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 31st, 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 are 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.
Thanks, Jonathan, good morning, everyone. Thanks for joining our call. I'll begin with a statement that sums up our position on 2020. We believe we've weathered the worst of the economic impact from the pandemic, and while the shape of the recovery remains unclear, the wholesale shutdown of the macroeconomy has started to lift. The visibility is still somewhat limited, but near-term indicators suggest that activity in the second half of 2020 may continue to track with seasonal patterns, which is something that we saw in June and July. The COVID response plan we shared with you in April is working. We can point to tangible gains from executing that plan, most notably a strong second -quarter performance. More than anything, our results confirm the flexibility and resiliency of our operating model. It's one of the reasons we felt comfortable reintroducing full-year guidance.
I want to start with a few metrics from the second quarter. After that, Jess will take you through the results and the guidance in detail. Then we'll go to Q&A. One highlight of the quarter is OEC on rent. I'm happy to report that rental volumes in all of our geographic regions finished the quarter above the trough they had in April. For the company as a whole, that low point came on April 9th. From that date through June 30th, fleet on rent showed fairly steady improvement, rebounding by almost 14%. This translates to over $1 billion of incremental fleet on rent.
The biggest takeaways from the quarter have to do with the five workstreams we introduced in April, and to remind you, they are ensuring employee safety, supporting the needs of our customers, showing discipline with both our CapEx and our operating expenditures, and proactively managing our balance sheet. I'll first speak to the cost management. This was very evident in our results. We aggressively flexed our operating expenses to mitigate the revenue loss, resulting in a decline of just 50 basis points in adjusted EBITDA margin. Our margin in the quarter was 46.4%, implying a strong flow-through of about 50%. I see proof of our cost vigilance every day in our spend on things like third-party services and overtime. While certain costs will return with volume, the team has gone above and beyond to run a lean ship.
Turning to CapEx, we're now guiding to a range of $800 million-$900 million for 2020. This is significantly lower than the $2.1 billion of gross CapEx we spent last year. Our primary focus this year is to serve customers with the fleet that we already own. When we do make selective investments, they're targeted to specific opportunities. As a result of this cost and capital discipline, our free cash flow generation in the quarter was a very strong $817 million. This is a year-over-year increase of almost 300%. I'm particularly pleased we achieved these numbers without compromising our capacity for the future. This means no branch closures, no COVID-related layoffs. We thought long and hard about this playbook for years; it came together quickly in March.
We're taking a measured response that serves the near and long-term interests of the company. Jess will have more to say about the financial impacts of the workstreams. I wanted you to understand just how well our field organization is rising to the challenge. It was a huge ask of them to provide essential services during such a difficult time, and they're doing a great job. Not only did the team embrace the health and safety protocols in our COVID plan, but they also did it safely with another recordable rate below one. The workstreams also give you a bird's -eye view of how we're maintaining our competitive advantages. In short, we're managing the business in a way that leverages our value proposition. Customers see us as a business partner capable of delivering value across all of their needs and under all conditions.
Throughout this pandemic, we've been determined to meet this expectation, and I'm happy to say we're succeeding. A few comments on the operating environment. It's certainly been a turbulent few months. Industrial activity has deteriorated more than construction. That's not surprising given the domino effect of COVID-19 on different parts of the industrial economy. For example, as people stayed at home, the decline in demand for gasoline and jet fuel significantly impacted our petrochem customers. On the construction side, non-res is a very broad category that covers a lot of different market dynamics, and some of the verticals have stayed busy throughout the pandemic, like power and data center builds, and others are obviously more challenged, like retail or hospitality. Now with states reopening, we see the same COVID-19 news you do about areas that are struggling to avoid spikes in the infection rates.
So far, it hasn't had any additional impact on our business. Our focus is on monitoring market conditions that could be triggered by infection rates, like state and provincial construction restrictions. We'll continue to keep a close eye on that. We're also seeing demand continue for our specialty segment, which is holding up very well. Our strategic investments in specialty are making helpful contributions to the segment's revenue this year. Another positive has been the strength of the used equipment market. So far, retail demand has remained solid, and we view this as a leading indicator, meaning contractors expect to need equipment for their upcoming projects. We've been able to leverage that demand to recover more than half of our original investment on equipment that's over seven years old. Big picture, we know that our end markets will recover at different speeds in different areas.
Fluctuations like this allow us to leverage our strengths of flexibility, diversification, and scale. We have a deep fleet of fungible assets that we can shift between construction and industrial sectors and across geographies and verticals. Even in this environment, our flexibility helps to mitigate the pressure on revenue. We could also pivot to new opportunities that may arise from COVID. For example, the idea of repurposing large commercial properties has been floated by some construction analysts, and this could create some incremental demand in the construction space. That gives you some color. Our customers are still working their way out of the tunnel, and it's our job to be the partner that helps them get there.
What we're hearing from our customers is that they have the same feeling we do about 2020, reasonable near-term visibility with current work and backlogs, and less visibility in late 2020 and 2021. In the meantime, we're on course with our plan and making good progress. All things considered, we delivered a strong second quarter with solid fundamentals for profitability. The things that we told you we could control, we did control, and we moved fast in a very volatile environment. The guidance we provided reflects our best estimates on what we can achieve barring some significant change to the operating environment. The ranges are a bit broader than we typically provide at mid-year, but that's the reality of the times we're operating in. Under any scenario, we expect to generate significant free cash flow this year.
