Earnings Call: Q4 2019

Jan 30, 2020

Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2019, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin. Thank you, operator, and good morning, everyone. Thanks for joining our call. Let's start with full year 2019. It was a solid year of profitable growth for United Rentals, both organically and through the impact of our acquisitions. We expect to deliver more growth again this year. We're continuing to gain ground in a cycle that's not without its challenges, but one that we think has legs in 2020. You saw that reflected in the guidance we released yesterday. In many ways, 2019 was a year of transition for us. Now we've lapped the large acquisitions, and we have a clean slate and a much greater platform for growth. To recap the full-year highlights, both our revenue and earnings were up year over year as reported and also pro forma. We delivered record EBITDA of $4.4 billion and a record free cash flow of $1.6 billion. On the flip side, there were some stubborn headwinds that impacted our numbers. When we look at the fourth quarter specifically, we had some rough spots. We knew rental revenue growth would moderate, but Q4 pro forma growth was lower than expected at around 1%, and some of our costs were higher. This created a drag on our margins. The single biggest constraint was a slowdown in upstream oil and gas. Within our rental operations, it impacted not just revenue, but also our operating costs. We spoke about this last quarter, and Jess will discuss the impact in detail, including the expenses we had for repair, maintenance, and repositioning of the fleet that we pulled back from the oil field. We're sending that equipment to other markets where it can generate revenue down the road. We didn't have grand expectations for the upstream market, but frankly, the speed of the decline was a surprise. We expect the demand to stabilize early this year, although year-over-year, the comps will remain tough for a couple of quarters. If I had to point to one metric where we were most disappointed in overall, it's fleet productivity. Our biggest opportunity to repair productivity in 2020 is with fleet absorption. We have the assets in place and the team is focused on getting excess capacity out on rent in a disciplined manner as activity ramps up. Based on what we're hearing from our customers and the field organization, we're confident that the demand will be there. On the subject of fleet, I want to take a minute to comment on the CapEx ranges in our guidance. Our plan calls for $1.9 billion to $2.2 billion of gross CapEx this year. The low end of that range represents our expected maintenance CapEx, and the top end accommodates growth as the year plays out. This would most likely be used for specialty fleet or equipment for specific projects. Broadly speaking, the last three months have helped confirm both the weakness and the strengths we see in the cycle. We had a couple of regions hurt by oil and gas, and a couple of others with strong increases in rental revenue, driven by large infrastructure projects and non-res activity. Aside from those, our regions were generally slightly up or slightly down. Our specialty segment had another strong quarter. Rental revenue from Trench, Power and Fluid Solutions combined grew almost 9%, and about half of that was organic. The highest growth came from our Power and HVAC business. This year, we'll continue to invest in specialty with another 25 cold starts planned across our service offering. That's following 34 we added in 2019. This will bring our specialty network close to 400 locations by year-end. Our ongoing investments in specialty are part of our broader strategy to differentiate our service offering. Customers see us as a solutions provider, not just an equipment rental company. In 2019, we made strategic investments in growth initiatives that we believe can be highly accretive long term. We'll continue to invest in the business this year, even though it may have a short-term impact on our margins. Here's where we come out on the landscape looking forward. We believe that our construction markets will continue to grow through 2020, but not at the same rate as 2019. With industrial, our base case assumes more of the same sluggish activity. Our industrial revenue in 2019 was essentially flat with 2018. If we exclude the impact of upstream oil and gas, industrial was up 3% for the year. I can sum up our expectations for this year in four words: slowing, but still growing. This jives with a number of external data points, including our most recent customer confidence index. It's at the highest point since August. Construction backlogs are stable. The December ABI came in above 50 again, and the CEO confidence remains strong. The combination of these indicators help shape our outlook. We're not taking anything for granted. If conditions change, we have a lot of flexibility built into our business model. Our job now is to unlock the value of this big engine we've built. I made that comment on the third quarter call, and it was a theme for our annual management meeting this month. We had more than 2,000 leaders in Minneapolis to kick off the year. They came away with concrete plans to achieve our goals and a powerful platform to do it with. Not just fleet and branches, but also digital capabilities, specialized solutions, and most importantly, our talent base. Our people are the number one reason I can say with confidence, while no company can control the operating environment, we do have the ability to continuously improve our performance from the inside out. That's our mantra. Bigger doesn't really matter unless we're constantly driving for better. Also, I want to give a shout-out to our team on safety performance. They delivered another year with a total recordable rate below one, despite the noise of the multiple integrations. Finally, I want to speak to our stewardship of United Rentals on behalf of all stakeholders. The priority of our leadership team is to manage the business for the optimal balance of growth, margin, returns, and free cash flow. In 