Herc Holdings Inc

NYSE:HRI

Earnings Call Transcript 2018-Q4

[Operator]

Good day and welcome to the Herc Holdings Inc Fourth Quarter and Full Year 2018 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 Ms. Elizabeth Higashi. Please go ahead.

[Elizabeth Higashi, Vice President, Investor Relations]

Thank you and good morning everyone. I would like to welcome you all to our fourth quarter earnings conference call. Our press release and presentation slides went out this morning and both are posted on the Events page of our IR website at ir.hercrentals.com.

Please turn to Slide 2. This morning, I am joined by Larry Silber, our President and Chief Executive Officer and Mark Irion, Senior Vice President and Chief Financial Officer. They will review the quarter and full year results for 2018 as well as the industry outlook. The prepared remarks will be followed by an open Q&A which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer.

Before I turn the call over to Larry, there are few items I would 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 Slide 3 through 4 of the presentation for our complete Safe Harbor statement. The company’s Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission this morning contains additional information about risks and uncertainties that could impact our business. You can access the copy of our 2018 Form 10-K by visiting the Investors section of our website at ir.hercrentals.com or through the SEC’s website at sec.gov. On a related matter, we expect to file our third quarter Form 10-Q later today, which will be available through either websites.

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 material, which were furnished to the SEC with our Form 8-K this morning and are also posted on the Investors section of our website at ir.hercrentals.com.

Finally, a replay of this call can be accessed via dial-in or through 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 will 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 are very pleased with the strong fourth quarter and full year results we reported earlier today. Our strategic initiatives drove volume, improved year-over-year pricing and continued our fleet diversification. In 2018, we achieved strong rental revenue growth and improved flow-through by controlling direct operating expenses and reducing SG&A. We increased our utilization and adjusted EBITDA margin year-over-year every quarter in 2018 and we expect to continue improve both going forward. The strong 2018 results are a springboard for the continued organic growth we expect in 2019. Our guidance range for 2019 adjusted EBITDA is $730 million to $760 million, an increase of 7% to 11% over 2018.

Now, please turn to Slide #6. By now, you are all familiar with four of these five strategic initiatives. Early this year, we added a fifth pillar developing our people and culture. We have always believed that our people support the achievements of our customers and communities everyday and as such, our people are the major differentiator for Herc Rentals in a highly competitive industry. It’s important for us to highlight our commitment to development of our people and culture for a set of priorities outlined here. First, we intend to attract and retain talent, align performance through a shared purpose, create a supportive workplace culture and finally expand continuous learning. The major things of our other strategic initiatives remain the same even as we continue to refine the elements within each pillar. Within our expand and diversified revenues pillar, our initiative to broaden our customer base consists of two main strategies. First, by expanding and diversifying our fleet we are focused on increasing our share of our customers’ equipment rental spend or budget. Second and equally important we are focused on adding new customers within new key vertical industries which broadened our revenue base and limit our exposure to any one specific industry. These strategies have already resulted in a positive impact with our 2018 annual top line growing at a rate nearly 2x the industry growth rate.

Within improved operating effectiveness we have formalized our operational excellence program to advance a company wide operating culture dedicated to continuous improvement, outstanding execution and ongoing operational effectiveness. Enhance the customer experience continues to drive ongoing improvement in our back office systems to better service our customers throughout their interactions with our team with on-time delivery, a quick response to service needs and timely and accurate invoicing. And throughout the organization we continue to instill a culture of disciplined capital management including programs focused on efficient fleet management, improvement in working capital, free cash flow and continuing margin expansion.

Now please turn to Slide #7, we remain absolutely focused on safety at the center of everything that we do. As I have said many times before safety awareness is the fundamental that we operate, how we treat our employees and how we work with our customers. We continue to make excellent progress on our total reportable incident rate or TRIR. Our TRIR performance has improved 22% since 2016 and almost 5% year-over-year. Throughout our locations we focused on the simple concept of a perfect day which means no OSHA recordable incidents, no at fault motor vehicle accidents and no DOT violations. In 2018 all of our regions recorded at least 85% perfect days, an accomplishment we are extremely proud of. But one we continue to strive to improve upon as we seek to achieve and maintain 100% perfect days for the entire company. As part of that goal and in support of building a robust safety culture, our safety training programs continue to expand in 2018 and will remain a major focus for us in 2019 and beyond.