If the economic impacts of COVID linger on, we have additional flexibility, and we can leverage it in our business model to remain resilient. I'll wrap up with something I talked about last quarter when I stated that the value we preserve now will be the foundation for the value we create in the future. A big part of that value is our commitment to being first call for customers under all market conditions. We've been putting our best efforts into delivering on that commitment, and our Q2 results show that our best efforts and our business model are more than up to the task. Not only are we preserving value, we're doing it strategically in ways that'll drive returns today and in the future. With that, I'll hand the call over to Jess to cover the numbers. Jess?
Thanks, Matt, and good morning, everyone. I'll cover the highlights of the second quarter, which were, of course, significantly impacted by COVID-19. I'll also share an update to our debt structure and finish with some comments on our 2020 guidance before we move to Q&A. There's a lot to cover, so let's jump in. Rental revenue for the second quarter was $1.64 billion, which is down $318 million or 16.2% year-over-year. Within rental revenue, OER decreased $264 million or 15.8%. In that, fleet productivity was down 13.6%, or $226 million. That's primarily reflecting the decline in volume we experienced during the quarter due to the pandemic. Inflation of about 1.5% cost us another $26 million, and a 0.7% drop in the average size of the fleet was a $12 million headwind to revenue.
Rounding out the decline in rental revenue for the quarter were $46 million in lower ancillary revenues and $8 million in lower re-rent, which together were a 40-basis point headwind to revenue. Let's move to used sales. Used sales revenue was down 10.7%, or $21 million, year-over-year, which is almost entirely due to less used fleets sold to OEMs in trade packages. The retail used market remains quite strong. OEC sold at retail was up 17% year-over-year, despite a slow start at the beginning of the quarter. Used margins in the quarter were healthy as well. Adjusted gross margin on used sales was 46%. Now, while that's down from 49.2% in Q2 last year, it's up 30 basis points sequentially from Q1. Retail pricing was down about 6% off last year's peak, but consistent with what we saw in the first quarter this year.
Finally, proceeds as a percentage of OEC were a robust 54%, and that's on a fleet sold that was on average over seven years old. Taking a look at EBITDA. Adjusted EBITDA for the quarter was $899 million, down $174 million or 16.2% year-over-year. Here's the bridge on the dollar change. The impact from rentals was a drag of $197 million. OER was a headwind of $179 million, with ancillary and re-rents down a combined $18 million. The used sales impact on EBITDA was a headwind of $16 million. Year-over-year, SG&A was better by $48 million, with the majority of that benefit coming from lower discretionary costs, including T&E. To a lesser extent, we also had lower commissions and bonus accruals versus Q2 last year. Our adjusted EBITDA margin was a highlight in the quarter, coming in at 46.4%.
Now while that's down 50 basis points year-over-year, our margin clearly reflected our commitment to aggressively manage costs, particularly in the early part of the second quarter when volumes were most depressed and restrictions were still in effect. Our focus on costs is also evident in adjusted EBITDA flow-through of 50%. Through the second quarter, we continued to action reduced overtime in-house to reduce the use of third parties and canceled or delayed discretionary spend, mostly in G&A. The second quarter flow-through benefited from the flexibility we have in our business model to respond quickly on cost. Cost control remains a major focus for us, especially for discretionary spending. But a good portion of our costs will continue to flex with volume. For example, spend on delivery if necessary as volume increases through the season and we need to reposition the fleet to service our customers.
Those expectations are included in our guidance. Back to the second quarter results and adjusted EPS, which was $3.68 and includes $0.30 of benefit from discrete tax items. That compares with $4.74 in Q2 last year, and the year-over-year decline is primarily due to lower net income from lower revenue in Q2 this year. Let's move to CapEx. Year-to-date through the end of Q2, we've brought in $353 million in gross rental CapEx, while proceeds from sales of used equipment have been $384 million, resulting in negative net CapEx of $31 million. Together, these results reflect our continuing focus on capital discipline. Turning to free cash flow, another highlight through the end of the quarter. We generated over $1.4 billion in the first half of the year, an increase of $643 million. Our ROIC remains strong, coming in at 9.6% for the second quarter.
That continues to meaningfully exceed our weighted average cost of capital, which continues to run south of 8%. Year-over-year, ROIC was down 120 basis points, due in large part to the decline in revenue this year. Looking at the balance sheet and our capital structure. Our balance sheet continues to be the strongest it's ever been. Net debt at June 30 was $10.3 billion, which is down $1.3 billion year-over-year and down $800 million quarter-over-quarter. Leverage at June 30 was just under 2.5 x, which is flat sequentially and down three-tenths of a turn versus the second quarter of 2019. Our current $500 million share repurchase program is still on pause. As a reminder, we had purchased $257 million of stock on that program before we paused it in March. Liquidity remains extremely strong.
