Herc Holdings Inc

NYSE:HRI

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to the Herc Holdings Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

[Elizabeth Higashi, Vice President-Investor Relations]

Thank you, and good morning, everyone. I'd like to welcome you all for our second quarter earnings conference call. Our press release and presentation slides were filed earlier today and are posted on the Events page of our IR website at ir.hercrentals.com along with our second quarter 10-Q.

This morning, I'm joined by Larry Silber, our President and Chief Executive Officer; and Mark Irion, Senior Vice President and Chief Financial Officer. They will review the first quarter as well as the industry outlook for 2019. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer.

Before I turn the call over to Larry, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to Slides 3 of the presentation for our complete safe harbor statement as well as Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials.

Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. I'll now turn the call over to Larry.

[Larry Silber, President and Chief Executive Officer]

Thank you Elizabeth and thank you all for joining us this morning. We recently celebrated our third anniversary as a public company on July 1. And we are pleased to report that our strategic initiatives continue to drive growth in revenue and profitability in the second quarter. Our team's focus has been to improve the quality of earnings through the execution of company-wide initiatives to increase our flow through and profitability.

Our initiatives successfully drove industry leading year-over-year price improvement and contributed to strong gains and adjusted EBITDA margins in the second quarter. Our focus on costs also contributed to excellent REBITDA flow through. Our targeted management of net fleet capital expenditures for 2019 also helped improve both mix and fleet utilization in the quarter. Our interactions with contractors and customers reinforce our belief that the economy is stable and growing.

We are excited about our success in expanding our reach to new customers by providing solutions to meet their equipment and service needs, and are committed to closing the gap between us and our industry leading peers. These factors contribute to our belief that 2019 will be another strong year for Herc Rentals and our confidence is reflected by our increasing adjusted EBITDA guidance for 2019.

Now please turn to Slide number 5, the major initiatives of our long-term strategy guide our operating plan and day-to-day activities that drive our performance. We have made tremendous progress to position Herc Rentals to be a leader in our industry by executing on the pillars featured on this slide. Fundamentally, our progress has been driven by solid execution of our long-term strategy. Our continuous focus on customer service and the ongoing dedication and commitment of all Herc team members. At the same time, we are continuing to build a culture that supports and enables team members to contribute to the progress we expect to achieve and that reflects the kind of company we want to be.

Now, please turn to Slide number 6. Last month we took another step towards the finding the kind of company we want to be. We are declaring our company’s enduring aspiration, which is more commonly referred as our purpose. Our purpose is, we equip our customers and communities to build a brighter future. As members of team Herc, we're proud to say we make progress easier to achieve. You can hear more about our purpose in the video available on our corporate website.

On Slide number 7, with our developing people and culture strategic initiative is our focus on attracting and retaining talent and creating a supportive workplace culture. The company was recently honored by the U.S. Department of Defense for our support of employees who are a part of the National Guard and Reserves. We were nominated by one of our employees, William Brown, our Branch Manager in Deer Park, Texas who serves as an army national guardsman.

Herc Rentals was also recognized with the above and beyond the award. The award was given to recognize employers at the local level who have gone above and beyond the Uniformed Services Employment and Reemployment Rights Act. Examples of going above and beyond may include providing guard and reserve employees with additional non-mandated benefits such as differential or full pay to offset loss wages, extended health benefits, and much more. While I accepted the awards on behalf of the entire company, I also wanted to thank our veterans, guardsmen and reservists for their service as well as share in this award.

On Slide number 8, you've heard me talk about safety. And as we've said before, our team members are our most important asset and through their focus on serving our customers provides a differentiating factor that makes us unique in the equipment rental industry. We are committed to advancing the safety of our employees, customers, and communities through best practices and safety programs that guide our everyday activities. To that end, throughout our locations we continue to focus on a single – on a simple concept of a Perfect Day, which means No OSHA, recordable incidents, no “at fault” motor vehicle accidents, and no DOT violations.

Through the first half of 2019 all of our regions recorded at least 85% perfect days with many of our locations reporting 100% perfect days in the second quarter. As part of our perfect day goal and in support of building a robust safety culture, we continue to expand our safety training programs through mandatory in person and online training.

