please go ahead. Hi. Good morning, and congrats on a great quarter. Good morning, Neil. How are you? Good. Mark, I realize you won't give EBITDA guidance until March, but can you help us think of an incremental EBITDA margin framework, at least going forward now, with what you've laid out now that some of the cost initiatives are taking hold? Is there any reason to think a 60%-70% incremental rental EBITDA margin is unreasonable going forward? Yeah, no, certainly our goal, as we stated before, is 60%-70% flow-through in terms of our EBITDA. And we'll also be challenging ourselves for up to 200 basis points improvement sort of on a year-over-year basis if current market conditions continue, and we continue to execute on our plan. You said, Mark, 200 basis points into 2019 would be the hope? That's not guidance, but that's our internal challenge on a go-forward basis. Right. Okay. Switching to the CapEx, you mentioned lower versus 2018. Can you give us a sense of what fleet growth would be? Let's just say if fleet spend was down, call it 10% next year. Would fleet growth be still somewhere in the call it 2%-4% range? Any help there? I think that's sort of the math. We've got a bigger fleet than we had at the beginning of the year, so less CapEx on top of that fleet is going to result in less fleet growth than the 5% plus that we've generated this quarter. So the math will indicate a less than 5% sort of fleet growth going forward with less net CapEx in 2019. Okay, great. Thanks. I'll pass it on. Sure. The next question will be from Seth Weber of RBC. Please go ahead. Hey, good morning. Good morning, Seth. How are you? Doing fine, thanks. Yourself? Great. Wanted to ask about dollar utilization. Rental rates very strong. Dollar utilization was up year-over-year, but not as much as we thought. I understand you're managing the business for returns and all. I'm just trying to frame kind of expectations for dollar utilization going forward. You said it should be up year-over-year. Right I think, in the fourth quarter. We kind of continue to be too high with our expectations there, even though the rates are very strong. If you could help us sort of understand the dynamic that's going on there. Thanks. Yeah. It's a tougher number to move, I think, just given the denominator with the fleet size. We were perhaps not as pleased with the improvement that we got this quarter. With less CapEx going into 2019 and a continued focus on rate growth, as you mentioned, we do expect to see continued growth there. We will continue moving forward. It's a tough metric to move in a quarter on a sort of substantial level. We did have some tough comps last year with the hurricane activity in Q3. We are focused on it, and we are looking for consistent gains in dollar utilization. Yeah. Remember the dollar uses the denominator and the numerator. While the numerator is based on current activity, the denominator still has some of the sins of the past. We only completed our third year of fleet additions, where we were in control of the fleet. So we're not even halfway through the fleet rotation that we talked about relative to the cost of OEC and the denominator. As we continue to roll forward, that will have an improvement effect. Okay. So Mark, do you think like a 50 basis point kind of year-over-year improvement is the right way to think about it going forward? We would have an internal expectation of more growth than that. Okay. Super. My follow-up question is on the used equipment sales. It sounds like your auction sales picked up quite a bit here in the quarter. I'm just trying to understand if that's signaling anything that you're seeing in the end market as far as demand, retail channels getting full. Anything that we should read into increased use of the auction channel here in the third quarter. Thanks. Yeah. Hi. This is Bruce. We're still seeing a real robust, strong used equipment market. I think just the mix shift there is kind of a quarterly anomaly in what we sold. But overall, strong market, strong demand. Okay. Thank you guys. Appreciate it. Sure. The next question will be from Brian Sponheimer of GAMCO. Please go ahead. Good morning, everyone. Morning, Brian. How are you? I'm terrific. Really nice quarter. Mark, I appreciate the extra color on the EBITDA and REBITDA. You brought up the idea that you do depreciate your equipment differently than the rest of the industry. Is that something that at year-end you guys can take a look at to maybe put yourselves on an apples-to-apples basis with the rest of your peers, you know. Theoretically, the market is going to value you on EBITDA. So the opportunity to adjust that would be potentially a catalyst, correct? It's something that we can look at at some stage going forward. It's not necessarily something that will be an immediate review. There's a change in estimates, which takes quite a bit of conversations with a number of parties to just sort of work our way through. We are comfortable with the depreciation schedule that we're on. We're sort of highlighting the variances here, and we can communicate that, I think, with EBITDA going forward. It is something that we'll review, but I don't think it's a short-term change to be expecting. Understood. Just on the CapEx guidance, bringing down the high end, is that you buying less equipment or selling more? I