Please turn to Slide #8, before I review our financial summary, I would like to comment on our final step in establishing Herc as a truly independent public company. Since we separated from our former parent company, we have been diligently working to remediate material weaknesses in our internal control of our financial reporting. Some of the prior weaknesses could not be remediated until we have established our own separate IT platform and systems to totally separate from our former parent. We are pleased to report that we have now remediated all material weaknesses including the redesign and implementation of new controls. I would like to acknowledge and congratulate the hard work and dedication of our Herc Rentals team both from operations and field support staff to meet this major public company requirement.

And now let’s review our financial results. We are pleased to report strong growth in equipment rental revenue and sales of used equipment which contributed to the 12.7% growth in total revenues we achieved in 2018. Equipment rental revenue grew 10.6% to $1.658 million. The growth was driven by improved pricing mix and increased volume. We reported net income of $69.1 million in 2018 compared to $160.3 million in 2017. The results in both years included net tax benefits associated with the Tax Cuts and Jobs Act of 2017. In 2018, net tax benefits were $20.8 million and in 2017, the net benefits were $207.1 million. Adjusted EBITDA increased 17% to $684.8 million at the high end of our guidance range. Adjusted EBITDA margin was 34.6%, an increase of 120 basis points over the prior year. Dollar utilization increased 150 basis points to 37.4% in 2018 as we benefited from pricing improvement and diversification of our fleet.

Slide 9 illustrates the continuing positive improvement we made each quarter in 2018 over 2017. Mark will go into the details of the year-over-year fourth quarter performance. But as you can see from the charts on this page, we made consistent progress every quarter throughout the year. Annual pricing improved 2.9% over last year with strong results each quarter and marking the 11th consecutive quarter of year-over-year improvement. Our 2018 pricing performance positions us well for 2019, with a solid base to current momentum into the new year. Our team’s ability to utilize our proprietary optimist pricing tool has been a major contributor to our positive pricing trends in the strong competitive market. This slide also shows the growth in our average fleet at OEC on a quarterly basis for 2017 and 2018 reflecting the substantial investment in new equipment in 2018 throughout the year as we continue to improve our fleet mix and age, while partnering with premium equipment manufacturers. Our fleet additions in 2018 provide us with a strong base on which to continue to improve the quality of our fleet, enhanced fleet efficiency and improve return on invested capital.

Now please turn to Slide #10. The improvement in price and mix continue to contribute to the improvement in our overall dollar utilization. We improved dollar utilization year-over-year throughout 2017 and ‘18 and reached 39.7% in the fourth quarter of 2018. For the full year, 2018 dollar utilization was 37.4%, a 330 basis point improvement from 2016 which was our first year as a standalone company. Fleet at OEC as of December 31, 2018 was $3.78 billion with an average age of 46 months compared with 49 months for the same period last year. Together, ProSolutions and ProContractor equipment now account for approximately $793 million of OEC fleet or about 21% of our total fleet as of the end of the fourth quarter 2018. That’s an increase of 6% in the value of that portion of OEC fleet year-over-year. While the pie chart on the left-hand corner shows the major categories of our fleet, you can see from the graph on the bottom right, we have changed our emphasis within the categories. The largest percentage of our fleet consists of aerial equipment at about 26%. The mix within aerial has changed with a slightly smaller percentage of aerial booms and an increase in the percentage of aerial scissors and other access equipment. Earthmoving equipment is now about 14% of our total fleet and we continue to favor investments in compact equipment, which has a higher dollar utilization opportunity for us. Compact earthmoving equipment increased to 8.5% of our fleet from 7.7% last year. A detailed breakout of our fleet categories is contained in our appendix.