Now please turn to Slide number 9 for a summary of our financial results. Starting from the top, total revenues were $475.1 million down slightly compared to the same period in 2018. Total revenues were impacted by the planned reductions in used equipment disposals in the quarter, which Mark Irion we'll describe more fully later in our presentation. Equipment rental revenue grew 3.8% to $407.6 million. Strong gains in pricing were offset by strategic reductions in re-rent revenue to improve profitability. Our rental business was also negatively impacted by record rainfall in many parts of the U.S. during the quarter.

To improve fleet utilization, we reduced both fleet capital expenditures and made regional fleet adjustments during the quarter. Average fleet in the quarter was slightly lower than last year, down 1.3% compared with the same period in 2018. We're managing our fleet size and mix to enhance fleet utilization in each of our branches, districts and regions as we continue to manage our net fleet capital expenditure plans laid out earlier this year.

Pricing improved 4.6% compared with last year second quarter. Reflecting strong demand in our markets, and recognition of our customers and our professional services and support has real value. We reported substantially improved year-over-year net results in the second quarter of 2019, with net income of $9.7 million or $0.33 per diluted share, compared to a net loss of $300,000 or $0.01 in the prior year. Adjusted EBITDA increased 14.9% to $174.9 million reflecting the reduction in direct operating expenses and SG&A. Dollar utilization increased 260 basis points to 38% in 2019 benefiting from improvement in pricing and fleet utilization. Now please turn to Slide number 10.

Slide 10 illustrates the continuing improvements we made in the second quarter of 2019 compared with 2018. Year-over-year pricing improved for the 13th consecutive quarter up 4.6% over last year. That's also a sequential improvement from the 3.8% reported in the first quarter of 2019. We believe our proprietary pricing technology leads the industry and its ability – local market and price dynamics to set competitive prices. This slide shows average fleet at OEC decreased 1.3% in the second quarter of 2019 over last year and also we added a substantial amount of new fleet in last year second quarter.

Our average fleet on rent during the second quarter of 2019 was flat compared with a strong 2018 second quarter. We were pleased that our initiatives helped us improve fleet utilization in the second quarter of 2019 over the last year's comparable period.

On slide number 11, the improvement in price continued to contribute to the overall dollar utilization. Second quarter dollar utilization reached 38%, an increase of 260 basis points and up from a strong second quarter performance in 2018. Fleet at OEC as of June 30, 2019 was $3.86 billion with an average age of 44 months compared with 46 months for the same period last year. Together, ProSolutions and ProContractor equipment now account for approximately $807 million of OEC Fleet or about 21% of our total fleet as of the end of the second quarter, 2019. That's an increase of 6% in the value of that portion of the OEC fleet on a year-over-year basis.

While the pie chart on the left hand corner shows the major categories of our fleet. As you can see from the graph on the bottom right, we have changed our category emphasis. The largest percentage of our fleet consists of aerial equipment at about 25.5%, followed by specialty at 20.9%. Earth moving equipment is now at about 14.5% of our total fleet, and trucks and trailers represent about 13.3% of our fleet. A detailed breakout of our fleet categories appears in the appendix of this presentation.

On Slide number 12, shows that we now have about 265 locations primarily in North America, closures of a handful of underperforming locations and the completion of the planned divestiture of our joint ventures in Qatar and Saudi Arabia dropped down our total location count as a result of our focus on branch profitability and opportunity. We plan on adding four to six greenfield locations in high growth urban markets in 2019. This map shows the growth expectations by state and province over the next five years. The American Rental Association took 10 years to forecast strong growth, particularly in the west, southwest, and southeast with annual compound growth rates higher than 6% over the next five years.

Now please turn to Slide number 13. Our strategy is driving further diversification of our customers and markets as well as industry mix. Second quarter, local rental revenue grew 7.7% year-over-year and accounted for about 59% of rental revenue in 2019 for the quarter. National account revenue represented about 41% of the total in the second quarter and declined 1.4% compared with last year, primarily due to the impact of project timing and reduced spending in some of our key industrial customers.

Our rental revenue by major customer segment for 2018 is shown in the rental revenue composition chart, the upper right hand corner of the slide. Contractors represented about 33% of equipment rental revenue followed by industrial customers with 28%, other customers, which includes commercial and retail service, hospitality, healthcare, recreation, entertainment and special events represented about 21% of the equipment, rental revenue, and infrastructure and government increased to 18% of the total. Growth in new customer accounts continues to be solid throughout the second quarter at both the local and national level. We continue to be focused on maintaining a solid pipeline for future growth opportunities in all of our targeted end markets.

