Earnings Call: Q1 2017

May 9, 2017

Summary

Q1 rental revenue rose 4.2% and key-market revenue grew 8.5% excluding currency, while adjusted EBITDA declined on cost headwinds. FY 2017 adjusted EBITDA guidance remained $550M–$590M.

Hello, and welcome to Herc Holdings, Inc. Q1 2017 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please speak to 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 touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead, ma'am. Thank you, Keith, and good morning. This is Elizabeth Higashi, Vice President, Investor Relations. I'd like to welcome everyone to our first 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. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer, and Barb Brasier, our 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 and Barb, 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 3 through 6 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, 2016, 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 2016 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 first quarter Form 10-Q today. Once filed, the 10-Q can also be accessed 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 to 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 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. This concludes my comments, and now I'll turn the call over to Larry. Thank you, Elizabeth Higashi. Please turn to slide number seven. Good morning, everyone, and welcome to our first quarter call. I'm pleased that you're able to join us this morning. Before we begin our review of the financial highlights, I'd like to provide you some brief context about our business to better frame our discussion. First, we experienced strong progress in our efforts to drive top-line growth, including solid gains in pricing. This indicates that our strategy to expand and diversify our revenues and introduce new fleet to serve more customers and markets is taking hold at this early stage of our business transformation. Second, we faced a profitability headwind due to unavoidable costs in the quarter. These costs fall into two primary areas. The first cost area relates to investments to transform our operations, which either address years of deferred upgrades or positions us to execute our strategic growth plan. The second cost area relates to ongoing separation activities and matters, including costs to strengthen our internal control environment and establish our own IT infrastructure. The separation costs are on top of SG&A related to operating as an ongoing public company. Make no mistake, we are taking a hard look at costs overall with the intent to drive savings or reductions wherever we can. Lastly, we are affirming our adjusted EBITDA guidance for full year 2017. Longer term, we remain committed to our five-year business transformation plan and to meeting the financial targets that we established and shared with you around this time last year. Overall, we remain confident in our strategy and in our ability to deliver improving results in connection with that strategy over the long term. Please turn to slide number eight. Now referring to slide eight, I'll cover our performance through our key metrics for the first quarter. We reported an increase of 4.2% to $321 million in equipment rental revenues in the first quarter, compared with $308 million in the comparable period last year. The most important takeaway on this slide is the strength of the equipment rental revenues in our key markets, which increased 8.5% compared to the same period in 2016, excluding the impact of currency, and now comprises about 85% of our total rental revenues. Overall, rental revenues increased 3.8%, excluding currency. Pricing in key markets increased 1.7% in the quarter over prior year, supported by solid performance in renewals of national accounts and growth in local revenues. Overall pricing increased 1.1% in the quarter compared to last year's quarter. Despite the strong top-line growth, we posted a net loss in the quarter due to increased interest expense, stand-alone public company costs, including professional fees and other costs, and investments in facilities, people, and processes. Barb Brasier will go into more detail on the elements that contributed to this quarter's results, but clearly these costs and the continued challenges in our upstream O&G markets impacted us in the first quarter when compared to the previous year. The increased expenses also impacted our adjusted EBITDA, which totaled $97.8 million for the first quarter. In spite of the decline in adjusted EBITDA in the first quarter compared with last year, our first quarter revenue growth in key markets outpaced the industry, and we remain confident in our strategy and in our ability to improve results through the rest of the year. Therefore, we are affirming our adjusted EBITDA guidance for the full year of $550 million-$590 million for 2017. I will go through our progress to date and the initiatives which give us confidence in our expected performance for the rest of the year. Please go to slide number nine. Our strategic direction includes operational priorities to expand and diversify our revenues, improve our operating efficiencies, and enhance the customer experience. These strategies drive our actions as we continue to transform