Now, please turn the Slide #11. This map has been updated to show the growth expectations by state and province over the next 5 years. As you can see, the American Rental Association continues to forecast strong growth, particularly in the Southwest and Southeast with annual compounded growth rates higher than 6% over the next 5 years. To take advantage of that growth, in 2018, we continue to add urban locations to increase the scale of our operations in targeted metropolitan areas. During 2018, we opened new Greenfield locations in St. Peters, Missouri which is part of the St. Louis metropolitan market, in Covington, Georgia supporting the Atlanta metropolitan market. Additionally, we opened new locations outside of Seattle, Washington and Dallas, Texas. In 2018, we closed six locations in Canada which were unlikely to achieve our long-term performance requirements. These closures were reflected in the $5.3 million of restructuring costs we have reported for the full year 2018. We intend to add approximately four to six new Greenfield locations during 2019 to support our urban market strategy.

Now please turn to Slide #12, our strategy is driving further diversification of our customers and markets as well as industry mix. Local rental revenue grew almost 17% year-over-year and accounted for about 57% of rental revenue in 2018. National account revenue represents about 43% of the total and continues to grow as well. Our rental revenue by major customers segment for 2018 was shown in the rental revenue composition chart in the upper right hand corner of the slide. Our contractor and other customers’ equipment rental revenue grew the fastness with an increase of 14% and 16% respectively over the prior year. Contractors represented 35% of equipment rental revenues followed by industrial with 29%. Other customers include commercial and retail service, hospitality, healthcare, recreation, entertainment and special events which represented 19% of equipment rental revenue and the infrastructure in government sectors posted at 17%. Growth in new customer accounts continued to be quite strong throughout the quarter maintaining the solid pipeline for our future potential growth opportunities for us.

Please turn to Slide #13, key economic and industry metrics remain positive as evidenced by the architecture billing index which was 55.3 in January, a substantial increase from the December level of 51.0. Industrial spending was estimated to increase 7% in 2018 over 2017 and spending forecast for 2019 are showing a slight increase over 2018. Our conversations with industrial customers indicate expectations for continued growth in spending over the next few years. Expectations for U.S. non-residential construction spending for 2019 also continue to be healthy with expectations for a year-over-year increase of 3%. Longer term the American Rental Association forecast for equipment rental revenue growth remains robust with compound annual growth projected as 5.4% through the year 2022.

We expect secular trends in conversion to rental to ownership will continue as North American businesses follow the model of Europe and Asia where space comes with a premium cost. In those countries urban customers utilize rentals as a way to reduce cost and eliminate storage requirements. In North America companies prefer the ease and continuity that equipment rental companies provide through service and maintenance of equipment. This service enhances customer productivity and reduces overhead costs associated with maintenance facilities and staff as well as providing more balance sheet flexibility. Our strategy to focus on urban market coverage should further accelerate the rate of growth that we can achieve as urban customers increasingly use rental to offset space and cost constraints. We are making great progress on executing our strategy in 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.

So now let me turn the call over to Mark Irion, our Chief Financial Officer and he will discuss our quarterly financial results in more detail and then I will summarize at the end before we open the call to your questions.

[Mark Irion]

Thank you, Larry and good morning everyone. We continued to make good progress this quarter and for the full year. Our journey is still in the early stages, but as you can see from our top line growth, we are well positioned to maintaining our focus on flow-through and margin improvement in 2019.

If you turn to Slide 15, we will review the Q4 financial summary. Larry has already provided an overview of annual performance. Now, I will focus on some details of the fourth quarter. I will reiterate a few highlights then I will walk you through the fourth quarter year-over-year changes. We are pleased to report equipment rental revenue grew 8% to $447.7 million in the fourth quarter of 2019 against some tough comps of $414.5 million in the prior year period. The growth was driven by improved pricing mix and increased volume.

Total revenues increased 10.6% to $543.7 million year-over-year, our sixth quarter of double-digit growth. Net income in the fourth quarter was $33.3 million or $1.16 per diluted share compared with $214.3 million or $7.44 per diluted share in the fourth quarter of 2017. Both quarters included net tax benefits related to the Tax Act of 2017 was $6 million or $0.21 per diluted share this quarter compared with a net tax benefit of $207.1 million or $7.19 per diluted share in last year’s fourth quarter. Adjusted EBITDA in the fourth quarter of 2018 improved to 11.6% to $198.4 million over the same period in 2017, an increase of 17% for the year-to-date period. Adjusted EBITDA margin was 36.5% in the fourth quarter, a 30 basis point increase year-over-year and an increase of 120 basis points to 34.6% for the full year. We continue to focus internally on REBITDA which measures the contribution from our core rental operations without the impact of low margin sales of new and rental equipment.