Now please turn to Slide number 14. Key economic and industry metrics remain generally positive, while the Architecture Billing Index fell below 50 in June, the southern region registered above 50 and 52. The index predicts activity nine months to 12 months out and recently its reporting a tight range around the 50 level. Industrial spending increased 3.2% in 2018 over 2017, and spending forecast for 2019 are showing an increase of 5.6% over 2018.

Our conversations with industrial customers and contractors indicate their confidence for continued growth in spending in the short and medium term horizon. Expectations for the U.S. non-residential construction spending for 2019 also continue to be healthy, with expectations of a year-over-year increase of 3.8%. June construction started to increase 11%, reflecting the second double-digit gain in a row according to Dodge Data and Analytics. Longer-term, the North American NRA forecast for equipment rental revenue growth remains robust with compound annual growth projected at 5.2% for 2022.

Our strategy to focus on urban market coverage further accelerates the rate of growth that we can achieve as urban customers increasingly use rental offset space and cost constraints. Those secular trends will contribute to steady industry growth, as rentals expand beyond traditional rental equipment categories. We are making great progress on executing our strategy and driving improvements in our operating performance. Key economic indicators continue to look favorable and we are optimistic about our future growth opportunities in 2019 and beyond.

Now, let me turn the call over to Mark Irion, our Chief Financial Officer. He'll discuss our financial results in more detail and then I'll summarize before we open to questions.

[Mark Irion]

Thank you, Larry, and good morning everyone. It's been just a year since I joined Herc and I'm even more excited to be part of the Herc team now, than I was when I accepted the position. I'm very pleased with the progress we're making in increasing profitability through improved flow through in higher operating margin. Our entire team is working together to improve the quality of our earnings and our bottom line shows that we are achieving results.

So let me start first with our summary. On Slide 16, we see the equipment rental revenue increased 3.8% from $392.5 million to $407.6 million in the second quarter of 2019. Year-over-year growth was driven primarily by improved pricing, but was partially offset by a reduction in re-rent revenue. As part of our self-help initiatives for 2019, we are being focusing on utilizing our own rental fleet and re-renting less fleet. Excluding re-rent revenue from our results, pure ritual revenue increased 5.7% year-over-year, in spite of the impact that we have ahead in certain geographies on our volume.

In addition, as we focused on improving performance, we reduced our sales of rental equipment in the second quarter, impacting total revenues which decreased year-over-year 2.1% to $475.1 million. I'll talk to that in more details in our revenue comparison slide. Net results improved in the second quarter of 2019 compared with the prior year. We reported net income of $9.7 million or $0.33 per diluted share in this year second quarter compared with a net loss of $0.3 million or $0.01 per diluted share in 2018.

This year's results also included $7.8 million restructuring charge, comprised of a payment of some leases and severance charges. More details regarding our net income bridge are included in our Appendix. Adjusted EBITDA in the second quarter of 2019, increased 14.9% or $22.7 million to a $174.9 million over the same period of 2018. Adjusted EBITDA margin was 36.8% on the second quarter, a 550 basis point improvement year-over-year. The second quarter reflects excellent progress in terms of flow-through. We reported REBITDA flow-through of 168.1%, which benefited from reductions in re-rent expenses, as well as reductions in direct operating expenses and SG&A compared with last year.

Our REBITDA margin rose to 41.6% during the second quarter of this year, an increase a 450 basis points from the second quarter of 2018. There is a reconciliation of these measures in the Appendix, which I think you'll find useful in evaluating our operating progress. We reduced our average OEC fleet in the second quarter of 2019 by 1.3% over the prior year to improve our fleet utilization. We are focusing carefully on fleet at the location level to ensure we are maximizing fleet utilization before we make any further additions.

Our focus on rates delivered excellent results in the quarter, pricing improved 4.6% year-over-year, an increase of 80 basis points sequentially from a 3.8% rate improvement we reported in Q1 2019. Dollar utilization increased 260 basis points to 38% in the second quarter of 2019, compared with the prior year period, benefiting primarily from the 4.6% increase in pricing and approved fleet utilization.