We finished the second quarter with over $3.8 billion in total liquidity. That's made up of ABL capacity of just over $3.6 billion and availability on our AR facility of $56 million. We also had $127 million in cash. Yesterday, we announced we will redeem our $800 million, 5.5% senior notes due in 2025. Our decision to do so includes our views of continuing strength and liquidity given our expectations of free cash flow for the year, which is reflected in our guidance. Speaking of our guidance, I'll close with a few comments. Of course, no one knows the ultimate impact of the pandemic on 2020 or beyond. We continue to run numerous scenarios, each with varying levels of revenue expectations and related actions to arrive at adjusted EBITDA, taking into consideration the six months behind us and the visibility we have to the rest of the year.
Our guidance represents what we think of as our most likely range of possibilities. To be clear, this guidance does not contemplate a shutdown of the economy like we experienced earlier in the year. Our CapEx guidance has been refined as we balance our fleet mix in response to customer demand and continue to focus on fleet productivity and better fleet absorption. Finally, and notably, our free cash flow update is a clear indicator of the strength and resiliency of our business model as we plan to generate over $2 billion in free cash flow this year, paying down debt with the vast majority of it. With that, let's move on to your questions. Jonathan, would you please open the line?
Certainly. Ladies and gentlemen, if you do 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. Jess, you just mentioned the outlook; the potential ranges does not include a shutdown of the entire economy. Can you help us, at least on the lower end, with how you're thinking about some of the key states, the Floridas, the Texas, and even parts of Southern California? Are you seeing any negative reactions from customers for projects or equipment demand related to the uptick in the virus? Again, what's baked into the low end of the range? Just so we have a sense of if there's any cushion at all from the virus, or are we just purely assuming no virus will impact the rest of the year?
Sure, David, this is Matt. First, to answer your question about the states, I kind of tried to cover that in the script. We're seeing all the spikes up specifically in four or five pretty large states and large for us as well. When we went back to look at the data, it was not impacting our business at this point. What would be closures and construction restrictions that haven't manifested, similar to what happened early on in the Boston area and the N.Y. Area, and the Bay Area, were the most specific ones back in the beginning. We're not seeing that. What's embedded in our guidance is more of a normal seasonal build that we would expect.
Although we don't plan on backfilling the gap that was created from COVID at the end of the first quarter and the beginning of the second quarter. We do expect to see normal seasonal builds. As far as cushion, the fourth quarter's a little bit less clear today than what we saw in Q3. We think the backlogs and the work that's ongoing in Q3 is much more predictable from our perspective. Where we fall within that range that we gave really depends on whether we get any acceleration or deceleration of the demand in Q4. That's how we're thinking about it. None of it comprehends all five of those states doing a major shutdown. That's not really the way we ran about it, nor do we think that's going to happen.
I think that people have been pretty obvious of their intent to continue to make sure they drive the economy, and that's kind of how we're planning and how we guide it.
Any change in tone? At this time of year, you have some visibility into the following year with larger projects. Have you heard any tone change in those customers about 2021 or even just a sense of where your sort of visibility to the size of both backlogs is today for next year versus the same time last year for 2020?
If you think about the macro data that everybody looks at, that we look at as well, you could see that incrementally, some of the negatives got less negative. If you want to think about that as positive momentum, whether it's backlogs of ABC contractors, the backlog is down about-- it's up to about eight months now. ABI is not quite as bad as it was, but it still doesn't denote growth. I'd call those indicators bouncing off the bottom, but I wouldn't call them positive yet. I think even our own customer confidence index improved sequentially, but still not to the levels of what we'd expect. I think it's because of the lack of visibility that we talked about. It's just not there right now for people to get comfort.
The experience of being better today than we were in April has given everybody some more confidence, but just not enough to predict 2021 yet.
Last question, obviously just mathematically, if you get back onto the normal seasonal trend, though from a lower level that April obviously got hit. Time you wouldn't improve again till April, right? Just the natural math of it. Time, you would still stay negative.
Yeah.
Please, I was going to ask a CapEx -related question, but do you have a comment about the seasonality?
No, please. Go ahead. Sorry to interrupt.
That's the math. I'm just curious, when we think about cash flow, and I know it's been particularly strong, but for CapEx next year, if I told you the seasonal trend's just going to continue. No catch -up, but no dip. How should we I know Jess isn't going to want to give a CapEx number for next year yet, but just so we get some sense of the spending below replacement this year? If you're back on a seasonal pattern, just to gauge a bit the cash flow impact from CapEx changes. Can you just give us at least a framework to think about if we're back on a seasonal pattern?
It would really depend on two issues. How this exit rate of this year comes out. How do we do with the absorption of the fleet, and how much does fleet productivity improve sequentially throughout the balance of this year to give us our exit rate, and then what does the demand look like going forward? If you thought that demand would return to 2019-like levels, if that's what you mean by normal seasonality, then you could think about 2019 CapEx. I'm not sure that that's a visibility that anybody or anybody's calculus has quite yet. If we get a vaccine and the world starts opening up and people start traveling again, certainly that would be a thought that we'd be looking towards. Way early for us to even get close to thinking definitively.
By the end of the year, we'll try to get there to where our guide would be. The reality is, we won't really have to make those CapEx decisions until we start building in the spring of 2021; that's when we'd really have to start spending money.