As we pointed out last quarter, we are primarily a rental business and a keen focus on improvement in our rental operating margins will add value to our business over time. Different depreciation assumptions and other than the industry has an impact on margin on the sales of rental equipment we report in our financial statements. And as such, there is likely to be a 400 to 500 basis point gap in our adjusted EBITDA margins that is structural in nature rather than performance driven. For this reason, we will focus on managing our REBITDA margins and flow-through and have the goal of closing the gap versus our peers over the next couple of years. For the current quarter, we are very pleased with the progress we made in terms of improvements through our core rental business as measured in REBITDA. Through a strong flow-through of 62.5%, our REBITDA margin rose to 42.3% during the fourth quarter of this year, an increase of 160 basis points from the fourth quarter of 2017. For the year, the improvement of REBITDA margin was also 160 basis points and reached 39.6% in 2019 compared with 38% in 2017. There is a reconciliation of these measures in the appendix which I will think you will find useful in evaluating our operating progress.

To summarize the operating metrics at the bottom of this slide, our average OEC fleet grew 4.4% in the fourth quarter over the prior year and was up 4.8% for the year. Pricing was good in the fourth quarter improving 2.9% year-over-year, up across both local and national accounts and in all of our regions. Total utilization increased 100 basis points to 39.7% in the fourth quarter of 2018 compared with 2017 benefiting from the 2.9% increase in pricing as well as improved fleet and customer mix.

Slide 16 focuses on the changes in total revenues for both the fourth quarter and the full year. In the fourth quarter of 2018, total revenues grew 10.6% or $52 million to $543.7 million compared to $491.7 million in the fourth quarter of 2017. Excluding currency, rental revenue was the main contributor to revenue growth and increased $35 million or 8.4% compared to the same period last year. The higher year-over-year equipment rental revenue results, reflects the 2.9% increase in pricing, 2.3% increase in volumes with the remainder from improved mix and other. The improved mix is partially due to the revenue growth from local accounts and the ProSolutions and ProContractor lines of business.

In the fourth quarter of 2018, sales of rental revenue increased 30.2% or $18.8 million excluding currency and reflected our ongoing focus to improve fleet mix and to maintain the age and quality of our rental fleet. The largest portion of our sales went through auction channels, which accounted for 48% of the total sales volume in the fourth quarter of 2018 compared with 22% in the prior year. We generated proceeds of approximately 42% of OEC in the fourth quarter due to the large concentration of auction sales during the quarter. For the full year, our proceeds also totaled about 42%.

Please turn to Slide 17 to review the Q4 adjusted EBITDA bridge. Adjusted EBITDA for the fourth quarter was $198.4 million, an increase of 11.6% or $21 million compared to $177.8 million in the fourth quarter of 2017. The bridge shows that the largest contributor was the improvement of rental revenue with growth of $35 million. Direct operating costs increased $9 million over the fourth quarter of 2017 as a result of the higher rental equipment activity and related costs such as fuel, transportation as well as payroll and payroll-related expenses. Those costs were partially offset by an improvement in maintenance expenses.

Selling, general and administrative expenses increased by $8.1 million in the fourth quarter primarily due to increases in variable compensation incentives supporting revenue growth. A number of initiatives that were rolled out in the third quarter to reducing controlled expenses should continue to add value. While we are making good progress towards flattening out our operating expenses, we are committed to maximizing flow-through and to improving our EBITDA margin with flow-through targets of 60% to 70%.