our business while maintaining disciplined capital management. Now, please turn to slide number 10. Rental revenue in key markets accelerated throughout the first quarter, with March being especially strong for us, despite the continuing softness in upstream O&G markets. We continue to experience solid growth in the U.S., particularly in the Southeast and West. The Midwest region is improving as a reflection of some of the changes that were implemented late last year. Many of our major urban locations showed excellent rental revenue growth by exceeding local market growth in the quarter and demonstrated that our urban strategy is delivering our desired results. The graph in the upper right shows a year-over-year improvement in growth in rental revenues in both key markets and overall, in spite of the challenges of upstream O&G markets. Pricing was strong in key markets, particularly in the U.S., in both national and local customer accounts. As you can see on the bottom right of this slide, we have successfully increased overall pricing year-over-year for the last four consecutive quarters. Of significant note is the trend that shows that key markets increased at least 1.5% in each of the last five quarters. Importantly, new account signing and reactivations were at a record monthly level in March. Although we consider this indicative of momentum in our business, it should not be considered a guarantee of future performance. In the first quarter, local rental revenue grew faster than national account revenue, showing strong traction in our new fleet categories and our focus on local markets and transactional revenue. We also continue to improve our ancillary revenues, which grew 8% in the first quarter compared to the first quarter of 2016. While this is a small percentage of revenue, approximately $0.90 of every dollar increase falls directly to the bottom line. We are starting out the spring season strong from both a rental momentum and pricing perspective. We are excited about how we have repositioned the fleet so far and believe that we have the right strategy and CapEx plan to continue to make great headway. Please turn to slide number 11. Safety is the number one priority for us. We are building on the success of 2016 and are pleased with the progress we are making in 2017 as our total recordable incident rate improved about 14% compared with the same period the previous year. We opened three new full-line classic greenfield locations in the quarter: Honolulu, Hawaii, the Bronx, New York, and Houston, Texas, bringing our branch count to approximately 275. We are also opening two new locations with a ProSolutions branch in Seattle, Washington, and a full-line classic branch in Phoenix, Arizona during the second quarter. We are investing in training programs designed to enhance the productivity and effectiveness of our sales force going forward. Compared with March of 2016, we now have 75 additional sales professionals on the ground and have approximately 625 currently in our sales force. We have also made significant investments in training programs to enhance branch operating efficiency, safety, and sales support effectiveness. We are focused on improving the efficiency of our maintenance and service organization through investments in branch locations to facilitate ordering, tracking, and storing of spare parts and inventory, as well as monitoring and measuring the effectiveness of our service technicians. Direct operating expenses as a percent of our total revenues remained flat compared with a year ago, even as we invested in our facilities to create customer-friendly showrooms that showcase our ProContractor equipment, the type of smaller tools and gear that local contractors need. As mentioned, these branch investments are a combination of addressing years of deferred upgrade and positioning us to execute our strategic plan. FIR was 13% in the quarter, up slightly from the 12.4% in the prior year, primarily reflecting seasonal equipment that came off rent in Canada due to an early spring this year. Please turn to slide number 12. We're committed to building a customer-first culture. We've expanded our customer care and telesales initiatives, and they're driving better customer experiences and paying off through pre-qualified leads. Both contributed to increased sales. We're also making our industry experts and ProSolutions equipment more accessible to customers, and now have 32 locations that include ProSolutions Centers of Excellence. These centers are focused on assisting customers with mission-critical requirements, including climate control and restoration and remediation. We are known for our insight and technical know-how and responsiveness in our ProSolutions services. We also continue to upgrade our branch locations to showcase our ProContractor tool line and make it easier for customers to get the gear they need. To date, we have 35 new branch showrooms and expect to have more than 50% of our targeted branches completed by year-end. We continue to invest in premium brands that address our customers' preferences and expectations for gear that's reliable, safe, efficient, and effective. That's extremely important as we broaden our appeal, particularly to the professional contractor. Our technology enhancements, which are