All right. Thank you for the time; I appreciate it.
Thanks, David. Jonathan?
Our next question comes from the line of Joe O'Dea from Vertical Research.
Hey, Joe.
Hi, good morning, everyone.
Hi, Joe.
First, on the implied kind of back half of the year guide, when we look at equipment rental revenue, that was down 16% in the second quarter, and the guide implies something similar in the back half of the year. Even as you go through the second quarter , you see parts of the country that were shut down coming back online. We don't see sequential improvement into the back half of the year on the decline rate. Can you talk about what's gotten better and maybe what's softened a little bit? Then the degree to which it's just there's low visibility in Q4.
Yeah. I think your last comment hit on it the most, Joe, which is that lack of visibility in Q4. When we think about our GAAP on the year-over-year perspective, we think it's going to improve slightly, and that's with that 15% versus 16% rent revenue decline in Q2. We don't think that that's going to compress right now. If that pipeline of demand starts to increase, if pent-up demand for some work to get done or people get through better in Q3 than we expected, then we'll accelerate that. When we think about the places that we just really don't see changing for the better in the back half, it would be first and foremost upstream. We're not counting on upstream, and I don't even think the folks in that space are counting on improvement there.
When we think about the one big variable that we didn't expect in a normal recession that we are seeing in this pandemic, it is the petrochem. Specifically, the downstream business, where just nobody needs their product. If people start traveling again, that would be a pickup. That's probably more of a 2021 event than a Q4 event. These are the reasons why we think. And then non-res will be choppy. We think that this steady—I don't want to anchor too much on the midpoint, but this steady 15% down year-over-year would imply a standard seasonal build -off of the hole that was already created. That's the way we're thinking about it.
Got it. On the replacement CapEx front, pre-COVID you were talking about roughly $1.9 billion, and you're shrinking the fleet this year, so that goes down a little bit. The question is the cushion to continue aging the fleet if you find yourself in sort of a protracted slow demand kind of environment? Can you talk about where you are on fleet age, where you're comfortable going, and how much cushion that gives you to continue buying at this kind of pace versus navigating back to replacement?
Joe, I'll start on that one. Based on what we're seeing kind of going out to the end of the year, we'll likely age the fleet somewhere between five and six months. We've talked a lot with you guys and with investors about having at least a year of headroom in our category classes to be able to age out the fleet in down cycles like this one and not have any real discernible impact on increased R&M or have any urgent need to replace them. As we even think forward into 2021, there still is some opportunity and some headwinds. If we needed to age the fleet out a little bit more, we could without any real impact.
That's great.
Not that we're trying to speak that into our future in any way, Joe.
Yeah. No, not at all.
No. Appreciate it. Thank you.
Thank you.
Thank you. Our next question comes from the line of Mig Dobre from Baird. Your question, please.
Yes, thank you for taking my question. Good morning, Matt and Jessica.
Good morning.
Yes. I guess I'm going back to the Q1 call, and I think at the time you provided some good insight on April. My recollection is that you called out fleet on rent being down 15%, and obviously you told us that the improvement here was pretty significant. You're up 14% from that level. I'm trying to juxtapose that against the 4% decline in the fleet in the quarter. What I'm getting at here, what I'm trying to understand , is as you're getting to the third quarter here, where are you on a year-over-year basis in terms of fleet on rent? What is the implication here for the fleet productivity metric?
We don't give that fleet on rent number, but you see where we're guiding to, and we talked about the 15% that we were down in Q1. What you're seeing is just a normal seasonal build off of that. Even though we're sequential and did so through Q1, sequentially we saw improvement; you have to think about how fleet productivity is measuring that year-over-year gap. We don't talk about the individual components, but we certainly shared color ; coming into the year, we thought our biggest opportunity was absorption. You can imagine that was exacerbated by COVID. As we continue to manage the denominator of that calculation, we're expecting to see sequential improvement, but we're not expecting to see positive fleet productivity , unfortunately, until we get past these comps, probably in the Q2 to second half of 2021.
We'll continue to, depending on what kind of demand environment we're in, manage that inflow. We'll manage the denominator as well as the numerator depending on what demand says. That's the way we're looking at it, and that's how we're going to focus on driving higher fleet productivity.
I appreciate that. Thank you. I guess my follow-up, maybe trying to get a little bit of color from your perspective in terms of how this downturn compares to some of the prior ones that you've seen. Obviously, your cost flexibility has been evident, but I'm more thinking from the standpoint of competitive dynamics in the industry, the way you're seeing customers react, and frankly, maybe some opportunities that you see for the industry coming out of COVID-19. Thank you.
Sure. This was certainly in the handful of downturns I've seen now in my 30th year in this business; this was unique. I don't think anybody that didn't live through the Spanish flu did, right? This is a very unique creation of this dislocation, and it made us move really fast. It made our customers move really fast. It went from almost panic, when you really think about it out there, to now people starting to feel a little bit better but still very cautious. That's how people are managing their business as well. When you see that flow-through that we had in Q2, it was part of those things immediately shutting down. That gave us a bit of a cost advantage, and I think you saw that in a lot of businesses. Now people are starting to think about what the future brings.