2020, we're looking at another year of profitable growth and strong cash generation. We plan to use that cash in ways that'll benefit our investors. First, we'll continue to invest in strategic initiatives that we believe have long-term accretive value. Second, we're planning to use about $1 billion to pay down debt. Yesterday, we announced a new share repurchase program that'll return an estimated $500 million to our investors over the next 12 months. We have a lot of flexibility in the ways we can serve our stakeholders. The constant is that we're a disciplined, resilient company with a focus on driving returns in any environment. That's what our investors expect, and that's what we'll deliver. With that, I'll ask Jess to walk you through the quarter, and then we'll go to Q&A. Jess, over to you. Thanks, Matt, and good morning, everyone. There's a lot to cover this morning, so let's jump right into the fourth quarter results, starting with rental revenue. On an as-reported basis, our rental revenue grew 3.7%, or $73 million, to just over $2.06 billion. Adjusting for BlueLine on a pro forma basis, rental revenue was up 0.8% for the quarter, or about $14 million. Within rental revenue, as reported, OER growth contributed $62 of the $73 million increase. Ancillary revenue was up about $15 million, and re-rent revenue decreased by four. Here's the breakdown of the $62 million or 3.7% OER growth. We had growth in our fleet of 7.6%, which translates into $127 million of additional revenue. Fleet inflation cost us 1.5%, or $25 million, and fleet productivity on an as-reported basis was down 2.4%, or a decrease of $40 million. I'll mention that year-over-year, fleet productivity on a pro forma basis was down 1.8%. Time utilization remained a headwind in the quarter, and the combined benefit we've had in rate and mix were not enough to offset the impact of lower time. That's rental revenue. Let's move to used sales. Used sales revenue was up 31%, or $58 million year-over-year. That represents $154 million more fleet sold at OEC. The environment continues to be strong, with overall proceeds as a percentage of OEC of about 52%. That number climbs to 56% if I exclude the auction sales we had in Q4. Sales at retail made up over two-thirds of sales in the quarter, as we sold 40% more fleet through this healthy retail channel versus last year. Adjusted gross margin on used sales in the quarter was 43%, down from 51% in Q4 last year. That decline is mainly due to more auction sales of fleet with high operating hours, including units from the oil patch, as well as a 4% decline in retail pricing we experienced given the increased volume that we sold through that channel in Q4. Taking a look at EBITDA, adjusted EBITDA for the quarter was just over $1.15 billion, an increase of $37 million or 3% year-over-year. Here's a bridge on the as-reported changes. In rental, OER contributed $7 million. Ancillary benefited adjusted EBITDA by $2 million. Re-rent was a decrease of seven. Used sales added $11 million to EBITDA, and better performance in our other lines of business provided $3 million. SG&A helped adjust EBITDA by $21 million year-over-year. I'll note there, that includes the impact of about $15 million in lower bad debt, and we also recognized about $6 million in synergies year-over-year from the BlueLine stub period. Our adjusted EBITDA margin was 47%, which is down 140 basis points year-over-year. Adjusted EBITDA flow-through was approximately 25%. Both margin and flow-through were impacted this quarter by a number of dynamics. First, and most importantly, was the slower rate of growth realized in the fourth quarter, in large part due to the decline in the upstream end markets. As we've said before, our ability to reach our targeted levels of flow-through requires a combination of positive fleet productivity in revenue and cost productivity gains. At 0.8% pro forma rental revenue growth, which includes negative fleet productivity, the margin and flow-through were challenged, given slow growth in the quarter and our maintaining a cost structure that supports the capacity we expect to need to service growth in 2020. We also continue to make investments in growth initiatives that will drive value in the future. Second, our cost base was stressed by repair and repositioning costs coming out of continued declines in the upstream markets. I mentioned in the third quarter call that some of those additional costs would play out through the fourth quarter, and they did, at around $8 million. Line of business mix was another headwind in flow-through. The fourth quarter included a sizable increase in used equipment sales, as well as growth in our non-rental lines of business, all of which are dilutive to margin and flow-through this period. A comment on adjusted EPS. We delivered a strong $5.60 in the quarter, compared with $4.85 in Q4 of 2018. That is an increase of 15%, primarily from better operating performance, lower shares outstanding, and tax benefits that we recognized in Q4. Let's move to CapEx and free cash flow. For the full year, we brought in $2.13 billion in gross CapEx, with $158 million of that having come in during the fourth quarter. Excluding $831 million in proceeds from used sales, net rental CapEx for 2019 was $1.3 billion. We generated robust free cash flow in 2019, about $1.6 billion for the year, or an increase of $258 million from 2018. That is up over 19% and adds back about $26 million in merger and restructuring payments we made last year. Our tax-adjusted ROIC remains strong, coming in at 10.4% for the fourth quarter. That continues to meaningfully exceed our weighted average cost of capital, which currently runs south of 8%. Year-over-year, tax-adjusted ROIC was down 60 basis points, due in part to the decline in margins this quarter and, to a lesser extent, as a result of the expected drag from our acquisitions. Looking at the balance sheet. Net debt at December 31st was $11.4 billion, which is $300 million lower than last year. Leverage at the end of the year was 2.6 times. That is down 10 basis points from the end of the third quarter and down 