On Slide 17, the focus on changes in total revenues for the second quarter and six months period. In the second quarter of 2019, total revenues declined 2.1% or $10.4 million to $475.1 million, compared to $485.5 million in the second quarter of 2018. Equipment rental revenues grew 3.8% to $407.6 million, although the increase was impacted by a strategic reduction in re-rent revenue compared with last year's quarter. Re-read revenue is a low margin business for us, but a necessary part of maintaining strong customer relationships. We'll continue to work on finding the right balance in order to satisfy customer demand and manage our capital investments and fleet. Excluding the impact of re-rent, out pure rental revenues were up by 5.7%.

In the second quarter of 2019, sales of rental equipment declined $26.5 million, excluding currency. The lower year-over-year sales in the second quarter, reflected the company's acceleration of disposals in the first quarter of 2019, related to the strong used equipment market, as well as the comparison with higher than average sales with rental equipment last year as we improved fleet mix and age. The largest portion of our sales of rental equipment in the second quarter went through auction channels and accounted for 52% of the total sales volume, compared with 47% in the prior year. We generated proceeds of approximately 42% of OEC, due to the larger concentration of auction sales during the quarter.

Please turn to Slide 18 to review the Q2 adjusted EBITDA bridge. Adjustment EBITDA for the second quarter was $174.9 million, an increase of 14.9% or $22.7 million compared to $152.2 million in the second quarter of 2018. The bridge shows that the largest contributor was increased equipment rental revenue with growth of $16.6 million as compared to the prior year. Direct operating costs fell $6.1 million compared with the second quarter of 2018 with improved operating efficiencies, such as lower maintenance and delivery and freight expenses and lower re-rent expenses. Those reductions were partially offset by higher new facilities costs compared with last year.

Selling general and administrative costs were up slightly in the second quarter compared with the previous year, when you exclude spin-off costs. A reduction in professional and consulting fees were somewhat offset by increases in payroll and payroll related expenses.

REBITDA measures the contribution from our core rental business without the impact of sales of equipment, parts and supplies. We believe REBITDA provides a better comparison with our industry peers as it excludes the impact of varying depreciation policy. Second quarter 2019 REBITDA flow-through improved 168.1% and drove the margin of 41.6%, an increase of 450 basis points compared with Q2 of 2018. Our REBITDA increased by 16.1% over prior year, all of which we consider to be excellent results.

On Slide 19, we have broken out fleet expenditures and disposals on our OEC cost basis and have provided a rolling balance of the OEC value of our total fleet. A quarterly breakout of this information is also in the Appendix. Total fleet at OEC was $3.86 billion as of June 30, 2019. The average OEC of our rental fleet during the quarter decreased 1.3% over the prior year quarter. For the second quarter of 2019, fleet expenditures at OEC were $289 million, with fleet disposals of $123 million. The average age of our disposals in the first quarter was 80 months. We reduced the average age of our fleet to approximately 44 months at the end of the second quarter 2019 from 46 months in the

On Slide 20. We can see the total debt was $2 billion as of June 30, 2019, about the same as the prior year. Net leverage continued to improve to 2.8 times, solidly within our targeted range of 2.5 times to 3.5 times. We had ample liquidity of $791 million as of June 30, 2019.

On a cash basis, net Fleet CapEx for the six months was $133.4 million, compared with $170.4 million in the prior year. Non-fleet capital expenditures for the quarter totalled $20.5 million, down from $33.2 million in 2018. Free cash flow for 2019 was $124.7 million, a substantial improvement compared with the previous year.

Please turn to Slide 21. On July 9, 2019, we were excited to announce the completion of the issuance of $1.2 billion of a 5.5% senior note due in 2027. We use those proceeds to redeem our 7.5% and 7.75% second priority notes due in 2022 and 2024 and to pay down the ABL by over $200 million. We also recently completed the refinancing of our ABL Credit Facility to extend the maturity date to 2024, while reducing our interest expenses by 25 basis points to LIBOR plus 1.5%.

Securing these transactions extends our maturities, increases our liquidity and reduces our future costs. Together the new node in the ABL will save us $21 million in interest expense annually on a go-forward basis. In Q3, we expect to record a loss on the early extinguishment of debt, comprised of the premiums paid and unamortized debt issuance costs. We’ve provided an adjusted capitalization table as of June 30, 2019 to illustrate the changes on the balance sheet and the impact on the company's net leverage, which is up slightly to 2.9 times due to transactional costs. We’re continuing to focus on a discipline financial strategy to reduce leverage and fund organic growth opportunities with our operating cash flow.