Some of the things that we're learning in a post-COVID-19 environment are what end markets are going to do better. Believe it or not, it's hard to see within our numbers, but even within our current fleet productivity, we actually have some asset categories that are up year-over-year. It's hard to imagine, but that's about shifting to where the opportunities are, and that's always what our business model's been about. That flexibility and fungibility of our assets so that we can move them to where we need to move them to. That's the way we're moving. I'm sure many customers are doing the same. Customers are going to need to find different ways to drive revenue, different ways to create value for their clients, and we'll continue to do that. We also think technology and safety are both important already.
I think they're going to be more top of mind in our space and for our customers, and we think that's inherent to the large players that have the scale to invest in some of these, and we'll continue to use that as a future post-COVID-19 opportunity as well.
Just to clarify, are you seeing better industry discipline around both fleet and OEM pricing?
Yeah, I think you'll hear it, right? Many of the OEMs reported this week as well. I think you'll see, and you already have seen, what they need to do to react to our rental industry's very positive reaction of shutting off the CapEx spigot. Obviously you're seeing it not just play through in those that report, but you're seeing it play through in the OEM's production or lack thereof. We think that's the right way to manage through this, and I'm very pleased with the data that we see. The industry remains disciplined.
Thank you. Good luck.
Thanks.
Thank you.
Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question, please.
Hey, good morning, everybody.
Hey, Rob.
Your downside volatility to earnings has been less than some of the rest of the group. I think that probably speaks more to natural variability in the cost structure than it does to any strong one-off actions you took. Could you just kind of outline whether it's re-rent or outside haul or what kind of improvements allowed costs to flex down so abruptly? I don't think you did a bunch of big salary cuts or layoffs or closures. I suppose some of those things are still in reserve if the economy does get a whole lot worse. Can you just sort of talk about that variability cost structure? Thanks.
Sure. Hey, Rob. It's Jess. Yeah, obviously, the team did a great job in managing through the second quarter. Some of the costs that we've called out have been a focus on reducing overtime, right? Really focusing on the capacity that we have in-house by insourcing delivery and repair and maintenance that, in part, had been outsourced to third parties, right? Bringing that in, using our capacity, and saving what's premium cost, right, in using those third-party services. We've also, as Matt mentioned, the beginning of the second quarter, especially as we were all adjusting to restrictions in place; we very quickly shut down our discretionary costs, right? You saw that in the SGA year-over-year benefit that we called out this quarter, which was T&E, of course, right? That's an easy one to kind of think through as folks stopped traveling immediately.
Also, discretionary costs that we were able to cancel or delay as a result of trying to keep only business-critical needs in the cost structure.
Okay. Thank you. I wonder sometimes if you ever quantify some of the outside haul and some of the other things. It'd be a little bit interesting to see how big an impact each was, but I guess there are competitive issues. Just you have a lot of cash flow going through the company right now as you reduce the fleet and so forth. Can you just give us the guide points on when you might do what you intend to do with that as the year progresses, if nothing really dramatically bad happens in the economy? You'll have a lot of cash to do something with. What drives those decisions there? Thank you. I'll stop.
Sure. No, great question. Thank you. Yeah, our focus right now is to use that free cash flow to pay down debt, right? We're not out of the woods yet as far as the COVID impact, and liquidity is going to continue to be a major focus for us. We'll use that excess free cash flow to pay down debt. What happened just kind of in the normal course, right? As we do our 2021 plan and we look at the kind of cash that we expect to generate next year as well, we'll have that conversation with our board and make a decision as to whether or not we want to use some of the excess cash to finish the share repurchase program, for example. Right now, it's steady on continuing to reduce the leverage and pay off the debt.
Thanks, Jess.
Sure. Thanks, Rob.
Thanks, Rob.
Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please.
Hi. Good morning, everybody.
Morning.
Hey, Seth.
Hey, Jess. I just wanted to follow up on Rob's question. I know you guys always discourage kind of using the midpoint anchors for the guidance for the decrementals, but just kind of going back to the cost discussion. Your second -half decremental guidance does suggest the decrementals are worse than, or higher than, what they were in the second quarter. Can we just kind of walk through a little bit more detail, like what's coming back on? I know there's variable commissions and things like that, but is there anything else that we should be thinking about there? Thanks.
Yeah. Thanks, Seth. Yeah, I think the first thing that I would do before I get into some detail is be cautious on the midpoint, right?
Yeah.
We're really thinking about this guidance as a range of possibilities. Probably easiest for me to frame that in terms of flow-through for the back half, right? Where we land is really going to depend on how the revenue steps up, first and foremost, right? If you think about it from a cost perspective, as I mentioned in my prepared remarks, there may be some variable costs that come back into the business. They'll flex with the volume, right? If you even just think of the seasonal trend as we work out to the October peak, you may have some; we may see some additional delivery costs, right? Repositioning, even overtime, right? Where we normally will use overtime to flex for labor needs instead of bringing in full-time help.
We could see some of that come back in depending on how the volume trends. Discretionary costs, we're going to continue to keep a tight handle on. We could see a situation where if things do start to open up, we do start to have folks spending some T&E, meeting with customers, right? Some of those costs could come back into the business as well, at a rate a little higher than the way we were able to pull back on them in the second quarter.
