Earnings Call: Q3 2019

Oct 17, 2019

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, 2018, 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 presentations 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 us. I will start by commenting on the quarter and the state of the operating environment, and then Jess will cover the financial results, and after that, we will take your questions. As you saw in our release, we reported a solid third quarter, but not a perfect one. We are pleased that we delivered substantial growth while wrapping up the integrations. That is an important achievement because it speaks to the long-term potential of leveraging our larger platform. Yesterday, we reported the best revenue numbers of any quarter in our history, $2.5 billion of total revenue and $2.2 billion of rental revenue. To put that into perspective, our total revenue was up more than 5% pro forma. That took a lot of focus on the part of our field organization. Their efforts drove an improvement in our fleet productivity metric, both sequentially and year-over-year. Jess will talk more about that in a minute. Here is what we could have done better. Our adjusted EBITDA was a record $1.2 billion, and that is good, but not as good as we expected, and it created some pressure on margin and flow-through. Part of that relates to a more moderate build with the OEC on rent due to a slower growth in some of our industrial end markets. This, coupled with the acquisitions, resulted in some excess fleet, and we have been working through that, and when it makes sense, we service these assets and relocate them to markets of higher demand. This increases R&M and delivery costs in the near term, but it drives capital-efficient growth over time. We also sold some older assets with high operating hours, and this includes some equipment from the oil patch where upstream declined. Sales like this are generally dilutive to our used equipment margin. The parts of the quarter that weren't perfect are largely tied to positioning, and that will continue to play out to a lesser degree in the fourth quarter. We will absorb the near-term impacts because the benefits will last well beyond that, and we are confident that we are making the right long-term decisions for the business. Our job now is to take this powerful engine that we have built and extract increasing value from it over time. As we discussed in July, in the first half of the year, we were focused internally on the structural phase of the BlueLine integration, as well as some smaller deals. Now we have pivoted to an external focus. Our sales territories are finalized. We have added more sales talent in the field to expand our coverage, and we have enhanced our outreach program to reactivate dormant customers. We have also been making significant investments in our fleet mix, including continued investment in our Specialty Solutions. Having the right fleet in the right markets delivers on two fronts. It helps us solve more challenges for our customers, and it is also key to our strategy for improving return on capital. Now moving on to the operating environment. The construction landscape has remained strong across the board. Our customer survey suggests this trend should remain intact. All three construction sectors are showing good growth: non-residential, infrastructure, and residential. In fact, the rental revenue from non-res, our core market, was up almost 9% pro forma in the quarter. Our focus on infrastructure continues to pay dividends, as it now accounts for a double-digit percentage of our total rental revenue. This positive environment was partially offset by headwinds in some of the industrial verticals, as I mentioned earlier. The further deceleration in upstream oil and gas is reflected by the rig count data. By contrast, downstream grew in high single digits, and there were some other puts and takes in the industrial verticals. In general, industrial was more of a mixed bag than it was in the first half of the year. For the first time in a while, construction and industrial activity appear to be on somewhat different paths. We have taken this into account in making the updates to our 2019 guidance. Our new ranges assume a more modest rate of growth in the near-term impacts on flow-through that I mentioned earlier, as well as our expectation for higher free cash flow. Jess will address these in more detail. Now, looking at it geographically, the majority of our regions were up in the quarter. Only a few were down, and those were small single-digit declines. Our specialty segment continues to deliver strong growth. Trench, Power and Fluid Solutions combined generated a 21% increase in rental revenue as reported compared to a year ago. Organic revenue accounted for about half of that gain. A shout-out to our European team, Fluid Solutions. They delivered 17% pro forma growth in the quarter in local currency. In North America, we opened another 8 Specialty cold starts in the last 3 months, bringing that network total to 361 locations against our target of 363 by year-end. Before I wrap it up, I want to give you a safety update, and it's a really good one. Heading into September, we challenged the team with an aggressive target for a recordable rate well below 1, and our team responded with an incredible performance. They did better than target, resulting in 12 of our regions and 99% of our branches reporting zero injuries. September was the safest month for United Rentals in our 22-year history. I'm personally inspired by the way our 19,000 employees have come together as one and embraced our safety culture. Now, for one final comment before I turn the call over to Jess. I want to reiterate our confidence in our positioning going into 2020. We appreciate that economic and political uncertainty is a concern for a lot of people. While we don't have a crystal ball, we do have a lot of experience in planning for different end market scenarios. We can shift gears quickly when we need to. Most important, we remain strongly committed to our strategy of driving profitable growth and to the capital discipline, cost management, and execution required to do that. These are the attributes that drive returns in every area of our business under all types of operating conditions. 