would say that it's a bit of both, quite frankly. We loaded up heavy early in the year. We've been absorbing the fleet we brought in, and we've also taken advantage of the strong and robust used equipment market by de-fleeting some categories where we felt we had ample opportunity to do so. Understood. Well, congratulations, and I look forward to seeing you later. Thanks. Thanks, Brian. The next question will be from Jerry Revich of Goldman Sachs. Please go ahead. Yes, hi. Good morning, everyone. Morning. You folks, as you pointed out, had really strong operating leverage with rental costs, flat sequentially on nice seasonal pickup in fleet on rent. Can you talk about how you think about the cost structure heading into 2019? Are the costs in place to deliver the type of top-line performance that you alluded to earlier in the call, or how should we be thinking about operating leverage from here, as it relates to just pure cost rent? Yeah. No, good question. I think this quarter, we delivered on what we said we were going to do in the last quarter. We certainly have the cost structure in place to be able to deliver low single-digit revenue growth. Our continued focus through 2019 is going to be to flatten out our cost structure at similar levels to what we've got now, concentrate on DOE, concentrate on reducing SG&A if possible, and focus on flow-through to improve our EBITDA margins. Mark, in terms of the free cash flow outlook for free cash flow negative or free cash flow positive, excuse me, next year, given the working capital build that we tend to see in the business, I guess the comment implies CapEx, I think, could be down as much as, call it, 20% year-over-year on 2019, unless there are other levers that you're pulling. Can you just give me some context around the positive free cash flow outlook that you mentioned? Is that right? Is CapEx going to be down that significantly to get there? No. There might be something wrong with your model there. There's not a big working capital build from year-end to year-end in this business. We do see something during the middle of the year, like you saw building up in Q2 and releasing in Q3. That's just as the fleet comes in, builds up into accounts payable, and then gets paid in Q3. You'll see that continue with a reduction in working capital from current levels to year-end. But year-end to year-end, there's not really a significant buildup unless there's a big increase in revenues that translate into receivables. I doubt it'll be a 20% decrease. With the combination of increased operating cash flow from EBITDA, flat-ish working capital, and a slight reduction in net CapEx into 2019, you will, from your model, I think, be able to squeeze out quite a bit of free cash flow. All right. Thank you. Sure. Thank you. The next question will be from Rob Wertheimer of Melius. Please go ahead. I had two questions. Thank you, and good morning. Morning. Operationally seems to be pretty good. Fleet on rent up, I guess, 5.5, and then your sort of non-depreciating rental expense is up three something. Maybe you could just give us a little background color around what you're working on operationally right now, driving those improvements. I know you've talked about in the past, I'd just like to hear an update. Then second, just your thoughts on equipment cost inflation into next year with all the tariff stuff. Yeah. So this is Bruce. Just as Larry stated on the operational improvements and efficiencies, we're just highly focused on the DOE costs getting more efficient. So we're driving that and holding that flat, as Mark stated. Fleet inflation, as we've discussed, is running in the sort of inflation sort of bands for next year. So 1%-2% is the expectation going forward. As I stated on the Q2 call, we've now completed all of our kind of 2019 negotiations with all our partner suppliers. So, 2% or less is what we are anticipating. Perfect. Thanks. The next question will be from Kathryn Thompson of Thompson Research Group. Please go ahead. Good morning, Kathryn. Morning, guys. It's Steven on for Kathryn. On reduced CapEx guidance, just to confirm, this does not reflect any slowing in markets in your outlook for 2019, and does not reflect any slowness of orders being able to come in with OEMs potentially being backed up. Absolutely not. This is Bruce. We still feel and see a very robust market out there, and any intel from our customers says the same. Actually, the suppliers have kind of improved on their delivery. I do not think we are going to see any of the log jam that we saw in 2018 from the supplier base. Great. Are you seeing any benefit in Q4 or expect to see in coming quarters from storms and hurricanes? Yeah. Look, last year, we had some Storm activity in both Q3 and in Q4, which we previously reported. We had a little bit of activity in Q3, about $1 million worth of activity in Q3, which resulted in about a half a million dollars of EBITDA. We will have a fair amount of activity in Q4, which has been incorporated within our current guidance. Great. Thank you. The next question will be from Bill Mastoris of Baird. Please go ahead. Thank you. Mark, next year you have your second lien 7.5s which become callable. I realize we are looking far into the future here, but it trades at a fairly decent sized premium. Would it be fair to say that in the interest of