Okay. Structurally, is like a 60% number the right way to think about decrementals, do you think, just in general for United?
Yeah. I'm skittish to give a number because, again, for us, it's extremely fluid based on the way that the third quarter, and really the fourth quarter, right, where we have a little less visibility, plays out. I'll let you do the math on what you think is the right number. How's that?
Okay. Just really quickly, the specialty business continues to perform really well. Could you just talk about cold starts there and how you're thinking about allocating capital to the specialty business? Thanks.
Sure, Seth. You're right; we continue to be very pleased, and even with the lower revenue, specialty did a good job of driving even increased margins based on some of the insourcing, getting rid of third-party services, and really a good team effort across the board. We'll continue to invest in those. We've done about 10 cold starts year to date, and we plan on doing another five in the back half of the year. We're still leaning into specialty. We'll continue to put capital in there, and our power segment, for example, is one of the regions that actually is up year-over-year. There are opportunities during COVID that we'll continue to fund.
Super. Okay. Thank you very much, guys. Stay safe.
Thanks, Seth.
You bet. You, too.
Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please.
Thanks. Good morning. Just to follow up on the cost question. It sounds like for the most part, the efforts have really been focused on the third-party services and overtime, and you're just saying that some of the variable costs might come back in. Let's say you wanted to look for the next area of cost to actually take out if things were to be a little bit softer on the demand side. What are those next areas of cost that you would look to tackle? I think, Matt, you said in your prepared remarks that there haven't been any COVID layoffs yet. Is that where we would go? Would you start looking at actual kinds of whole branch closures? How would you think about the hierarchy of where we go in the cost structure to take the next round out?
Sure, Steven. This is something that we've thought about a lot and are very intentional about how we've responded so far. Let me just talk about it; forget about the numerical values. I think we've covered that. Strategically, coming out of 2009 and having experienced that downturn and what we did and had to do and what I would want to do differently or what we'd want to do differently. We built a strategy to make sure we didn't have to do a couple of things. Number 1, we didn't want to unnecessarily take out or damage our capacity to get ready when we got through the other side. We've structurally worked towards that during this pandemic, which is why we're very pleased that we used insourcing to keep our labor force busy as opposed to layoffs.
That was very intentional, and you can see from the flow through that it worked. When we think about store closures, we intentionally did not want to go there. If we went into a full recession, a 2009 type recession, which I don't think anybody's predicting right now, but if it happens, we have that playbook. We know what to do. There are a couple of things that we are going to limit. We're not going to fire -sale equipment. We don't need to. We have great liquidity and a strong balance sheet with maturities out to what, Jess? 2025?
2025, yeah.
Right. We don't have that anvil hanging over us. We don't need to fire sale equipment, and we don't need to make rash decisions to make sure we make payroll. We don't have liquidity issues. This balance sheet allows us to react a little bit differently. We'll still protect margin. I think we just proved that, but we're not going to damage the business long term. There is more flexibility to make sure we remain resilient and we'll utilize it.
Okay. That's helpful. Maybe on the flip side of that, I'm just curious how you think about potentially going on offense. As an industry leader, when you go through a downturn, you might expect that you should be able to gain some share. When do you think is the right time to start being more active in trying to gain some share, and where would you look to do it, and then how would you go about it?
That's something that we talk about actively, right? That balance sheet can be used defensively, and it can be used offensively, and we want to make sure we've used it defensively and appropriately so, and we are turning our minds to offense. When we think about where these other opportunities are, some could ask, Well, why are you guys spending another, at the midpoint, about $500 million of CapEx? Because there are offensive opportunities. There are products and end markets and verticals that we're still going to support, and that's the way we're looking at it. As more post-COVID opportunities arise, we will use that balance sheet. We'll use our scale and our leverage to make sure that we can play some offense.
If I can just add one thing. The flexibility that we have is also something that we'll lean into as opportunity presents itself and we can lean into a recovery and into the market, right? We'll be ready to spend when we need to based on being able to flex that model up as necessary.
Great. Thank you.
Thanks, Steve.
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please.
Yes, hi. Good morning, everyone. You folks have been on a continual journey to improve the logistics, and we're seeing some of that with insourcing here. I'm wondering, based on your experience going through this environment, is there an opportunity to, on the other side of it, have higher fleet availability? Could this be an opportunity through touchless pickups and having a standard process in place? Can we come out of this with higher fleet availability across your business?
Thanks, Jerry, for the question. Absolutely. I had a note from a customer early on during COVID-19 when we created this touchless system ; they sent a very nice note thanking us and said they had the best rental experience ever. They pulled their truck up. Everything was done digitally about ordering the equipment and confirmations. When they pulled up, we hooked a trailer up and had a skid steer behind it, and he went on his way. He said it was the fastest, most painless transaction he's ever had in the rental business. There you go. Necessity is the mother of invention once again. We'll continue to take those learnings. When we think about our labor headcount models, one of the ways that we did retain our labor, as we talked about earlier, was insourcing.
When we get to the flex upside in a more stable environment, not necessarily the back half of this year, I don't think adding heads right now makes sense. Maybe having more heads and eliminating some of the more expensive variable costs we have, like overtime and outsourcing logistics when we meet capacity, are some of the things that we'll be investigating to make sure that we can continue to drive efficiency in our model.