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. As with past quarters, I'll walk you through our as-reported results, but I'll pivot at times to speak to our performance on a pro forma basis. That includes BlueLine and also includes a month of Baker as we lapped the acquisition on July 31st. Let's get into the Q3 results. Rental revenue on an as-reported basis grew 15%, or $286 million, to $2.147 billion. That's a record for us. The increase is primarily related to the impact of both BlueLine and Baker, but on a pro forma basis, rental revenue was up a solid 4.2% for the quarter. Within rental revenue, as reported, OER growth contributed approximately $242 million of the increase. Ancillary added $44 million, and re-rent was flat. Here's the breakdown of that $242 million or 15% OER growth. We had growth in our fleet of 18%, and that's about $287 million of additional revenue. Fleet inflation cost us the usual 1.5%, or $24 million, and fleet productivity on an as-reported basis was down 1.3%, or $21 million. Now, a more helpful way to consider fleet productivity is on a pro forma basis, which was up 1.7%. Within that number, rental rates and mix were positive for the quarter, partially offset by lower time utilization. That's rental revenue. Let's move on to used sales. Used sales revenue was up 41%, or $58 million year-over-year. The used sales environment continues to be healthy, and we sold $132 million more fleet at OEC than last year. This included a significant increase in sales through our retail channel, which made up 60% of our overall sales. The pricing on those retail sales was down slightly, around 1.5%. Adjusted gross margin on used sales was 46%, down from 50%. That decline is due mainly to the mix of equipment sold and channel mix, which included some auction sales of some tired fleet from the oil patch. Taking a look at EBITDA, adjusted EBITDA for the quarter was $1.207 billion, another record for us, and an increase of $148 million or 14% versus prior year. Here's the bridge on the as-reported changes. The improvement in OER added approximately $140 million. Ancillary and re-rent together contributed $4 million. Used sales added $21 million to adjusted EBITDA. SG&A expenses were a headwind of $24 million, mostly due to adding the BlueLine and Baker cost bases. That leaves $7 million of adjusted EBITDA benefit in the quarter, which is primarily coming from better performance in our other lines of business. Our adjusted EBITDA margin was 48.5%, which is down 150 basis points year-over-year, due mainly to the impact of bringing in BlueLine and Baker. On a pro forma basis, our adjusted EBITDA margin declined 40 basis points. That is in part coming from a shift in revenue mix with higher used sales in the quarter. It's also due to higher operating costs, primarily in repair, maintenance, and delivery. These costs were associated with getting excess fleet rent-ready and into higher growth end markets. As reported, adjusted EBITDA flow-through was approximately 40%. Now, if I reconcile flow-through similar to what we've shared in the past, which is to adjust for the impact of our acquisitions, including synergies, as well as the impact of new and used sales, adjusted EBITDA flow-through is still about 40%. The biggest drag on that adjusted flow-through this quarter comes from the higher operating costs I mentioned. However, that calculation is very sensitive, so I'll add that the gap this quarter from 40% to a flow-through of close to 60% is around $12 million, which on its own is the cost associated with the investment we've made in repairing and repositioning the fleet this quarter. As for adjusted EPS, a robust $5.96 in the quarter compared with $4.74 in Q3 of 2018. That's an increase of 26%, primarily from better operating performance across the business, and includes the impact of our acquisitions. Adjusted EPS was also helped this quarter from lower shares outstanding. Let's move to CapEx and free cash flow. Year-to-date, we've brought in $1.97 billion in gross CapEx, with $845 million of that having come in during Q3. We're on pace to purchase between $2.05 billion and $2.15 billion of CapEx for the year. Now we've adjusted our view of net rental CapEx down for the year by $50 million, as we anticipate selling more used equipment than originally expected. That will refresh more of our fleet in a strong used market and position us well going into 2020. Free cash flow, very strong, as we generated $1.1 billion through the end of September. We are on track to deliver our full-year expectation, which we increased in our guidance update. Our tax-adjusted ROIC remains strong, coming in at 10.6% for the third quarter. Now that continues to meaningfully exceed our weighted average cost of capital. Year-over-year, tax-adjusted ROIC was down 40 basis points, primarily as a result of the expected drag from our acquisitions, and we believe that impact will moderate over time. Taking a look at the balance sheet. Net debt at September 30 was $11.7 billion, which is up $1.6 billion from last year. The biggest driver there was the financing of the BlueLine deal, offset in part by our reducing debt through the year. Our total liquidity at September 30 was a very strong $2.16 billion. That is comprised mainly of ABL capacity. Leverage at the end of the quarter was 2.7 times net debt to adjusted EBITDA. That is down 10 basis points versus where we were at the end of the second quarter. As we have updated our forecast for the remainder of the year, we expect to finish 2019 at 2.6 times, which is a 50 basis point decline from the end of last year. Here is a quick update on our share repurchase program. We purchased $210 million of stock in the third quarter on our current $1.25 billion program, which puts us at $1.05 billion purchased to date. We still expect to complete this program by year-end. I will also note that our total share count at the end of the third quarter was down about 7% year-over-year. I will wrap up with a few comments on guidance. Our update was impacted primarily by our third quarter results and trends, some of which we expect will continue through the end of the year. First, we still expect to deliver mid-single digit growth in total revenue, but the revenue mix has shifted between slightly lower rental revenue and slightly higher used sales. That shift in revenue mix is reflected in our total revenue range and its impact on adjusted EBITDA. Second, cost management remains a focus for us. We are balancing that with the need to repair and reposition excess fleet, putting that fleet into strong end markets, which we believe is the right choice for the business. As a result, some of those higher repair, maintenance, and delivery costs will play out through the fourth quarter. That change is reflected in our updated adjusted EBITDA range as well. Third, as I mentioned earlier, we expect to generate better free cash flow than originally expected. So we brought up the bottom of the free cash flow range such that we expect to generate between $1.45 billion and $1.55 billion in free cash flow this year. That compares to a little over $1.3 billion last year. With that, let us move on to your questions. Operator, would you open the line, please? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered and you wish 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. Good morning, Dave. Given the way the rest of the year guidance played out, where mix obviously is fairly significant as well as some of the cost obviously to repair and maintain and move some of the equipment out of the softer industrial markets. Can you help us a bit with trying to think about 2020 margin sensitivity to mix? Can you give us a little education on exactly how we should think about if the industrial markets start the year a little bit weaker, but construction a bit better? How to think about some of the geographic issues of equipment, let's say equipment's coming out of Texas, but going to the Southeast. Can you just give us a little lay of the land of how to think about the sensitivity to mix going into next year? Sure, Dave. This is Matt. First off, I think one of our opportunities, especially if we know it ahead of time, right? If we feel comfortable that the work we're going to do throughout this quarter and our planning process for 2020 and the field validation, customer information that we go on, it gives us a better view. The sooner we can reposition stuff appropriate to where the opportunities are, the better the outcome is going to be. There will be some nuance, not just between oil and gas and other markets. Some nuance as to markets that bring higher returns than other or a different mix than other. But I think in the balance of a full year planning area, the most important part is getting the fleet in the right area so we can maximize the usage of that fleet and therefore our fleet efficiency. That is how we view it, acknowledging there can be some moves. All that work will be done in detail from the ground up and then reviewed top-down to get us ready for 2020 guidance in January. Would you say the fleet movement that occurred in the third quarter is the bulk of the moves you expect to make through the end of the year? I mean, just trying to get a read on how you view some of the industrial markets in 2020 by the actions you are taking in 2019. Is there still more to do, or do you feel you made I think all of the moves already? I think by really probably midway through this quarter, but certainly by the end of fourth quarter, that answer will be a yes. To be fair to the question, the downside of oil and gas accelerated faster than we thought in Q3. It's only 4% of our business now. Rig counts are down as we sit here today, 17%, and our revenue's down 20%. Does that get worse? I don't know how far you can fall from this low level, but that would be the only wild card. To be fair, that is what created our challenge here in the back half on movement and extra investment we need to make to pull that fleet out, because it is a unique market. Other than that, our movements are usually just part of our regular business because we have those very fungible assets and such a broad network. Short answer, yes, understanding that oil and gas part could be the only variable, and I don't pretend to know where oil and gas is going, but it's got to be close to the bottom. Lastly, the fleet productivity, be it pro forma or year-over-year, however you want to think about it, report it. Can you help us a bit with just some sense of movement from the third quarter to fourth quarter, what we should generally expect as the fleet productivity improve on a year-over-year basis, pro forma reported, just if you can help us with some framing it. Yeah. As we've discussed before, as much as I'd love to be able to predict this, just like we would've loved to predict rate and time that precisely, those are the two biggest variables along with mix in these numbers. We're not trying to predict it. It's an output that we are utilizing to discuss what happened. Really not getting into, even for the fourth quarter, forget about 2020, the predictability of it or our ability to forecast it. We still peg a point and a half overall throughout a year is what we want to do and what we want to achieve because we want to achieve our inflation. That'll change in some years, and maybe our inflation will change in some years, depending on what the macro is. But we are really using it as a postmortem on how to explain how our revenue acted than a predictive metric, to be fair. That is what I asked. It is a long no, but just trying to give you color on why. Yeah. Not to push you to an exact number, but just the idea that the fleet will be bigger year-over-year in the fourth quarter than the implied revenue growth. Especially given used equipment sales will be up year-over-year in the fourth quarter. I am just trying to make sure we do not get off the phone thinking that fleet productivity year-over-year degrades, deteriorates from what we just saw, at least not materially, because it is sort of what is implied in the guide if we use the revenue midpoint. So I just wanted to give you the opportunity to address that. Yeah, I understand the viewpoint and the position there. As always, we'll do the obligatory, don't anchor on the midpoint, but to be fair, we create the midpoints for you. It really is a number that's going to move compared to where we end up within that pretty tight range that we gave you. And part of that range, you will be very pleased with it. If we end up in a different part of that range, maybe less pleased. But I would just say it is a way that we talk about the output and not to be predictive. I get your point, though. Thanks for that. Thank you for the time. I appreciate it. Thanks, David. Thank you. Our next question comes from the line of Rob Forsythe from Melius. Your question please. Hi. Thanks and good morning, everybody. Hi, Rob. Good morning. I just wanted to ask about outside of oil and gas. You guys have a really good insight into what's happening, sort of finger on the pulse of the construction and other economy, and it seems like it's pretty good still. I wonder if you could talk just a bit about how much visibility you have into next year, not your forecast, but just how far your customers you can see. You can see some starts, you can see some cancellations et cetera. Then just as a management team, how are you thinking about, philosophically, the market's obviously very worried about recession and different things, or as you're seeing strong trends. How do you sort of think about balancing those as you go into guidance, too? Yeah. Thanks, Rob. As we're into the planning process, and we'll be doing reviews here within the next 30 days in detail at the field level. A couple of data sets that