critical to enabling superior customer experiences, are also progressing. Enhancements to ProControl, our next-generation telematics system, were rolled out this past December. The advanced telematics systems tracks equipment and provides real-time utilization and other data that helps our customers manage their rental fleet more effectively. We're also making it easier for customers to do business with us with the rollout this month of our online credit application, which replaces our existing system. This tool will allow customers to complete the credit application process, including electronic signing completely online, which will greatly support our new account initiatives. We're committed to enhancing technology and mobility to provide our customers the tools to drive their efficiency and effectiveness. Please turn to slide number 13. Key industry metrics remain positive, with the Architecture Billings Index improving to over 50 over the last two months. While the forecast for 2017 growth in industrial spending has slowed somewhat, it still remains at a positive 2.4%. The outlook for non-residential starts also continues to be solid at a compounded annual growth rate of 4.6% through 2019. The impact of President Trump's campaign commitments to reduce corporate taxes and increase infrastructure spending would clearly have a positive impact on the long-term projections for non-residential construction. However, our financial goals to meet or exceed our peers' metrics were established well before the President was elected, so we are viewing any help from that as being icing on the cake. Longer term, the continuing overall shift from ownership to rental is expected to drive growth in the equipment rental industry over time. We believe that these factors will continue to fuel revenue growth and extend the current market cycle. Please turn to slide number 14. While our business transformation began about a year ago, we continue to be focused on executing our strategy and driving improvements in operating performance. Our U.S. location rebranding to Herc Rentals is nearly 90% complete. From a revenue perspective, diversifying our fleet mix to higher dollar utilization equipment categories is driving improvements in our customer diversification and revenue mix, as well as an increase in new account growth. Our urban strategy is achieving above-market growth, driven by a combination of diversification of fleet and the clustering of locations that serve a broad market area with multiple locations and an array of equipment and services. Local revenues, which generally correspond to higher dollar utilization, grew at a faster pace than national accounts in the first quarter and represented 52% of our total rental revenues. Operationally, we continue to focus on improvements in fleet availability through the implementation of our Herc Rentals operating model, which we continue to upgrade across our branch network as we identify new areas for focus and improvement. By narrowing our vendor list, we've created stronger supplier relationships and better terms. We also have been able to reduce equipment, parts, and service costs while offering top-tier brands to our customers that meet their expectations for gear that's reliable, safe, efficient, and effective. We continue to invest in enhanced technologies to further improve our customer support programs. Now, let me turn it over to Barb, who'll discuss our quarterly financial results in more detail. Then I'll summarize everything before we open it up to questions. Barb? Thanks, Larry. Good morning, everyone. Before I cover the financial highlights, I want to reiterate three takeaways from the quarter, all of which I'll expand upon in my remarks. First, our top-line growth was strong. Second, we are investing to deliver growth and to separate from Hertz. Third, we are affirming our full-year guidance. Please turn to slide 16. Larry already provided an overview of our key performance metrics for the quarter. I will review the major factors that impacted the year-over-year changes. In 2017, our key markets delivered strong revenue growth and pricing improvement. Key markets are those outside of upstream O&G. However, our adjusted EBITDA results declined year-over-year, as our strong revenue performance in key markets was offset by a number of cost headwinds. I'll cover those issues more specifically in a few minutes. Please turn to slide 17. We reported equipment rental revenue for the first quarter of 2017 of $321 million, an increase of 4.2% compared with the prior year's quarter. First quarter rental revenue in key markets increased 8.5%, excluding currency, and represented about 85% of rental revenue in the quarter. This increase is attributable to three factors. Our urban strategy gained traction, our core business continued to do well with strong gains in the West and Southeast, and improvement in the Midwest, and we had solid gains in our ProSolutions business as we continued to gain traction. First quarter rental revenue from upstream O&G markets was down about 17%, or $10 million. The rate of decline has been lessening, but these markets remain a challenge. We continued to realize strong pricing gains in the first quarter, with an increase of 1.7% in key markets and 1.1% overall. Please turn to slide 