On Slide 22, we've got our updated guidance. Based on strong demand in our markets and our continued margin improvement focus to tightly manage operating expenses, we are raising the lower end of our guidance range for adjusted EBITDA for 2019. Our new guidance range is $735 million to $760 million or an increase of 7% to 11% compared with 2018. We are maintaining our guidance of $370 million to $410 million in net fleet capital expenditures. The planned reduction in capital spending over the prior year along with the expectation of improved EBITDA should contribute to strong free cash flow for the year.

Our overall strategy is expected to continue to provide ample liquidity and the financial flexibility to fund our strategic growth, to improve our operating margins, to serve our customers and to create value for our shareholders.

And now, I'll pass the call over to Larry.

[Larry Silber, President and Chief Executive Officer]

Thanks Mark. Before we go to Q&A, I'd like to summarize where we are today. Our strategic initiatives are expected to continue to drive growth in revenue and improved dollar utilization. Our operating initiatives should contribute to strong REBITDA flow-through of over 60% in the second half of 2019, even as we compare to the strong results we posted in the second half of 2018. Given our current expectations, we are raising our adjusted EBITDA guidance range to $735 million to $760 million, which implies year-over-year growth of 7% to 11%. I'd like to thank our Herc team for their hard work and commitment to excellence. We're excited about our future and our purpose.

And now, we'd like to have the operator open the line for questions.

[Operator]

[Operator Instructions] We will take our first question from Seth Weber with RBC Capital Markets. Please go ahead.

[Brendan Shea, RBC Capital Markets]

Hi, thanks for taking my question. This is Brendan on for Seth. So obviously your rate growth has been extremely strong over the past several quarters. Do you think that, that level of growth is sustainable? And I guess, what are your thoughts on kind of a normal run rate for rate growth going forward?

[Larry Silber, President and Chief Executive Officer]

Well, look, we don't really give forward guidance on rate growth or really any of our metrics. But let me – let Bruce talk to what he is seeing in the marketplace and how he is handling that.

[Bruce Dressel]

Yes, I guess without giving any guidance, I would say the pricing is reflective of a pretty healthy demand out in the marketplace and we'll stay – we'll continue to be focused and discipline on achieving rate in the near-term.

[Brendan Shea, RBC Capital Markets]

Okay, thanks. And then, you mentioned that customers are still optimistic, you're hearing some optimism from them. How much project visibility are you getting from the fields for the rest of this year? And then, you mentioned that you don't give guidance, but I guess any high level thoughts for projects of what you're hearing from the field heading into 2020?

[Bruce Dressel]

Yes. Bruce, again here. I would tell you that from – everything we hear from our customers or from all our people in the field, everyone is feeling very comfortable with the amount of backlog to the system in the large projects that are getting ready to start or have started. So we feel very comfortable with kind of continued strong demand in the marketplace.

[Brendan Shea, RBC Capital Markets]

Okay. Thank you.

[Operator]

We will take our next question from John Healy with Northcoast Research. Please go ahead.

[John Healy, Northcoast Research]

Thank you. To me the story of the quarter or the rates in the REBITDA improvements, I want to spend my time there. On the margins, I think three years ago you guys kind of came out of the gates and started your own journey. I was hoping you could just revisit those margin targets for us again. I know initially there were EBITDA margins and then went to REBITDA margins. I just kind of want to get your thoughts on, where you started your journey? If you thought you'd be where you are at this time and if you still think over the next two years what the number is that we can think about you guys targeting closing in on?

[Mark Irion]

Hi John, yes. I mean we are obviously very excited with the amount of traction we've got in terms of flow-through in the margin improvement, it's a team effort, in terms of focusing on cost and focusing on rate and just generating healthy revenues and pushing that through to the bottom line. There is still a gap between us and sort of the peer group in terms the industry that we're focused on closing. And we're looking to sort of push those margins up towards the REBITDA margins up towards the high 40s over the next couple of years. So that's the target that we've set for ourselves and we're going to continue sort of pushing along in that direction.

[John Healy, Northcoast Research]

Okay. Excellent. And then just on the pricing, I was wondering if you could give us some color of what drove the pricing. Obviously demand is healthy for you guys and – but is it a lot of customer mix changing? Is it best practices in terms of maybe ancillary items in the pricing? I was hoping just to try to understand, how you guys got to a number that's close to 5%, which seems well above the industry right now?