we'll look at, in addition to everything that all of you have access to, our additional information, as we said before, is our customer confidence index, which remains strong. I referred to that in my prepared remarks. Yeah. Whereas we have still 60% of our customers surveyed believe 2020 will be better than 2019. Admittedly, that subset is more large customers. As we said before, strategically why we focus on large customers, as they're the ones that are going to do better in a slower growth environment. You could say if you want to jade that at all, but 97% of the customers say it'll be flat to better. Only 3% of the customers are looking at their business as 2020 being down. That's a good indicator for us. We then need to test that with our field representatives, whether it be the sales folks or the managers, and what they're seeing in their business, in a competitive landscape, in a volume landscape, in a jobs landscape. All that work will be done throughout Q4, and we'll inform what we guide to for 2020. The industrial part, the other part of it I'd say is, I think some of the headwinds we had to absorb internally in the first half of the year won't be there next year. I think we'll be better prepared to position fleet more accurately. We'll be more externally focused. I'm looking forward to that after the team did a lot of work internally in the first half of this year and is moving past that. That's helpful. You've outgrown the market for a number of years via acquisition and just your own investment. Obviously you're skewed towards the bigger customers that ought to outgrow the construction market. In a flatter market, you would continue to expect to continue that trend? It's always our goal to outperform the end market. That is always our goal. We've got a lot of resources. We've got a lot of breadth and depth, and we serve a lot of end markets. For this quarter, for example, if we were overly reliant on oil and gas or a flattish industrial sector, this would have been a different outcome for us. We wouldn't have had record revenue, record EBITDA. The fungibility of the assets and the diversification of that portfolio gives us a lot of confidence that we have the opportunity to outperform the end market, and that is our goal. Okay. Thank you very much. Thank you. Our next question comes from the line of Ross Gilardi from Bank of America Merrill Lynch. Your question, please. Hey, good morning, guys. Morning, Ross. Morning, Ross. You guys are acknowledging that the demand on the industrial side's a little slower. You sold off some excess fleet. I'm just curious to hear, why didn't you cut the gross CapEx guide again, and is it fair to say that you're more likely to trend towards the lower end of the gross CapEx guide as you finish out the year? No, Ross, I wouldn't say. Let me answer the first part of your question, which is why. We had the opportunity to take some older assets that were at the end of their rental useful life and sell them into a strong end market. When we think about some of the stats that Jess reported in her prepared remarks, think about that used sales market still throwing off high margin. We're still recovering $0.53 on the original OEC dollar. For fleet, that's over 86 months old, so over seven years old. We had the ability. After cutting CapEx in July, we had the decision to make, do we cut further if we've got, let's say, 100 million excess capacity, or do we take that opportunity to refresh the fleet? The other issue is we generated higher free cash flow. There was no reason for us to cut the gross versus the net, and we think that positions our fleet better. As we've always said, we want to keep that fleet age at the appropriate time, so when there is a downturn, we can age it, and that's part of our resiliency. We view that as part of continuing that part of that strategy. All right. Thanks, Matt. You went through a similar dynamic in the industrial recession a few years ago where you redeployed fleet out of the oil patch into some of these other markets, and you managed to pull it off. Can you give us a little more color as to where, in terms of geography or end markets, you are going to move that fleet, and what gives you confidence that you won't create an oversupply situation elsewhere in doing so? In the relative scale of our $15 billion of fleet, we're not going to move it. It's still a pretty small number. We're not going to move it to any end market that it's enough to overwhelm, right? I guess if we moved all of it to one market, technically that could be. We're not doing that. We're moving it to the markets where non-res is strong. To be fair, even close by, downstream's still strong. Just for clarity, we talked about industrial being choppy. They're not all down. Downstream is still a good part of our business. Upstream and midstream are negative, and the rest of them are just kind of a little bit up, a little bit down, leading to a flattish industrial overall end market. But those end markets that we have and the customers that we can serve outside of those verticals is where we're moving that fleet. It's not a single large enough number to any one of those verticals or geographies that's just going to create a supply glut, in our opinion. I'd say the other difference between, because I know a lot of people will tie this dialogue of oil and gas to back what happened between 2014 and 2015. Right? When oil and gas was at a peak then, it was a much bigger part of our business. But even for the industry overall, that knock-on impact of what happened with oil and gas in 2015, of the infrastructure built to help serve the area around it of additional hotels, retail. Right? Shopping centers, even schools, all that's built out already. That was not part of this oil and gas run the past couple of years. Therefore, you won't have the knock-on effect that you had back then. That's the way we're viewing this. We're viewing this as a temporary issue that we had to work through, but nowhere near the impact that we had back in 2015. Got it. Thanks. Then just lastly, how much momentum do you feel like you have in the tank for Specialty Solutions in the next year? It's got 20% of your business. Still growing 10% organically. Does it feel sustainable even if non-res does have a sort of a notch lower? What are the areas you are most excited about in the Specialty Solutions portfolio? Yeah, no, we absolutely feel good about it. That team continues to generate not only good returns but good growth. I think Fluid Solutions, right? Sometimes it gets lost in the conversation of the bigger integration. Fluid Solutions is a new go-to-market strategy where we had to integrate the Baker and the old pump team, so they have worked through that in the past 12 months. I think they have got great opportunity to get externally focused and run with the ball a little faster. So we like the prospects. Thanks a lot. Thank you, Ross. Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question, please. Thank you. Matt, you touched earlier on mix, and I wanted to see if you could give any sort of help in terms of, again, high level thoughts on rate for 2020, and specifically if the remaining couple of months here played out with whatever normal seasonal patterns would suggest. What would that imply in terms of the rate carryover for 2020? Yeah. Tim, wish I could help you. We're committed to not giving that level of detail. The way that we're going to talk about rate, time and mix in the future is exactly how we're talking about it this quarter. We're going to give it in arrears. We're going to give it all in year-over-year, and we're going to talk about it in fleet productivity, and we'll give you that numerical value. Then what we're going to do qualitatively is say, as we did this quarter, rate's a good guy. Mix has been a good guy, overcoming some headwinds that we've had in time utilization. As we look forward, the mix of those three will be impacted by the demand environment, certainly, right? All three of them, and our decisions on where we invest our capital and what our customers rent from us. That is how we look at it. I want to stay true to that. We want to stay true to that because we think isolating any one of them belies the interaction between the three of them in our business going forward. That is really why we made the change. Our business has changed. If this was back 2006, it was very simple. We knew our fleet mix did not change much, and it was a direct correlation. The interplay of the three is much more relevant for today, which is why we made the pivot. Okay. Old habits die hard, I guess. Maybe just the second one was, is coming back to, I think you said your non-res or just maybe it was construction in total up almost 9% in a backdrop where depending on what statistics you are using, there is not much by way of overall construction spending growth. Just curious in terms of this whole notion of outgrowth and the kind of the magnitude, basically what is contributing to that? It is a pretty big number, and I do not know if that is Is there any tangible share, or not share, but kind of penetration gains you think are contributing to that? Maybe just touch on that in terms of if we are in an environment where non-res spending is flat to maybe up a little bit next year, what sort of outgrowth could we potentially be looking at? Thank you. Sure. First of all, I think it is a little bit of share gain, right? When we think about the bigs getting bigger, which is something we have talked about, it is why the consolidation plays work. We think the opportunity of that density and diversity gives you the opportunity to over-index in places that are growing and therefore dampen the impact or mitigate the impact of places that are not. That is the overarching reason why we think we can swim upstream, so to speak, in different end markets. We continue to feel that way. I would say that every time we look in arrears at what some of these end market data says, maybe it is too self-serving to say we outperform because maybe sometimes they are just wrong. But at the end of the day, the macro data is a good framing for us to look at. That deep dive on what our customers are telling us their backlogs are and what our managers and sales teams are telling us of the work that they foresee needing to serve is our single largest barometer to how we build the plan. Not saying we are going to overperform by 30% what the end market forecasts say, because they are just not reliable enough to build a business plan around that. We are going to do all that hard work, as I said, throughout Q4, throughout our planning process, and that will inform where we guide for 2020. All right. Thanks a lot. Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Yes, hi. Good morning, everyone. Morning, Jerry. I'm wondering if you could talk about the demand cadence over the course of the quarter. Your fleet in the quarter grew about 3%, which is a point better than normal seasonality. So looks like you were able to put more equipment to work this Q3 sequentially compared to normal seasonality. Can you comment on that? Is that what's playing out in the field? It looks like by the improvement in fleet productivity, I would imagine utilization improved at least in line with normal seasonality in the quarter. Can you just comment on that? Because in the prepared remarks, spoke about oil and gas headwinds, et cetera, but you folks were able to pull a lot of equipment to work this quarter, and I'm just trying to square up those two points. I really just think that there was that level of demand in our core end markets and with our key customers, and frankly we would have liked to have done a little better, and had we not had some of that choppiness, that's why we pointed to it. When you look at the year and break it in two halves, we talked in July about the internal focus maybe not getting that build that we wanted in the first half. When you look at the back half of the year, we're pretty dead on as to what our original thoughts were of how much OEC on rent fleet you build in the back half. Our hope was that we'd backfill some of that hole. As we got into some of the end markets not giving us that, specifically oil and gas, midstream, and maybe flattish, let's say, manufacturing down a little bit. We just didn't get that opportunity in some of those to offset what the team did do by backfilling the hole in a lot of the non-res markets. That's the way we look at it. So I'd say the demand trend was back half, probably as expected originally. The part where I say I wish we'd done better, I wish we could've backfilled that hole a little bit more, and therefore, we would've drove a little bit more volume. We're talking on 1% area. So we're talking on the margins here when you look about year-over-year, what we reported in January versus what we did here. But I'd say demand allowed us to have that growth throughout Q3. Okay. Matt, earlier in the discussion, you spoke about how pricing played out in the oil and gas downturn and the fact it's a smaller equipment-sized market today. Can you just expand on other differences you see in the market? So talk about the impact of data availability we're hearing from construction equipment dealers with rental fleets that the supply-demand data has been really helpful. Are you seeing that in your market in terms of better ability to match supply with