18. Total revenues for the first quarter were $389 million, compared with $366 million in 2016, an increase of 6.5%. The previous slide summarized the improvement in equipment rental revenues, so I'll move on to sales of rental revenue equipment. Sales of rental revenue equipment increased approximately $17 million, and the amount of OEC disposed in the quarter was about 40% higher than the prior year. We aggressively shifted the fleet in the quarter to support our urban market strategy. The improved results also reflect the return to normalized disposal channels, led by lower reliance on auction sales. As we said before, sales of new equipment were lower as a result of our decision to exit dealerships and focus on higher-margin rental activities. Please turn to slide 19 for our net income bridge. Our net loss in the first quarter was $39 million compared to a net loss of $1.5 million in 2016. Looking at the chart, you can see that two of the biggest drivers of the expected increased costs were interest expense and fleet depreciation. The all other category consists of the same drivers that negatively impacted adjusted EBITDA. I'll speak to those items on the next slide. Interest expense for the first quarter was $38 million, an increase of $31 million over the previous year, reflecting our interest expense as a standalone company and a $6 million charge related to the redemption of $124 million of our senior notes during the quarter. Fleet depreciation increased approximately $11 million in the first quarter as a result of fleet growth and the carryover effect of adjustments made last year. In the third and fourth quarters of 2016, our normal course depreciation reviews resulted in rate changes due to lower residual values and shortened holding periods for certain categories of fleet. These adjustments accounted for about 60% of the increase in depreciation expense. As we have stated before, our policy is to depreciate equipment to its expected residual value over its holding period, thereby minimizing gain or loss at the time of disposal. We had a slight decline in spin-off costs of about $2 million in the first quarter from the prior year. We will continue to incur spin-off costs in 2017, and we estimate that for the full year, we'll spend about $26 million, about half of the $49 million that we spent in 2016. Please turn to slide 20. Adjusted EBITDA for the first quarter was $98 million, a decline of about $10 million from 2016. We benefited from a year-over-year improvement of $7 million in reduced losses from the sale of revenue-earning equipment and from a $4 million improvement in key markets. These positive results were partially offset by a decline of nearly $6 million in EBITDA from upstream O&G markets. In addition, the quarter was affected by business transformation costs of $4 million related to IT, staffing changes, and facilities, and a $6 million increase in standalone public company costs. Remember that during the first half of 2016, when we were a division of Hertz, certain costs, such as corporate staff salaries, were categorized as spin-off costs. Since July 1, 2016, these costs are no longer considered spin-off costs, as they represent our ongoing standalone company costs. We also incurred some costs in the first quarter that were particular to circumstances in the quarter, namely $4 million of professional fees related to the company's year-end reporting and a charge of $2 million related to the bankruptcy of a large customer. Excluding the year-end reporting cost and customer bankruptcy, normalized SG&A for the first quarter was approximately $75 million. This run rate is more representative of our expected average SG&A for the remaining three quarters of 2017. We recognize that this is higher than what we had discussed last quarter. We have gained additional clarity on the complexities of our transformation and the cost of our independence and expect that we will continue to incur this level of cost in 2017. Our EBITDA guidance assumes a range of market outcomes and a range of potential costs for the full year. After considering both our strong top-line performance and our cost headwinds for the first quarter, we are affirming the same range for full-year adjusted EBITDA that we have previously discussed, namely $550 million-$590 million. Please turn to slide 21. Our fleet CapEx on a cash basis in the quarter totaled $56 million. We continue to make progress in shifting fleet into higher dollar utilization categories. Net cash proceeds from disposals after expenses were $45 million in the quarter, resulting in net fleet CapEx of $11.5 million. The higher level of disposals reflects our disciplined capital management approach to aggressively managing our fleet to meet our strategic objectives. As of March 31, 2017, the fleet value at OEC remained $3.56 billion, unchanged from year-end, as additions and disposals of fleet at OEC during the first quarter were approximately equal. When compared to the first quarter of 2016, average fleet value at OEC increased 5.3%. Please turn to slide 22. Total debt was $2.2 billion as of March 31, 2017, largely unchanged from year-end. In the first quarter, we redeemed 10% or $123.5 million of our senior notes utilizing borrowing under our ABL credit facility. We recorded a $5.8 million