If you turn to Slide 18, net income in the fourth quarter was $33.3 million compared to net income of $214.3 million in 2017. As mentioned previously, the largest impact on net income was the change in income taxes, which decreased $198.2 million over the same period in ‘17 driven by the net tax benefits related to the 2017 Tax Act. Interest expense for the fourth quarter decreased $4.2 million primarily due to the reduction in interest expense of our senior secured second priority notes through the partial redemptions made in March and October of 2017 and in July 2018. These savings were offset by the higher average interest rates on the revolving credit facility during the quarter compared with the prior year. Spin-off costs in the fourth quarter declined $4.3 million to $3.9 million from $8.2 million and are expected to be minimal in 2019.

If we turn to Slide 19, we have broken out our fleet expenditures and disposals on an OEC cost basis and it provided a rolling balance of the OEC value of our total fleet. The quarterly breakout of this information for 2018 and 2017 is also in the appendix. Total fleet at OEC was $3.78 million as of December 31, 2018. The average OEC of our rental fleet during the quarter increased 4.4% over the prior year quarter. For the fourth quarter of 2018, fleet expenditures were $84 million and fleet disposals at OEC were $193 million. The average age of our disposals in the fourth quarter was 84 months. We reduced the average age of our fleet to approximately 46 months at the end of the fourth quarter of 2018 from 49 months in the comparable period last year.

If we take a look at Slide 20, total debt was $2.2 billion as of December 31, 2018 which was about the same as the prior year. Net cash flow from operations for the year ended December 31 improved from $349.1 million in 2017 to $559.1 million in 2018 or $210 million increase. Net fleet capital expenditures increased for the full year from $341.3 million in 2017 to $499.1 million in 2018. Actual net fleet CapEx for the year was lower than the guidance we provided on our third quarter conference call, because we decided to take advantage of the strong used equipment market and moved more fleet than we had planned through auction channels. Non-fleet capital expenditures for the year totaled $77.6 million, up slightly from $74.6 million in 2017. Free cash flow for 2018 was negative $7.9 million and improved in comparison to negative $60.9 million in 2017. We were pleased with the progress we made during the year to improve working capital and reduce our DSO. A reconciliation of free cash flow is also in the appendix of the deck. We had ample liquidity of $668 million as of December 31, 2018, and we are continuing to focus on the disciplined financial strategy to reduce leverage and fund organic growth opportunities with our operating cash flow.

On page – on Slide 21, as Larry mentioned earlier, our guidance range for 2019 adjusted EBITDA is $730 million to $760 million or an increase of 7% to 11% compared with our 2018 adjusted EBITDA of $685 million. This year we expect to spend $370 million to $410 million in net fleet capital expenditures. The reduction in capital spending over the prior year along with the expectation of improved EBITDA should contribute to a reduction in our net leverage ratio by the end of the calendar year as we expect to generate strong free cash flow. 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 will turn it back to Larry.

[Larry Silber, President and Chief Executive Officer]

Thanks Mark. Before we move to the Q&A portion of the call, let me summarize where we are in our journey. Please turn to Slide #22. We are very pleased with the results we reported today and on our outlook for 2019. Our strategic initiatives are expected to continue to drive growth in revenue and dollar utilization. We expect to maintain REBITDA flow through of approximately 60% to 70% throughout 2019. And our adjusted EBITDA guidance is expected to be 7% to 11% higher than our 2018 results and we expect dollar utilization and REBITDA margins to steadily increase.

And now we look forward to your questions, so operator, please open the lines.

[Operator]

Thank you. [Operator Instructions] We will take our first question today. Please go ahead. Your line is now open.

[Neil Frohnapple, Buckingham]

Yes. Hi, Neil Frohnapple with Buckingham. Congrats on a great quarter and year.

[Larry Silber, President and Chief Executive Officer]

Thanks Neil.

[Neil Frohnapple, Buckingham]

Maybe a starting off question for Mark just on wanted to drilling on direct operating costs, so they ticked up a little bit in Q4 versus Q3, just curious looking out what’s embedded in EBITDA guidance for direct operating growth in 2019. And then as a follow-up could you just talk more about the initiatives to reduce direct operating costs, are there still opportunities for improvement here and if so can you highlight some of these initiatives?