demand for the industry? Because the concern is, in the last cycle, utilization moved down, and then pricing moved down. I just want to make sure we ask the question of what's playing out differently in this cycle. So I'm wondering if you can expand on any other drivers there. Sure. First and foremost, I think the discipline that the industry, and we've been talking about this for a few quarters. I think the discipline the industry's showing in the last 10 years of my career compared to the first 18 years of my career is night and day, right? That's number one. I think data has been a big help with that. I think history's been a teacher of that, too, right? Going through '09 and that scar tissue, I think you can't underestimate the impact that may have had on folks being much more responsible for that. There'll be times throughout any cycle where it'll get ahead and pull back, and I think the industry overall is responding appropriately. To be clear, I also don't think the end of demand is here. We have the opportunity to continue to put fleet to work. I think our actions of consolidating capacity to drive growth as opposed to just adding capacity to drive growth is a significant difference, right? When you think about the last 10 years. I think some of our competitors are doing the same. I think that's good news. I think when you think about all those issues, the availability, right, that those of us, which is about half the industry now get from the Rouse information, is helpful. Technology in general, the professionalization of the industry, which consolidations help bring, of having analytics, having data as a resource to think through investments and timing. All those are part of why I think we'll see a better outcome, why we've been seeing a better outcome in supply-demand. Okay. Thank you. Lastly, on the cold starts within Specialty Solutions, can you just talk about what the learning curve has been as you ramp up the cold starts over the course of this year and as you look at the opportunity in terms of potential new locations over the next couple of years, what that opportunity set for expanded cold starts looks like on a multi-year basis based on everything we've learned with the rollout this year? Yeah. Not terribly different than what we've been doing, right? We don't really communicate it that way. The year one, the year two, the year three communication. That's not the way we do it. Mostly because many of our cold starts are growing on the border of another one. There's a lot of efficiency that's built in when one store doesn't, especially in our specialty network. As we build it out, that network doesn't have to travel out as far to serve the market. We can be more responsive. We get growth out of that, but then we also get better value in the existing store that's no longer going there. There's a couple of different calls to look at it. I think we're going to have a specialty day that maybe we could talk about that, and Paul will be leading that in more detail. That would be more helpful as opposed to trying to get to that level of specificity on this call. But you know what, we'll follow up with Ted, make sure that we get that on your calendar. I think that will be a great opportunity to learn about how Specialty cold starts and Specialty growth play out. We'll look forward to it. Thanks. Thanks, Jerry. Thanks, Jerry. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please. Well, thanks. Good morning, guys. Good morning. Hey. Just to follow up on Ross's question. Just really if you could characterize how tight are the markets from a supply and demand basis in those construction areas where you see the better opportunities to move fleet? And I guess, to what extent are you seeing others sending equipment into those same places at the moment? I wouldn't say less or more competitive than they've been. I'd say we're not seeing any extra competitiveness. We're not seeing any easy roads either. We have to earn our customers' business every day. I would say that there's only a few companies, and this is why I think the bigs are getting bigger. There's only a few companies that have that flexibility and fungibility to do that. So it's not the whole market. It's only a subset of the market that can make those pivots in a quarter to quarter or within an annual cycle. Because other companies that don't have stores there, they're just not going to have the ability to go ramp up and open up an X location because all of a sudden there seems to be better opportunity there than where they reside. They may do it on the fringes. They may travel a little further, but that's a little bit different than the broader footprints that a couple of companies in the industry have. I think that's a big differentiation and why you're not seeing a rush to any individual market, quite frankly. I hope that answers your question. Yeah, that's helpful. Then any chance you can give us some color on how the fleet productivity metric trended over the course of the quarter? Did your upside to the 1.5% target, did that come more later in the quarter or kind of steady throughout? Yeah, no, we're not pulling. Actually, we don't calculate it that way, but we're not pulling it apart that way. This is a quarter end, year-over-year result that we look at and prep for earnings to help communicate what happened in the quarter, but not sequentially or not trying to use it as a trend line or anything like that. So no, I don't have that color for you. Okay. Thanks a lot, guys. Thanks, Steve. Thank you. Our next question comes on the line of Joe O'Dea from Vertical Research. Your question please. Hi, good morning. Hi, Joe. Can you quantify how much fleet you've taken out of the oil patch? Then Jess, I think you touched on this, but just to confirm what the related repositioning and repair costs are that are attached to that. I'll start there, Joe. We called out about $12 million of costs that we incurred this quarter. Going forward into Q4, we think it'll be something less than that, as we do have a little bit more to work through. But something less. I don't have a number right now, but Yeah, when you think about the fleet, it's a portion of, and it will be in Q4, say 1% of 4% of your business, right? Somewhere in the $100 million range. Let's say we moved about half of it out of there, we got another half to go. Depending on how it turns. That could accelerate or decelerate if we get any different news there, but it's in that realm of impact from an OEC perspective. And then just the related kind of EBITDA bridge sequentially, you are implying margins up seasonally. They are typically down Q3 to Q4. You are still going to have some of these carryover costs. Just