loss on early extinguishment of debt. We maintained ample liquidity during the quarter. Availability under our asset-based revolving credit facility, plus cash on hand totaled $773 million as of March 31, 2017. Our free cash flow for the first quarter was $59 million, driven by net cash flow from operations of $86 million and benefiting from favorable working capital. A reconciliation of free cash flow is in the appendix of the deck. In summary, our operating cash flow and ample liquidity provide us the financial flexibility to fund our strategic growth, serve our customers, and create value for our shareholders. Now, I'll turn it back to you, Larry. Thank you, Barb. Now, please turn to slide 23. Before we begin our discussion, I want to recap the reasons we're confident and we're on track to achieve our long-term financial targets. First of all, our strategy is driving strong top-line growth. Secondly, we're making investments that will transform our business and seed future growth. We are also investing in the activities to support us as a standalone public company and are taking a hard look at costs overall with the intent to drive savings or reductions where we can. Importantly, we are affirming our 2017 guidance and remain committed to our longer-term, five-year business transformation plan to meet or exceed the financial metrics of our industry-leading peers. I look forward to sharing our progress with you in the quarters ahead, and want to thank our Herc Rentals team members who are hard at work transforming our business while maintaining unwavering focus on serving our customers. We continue to advance every day toward our vision to be the supplier, employer, and investment choice of our industry. Now, we look forward to your questions. Operator, please open the lines. Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To drop another question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question comes from Jerry Revich with Goldman Sachs. Hi. Good morning, everyone. Good morning, Jerry. How are you? Good. How are you? Great. Thanks for joining us. I'm wondering if you folks can talk about, based on your CapEx program this year, how do you expect the fleet mix to look like as we exit 2017, especially on the ProSolutions side? Can you just give us some context and maybe some longer-term targets on how significant you expect that part of the mix to be two to three years out? Yeah. Terrific. Let me let Bruce handle that one. I think he's well-equipped to talk about it. Yeah. Thank you very much for the question. This is Bruce. I'll start by putting in context, Barb spoke to the capital expenditure on a cash basis. The way I look at it, a simpler way to look at it is we brought in the door about $120 million of OEC in the first quarter, and about $130 million went out the door, with an average age going out at about 81 months. As we continue to transform this business, a lot of the new product we're bringing in is the ProSolutions product range as we turn out the heavy earth and the other types of products that we've said as we transform. You will see that continue to grow as a percentage of our OEC mix and as a percentage of the business overall as we grow that and at the same time shrink other portions of the different types of equipment that we carry. Bruce, can you just quantify that at all? Based on the capital plan this year, as you exit 2017, ProSolutions is now 13.5% of the fleet mix. I guess how much higher can that go exiting the year? In terms of the strong pricing performance that you folks highlighted, how much of that was helped by mix, if at all? Yeah. Okay. Just to answer the first question on the ProSolutions, you can see in the appendix that it grew year-over-year. That is going to continue. I really do not want to give any kind of guidance on where that will get to, but we will continue. You will see it happening from both sides as we invest in that type of product, but then invest less in other types. The overall dollar value of ProSolutions will grow, and it will grow greater as a percentage of the overall fleet. We have seen a much stronger pricing performance from that range of products, so we feel comfortable with the absorption we are getting from the fleet, even though we are investing heavily in it. With the 32 now current locations and the new locations opening in the second quarter in Seattle, we feel highly confident about the growth of that product mix. Jerry, it is Elizabeth. Just let me add that we have said over the five-year plan that our goal was to get combined ProContractor and ProSolutions to 25%-30% of the OEC fleet. Okay. But we have to. Go ahead. Oh, sorry. I was just going to ask, in terms of your O&G markets, can you talk about the trends as you folks went through the quarter? I guess over what timeframe do you think it's feasible for rental rates to turn positive on a year-over-year basis in the O&G part of your footprint based on the trajectory that you saw as we went through the quarter? Yeah. Good question, Jerry Revich. As we've been saying for nearly, I think, six quarters now, we were hopeful that O&G would have bottomed out at this point, and we would no longer be seeing declining business conditions in those markets. O&G now represents about 15%, upstream O&G, about 15% of our