From an end market standpoint, a lot of folks, us included, are concerned about non-res entering next year for good reason. On the flip side, a lot of your industrial markets are really in the early stages of recovery. Can you just talk about your fleet on rent for some of your industrial verticals? I know you're not going to want to provide a ton of specificity, but just a broad range of color on where we are in the restart and fleet on rent for those deployments would be helpful.
I won't give you the fleet on rent stats; I will share them with you, and as I did in my prepared remarks, the petrochem industry is really challenged. That market for us is down 35%. That's a big portion of what we've had to endure in post-COVID. You could look at both sides of that. You could look at it as the world opens back up; that's one of the opportunities to get back to normal -type volume. We think that's an opportunity for us. Industrially overall, if you take that out, if you take out petrochem, industrial looks a little more like construction overall, right? Not really a big deal.
When you look at data centers, power as a segment, and infrastructure, there are opportunities that we can lean into, whether we add additional products to the mix, which we've been doing, or whether we just enhance some of the offerings that we already have to make sure we're being a one-stop-shop solution for all these end markets. That's really how we're looking going forward. And I think the industrial markets will recover at the same pace and maybe even a little faster because of the petrochem drop once we get on the other side of COVID.
Okay. Matt, in your prepared remarks, you said you're monitoring the coronavirus from here, but you haven't seen any impact so far. Is it fair to say that the fleet on rent momentum has continued into July by those comments? There are concerns by one of your suppliers brought up today that there was some slowdown in parts of the country in July in getting fleets back on rent because of COVID. Can you just comment on that, please?
Yeah. We are seeing the seasonal build, but what I referred to specifically is because we went and looked; we're saying, Wow, look at these spikes in these states that we all see all over the news. We went and looked at those states, at our volume, and some of them are big states for us, and we're not seeing it. The data's not showing a correlation to our fleet on rent, our revenues, or our activity in those states that would match a negative correlation to the infection rates. That's really what we meant. We'll keep an eye on it. If that pivots, as always, we'll let everybody know. We actually haven't seen that. I think that's the commitment a lot of these communities have: that they got to keep running, right? The world's got to keep on.
We'll continue to see the seasonal build. That's what our guidance implies.
That's a comment through July, just for clarification?
Yes, sir.
Okay. Thank you.
Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question, please.
Hey, good morning, guys.
Hey, Ross.
I just had a question on specialties. You had strong margin performance, an 80 basis point increase. Your revenue's down 11%. Always hard to know if this is all apples to apples. It just feels like some of your competitors are posting stronger growth in what they label as their specialty rental businesses. I'm just wondering, are you seeing increased competition in any of those specialty markets, particularly in areas like climate control and parts of power gen, which have been very hot markets as the core general rental markets are depressed?
Yeah, no, we aren't seeing any competitive change in the landscape. You hit on the right one. Power has been growing for us, and I'm sure others have been growing. It's part of an emergency response. When you think about all the temporary things, whether it's shelters, businesses, or people putting tents out in their parking lot so that they can feed people outdoors, right? There's so much opportunity for power to grow. We've been seeing that growth as well. I don't think we're losing share there in any way, shape, or form. We're pleased with what we're doing there. As far as the specialty of some of our competitors, different companies categorize it differently. For us, how we look at our specialty business is products that have more of a unique, fully embedded, engineered solution, so to speak, right? It's not just dropping off a generator.
It's cabling; it's putting in step-down transformers. It's making sure we're creating a solution. That's how we look at our specialty, and I won't comment on others. It's just that I understand there are some products that are in other specialties that are not in ours. We're not seeing any change in the competitive dynamic there.
Matt, can you just talk a little bit more about why your revenue's down 11%, then? I suspect some of it's in the fluid solutions business. I'd be curious.
Yes
What kind of growth are you seeing ex -fluid solutions? Was trench up this quarter, or did it behave more like a general rent -type business, at least in terms of demand trajectory? Thanks.
Sure thing. We don't usually get down to breaking all those segments down. You're hitting on the head here, right? Think about pumps and tanks and how much in the petrochem space we're penetrated with those products , even with the BakerCorp acquisition, right? They're certainly faring worse, more in line with how our gen rent areas are faring in those marketplaces. That would be a drag on the overall specialty growth. Trench is slightly better than the average, not a positive. We're calling out power because power is unique. I don't think people would think that any business unit would be positive. Power, our Reliable Onsite business, although small, is seeing positives as well.
I think you hit the nail on the head ; fluid certainly is having challenges as we're going through COVID here, and that's a big part of what's driving the negative growth.
Got it. Okay. Thank you.
Thanks, Ross.
Thank you. Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question, please.
Hi. Good morning, guys.
Hey, good morning.
Just curious, you guys have, kind of during the upturn, talked a lot about the outsourcing that you did, and that was kind of pressuring margins. Can you just quantify maybe how much of your repair and maintenance was outsourced and kind of help us understand how much the opportunity is, and at what point would you have to start outsourcing again as sales do recover? Then, maybe just the same quantification on the overtime. How much overtime had you added over the past couple of years, and when would we expect to see that increase?