any other factors to consider as we move from Q3 to Q4 EBITDA margins and see that improvement? There will be the impact. In addition to the acquisition impact, there will be the impact that will flow through margin of, as I mentioned, we will have a little bit higher used sales. And so that is going to come in at a lower margin than the rental would. The other caution, and I know Matt Flannery mentioned it earlier, but I will caution against using the midpoint. Yeah, I think whether you use the low end, high end or midpoint, it is implying a 48.8% EBITDA margin in Q4 versus 48.5% in Q3. And so I was just curious about what some of the good guys are in terms of that sequential move. Yeah, the two drivers are the ones we mentioned, the BlueLine impact, which we will anniversary that on November 1st, and then that mix shift between used and rental. Okay. Matt, just on replacement CapEx, as you do a little bit more this year, does that mean that you are positioned to do a little bit less next year? Then just bigger picture as you think about the backdrop of the market, are you seeing anything that is leading you to think we are going to pause a little bit on some of this replacement spend? No, definitely we are not planning on doing less. The used sales end markets, as we talked about, are still strong. We still want to keep that fleet age as fresh as we can as we are still in a growth cycle. So I would say if anything, we plan to be maybe 5%, even 10% more, For the replacement specifically. for replacement in 2020. So that is the way we are thinking about it. If the market change, if the outputs change, which we are not seeing, even as recently as last month. The used sales channels are still good, and we are going to utilize them to keep the fleet fresh and a little bit in what we did here in Q3. It is a good way to re-profile too, right? So as you are trying to continue to get your mix right, you could sell off some of the older assets and use those funds in net CapEx to help re-profile your fleet versus only using growth, which is a much smaller number to re-profile. Joe, just to be a little bit helpful, one step further. We are still pulling the plan together, so obviously we are still landing on what we think the growth CapEx could be for next year. But as far as the replacement, as Matt mentioned, that will be up next year. And if you think about something in the neighborhood of selling kind of $1.6 billion-$1.7 billion at OEC, inflation adjusted, that is going to look like something, call it $1.8 billion-$1.9 billion. That is really helpful. Thanks very much. Sure. Thank you. Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question please. Thanks, guys. Just wanted to go back just on the comment about the 12 million of costs incurred. Was that totally incremental or kind of what was that versus your baseline expectation for fleet repair and maintenance? And then I think you had called out in the press release increases of 27% and 19% for repair and maintenance versus delivery. Just wanted to understand if that was included in that number. And then if you could also just help us understand for the general rent gross margin impact, how much was in general rent versus specialty. Thanks. Sure. Hi, Courtney, it's Jess. For that $12 million, that was incremental for the quarter in terms of isolating what we leaned into to repair and reposition the fleet, some of that excess fleet that Matt talked about, and getting that into stronger end markets. As far as what you're seeing as the increases, R&M versus delivery, the mix impact of that is we saw a little bit more of the repair and maintenance and delivery costs together in the general rent segment. There was a bit more on the repair and maintenance side on the Specialty Solutions segment, a little less delivery. That's the dynamic there. Okay. Gotcha. Can you just help us understand when you do the repair and maintenance for something like this, does it extend the fleet age? Do you consider it getting reset at all? How do we think about how much this kind of extends the fleet age? Yeah, there's no real extension of the fleet age per se. It's just making sure that it's in rent-ready mode to get into those markets. We did spend a little bit more on some of the repair of the fleet that came out of the oil patch because that's going to be kind of worn down a little bit more than across some of the other end markets. There's a lean into the repair and maintenance as a result of that. Yeah, and we don't account for it in any way as capitalizing or extending or anything like that either. That's a difference. Okay, great. Thank you. Thanks, Courtney. Thank you. Our next question comes to the line of Seth Weber from RBC Capital. Your question, please. Hey, good morning, guys. Good morning, Seth. Most of the questions have been asked, but just on the $50 million or so of fleet that was moved and the 100 that maybe in aggregate, is it fair to assume most of that is general rent versus specialty? Can you just talk about what you're seeing on the specialty side in some of these oil and gas markets? Thanks. Sure. Certainly most, but there is some pump and gen sets that we have some work there, as you know, in the specialty, but I would say it is primarily general rent. Say 70. Okay. I do not have it broken down for you here, but we can maybe get you that data, but primarily general rent. Think about our fleet profile overall, and it follows the fleet profile. Sure. Yeah. I know. Some of the Specialty Solutions is just harder to move, obviously. I was just trying to get an understanding. Yeah. During the last downturn, I think you gave us a number that something like 80% of the revenue in Texas was from non-energy stuff. Is that still kind of a good framework to use? I know the upstream business is smaller today than it was back five years ago. Maybe is it less than 20% of your business in Texas at this point? I actually don't have that answer for you. I think we've talked about it in whole. I actually don't recall. I've been here a while. I just can't remember us talking about it as far as what percentage of the Texas business as a whole. Somebody must have slipped that by me because I would certainly have stopped that conversation just from a competitive perspective. I actually don't recall that number. Okay. Fair enough. Just given the potential for caution around the macro, clearly it's not manifesting yet, but just on the broader macro on the construction business, et cetera, are you thinking about changing your cadence of discussions with the OEMs? This is kind of around the time of year you would start to plan for 2020, your discussions with the OEMs. Are you thinking about maybe going