business. So fortunately or unfortunately, it's become a lower portion of our overall mix, and we continue to see declines in the upstream O&G area, primarily out of western Canada. And we're hopeful that'll become less worse as time goes on here, and it'll certainly become a diminishing part of our overall mix. But I think, Bruce Dressel, you might have a couple of comments about what we're doing as a result of that. Yeah. I would say that Larry Silber covered that spot on. Because if you look at 17% year-over-year, which as Barb Brasier said, equates to about $10 million. Now 50% of that comes from western Canada. So if you take the two different businesses and you look at U.S., we actually see that market stabilize and to some degree, a little bit of an upturn both in volume and price. Western Canada is still a bit choppy, so I would stay with what we've said in the past. It's less worse I would tell you, though, that even though you're seeing some uptick in the U.S. market, we're very disciplined about the capital that we're putting into that, and we've redirected capital into where we're having a better success in the urban markets. From our perspective, I look at it, we're kind of fortunate that we're growing above market in all of these key markets, which allows us to not have to chase whatever benefit we might be seeing in the O&G marketplace. Okay. Thank you. Thank you. The next question comes from Nick Coppola with Thompson Research Group. Hey, I guess kind of building off your last comment there, in outgrowing the industry in key markets, can you just talk about some of the ways that you're achieving that? I think I heard some commentary about new accounts being up. So maybe to Right To what extent is that success of sales force initiatives and the like? Yeah. Thanks, Nick. Good morning, and welcome to our call. Good question. A lot of the things that we've been talking about around the strategy in terms of expanding and diversifying the fleet, focusing on large urban markets, and maximizing the utilization of our sales force through what we call territory optimization, has really led to the gains that we've had. I think Bruce will talk to you about what he's done around pricing and on new account development in a second. But I think those are the key tenets of our strategy, is to grow the business in our large urban markets, diversify the fleet, diversify the customer base, pick up local contractors, focus on transactional customers that drive a higher rate of return, and that's driving our business records, our business levels. Bruce, anything to add? Yeah, and just to add to that, to kind of set the stage, it's a $50 billion market. We're a 4% player. We've added an additional 75 salespeople in the last year. We added prior to that, if you remember, we always said we would. We're at about what we believe our capacity is currently at 625 sales professionals. We started out, the first things Larry and I did when we arrived on the scene was get a sales force, the CRM in place to better efficiently and effectively manage the sales force. I think we're just starting to see our strategy play out and what we've always said we believed would happen. We're executing on that, and we will continue to do so. At the same time, you think about this, we're doing it while we're fighting this kind of larger portion of our business in O&G than our peers had. I think we're making good headway in this. We've always said also about new accounts, I'm a big believer in adding, filling the pipe with new accounts, even though that doesn't dictate whether business will increase, it definitely helps, and we're filling the pipe with record levels of new accounts, and we manage and can tell you what percentage of those new accounts are actually transacting business with us. Okay. That is great to hear, and certainly helpful. Transitioning a bit, sales of revenue-earning equipment up pretty dramatically year-over-year. Is there just any way that you can help us frame that? Is that normal turnover at this point given fleet age, or is there maybe some certain areas where you were over-fleeted or, I guess, just how should we think about that? No, it was 100% purposely done. We knew what we were going to dispose of. We set out and we executed well on it. I would say also, we sold $130 million in OEC approximately in the quarter and brought in a record amount of proceeds at around approximately $52 million. Not only did we go out and kind of reposition the fleet the way we wanted to, but we also got the channel mix right at the same time. As you know, over the first two quarters, that was a bit choppy for us as we kind of figured out our strategy and how we were going to implement that. I think the team did an amazing job in the first quarter, and you will continue to see that. One of the things is, you might think you sold $130 million, Bruce, but you only brought in $120 million. But remember, I have that tailwind of year-over-year, 4.9% growth year-over-year of my fleet. So I have the capacity there. So I have the capacity to grow volume while I still did that, and I am getting that price mix built into there. We continue to focus on FUR, although FUR was up a bit in the quarter due to an early spring in Canada and some returns. If you remember a year ago