I don't have the numbers handy for the past couple of years. When you think about when Jess was speaking earlier about what's implied in the flow through of the midpoint of our second -half guidance, you'll see some of the cost. You'll see the magnitude of some of what'll start creeping in with it, whether it's overtime, which we're leaning more towards overtime. We want to keep our people busy first, and that's been a big part of our COVID response. Then maybe some logistics and a third party. As far as third -party repairs, we're not expecting a lot of that. Some of that was for stuff that was really beat up out in the oil fields last year, stuff that needed major repairs, and we were already utilizing our capacity, so we outsourced it. That is always an opportunity, an area to flex.
I think one of the post-COVID learnings, as I talked about earlier, is maybe we will insource more going forward in a more stable environment. So I don't have the numbers for you on what that historical trend is. It's certainly an opportunity for us going forward.
Okay, gotcha. I think last quarter you had talked about $1.5 billion in OEC on rent that had come offline. It sounds like there's been a seasonal build of about $1 billion, so about $500 million is still kind of that hole you were talking about. You've also been kind of characterizing it as a very typical seasonal build that's been happening off of that hole. Can you just help us understand, is that hole all petrochem and the retail and hospitality and special events and those projects just never come back online? Is it just this seasonal build that you are seeing those projects come back online, and it's typical but just off a lower base?
Just trying to understand if there have been projects that have just kind of been permanently delayed that you just aren't seeing come back, pairing that with the comments about the seasonal build.
Yeah, you hit on the main point at the end of your statement there about the lower base, right? It's really just off a lower base. Unlike what we've talked about for the past few years, we are seeing project delays and cancellations, but more delays than cancellations. For us right now with the lack of visibility, we're just counting on the delays as they're not there until they come back. It's very spotty. Just think about the major airports. Last year we were traveling around; back when we were traveling, you saw work at just about every major airport that you flew into. Well, about half of those are continuing on; half are, quote-unquote, "paused or delayed." When those and what would create those coming back is something that will be part of the recovery, but we don't have the visibility for that right now.
It's really not even by geography. Right here in the New York metropolitan area, you have LaGuardia that's going full steam ahead. You have JFK that's slowed down and delayed many phases of that project. We see this as a future opportunity, but the difference between now and what we've talked about for the past 12 quarters is we are seeing project delays, and we do believe we'll continue to have a seasonal build -off this lower base. Those would all have to come back online for us to raise that base and to start to fill that gap.
Okay, thank you.
Thank you.
Thanks, Courtney.
Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question, please.
Hey, everyone. To dig a little deeper on delays versus cancellation, are the delays happening more on the side of projects that are going to go slower going forward? Or is it projects that you expected to start are now being pushed out? On the cancellations, even though you're not seeing many of them, is there a trend in what types of projects are being canceled?
Yeah. As far as the cancellations, and just to clarify, there are not as many cancellations as there are delays. In our minds, with the uncertainty going on right now, we're going to treat them fairly similarly, because a cancellation could be brought back up as well. Just think about the industries that have been most challenged through COVID. Certainly anything petrochem -related has been shelved, delayed, or whatever term you want to use. Travel. It's two different thoughts. There are some airports that are saying, "We don't have a lot of activity right now. Let's lean in." There are others that are delaying. I would imagine it has to do with their funding and their confidence going forward on how much volume they'll do in those locations.
When you think about entertainment, stadiums, and those types of jobs, as you can imagine, there's a little bit of uncertainty of what the future's going to look like. Some of those are being shelved. Certainly anything in hospitality. Travel and hospitality—we're seeing a lot of it. Just think about the industries that are more uncertain than others. You're seeing other things, even power builds I talked about earlier. Power segment's growing for us, whether it's standard power or alternative power. When you think about data centers, those are growing. That's a growing opportunity. For those of you that live here in the Northeast, as I travel around the Northeast here by car, I'm seeing roadwork everywhere. We expect infrastructure to continue to gain momentum. It's one of the values of less traffic: people can get this work done more efficiently.
Those are some of the puts and takes that we're seeing and that really inform how we view the balance of this year.
Great. I would just be curious to hear your perspective on how a secular shift to rental generally accelerates during challenged markets. Does the secular shift that potentially comes from this current downturn look different? Does it look better with your greater specialty equipment asset base? Thanks.
Absolutely. I think really for the industry, a broad-based offering of which we're leading and penetration overall, during all the downturns in my career, people that had to turn to rental when they previously weren't looking at it as their number one priority and channel very rarely, almost never, go away. Once they get to it, they realize they can rely on us, that the product will be there, and they'll have the right equipment at the right time. We do expect secular penetration on the other side of this, and I think it'll be broader, to your point, because we have a broader offering. I think it'll be across the board, especially new products in general rent that people weren't renting before. I think it'll be a good thing for the industry overall.
Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Flannery for any further remarks.
Thanks, operator. Just appreciate the conversation today. This is certainly turning out to be an interesting year, to say the least. As always, we'll keep you updated as things evolve. In the meantime, our Q2 investor deck is available online, and as always, Ted's available to answer your questions. With that, please, everyone, stay safe, and, operator, you can now end the call.
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.