[Bruce Dressel]

Yes. So Bruce again. so you're correct, it's reflective of a healthy environment. And I think also as we stated for the last 13 quarters, we're very focused on pricing with our proprietary optimist tool. So it's a bit of mix of some science in our tool and then absolute focus and discipline to driving rate, and we see opportunity to continue.

[John Healy, Northcoast Research]

Great. And then just final question for me. Is it reasonable to expect that the re-rent revenue headwind would continue into 3Q and 4Q or any color there?

[Larry Silber, President and Chief Executive Officer]

Hi John, yes. It will be dragged into Q3 and Q4 like a lot of these margin improvement initiatives that will slow down rolling into next year as we start rolling over some of the reductions that we've taken. But yes, there will be a continued reduction in re-rent expense in Q3 and Q4.

[John Healy, Northcoast Research]

Understood. Thank you guys.

[Larry Silber, President and Chief Executive Officer]

Thanks John.

[Operator]

We will take our next question from Steven Ramsey with Thompson Research Group.

[Steven Ramsey, Thompson Research Group]

I was just – wanted to get your thoughts, if we look at on I think Slide 14, the Dodge outlook, the industrial spending outlook. Thinking long-term certainly and any one I guess can have an outlook on the large market. But if those broad trend lines come to fruition in that flat to down activity at still pretty high levels. Do you start to position yourself for that eventuality, now with the lower fleet and kind of reduced CapEx year-over-year, or is this something you gradually work yourself into to prepare for that kind of market?

[Larry Silber, President and Chief Executive Officer]

Yes look, I think the forecasts are pretty healthy and as you said there, they may be flattening, but at a very high level compared to historic levels in the industry. We’ll continue to watch and adjust our fleet according to activity. But at the moment, all of our markets are healthy and we'll continue to put fleet where we have the opportunity and where the demand exists.

[Steven Ramsey, Thompson Research Group]

Great. And then kind of same topic, I think you cited reduced spending from industrial customers. I know it can be mixed by quarter. Can you maybe talk the context of that, and then how that plays into the positive feedback you're getting for the second half of the year?

[Bruce Dressel]

Yes, this is Bruce again. So if you kind of compare what we showed in Q1 in our national business was down 4.9% year-over-year and we've kind of moderated that going into Q2, which we said was kind of a timing issue. So we see that kind of correcting itself and some benefit to the upside on that going into the back half. So I think overall, our – it wasn't really reduced spending as much as it was timing on when the spending came and we see that kind of moderating and working itself out in the back half.

[Steven Ramsey, Thompson Research Group]

Great. And quickly on new customer accounts, can you describe how you're winning them over? Are you winning these from large companies? Or converting customers from owning equipment to rental? And is there a certain type of customer that's kind of driving these new accounts?

[Bruce Dressel]

Yes. So Bruce, again. So across the board I would say everything you just touched on, so it's from the largest customers to kind of what we call mid-market, but you can see that we're accomplishing it without having to use rate. So the market is strong and helpful in what we're doing and cooperative. And so it really as what – like Larry said in his end remarks, this conversion from ownership to rental, there are just more and more customers out there looking for rental as the solution over ownership, especially in our big large urban markets that we're focused on.

[Steven Ramsey, Thompson Research Group]

Great. Thank you.

[Operator]

We’ll take our next question from Neil Frohnapple with Buckingham Research.

[Neil Frohnapple, Buckingham Research]

Hey, good morning. Congrats on a great quarter.

[Larry Silber, President and Chief Executive Officer]

Thanks, Neil, good morning.

[Neil Frohnapple, Buckingham Research]

I wanted to start – good morning. Mark, direct operating costs were flat versus Q1, despite rental revenue being higher and DOE was down again on a year-over-year. I think earlier in the year you said direct operating costs could be flat up 5% in 2019, can you just update us on this now? And should we expect this to be down for the full year now with your initiatives and lower re-rent rev?

[Mark Irion]

Hi. Yes – no, we’re really excited with the results that we're generating in terms of our cost management, we're getting much more efficient in terms of the way we’re running the business and we are utilizing internal resources as opposed to spending money on external resources wherever we can. I think the guidance is still the same, we're sort of looking for flattish DOE, it’s not aligned that you can't keep going down while revenues are going up for an extended period of time. So we're sort of looking at that less than 5% sort of growth rate for the short to medium-term going forward on that line item.