50 basis points for the full year. A quick comment on liquidity, which at year-end was a very strong $2.14 billion, comprised mainly of ABL capacity. A few comments on capital allocation and our share repurchase programs. We have completed our $1.25 billion repurchase program, purchasing $200 million of stock in the fourth quarter. Our 2019 purchases under that program reduced the total share count by about 7%. As Matt mentioned, we will prioritize the use of our excess free cash flow towards reducing leverage in 2020. We are targeting $1 billion towards debt reduction this year. I will speak to guidance in a minute, but based on the strength of the free cash flow we expect to generate this year, we also expect to return additional cash to shareholders through a new $500 million share repurchase program that we will complete over the next 12 months. I will wrap up with a few comments on guidance. Our 2020 outlook was included in our release last night. First, we expect 2020 will be another year of growth in this cycle, albeit slower growth. Our guidance for low single-digit growth in total revenue assumes continued support from our construction end markets as well as certain industrial verticals while working through tough comps from oil and gas in the first half of the year. We are focused on increasing fleet productivity, and our plan sees positive fleet productivity for the full year. To be clear, we will likely continue to see some challenges in a seasonally slower Q1, closely managing our CapEx as we continue to reposition fleet in advance of the busier start of the season in Q2. We expect to sell more used equipment in 2020 as we leverage what is still a strong used market. We will keep our fleet refreshed with approximately $1.9 billion of inflation-adjusted replacement CapEx. That is at the bottom end of our growth CapEx range. We'll add growth capital in 2020, primarily in support of our specialty businesses, but we'll look to adjust CapEx accordingly as we monitor demand and look first to utilize the fleet we already have in the field. Our outlook includes low single-digit growth for adjusted EBITDA as well this year. Cost management remains a focus for us, and it's balanced with continued investment in areas we know will generate better customer service and shareholder value over the longer term, like in our specialty cold starts, the build-out of our services businesses, and our digital platforms. Finally, while we continue to invest in growth, we'll also generate higher free cash flow this year, the majority of it earmarked for debt reduction and the new share repurchase program. With that, let's move on to your questions. Operator, would you please open the line? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of David Raso from Evercore ISI. Your question please. Hi. Good morning. Thank you for taking my call. Good morning, David. I think the key issue is the fleet productivity for 2020, the credibility of the guide that it can be positive. Jeff, can you please take us through a little bit the thoughts on cadence? You mentioned that the early part of the year, it's still a struggle with productivity, and it seems that the key metric really is the fleet utilization within that productivity number. Can you give us some sense, do you expect fleet productivity to be positive year-over-year as early as 2Q, or is it more 3Q? Just some sense of what kind of ramp do we need to see, and really particularly in fleet utilization to give us confidence fleet productivity can be positive for the year. Good morning, David. Good question. This is Matt. I would say, we're no better at predicting fleet productivity than we were rate and time, to be frank. We do have a lot more, three levers combined in the one versus the two, and then mix. We think that we've been very explicit that fleet absorption is going to be the greatest opportunity. The only reason why we're talking about that'll take some time is because it's not going to be a light switch. We think the combination of our rigorous management of it, some easier comps, quite frankly, as we get through the back half of the year, is going to make it accelerate. I wouldn't necessarily take that at Q1 or Q2 as positive or negative, just that we feel it'll improve throughout the year. We do feel, if this guidance holds up, these end markets holds up, everything that we firmly believe in, it implies fleet productivity being positive. It almost has to. So we do feel firm on that. Would you say it'd be fair, Matt, to say the CapEx, especially the cadence, no less, if the fleet productivity's proving to be challenging as you get further into 1Q into the key spring selling season, you will pull back on the net CapEx because that's more the focus this year, is making sure that the utilization improves? Is that a fair- Absolutely great. That's an absolutely accurate and great point, and that's why you see a broader range this year in CapEx guidance than we normally have. Because where we end up in that range, obviously demand will play a part in it, but this year specifically, absorption will play a part, and how well we do in absorbing the fleet. That's why you see that broader range. That's the right way to think about it. I guess my last question, while we can debate the credibility if you can get fleet productivity to be positive. But if you believe you can, the incremental EBITDA margins for the year seem very low. You basically have 38% incremental EBITDA margins. If fleet utilization's getting close to flat to allow fleet productivity to be positive, I'm struggling with so many costs in 2019, right? $12 million in the last quarter alone on oil and gas, $8 million now in the fourth quarter oil and gas hit. That's $20 million of costs you would think wouldn't repeat. If you pull that out of the guidance, you're talking about almost no EBITDA incremental on the revenue growth. I'm just trying to square up, if you really believe you can get fleet productivity positive, why would the incrementals with all those costs not repeating be this weak? Jess, well, I think, did a great job breaking down some