reducing your interest cost, that that bond in fact will be called next year? And then I do have a follow-up. Well, we will analyze our financial structure next year. I don't think it's safe to say that we'll call it or we won't call it. It'll be an analysis based on market conditions as we get closer to the call period. Interest expense is something that we're comfortable with at these levels. Our business performs very well in a sort of rising interest environment historically. So it's not our major concern. We're focused on driving revenue growth through rate and effective utilization of our fleet and managing our cost structure. That's where we create value in this business. It's not really a balance sheet management game for us. Okay. Then you indicated that you expect free cash flow next year. On that allocation of free cash flow, would the priorities first be towards debt reduction, or would there be some other priority above debt reduction as you get towards maybe the lower end of your targeted leverage range? I think the primary use of free cash flow will be debt reduction. Okay. Then finally, a question for I think Bruce, and that is, Bruce Dressel, have you seen any impact at all from the rise in interest rates on any of your end user markets where projects may be either delayed or deferred? Any impact there? No, not that we've seen. The market's strong. It's one of the strongest markets I've seen since I've been in the business. That's why we're focused on rate and delivering service to our customer. Okay. All right. Thank you very much. Larry, nice seeing you in Berkeley. Yes, likewise. The next question will be a follow-up from Jerry Revich of Goldman Sachs. Please go ahead. Yeah, thanks for taking the follow-up. You folks spoke about the dollar utilization maybe being below your expectations this quarter. Can you just talk about how time utilization fit in? The numbers, I guess, imply time utilization was down about 200 basis points year over year. How much of that is due to fleet mix? Can you just expand on the comments on what exactly was disappointing within that mix? Yeah. So this is Bruce. I'm not quite sure how you're doing the math on time ute being down 200 basis points year over year. But time ute came in, we're satisfied with where it came in at. We do see areas of improvement there that we're focused on. I think overall, one of the things that Mark mentioned or Larry did on this, the dollar utilization. We hit up against a pretty hard comp with all the hurricane activity. So we were pretty satisfied with what we accomplished, but we are focused on the same kind of improvements in dollar utilization that Mark talked about internally here, that he talked about improvement in on our EBITDA margin. Well, Bruce, can you just say more? Because your dollar ute was up just 50 basis points. We said pricing's up over 3%. We're talking about a strong ancillary revenue contribution. So it's tough to get dollar ute to be only up 50 basis points if pricing's up three and mix is positive. Unless time ute is down year over year. Yeah. I would say time ute was down a tick, but not 200 basis points. Then you were up against a hard comp mix with the hurricanes. Okay. From a pricing comps from here, you folks have been able to deliver pricing well ahead of the industry over the past year. It looks like you might be up against a tougher pricing comp for you folks in 4Q. Is that right? As you folks look at the opportunities set, how long is the runway as you see it to be able to drive pricing ahead of industry from here? Well, look, as long as the market continues to remain robust as we are predicting and seeing it, we'll continue to be able to drive price. We'll continue to focus on price improvement. I feel pretty good about that, and I don't see that there'll be. We will be up against tougher comps, but we also have Storm in this market that has tougher comps or that has good opportunity as well. Yeah. Not to kind of pile on, but we were up against pretty tough comps on price in Q3, and we performed. As Larry stated, the team executed really well. It's an unbelievable environment out there, and we've always been focused on price and optimizing our Optimus pricing tool, and we'll continue to do that. We don't see any things in the near term that would not allow us to continue with that. All right. Thanks. Ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back to Herc for their closing remarks. Thank you, and thank you, everybody, for joining us on the call today. As we've stated, we've increased our 2018 guidance for adjusted EBITDA to $675 million-$685 million, or a 15%-17% improvement over 2017's $585 million, based on strong broad-based market demand and our continuing operating improvements. Additionally, we've narrowed our guidance on net fleet capital expenditure to $525 million-$540 million, and expect to spend less next year as we made major strides in repositioning our fleet this year. We believe that our strategic initiatives will continue to contribute to steady improvement in our financial metrics and that we're on track as we continue to close the gap with our public peers. If you have any further questions, as always, please contact Elizabeth Higashi, and we look forward to seeing all of you in the new year. Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.