[Neil Frohnapple, Buckingham Research]

And just to be clear there Mark, you're talking about inflation versus the first half or will it be flat year-over-year?

[Mark Irion]

Year-over-year flattish, so less than 5% growth sort of year-over-year.

[Neil Frohnapple, Buckingham Research]

Okay. Got it. And then just a quick question on time utilization, I know you don't explicitly disclose it. But just curious to weather impact on that and can you say whether time utilization was up or down year-over-year in the quarter at least? And just thoughts on time utilization for the back half of the year distractingly? Thanks.

[Mark Irion]

I think so we don't talk the time – there was – we had a impact on various markets during the year, and that impacted our volume. So you can sort of see the correlation between fleet size and volume, there was an improvement in the overall utilization of our fleet. We are focusing, as we mentioned in the prepared remarks on just getting the right fleet in the right markets, becoming more efficient with that fleet and getting more utilization on in terms of time with the customer and in terms of rental rates. So that's what's driving out dollar utilization.

[Larry Silber, President and Chief Executive Officer]

I would just kind of pile on to say that we continue to see there's room for continued improvement in the future and we're very focused on that.

[Neil Frohnapple, Buckingham Research]

Okay, great. Thanks so much.

[Operator]

We'll take our next question from Ron Wertheimer with Melius Research. Please go ahead.

[Rob Wertheimer, Melius Research]

I think that's Rob Wertheimer, hi everybody. I do sometimes write emails around by mistake. So just a quick one, actually two kind of big picture questions for your Bruce, to the extent that you're willing to answer them, you alluded that the category shifting over to rental, I know you've done a bit to expand what can be rented and so forth. One of the questions I've always had about the rental outgrowth theme is that, EWP is the product that’s mostly rented for a long time. So where are you seeing in categories that sort of shift to rental being most prominent right now?

[Bruce Dressel]

Look, I don't want to go into any specific segments or customers, but I would tell you it's broadly across all kinds of customers. You are correct, the early work platform market is probably maturing and the amount of business that's out there, but across all the other kind of segments of product, whether it be specialty, which our ProSolutions businesses, so HVAC, power, water transfer, all of what we kind of consider ProContractor and just broad range of products out there that more and more customers from, like I said earlier, kind of mid-tier customers that were really highly focused on to some of largest companies and corporations out there are viewing rental as a better solution.

Just because I know the infrastructure question will probably come up. We have seen and – recently, put out information where state and local infrastructure, and just local spending overall has been increasing and we're seeing the benefit of that. I think our industry is seeing the benefit of that. So more and more kind of local, municipal, state governments are using rental as a solution other than getting capital to buy their own equipment. And I think this is all driven by the same thing and this is kind of large urban market, it's more difficult to find mechanics, it's more difficult to find drivers and to find space to actually store and work on the equipment, so that's our specialty, that's our industry’s real value that we are adding more and more people are crossing over to rental as an answer.

[Larry Silber, President and Chief Executive Officer]

Rob, this is Larry, if you want to really look at the types of products, say look at our ProSolutions guide and our ProContractor tool guide and you'll see the kind of products that we've recently added that expand the categories and the reach to the customer bases that we're targeting.

[Rob Wertheimer, Melius Research]

Well that's a very helpful answer. Thank you. And then this one may be a bit sensitive also I guess, but just Bruce, you made clear that you're doing great on pricing and do you think there's still room to go. I'm a little bit curious if that's because you're not quite a parody with other large nationals or whether, you've sort of figured out how to deliver more value to the smaller customer. And therefore the price competition versus locals becomes less relevant. I'm just a little bit curious if you can say where that room in pricing exists still in the outside?

[Bruce Dressel]

Yes. First, I absolutely do not believe that we are under priced in the market. And we have the data internally and some external data that we have confirms that. And once again, I would go back to, it's a healthy environment that's receptive to pricing increases and we're very disciplined, and we have the science in this optimist proprietary tool that allows us to execute on that. We'll still stay very, very disciplined on that and continue to offer a value proposition to our customer that enables us to continue to push price.

[Rob Wertheimer, Melius Research]

Okay. Thanks everybody.