of the issues in her prepared remarks, and I would love Jess to comment in a minute, but the most obvious one is the slower growth, right? So it's just having to absorb both the natural inflation of the business when you're in a low single digit environment. But also some of the choices we're making to continue to lean in to making sure we're building out capacity for some of our other initiatives. If we were managing for a quarter, maybe you wouldn't make those investments. We're certainly not, nor would I think anybody want us to. So it's just a little bit of headwind from those two, but slow growth is the main driver. Jess, I don't know if you want to add any more color. Yeah, I think the only thing I'd add is there's really two other dynamics that are playing through. One is those comps in the first half for upstream. We saw in 2019 that the rig count in the upstream business really started to decline in the third quarter of 2019. So we'll need to comp that through the first half. The other thing is we're going to continue to make the investments that I mentioned. Continue to build out some of our services business that frankly come in with lower margins. They're not as asset intensive, so the returns are really good in those lines. But in building those up off of a low base, there's going to be some investment that we're going to continue to make in building those businesses out. The other is continuing to invest in cold starts that also need time to build up and build out, and some of the digital capabilities that we're going to continue to grow and lean into in 2020. All right. I appreciate the time. Thank you. Thanks, David. Thanks, David. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Hey, guys. Good morning. Hi, Seth. Hey, good morning. Two questions. I guess, can you just talk about what your assumptions are for disposing of used equipment in 2020? Do you expect to continue to use the auction channel as much as you did here at the end of 2019? Then my follow-up question is just on these oil and gas markets, the energy markets, are you seeing any kind of knock-on effect as of this point in more traditional construction equipment? Thanks. No problem, Seth. First answer for the auctions. No, we think this year, with all the fleet that we're pulling out of the oil and gas, and some of the extra capacity we had through the BlueLine acquisition, we had more than our usual by quite a bit of really tired, old fleet, and it was just the appropriate decision. I probably did four or five times more of the auctions we have in any other year we have. But we're not going to sell that type of fleet to our customers. We're just not going to do that. I think the good news is that, and Jess pointed to this in her prepared remarks, the end market for used equipment retail was really strong. We'll continue to push that lever. We think that's a unique strategy that separates us and our returns and our ability to get the high proceeds per CapEx dollar for OEC dollar, and we'll continue to focus on that. The only thing we'll send to auctions are the stuff that we're just not going to sell to our customers. On the oil and gas, we're not really seeing a knock-on effect broadly like you might have in 2015 because all that infrastructure was already built around it. What we are seeing, though, is that 31% drop in Q4 brought us to a 16% drop in upstream oil and gas full year. That was significant. You saw a little bit of that drag on midstream as well. Those are the two areas that, frankly, surprised us at how fast they decelerated. Within our embedded guidance, we're thinking that maybe another 10% drop in the year. We're not counting on oil and gas to recover, and we don't feel there's going to be any broad knock-on effect as a result of it. Thanks, Matt. Do you feel like you've finished the moves and the relocation of the fleet out of those markets at this point, or is there still more equipment that needs to come out? Can you characterize your utilization levels in the energy markets relative to where you want them to be? Thanks. Yeah. If you think about the cadence of $12 million in Q3, $8 million in Q4, I think that cadence will continue. We don't expect to see a big drag. Hopefully one that we wouldn't even call out in Q1. Now, to be fair, if it drops a lot more than 10%, it's only 3.7% of our business right now, so we think we're appropriately sized there. If you take 10% off of that's still not a big number, and then the repairs on that shouldn't need to be a call-out. The only reason you hear me say a caveat is because I didn't expect it in Q4. But we don't really expect to have a big number in 2020 for repair and repositioning in oil and gas. Okay. Thank you very much, guys. I appreciate it. Thanks, Seth. Thank you. Our next question comes from the line of Michael Hanger from Bank of America. Your question, please. Michael, you might have your phone on mute. We're still not hearing you, Michael. All right, we'll move on. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question, please. Yeah, howdy. Can I just ask a similar question, a little bit bigger picture versus what has been asked already. You look at your EBITDA margins over the past four or five years, and they're higher than today, and you've absorbed, obviously, a tremendous amount of growth and some asset mix changes too, I guess, BakerCorp and other things. So leaving aside the vagaries of this year, do you believe your intrinsic EBITDA margin potential is higher than today, or is this the right level, and you grow by capital redeployment from here? Thanks. Sure, Rob. I think it's a great point. It really depends on how fast some of our other businesses grow. Generally, we feel like this is a kind of EBITDA margin we can continue to drive longer term and maybe even improve upon as we get some of these lower margin businesses that we bought over the years to improve. I would say that the only thing that we're really focused on is as we build out these service businesses, there's not there. They're very asset light. So there's not as high an EBITDA margin, but really good returns. I think