[Mark Irion]

Yes, sure. I mean I think the general goal as we stated is just to sort of have DOE running flattish I guess which is very technical term. But that’s – and there is going to be a bit of noise just with certain amount of variability with revenue induced costs. But I would say the sort of guideline there is somewhere around 5% is something that we should be able to achieve that would generate the flow through that we are looking for. The initiatives that we have rolled out involved some XPO Logistics in terms of sort of consolidating the spend of [indiscernible] and similar initiatives with regards to fuel those are in place gaining traction and creating sort of savings in terms of the increase not necessarily absolute savings. And we continue to focus on the logistics of the business, so there are opportunities that we think for additional efficiencies as we go forward. So the general goal is flattish sort of DOE and SG&A to drive the flow through and that’s sort of what we are looking to focus on through 2019.

[Neil Frohnapple, Buckingham]

Okay, that’s helpful Mark. And then the net fleet CapEx outlook obviously implies less growth CapEx this year than in 2018. So, can you just talk about your confidence in achieving higher time utilization on like-for-like equipment, higher rental rates this year in order to deliver, I guess, greater than 5% revenue growth in order to leverage the DOE?

[Mark Irion]

Right. We’ve made substantial investments in our fleet over the last couple of years and we are sort of coming to a point where we’re looking just to maximize our utilization of those investments. So, putting less new CapEx than on top, just sort of human nature and efficiency and just the focus will allow us to improve our time utilization. We see markets very strong across our footprint and the demand opportunities [indiscernible]. So, 2019 becomes a self-help year in terms of just taking advantage of the investments that we’ve made historically maximizing the utilization on those, focusing on right and focusing in on efficiency just to get our margins improved and to improve the business performance.

[Neil Frohnapple, Buckingham]

Okay, thanks. I’ll pass it on.

[Mark Irion]

Great, thanks.

[Operator]

Thank you. We will now move to our next question today. Please go ahead, your line is now open.

[Seth Weber, RBC]

Hi, good morning. It’s Seth Weber from RBC.

[Larry Silber, President and Chief Executive Officer]

Good morning, Seth. How are you?

[Seth Weber, RBC]

I’m fine, thanks. How are you?

[Larry Silber, President and Chief Executive Officer]

Terrific.

[Seth Weber, RBC]

I wanted to I’ve couple of questions. Just the OEC on rent, the volume number 2.3% was a little bit lower than what we are looking for year-over-year growth. It’s the lowest spend in a while, I mean was there anything going on there that you’d call out, or is that sort of the right way to think about it going forward? First question. Thanks.

[Bruce Dressel]

Hi, Seth, this is Bruce. So, I would tell you that there is some room for improvement there and we’re focused on it as Mark stated. In our net CapEx guidance, we feel there is room for some improvement in our time utilization, and we see that as opportunity.

[Seth Weber, RBC]

Sure. Was there something in the quarter that you consciously pushed rate for volume? I mean was there something in the quarter though that you would call out that made that number a little bit light?

[Bruce Dressel]

No, I wouldn’t say other than some fairly tough comps year-over-over, but nothing in the market overall.

[Seth Weber, RBC]

Okay. So, you’re not surprised by the number, I guess.

[Larry Silber, President and Chief Executive Officer]

No, I mean there was there could be there was some opportunity there and we’re focused on that. But across as Mark stated, across all of our geographic markets we saw strong opportunity and growth and really a good healthy environment for pricing.

[Seth Weber, RBC]

Okay. And then, I might sorry, if I missed this, but did national account revenue grow in the quarter? I know it was up for the year, but was it up for the quarter as well?

[Mark Irion]

Yes. So, it was up for both the quarter and the year, and continues to grow albeit at a slower rate than our local accounts.

[Seth Weber, RBC]

Sure, okay. And then just lastly, we’re two months into the quarter here, we’ve heard some chatter that weather has not been helpful in the first quarter. Is there anything you you’d call out with respect to weather in the first quarter or is it kind of business as usual?

[Larry Silber, President and Chief Executive Officer]

No, I would tell you whether it was the fourth quarter or first quarter here, could the weather have been better, sure, but we are staying focused on diversification strategy and the fleet and the customer in their urban market footprint, so weather shouldn’t be an excuse.