where FUR was, it was probably in that 15% or 16% range, and for each percentage point of FUR, Fleet Unavailable for Rent that we bring down, that gives us an incremental $35 million of fleet at OEC. So we continue to focus on improvements in reducing FUR and driving that towards our corporate target of 10%. Many of our branches and regions are at 10%. A couple of them, particularly Canada, is running a little bit high, which brings the whole average up. But that gives us really extra fleet that is already paid for and in our system. Okay. I appreciate that. That is actually my questions. Thank you. The next question comes from Joe Box with KeyBanc. Hey, Joe. How are you? Hey, good morning, everybody. Doing well. Thank you. So a couple of questions around the operating expense. Is it common for that to be up sequentially from 4Q? Then I guess I appreciate all the color on SG&A over the next three quarters and the breakdown of standalone costs, but any color or just directional guidance that you guys can give us on the operating expense? Sure. I think, look, it's not directionally or sequentially up quarter-to-quarter. But I think I'd like to turn it over to Barb Brasier and have her address the operating expense as well as the SG&A a bit and give you some color around that so you can understand what we encountered in Q1. Yeah. In the first quarter, our direct operating expenses as a percent of revenue were flat compared to the prior year. The actual absolute increase in dollars was just due to personnel, fleet running costs, and investments in facilities. The investments in the facilities, quite honestly, represent some deferred maintenance in some branches and the build-out of our ProContractor tool and our ProSolutions business. These expenses are really coming from items that fall below our capitalization limit. Things like investments in safety, painting, some small shelving and racking, other miscellaneous repairs. That's what's driving the investment in facilities. I'd also point out to you, if you looked at the non-fleet CapEx, you'll see a corollary spend there. That investment was up about $13 million year-over-year, reflecting the same types of investments in PCT build-out and ProSolutions, as well as enhancements that we've made to our IT, like ProControl. That is a little bit about the business transformation and the DOE. Joe, this is Bruce. Just a couple of comments on it. It was higher. We made some investments in the business in this quarter that needed to be made. We have 75 more salespeople, so we invested a little heavily in training and some of the different things that we are doing with the sales force. These are all investments that are going to pay off for all of us long term in this business, and we are building the foundation and the culture of this business. It was a bit choppy, but I feel comfortable that what we did was the right thing to do for the long term of the business. Okay, I guess maybe to that point then, Bruce, it sounds like over the next couple of quarters, we could see maybe a little bit better execution on that front because you did pull some cost forward into 1Q. Is that fair? I wouldn't want to predict that or give any guidance, but that is probably a fair statement. Okay. Last one real quick, if I may. It was good to see dollar utilization flatten out year-over-year. Can you maybe just talk to some of the components there? Obviously, rental rates were up 1.1%. How much of that flattening was a function of mix, and how negative would O&G be at this point? Well, O&G, this is Larry, Joe. O&G on a revenue standpoint was down 17%, and we continue to see pressures, albeit less, in the upstream O&G markets on rate. So that is also flattening a bit of the rate in O&G. So I see the flattening that we've seen overall and the gains that we've made, I think are really a focus on the fleet diversification, the ProContractor tool initiatives, the ProSolutions business that we're picking up, and the improvements we've made, quite frankly, year-over-year in our national account business in terms of pricing. We have been very successful in our renegotiations, and we have some spillover tailwind from the prior year where we talked to you about renewals at a higher level. In just about every case, we have been able to improve our national account pricing. That's driving our overall ability to have our rate improve. Yeah. Joe, this is Bruce. I would say Larry's spot on, right? It's a mix of pricing, and that depends on what the portion of the portfolio of key kind of large national key customers to this local spot market that we're growing because we've always said we get a bit better pricing in that market. It's the fleet mix, taking out $130 million and bringing in $120 million. We've been doing that quarter after quarter, not at those types of volumes to kind of remix this fleet to drive higher dollar utilization. It's the diversification of the product portfolio, meaning ProSolutions, ProContractor, but also the customer mix that product reaches. All of those things are starting to take hold, and we see no reason that the momentum we're seeing shouldn't continue. Great. I appreciate the color. Thank you. Thank you. The next question comes from Neil Frohnapple with Longbow Research. Hi, good morning, guys. Good morning. A