[Operator]

We'll take your next question from Jerry Revich with Goldman Sachs. Please go ahead.

[Ben Burud, Goldman Sachs]

Hi. Good morning everyone. This is Ben Burud on for Jerry.

[Larry Silber, President and Chief Executive Officer]

Hey, Ben.

[Ben Burud, Goldman Sachs]

Hi, good morning. I was just wondering if we could get an update on how you all are thinking about the evolution of the fleet from here. I completely understand the focus on utilization, but obviously the OEC has been flattish past two quarters. Can you kind of give us a more immediate term view on when you see OEC began to grow again on a year-over-year basis?

[Larry Silber, President and Chief Executive Officer]

Yes, I mean, I think this is sort of marginal decrease, you're seeing in this quarter is more just I think due to a heavier sales in the Q1. At this stage in the cycle, we will be looking at a reduced sort of net CapEx spend level similar to what we're seeing this year going forward and that should generate flattish OEC growth over the next couple of years. It's something less than 5% maybe sort of 3% to 5% range. So the market is still receptive to increased fleet size and volume growth. We're focusing at the moment on utilization and just getting more efficient with our own fleet. It's more of an internal improvement initiative rather than a market sort of reaction. So that's a couple of quarter tied improvements where we're getting success there and we'll be moving into a sort of low fleet growth sort of mode going into 2020.

[Ben Burud, Goldman Sachs]

Got it. And if we think about dollar utilization, really strong number in 2Q and if we think about how it's going to progress into the back half, is there any reason we shouldn't see the same, let's say 400 basis points sequential improvement into 3Q that we've seen over the past two years, after the really strong 2Q frame?

[Mark Irion]

I mean we'd expect the same seasonality going into Q3 of the Q2 that we've seen in prior years. So there's no reason, that there's nothing that we see out here is going to change the normal seasonality in 2019. On a year-over-year basis, we are looking on a go-forward, at sort of plus 200 basis point improvement level. It's been a little bit accelerated this year just as we really concentrate on our internal improvements and internal utilization of the fleet. But we see our goals going forward is about 200 basis point improvement year-over-year on dollar yield.

[Ben Burud, Goldman Sachs]

Understood. Thank you.

[Operator]

And we will take our last question from Michael Cohen with Opportunistic Research. Please go ahead.

[Michael Cohen, Opportunistic Research]

Hi everybody. Thanks for taking my question. I have a quick question on sort of the balance sheet. How are you guys thinking or perhaps you could refresh our memories on what you're thinking for a long-term debt-to-EBITDA ratio which is continuing to improve on kind of both sides, I would assume the debt gets – begins to get paid down a bit after the short quarter, short transaction related costs, but one could envision you guys getting down into the mid-two times, so is there a target that you guys have long-term?

[Larry Silber, President and Chief Executive Officer]

Right. Our stated range is 2.5 times to 3.5 times, our thoughts on that will evolve based on where we see ourselves in the cycle and where our opportunities for growth are coming from. I think where we are today will look to push that down towards the lower-end of the range and potentially below the lower-end of that range and then reconsider sort of long-term strategy at that stage.

[Michael Cohen, Opportunistic Research]

Okay, great. And then maybe to sort of ask the yield question or the pricing question slightly differently, how much of it is related to kind of specialty ProSolutions and ProContractor, obviously those had outsized growth relative to the other categories as a percent of the OEC, is that a solid explainer of things?

[Mark Irion]

Well, that would potentially be a explainer of some of the dollar utilization gains, because you're getting a better rate for the dollar investment on pricing, it's straight, year-over-year pricing doesn't really matter, whether it's ProSolutions or aerial or platform whatever it is, whatever you're achieving for that range of product year-over-year and that's your price improvement year-over-year, so it has nothing really to do with the mix of the fleet.

[Michael Cohen, Opportunistic Research]

Okay. Thanks guys.

[Larry Silber, President and Chief Executive Officer]

Thank you.

[Mark Irion]

Thank you very much.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Elizabeth Higashi for any closing remarks.

[Elizabeth Higashi, Vice President-Investor Relations]

Thank you all for joining us today. And as always, if you have any further questions please don't hesitate to call me. We look forward to seeing you all soon. Bye-bye. Thank you.

[Larry Silber, President and Chief Executive Officer]

Bye-bye.

[Mark Irion]

Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.