[Seth Weber, RBC]

Okay, thanks very much, guys. Appreciate it.

[Larry Silber, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. We will now go to our next question today. Please go ahead, your line is now open.

[Rob Wertheimer, Melius Research]

Hi, it’s Rob Wertheimer, Melius Research.

[Larry Silber, President and Chief Executive Officer]

Hey, Rob, how are you today?

[Rob Wertheimer, Melius Research]

Good, thank you. Could you just, I mean I think you’ve answered the question somewhat, but I wanted to just probe a little bit on your CapEx outlook for next year. You remain, I assume fairly confident the market demand is there and that’s not, I guess, the driving reason for spending a little bit less than you otherwise could. Are you more confident that you can drive up time utilization through improvements that you made? Are you more focused on the balance sheet? Are you may be just a little bit more on what your decision framework was?

[Mark Irion]

Look, we are absolutely confident in the markets and the strength of the markets that we came out of 2018 with and we are just being more prudent in our capital. As Bruce mentioned, we have some room for improvement in our time utilization. We have added quite a bit of fleet over the last couple of years. We think we can squeeze a little more out of that fleet and up-tick it by being a little more disciplined with the capital on the one end. Look we are always going to be disciplined about looking at the balance sheet equations, but at the same time we feel we have ample opportunity to squeeze some more time out of our existing fleet before we look still adding $400 million worth of fleet to lot of fleet, so it’s not like we are about adding to the fleet, we are just being prudent about where we put it.

[Unidentified Analyst]

Perfect and if you wouldn’t mind I mean obviously there was a lot of consternation in 4Q about where the economy was going and so forth, are you seeing I mean could you just give us a walk through of your end markets, are you seeing anything that’s particularly weak or maybe characterize the end markets? Thanks.

[Bruce Dressel]

No. This is Bruce again. We are seeing kind of strength across all geographic areas including Canada in all segments of our customer base and kind of product mix like I stated earlier show kind of stronger markets that we are seeing a healthy environment for pricing and we feel comfortable that will continue into 2019.

[Larry Silber, President and Chief Executive Officer]

Yes. And I will add to that one of the – you got to remember where our strategy is, our strategy is focused around large urban markets, urban centers which are going to continue to have ample work going forward and we are not really seeing anything that would give us any level of concern across those markets.

[Unidentified Analyst]

Okay. Thank you, gentlemen.

[Larry Silber, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. We will now go to our next question today. Please go ahead.

[Ben Burud, Goldman Sachs]

Hi, good morning. This is Ben Burud on for Jerry Revich, Goldman Sachs.

[Larry Silber, President and Chief Executive Officer]

Hi Ben.

[Mark Irion]

Good morning.

[Ben Burud, Goldman Sachs]

Good morning, could you guys help us think about what level of price increases are embedded within your 2019 guidance, particularly in the context of the 2.9% pricing growth you reported this quarter and just looking at the back of the envelope based on your EBITDA and CapEx guidance it would appear that 2019 pricing growth of mid-2% range was embedded, is that kind of the ballpark we are looking at?

[Mark Irion]

We are not providing any specific guidance on pricing. I mean we have provided the guidance on EBITDA which includes sort of thoughts on revenues and pricing. But this has been consistent high-2s with the 3.2% in Q3 which you can see on the slide on Chart 9 and we don’t expect any change in direction in terms of our ability to generate pricing growth for 2019.

[Ben Burud, Goldman Sachs]

Alright. And then you have commented on wanting to get pro-solutions and pro-contractor up 25% to 30% of the fleet over the medium-term with pair at 21% today, can you help us think about how that will evolve over 2019 and can you give us an idea how accretive that specialty grouping as a whole particularly year-over-year in ‘19 versus ‘18?

[Bruce Dressel]

Yes. So this is Bruce again. So you are correct, we have always stated over this kind of 5-year journey that we would like to get that portion of our business to – into that 20% to 25% of our fleet. We are continuing to invest in the business we see opportunity. I spoke a little bit couple of quarters back about the absorption of the fleet that we bought for that that was put into that business, but there is still some room there. And it does drive a better return than the other parts of our business. So we will continue to invest.