lot of puts and takes in the quarter with the increased cost, but higher revenues. Just curious if adjusted EBITDA met your internal expectations for Q1, or does it require a greater contribution for the remainder of the year to hit the guidance now than what you had originally expected? Well, good question. Let me have Barb Brasier address the expectations. Yeah, no, absolutely, Neil Frohnapple. We don't provide guidance on the quarter, but this is exactly what we anticipated. We knew that some of our year-end costs were going to exceed. We, of course, didn't anticipate the bankruptcy, but the year-end costs we saw coming, and I think we've tried to give you some color on what we think is going to happen for the rest of the year, as we've gained a little more clarity into the cost of completing our separation. We're having a little higher run rate due to investments we've made in the field IT to improve our infrastructure, costs to establish our own IT infrastructure, and costs to strengthen and assess our controls over financial reporting. All of those are reflected in the run rate for the full year. Okay. Thank you. Maybe just a follow-up from an earlier question. Going back to the decision to accelerate sales of revenue-earning equipment in the quarter. Again, I understand it's part of the long-term plan to shift the total company fleet mix, but it does seem a little counterintuitive to do this at this point in the year, given the strength in volumes in the market and really ahead of the seasonally stronger part of the year. I guess, could you just talk about more why now and why not in previous quarters? Is the business finally to a point where you felt like you could really accelerate the fleet sales? Just any other color there. I know you've talked about it a bit already, but. Yeah, no. This is Bruce. Look, we invested fairly heavily last year. I'm coming in, like I said, into this quarter with a tailwind of a 4.9% larger fleet year-over-year. So I had the volume. You're only talking about a shift change there of $10 million-$15 million in the difference. So I had some volume capacity there. First quarter is typically your seasonally weaker quarter. Even if we are, and our peers may be seeing a bit better volume, it's not to the point where your volume's going to be in the second or third quarter. So I think you'll see us investing appropriately going into the second and third quarter as we continue to transform the fleet. Okay. Thanks very much. Thank you. Once again, please press star then one if you would like to ask a question. The next question comes from Michael Cohen with Opportunistic Research. Hi, guys. Thanks for taking my question. Forgive my ignorance, but can you explain or reconcile the distinction between the $56 million of CapEx investments and the $120 million that you're referencing, Bruce? I'm not quite understanding that. Yeah, Michael, that is an easy one. It is Barb. The $56 million is cash. In additional, we did put fleet to work that we had not paid for yet, so it is not reflected on a cash basis. You actually, you will see it in the cash flow. There is a line that is basically sitting in accounts payable of another $63 million. So fleet we put to work, had not paid for. The 56 is cash, 63 accounts payable. Yeah, I was just giving a number on a non-cash basis, just what actually hit a branch available to rent and what left a branch and brought in proceeds. Okay. As I look at your cash flow statement, I obviously see the 56, and I am sorry, Barb, you were referencing something else. I do not see any other $60 million. Where would that be at? You will probably see it in the Q. Is it in there? It's in the press release in the cash flow statement. It just takes into consideration if we receive any terms from the suppliers we're buying from. So maybe we're not paying net 30 or net 15. Maybe we're paying net 60, net 90, whatever that might be. Got you. Okay. Maybe I'll follow up on that offline. Could you just talk about the customer bankruptcy? What industry did that fall in? How large a customer? Obviously, you referenced large in the press release, but on a relative scale in terms of where it fits in quintiles or what have you. Talk to us a little bit about that and how it kind of got to that point. Well, I think it's been globally known customer in the electric utility industry, particularly the nuclear power industry. So without talking about the customer name in specific, I think it's been all over the news for the last two months. We were the primary supplier to the major projects that that customer was involved in. Got you. Thank you. That's helpful. That's all the questions that I have. Thank you very much. Thank you. Just so you know, in the Q, you'll see it in the statement of cash flow as a supplemental disclosure. We can follow up later on that. Are there any more questions, Keith? No, there are no questions at the present time. I'd like to return the call to management for any closing comments. Okay. Well, thank you all for participating in our call today. As always, if anybody would like to follow up with any additional questions, please just give me a holler. We're scheduling time slots for the next few days. Thanks a lot. Talk to you all soon. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.