a little bit more slowly this year versus prior years? Thanks. Yeah, no, it's been pretty successful for us. I think we'll keep that similar cadence. I think it helps them, and it helps us. We make sure once we build the plan, we understand what pipeline we think we need with flexibility, which we always have, as you know, and we try to be reasonable. We don't overuse that flexibility for no value, and it gives them the opportunity to build their plan. We need good suppliers. We need them to get their supply chain in order. It's a partnership, and I think the way we've been doing it, we're comfortable with the output. We're going to stay on cadence. Okay. I appreciate it, guys. Thank you very much. Thanks, Seth. Thanks, Seth. Thank you. Our next question comes from the line of Stanley Elliott from Stifel. Your question, please. Hey, everybody. Thank you all for fitting me in. Quick question back on the outgrowth piece. When you look across the portfolio in your national account profiles, are you over-indexed, under-indexed to any verticals necessarily, or is it pretty much consistent with the rest of the portfolio? From a national account perspective? Yeah. No, I wouldn't say over-index. Is there a percentage points of movement in certain verticals that's more primarily And I would segregate it as key accounts, not just national accounts. As we've talked to you all before, our national accounts use our national footprint, but we have strategic accounts or key accounts that are equally as important, just use maybe regional marketplaces, right? I would say the combination of those is No, I wouldn't call them heavily more influenced by any specific vertical. I think that's a pretty broad portfolio as well. Yeah, I appreciate that. I was just curious about the 9% construction growth, which is much better than what we are seeing. Then, Jess, thanks for the slide on the free cash flow conversion. Anything or any reason out of the ordinary why those numbers shouldn't carry forward as we look into 2020 and beyond? We are still planning 2020, which includes what we believe our view of free cash flow is going to be, not just from an operating perspective, but also taxes and interest and some of the other lines. So that's still to come, Stanley. What I will tell you is, we are planning for another robust year of free cash flow. Exactly how much, I do not know yet, but it will be robust. Perfect. I look forward to seeing it. Thanks, guys. Take care. Great. Thank you. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please. Morning, everyone. Morning. Matt, you covered in the beginning in prepared remarks a bit on the integrations in BlueLine, but that was a bit of a hiccup last quarter. Just looking back for a second, what were some of the actions that were taken this summer to enhance that integration process and maybe some lessons learned, since obviously URI is well experienced in acquisition integration. But what were some things that you took out of that process and would apply going forward? Great question, Scott. We do have a robust playbook, and every deal makes it better. That is one of, I think, the values of learning that that gives us. I want to focus specifically on BlueLine, because the real thing that we learned is BlueLine was the third deal in many markets in 18 months. If it was the first deal, then we would be talking about a different deal that had the challenges, and it would probably still be the third deal. That is a part of it. If I had to do it all over again, I would spend much more time making sure the external portion of it, that customer outreach was, which we have not had to spend extra energy on in the past. That is something in this deal. Whether it was just because it was the third, which I think plays a lot, or whether it was the largest of the three, I do not even care which one of those two it is because I do not really know, but that is what I would change. We would have a much stronger external focus on the front end of it versus what is a very aggressive internal focus as we get everybody on the same system in 9 days and try to get all the branch consolidations done so we are working as one unit and people know what they are doing in the first 3 months. We got to balance that aggressiveness internally with equal aggressiveness externally. That would be my learning, and I think what we would integrate into the playbook. The good news is I do not think there is 3 big deals to get done in a row again in the near term. I do not think that that part is going to be an issue, but the external focus is good learning. All right. Thanks. Appreciate that. Here at the end of the call, I guess a question I cannot help but ask. URI is generating a lot of cash, a lot of flexibility there. There has been a lot of talk this year, more than in years past, of M&A in the Specialty Solutions rental space. As we head into next year and everything you have been working on to integrate will now be in the rearview mirror and having an anniversary, could you address the use of capital? Again, I know, Jess, you have the new lower leverage objective, but please put that in perspective for us here at this part of the year. Thanks. I think you hit on it. As we have been saying, that our lean at a time where we are a little more focused on absorbing and leveraging, we still look at deals. We are still over a pipeline that we do work on, but the lean would be more on additional products and services to customers versus our overlapping products and services. The second would be filling out any gaps in distribution and footprint. By definition, that leans towards Specialty Solutions. On top of that, they are good return businesses. The three criteria of cultural, strategic, and then financial still need to be met, and that is a high bar for us. But there are deals out there, and if any of them meet those three deals, we have the flexibility. Jess and the team have given us the balance sheet and the flexibility that we could still do stuff that's accretive to the business, but we certainly also have the opportunity to absorb and leverage what we've bought. So it's that balance right now with a lean towards Specialty. Thanks. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks. Great. Thank you, operator. Everyone, thanks for joining us. Just a reminder that our Q3 investor deck is available online. As always, you can reach out to Ted with questions in Stamford, and we look forward to have a great holiday season, and we look forward to talking to you all in the new year and sharing our thoughts on 2020 and looking forward to that. Be safe, and thanks for joining. Operator, you can 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.