it's too early for us to worry about that now, but as I'm projecting to your point of a higher thinking, longer term question, even a margin could dilute and returns could be higher theoretically. It just depends on how fast we grow some of these asset light and service businesses. But we're going to be in this ballpark, we feel, around this area for a while. Then we've chatted about this in the past, but how long does it take to get BlueLine fully up and operational at sort of URI levels? Is it a year, two years, three or four years? Are you still seeing benefits? How do you think about that? I think that all the sales challenges and repairs are pretty much on external facing. That's what I meant when I said clean slate. I think as we get through the seasonal build of this year, get past some of the comps that Jeff was talking about for the first half of the year on oil and gas, I think we're in pretty good shape as an organization, including the teams that came from BlueLine. When you're thinking about some of the legacy acquired shops, I'll point to, I think we played a video a couple of years ago on Investor Day where we had the branch manager from Boston, did a real good job talking about year 1, they were just drinking from a fire hose and all the new tools. Year 2, they really started to comprehend how to utilize them. Then in that third year is where they ramp up. If I take that, I think the BlueLine team, maybe they're a little bigger company, maybe they're even faster learners. But I think that when we really think about the full maturity of productivity out of those acquired stores, sometime in the back half of this year, 2021, I don't know when exactly, but I think they're really catching on to the tools and being able to focus on utilizing them at scale, which is really the difference that we've done here in our legacy United stores. The scale is new to a lot of folks outside of our company. Okay, thanks. Thanks, Rob. Thanks, Rob. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research. Your question, please. Hi, good morning. Hey, Joe. First question is just on CapEx and an implied growth range of flat to up $300 million. It seems like based on the specialty growth targets that you revised recently, you should be at least at the midpoint of that, if not higher. I do not know if it implies that the Gen Rent fleet, if anything, could even shrink this year. Just how you are thinking about that path of specialty growth and then maybe what is implied in terms of Gen Rent fleet thinking. Sure. As I had answered, I think it was David Raso who asked the question first. Where we end up in that range depends on how fast we absorb. That absorption is real primarily in the Gen Rent business. So you are accurate. We are going to fund our specialty growth. When I think about at the midpoint, that is probably in the range of between the cold starts and the organic growth that we are driving through the specialty team. We will need to fund over and above the replacement CapEx. So we are not really guiding to that we will shrink Gen Rent unless all of the demand can be filled with the latent capacity. We are not betting on that. We are not even hoping for that. But it is a fair observation, so do not think that that 19, if we have to use some of that 19 because we are not absorbing as fast to buy some specialty assets, that is what we will do. On the time utilization side of things, just trying to understand a little bit better why that surprised in the quarter. A lot of attention on oil and gas. Was it all oil and gas, or were there other things that you saw develop over the course of the quarter that wound up shaking out just a little bit differently from what you anticipated in, say, end of October? Yeah. Oil and gas is certainly a big driver, but to your point, the back half of Q4, what we lovingly call the turkey drop. For my 29 years, I never get used to how much we drop after Thanksgiving. It was a little bit steeper than we usually do. That was transient. We feel comfortable that repairs, as we sit here and guide here today, we obviously feel comfortable that that'll repair. And those were the two major contributors. What we're encouraged about is that you see that the OEMs backlog seems to be that the industry is responding to that little bit of a slower growth. Think about everybody's been building their fleets for this high single digit, double digit growth. It's appropriate for people to take a pause and absorb. That really shows me good discipline from the industry overall, and I think that's a big part of the confidence we have that we'll be able to repair the time utilization in 2020. That's just a question on the fleet productivity, because my impression from your comments there is that it wasn't a matter of you might have been a little bit more disciplined on the rate side of things and suffered on the utilization side of things, that the industry at large would probably be trending with the kind of rate experience that you had. I don't really know. I don't want to say that because I don't know that answer, what the industry is doing. What I can say, and thanks for giving me the opportunity to reiterate, our opportunity to drive time utilization is because we're going to drive it through one of two ways, more fleet on rent or better discipline on the inflow. It's not because there's any change in strategy that we're going to trade off any kind of rate to get higher time utilization. That is not the goal at all. We think it's important to continue to have rigorous rate management to go forward as we absorb inflation. I think this is just more about as the growth decelerates to lower single to mid single digits, it is just appropriate that the industry paces, and I think that is what I was referring to, the backlogs that you are seeing from the OEMs being down year-over-year is a good response. I appreciate it. Thank you. Thank you. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Yes, hi. Good morning, everyone. I wonder if we just expand on the specialty discussion. At the specialty day, I think we spoke about 32 cold starts planned for 2020, which if we look at the midpoint of the CapEx guidance range, the entirety of $300 million of growth CapEx would be accounted for by specialty. I just want to make sure that we have those pieces right, and if there are any other moving pieces we should keep in mind relative to what we spoke about at the specialty day. Would love an update. Thanks. Yes. So glad you viewed that. I heard that was very widely and broadly enjoyed from the investment community, and Paul and the team did a good job. I would say we've got that number right now pegged for 25. Whether it accelerates will have a lot to do with. Actually, CapEx will be the last part of decision, will be are we getting the facilities, the people that we need to accelerate it to maybe a goal of above 30? As we did, frankly, in 2019. We increased the amount from what we originally thought. This is no change in the overall strategy, but just to be clear, the number that we're focused on right now is 25. Cold start's planned for 2020, and that may lessen that CapEx need more to the $200 million range, as the way we're thinking about it right now. That will be prioritized, because as I said in my prepared remarks, this is a differentiator for us, and solving more customers' problems, we think, is a real part of why people do business with United Rentals. No change in strategy, just numerically might be a little bit less than what you may remember from the specialty day. Okay. Thank you. As you folks have used more and more data analytics, can you just talk about the decision for CapEx for 2019 to come in at the high end of the prior guidance range? Because if we have CapEx at the low end of the guidance range, time would be 50, 60 basis points stronger and obviously, you folks made those decisions in the field on a case-by-case basis. But any comments that you can make, and I appreciate the seasonality comment post-Thanksgiving, but any additional context, because given the time you pressure, I guess, we would've thought CapEx would be at the low end of the guide. Yeah. So unfortunately, and we joke about this internally a little bit, I can't cut up a 60-foot boom and create generators and light towers. I will tell you that when we look at the fourth quarter CapEx, which we manage very tightly, we had a significant amount, almost 25% of that was just Power and HVAC assets. So between heaters, temporary power, stuff like that. So that probably would be in the range of, with the math that said $50 million, $100 million less, if we weren't bringing in assets that where we had some time utilization opportunity. It was more the mix of assets that we were bringing in for different businesses and to support, as to your question earlier, our specialty growth and some seasonal items as well. Okay. And lastly, on the cadence, as we look at the time utilization in the second quarter of 2019, it was, call it 150 basis points lower than normal seasonality versus the first quarter. So it does look like you could potentially turn the corner for fleet productivity in second quarter of 2020. I just want to make sure we're not up over our skis with that thought process. Any comments that you can share on that? Well, I think you're directionally correct. How the mix comes in, we talk a lot about time. The mix will be a component of it as well, but as long as we do think that we have that opportunity, and we think our guide kind of embeds that. As I talked about, I think it was a question that we had earlier on, regardless of where the number is, we do believe that we expect it will accelerate throughout the year because of the tough comps you mentioned. Okay. Thank you. Great. Thanks. Thank you. Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question, please. Hi. Thanks for the question. Just back on the comments about oil and gas being down another 10%, just wanted to clarify that that is for the full year 2020, not an incremental 10 off of the fourth quarter. Secondly, when you're thinking about the guidance for next year, I know you've talked about this slowing environment, but are there any other end markets or geographies that you are baking into your guidance to be down next year, either for the first half or for the full year? First on the oil and gas, probably flat from year-end, so that 10% would be the deceleration that's already continued. So think about that as flat. It's just the impact full year of that back half of the year decline. So not an additional 10. When we're thinking about other end markets, as you heard me say in the opening remarks, the industrial market's a lot of puts and takes. We talked a lot about upstream and then even midstream were down. Downstream was great. Downstream was a good guy. Chemical processing was down. Power was up. So there's a lot of puts and takes within it, which is why we're looking at industrial overall as flattish, and embedded in our guidance is that expectation. If something happens and industrial picks up, then that would help push us towards the higher end of the guidance. But we're really relying more on a continued strength, even if it's a little bit slower growth in our not in the construction verticals. Non-res, specifically. Got you. And how would you characterize MRO activity this quarter? I think you've historically talked about close to half of the business in industrial being MRO. Have you seen any impact to that from some of those puts and takes that you mentioned? Nothing that we can quantify. We certainly have heard some delays from the field team about turnarounds here in Q4, so that could have impacted that sluggish Q4 result, and whether they pick those up in Q1 or try to stretch it to Q4 next year, who knows. Those are usually the time periods when they would do turnarounds. That would be the only MRO thing that was a little bit lagging. We don't think it was structural or continual, just some push-offs that we had seen specifically in the Gulf Coast. Okay, great. Thanks. And then just lastly, on the debt pay down, I think, based on your guidance, that should be getting you guys close to 2x exiting next year. Just curious about how we should be thinking about your targets from there and whether any of this, when you talk about seeing construction markets up at least through 2021, is any of this kind of planning that you could possibly see some EBITDA declines beyond 2020? Let me take the first part first. The debt reduction that we have targeted for 2020, that $1 billion, we feel comfortable is going to continue to get us, call it into the middle of the lower half of our range. Looking out to 2021, it is a little too early for that right now. We have talked about prioritizing leverage reduction and working towards 2x at the peak. We are going to obviously continue that path in 2021. The quantum of it, I just do not know yet, Courtney, so I do not want to go too far on that. As far as EBITDA going forward, again, that is 2021 is just a little too far out at this point. Okay, great. Thanks. Thank you. Thanks, Courtney. Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question, please. Great. Thank you. Good morning. The first question, just on the latent capacity that you've highlighted and the focus on driving absorption. How should we expect that plays into how deliveries kind of move through the year? I'm just thinking from the standpoint of ending OEC sequentially. I would assume we should assume a bigger than normal seasonal decline from where you ended 2019. Is that fair? I.e., you sell more fleet than you bring in? When you say deliveries, Tim, I'm assuming you mean CapEx inflow? Yeah. Yeah. I think you could expect us to see pretty close to a normal cadence. Q1 will be a little bit softer, but it's a small number, right? When you're talking about whether it's $50 million or $75 million smaller on a $15 billion base, not meaningful, but technically a little bit softer in Q1. Then the rest of the cadence and really the meat of our CapEx spend is in that Q2 and the beginning of Q3 range where we really are in the peak build season of our fleet on rent. That will flex directly correlated to how we end up doing with time utilization, fleet absorption, whatever term you want to utilize. Right. Okay. That's how we're thinking about it, and hopefully that answers what you were looking for. Yeah. Okay. Then, Matt, just on kind of the interplay between fleet age and operating costs or, and R&M costs. There's been a lot of discussion here at least in the second half about elevated R&M costs, and I get that a lot of that was moving stuff in and out of the oil and gas regions and repositioning fleet. But at almost 50 months, does that start to put some pressure on R&M, or is that, I know used sales are up, so presumably that's somewhat a response to that. But can you just maybe speak to that just in terms of that interplay? Yeah. On the margin, right? You could pick apart how much of it's inflation, how much of it's just fleet age, but it's on the margin. The real opportunity and what you pointed to is that take advantage of a strong used market and a strong retail market to make sure we continue to manage that fleet age. Because when that market's not there, whenever there becomes a downturn, we don't know how to predict that, but we're not predicting it certainly for 2020, we're going to need to age that fleet. Then there may be some trade-off for R&M as you age it a year, and you really turn off the inflow for a while. That's when you may see a little bit more of an impact on R&M, but the trade-off between that and having too much fleet and the positive of free cash flow is the way we plan to think about it long term, which is why it's so important we drive used sales here, so we're not aging the fleet too quickly while there's still growth to be had. Okay. All right. Then maybe last one, Matt, just on the large project pipeline. What's the feedback just in terms of the quoting levels and just size of the pipeline in terms of what you're hearing from the national account team? Yeah, it's still good. The team still feels really good specifically about where we're aligned strongly with our national accounts and our large accounts and large projects. As you know, that's a specialty for us. It's strong, and more importantly, we're not hearing of any cancellations. That would be a sign of something different. So we think overall, most of the macro indicators, as well as our internal intelligence from our managers and our customers, is that there's still growth in 2020. So, big projects will continue to play a big part of that. Got it. All right. Thanks for the time. Thanks, Tim. Thank you. Our next question comes to the line of Steven Fisher from UBS. Your question, please. Thanks. Good morning. Just maybe to follow up on that last point there, just curious how much visibility you feel like you have for the business, Matt, as you think about the second half and the growth you forecasted, and curious how it compares to that second half visibility that you have had at this point in the year over the past few years. I wouldn't say it's any better or worse than over the past few years. And it's not just from our customers, but obviously from the macro indicators. As we say all the time when we talk about our customer confidence index being higher than it was in August, we think it's turned a little more positive than maybe what it was full year for our customers and really for most industries outside of maybe industrial. We think that's a general indication of 2020. Admittedly, we are skewed by large customers and large projects, as I was answering Tim's question, I realized the local customer is the part where maybe our visibility isn't as long, as opposed to larger customers, larger projects, where just the pipeline and the supply chain of what it takes to build these large projects gives you inherently more visibility. Okay, that's helpful. For Jess, what's the right way to think about SG&A over the course of 2020? Is it a dollar level? Is it a percent of sales? How much focus do you have on that number? Yeah. It's Morgan. That's a great question. The percent of sales is definitely the way I would recommend you think about it. The number might move a little here or there, but we're managing it more so from a percent of sales perspective. What do you think that percent of sales is? Do you have a target for that? How do you kind of quantify that? Yeah. There's no target per se. As we've recognized the benefit of the synergies from the deals that we've done, we're pretty comfortable with the percent that we're running with right now. The biggest mover in that, because it is total SG&A, is what happens with stock comp, and that's really going to be dictated on whatever happens with the stock price. But in terms of the components of SG&A that we're managing, the pace that we've got right now we're very comfortable with. Okay. Terrific. Thank you. Thanks, Steve. Thanks. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please. Thanks very much. Good morning. In specialty, a nice trajectory in gross margin, certainly improving and talking about getting synergies there as well. Matt, could you delve into cross-selling, how that's progressing, how you're integrating things like Total Control with Fluid Solutions perhaps, and can we see perhaps positive gross margins maybe in the back half of 2020 in the specialty? Yeah, absolutely. I think also the maturation of what's been a lot of cold starts for the last few months, as well as we continue to get the whole Fluid Solutions team continuing to get momentum from being two separate companies. Our pump business and BakerCorp, and how that continues. Much like I talked about the BlueLine integration, how that matures over time is another opportunity to get margins up in the specialty business. We absolutely feel good about that. The cross-sell opportunities is, as I said earlier, something that we view as a real differentiator and something we spend a lot of time with all of our leaders in Minneapolis in workshops on selling that continued value because we're big believers in it, and we expect that to contribute to margin expansion for specialty as well. I'll just add one thing there. When you look at the specialty margins, right now they are burdened by acquisition activity. To the extent that we continue to absorb and leverage the scale and the opportunity in those acquisitions, that's going to help margins over the long term as well. Great. Thanks, Jess. As a follow-up, and it's a follow-up to the prior question on SG&A, which you covered pretty well, but I want to delve into bad debt, which you called out in prepared remarks that you got that $15 million lower. That was impressive, and I don't recall you calling out bad debt before. A, kind of what was happening in the fourth quarter, and then B, how does that play into the SG&A consideration in 2020? Thanks. Sure. That $15 million is actually, I need to break that down. About 10 of that 15 is just better bad debt expense experience. Doing better on collections, the DSO coming down, just the actual bad debt activity that we had this quarter versus last year. $5 million of the 15 is actually a change. We had a change in the accounting standard for revenue. That moved $5 million out of G&A and actually moved it up contra revenue. That's actually a burden in OER. Understood. Thanks. Sure. Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question please. Good morning. I wanted to talk on upstream longer term. Some of it's out of your control, I know, but if and when upstream picks up again, rigs are active, would you move fleet back in to take advantage, or does the last six months change your perspective permanently on how you manage fleet in upstream areas? I think, believe it or not, we were a little more cautious of how much we moved in this last upcycle from the one previously. If you remember, this used to be almost 10% of our business. I think it was almost 11. We managed it down to about five. I think you'll see us come with it with that same caution again. It's not that the business full cycle isn't profitable. It's just If we don't need to, it's just a little too variable. So it'll depend on what's going on in other markets. If it's a place where we need to put latent demand, well, then that makes all sense in the world. But if you're talking about how you make your choices between each one of these cyclical challenges with upstream, that volatility certainly informs how much bigger we're going in next time. But to be clear, it is still profitable business throughout the cycle, so it's not something we would eliminate altogether. We would look to optimize existing capacity first and foremost, and even if we're pushing the limit a little bit there rather than throwing new resources at it. Great. Just thinking about, if I understand what you're saying, non-rental CapEx, should we expect that to continue moving up based on cold starts, digital investments, et cetera, even though rental CapEx, you're being more disciplined on that line? Not really. When we're talking about investments, we're not just talking CapEx. We're talking about and that's why we really talk about. So maybe the word investment, it's not the balance sheet form of investment, but investing into the cost that with a fixed cost and the additional cost that we have to support more techs for our service business or to build out the shops to do more work or trainers for safety training. Those are the service business we're talking about, where we're investing more costs into. As far as the hard asset capital investments, yeah, there'll always be some incremental to cold starts. You need to put new trucks in there. You need to do some of that stuff. But that's not anything extraordinary that we would call out. Okay. Thank you for the color. Thank you. Thank you. This does conclude the question and answer session of today. I would like to hand the program back to Mr. Flannery for any further remarks. Thank you, operator, and thanks to everyone for joining us today. Just a reminder that our Q4 investor deck and 2020 guidance are available online. As always, you can reach out to Ted with questions here in Stamford. Thanks, and we look forward to our next call. Operator, go ahead and end the call, please. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.