[Ben Burud, Goldman Sachs]

And just upon a clarification so was it – over the 5-year plan is it 25% our 30% of the fleet or the 20% to 25%?

[Bruce Dressel]

No. It’s 25% to 30% of the fleet.

[Ben Burud, Goldman Sachs]

Got it. And then would you expect the return profile to improve year-over-year in ‘19 versus ‘18?

[Bruce Dressel]

Correct. Yes.

[Ben Burud, Goldman Sachs]

Got it. Thank you.

[Larry Silber, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. We will now go to our next question today. Please go ahead. Your line is now open.

[Unidentified Analyst]

Hello.

[Larry Silber, President and Chief Executive Officer]

Good morning.

[Unidentified Analyst]

Good morning. This is [indiscernible]. Thanks for taking my question. The free cash flow guidance next year because CapEx is going to be less, what is the net fleet capital expenditures as opposed to the gross number? In other words, what’s the free cash flow number you’re expecting next year will range?

[Mark Irion]

Jordan, we’re not really providing explicit free cash flow guidance. You can sort of walk through, I guess, your own estimates based on the sort of main point of the guidance that we’ve given. So, there’s adjusted EBITDA and then just some sort of broad-brush strokes, if you take out interest expense, whatever the expectation is there. Net CapEx as we’ve guided is $370 million to $410 million. There’s also that’s net fleet CapEx, so there’s also a non-Fleet CapEx, which you can look at what we did last year and come up with a number. But certainly, there will be a big increase in our free cash flow in 2019 just given the increase in cash flow coming in the form of EBITDA and the decrease in net fleet CapEx, which is the main expenditure that we incurred.

[Unidentified Analyst]

Seems like it could be several dollars per share in free cash flow versus basically breakeven this year, is that crazy?

[Mark Irion]

It’s not crazy, not crazy, no.

[Unidentified Analyst]

Okay. And the EBITDA margin next year the $730 million to $760 million, you think about revenue, what REBITDA or EBITDA margin does that assume?

[Mark Irion]

Again, we’re not really explicitly guiding on EBITDA that involves a lot and another couple of numbers in our guidance that we’re not comfortable putting out. But we do anticipate an increase in our EBITDA and an increase in our EBITDA margins through the year. And as you sort of fill out your model, I’m sure you will be able to put that together.

[Unidentified Analyst]

So, it was about 160 basis points this year. I would assume it’s at least that amount next year, because you won’t have the changeover from the heart system next year as well, correct?

[Mark Irion]

Correct. So, the cost some of the spin-off costs that we incurred in 2018 and some of the consulting costs that we incurred in ‘18 with regard to remediating the material weaknesses will all go away in 2019.

[Unidentified Analyst]

Give me a sense as to how much that was to margin, 50, 60 basis points?

[Mark Irion]

We are not we’re early in the year, where we’re just providing general guidance along the lines that we’ve put out, Jordan, so I can’t really get too much more specific there with you.

[Unidentified Analyst]

But it just seems like ‘19 could be a phenomenally strong year for our margin acceleration and much greater free cash flow, which hopefully will be recognized by the Street?

[Mark Irion]

Yes. And that’s implied in the guidance that we provided. So, we continue to see the Street that the end of 2018 was. We’re going to continue to build on that and focus on margin improvement for 2019, focus on improving our rights for 2019 and continuing the journey that we’re on.

[Elizabeth Higashi, Vice President, Investor Relations]

Hey, Jordan, we’ve got holding some more folks who are lined up to ask questions. So, we’re going to probably talk to you later, so if you could just do one short question really fast and then we move on. I’m sorry, you’re done. Okay, next one.

[Operator]

Thank you. We will go to our next question. Please go ahead, your line is open.

[Brian Sponheimer]

Hi, everyone. Brian Sponheimer.

[Larry Silber, President and Chief Executive Officer]

Hey, good morning, Brian.

[Brian Sponheimer]

Mark, a little reeducation about your depreciation of equipment, and you may not need to get too much into a comparison mode, but just how you look at it before you sell it?

[Mark Irion]

Well, I think it’s in our K in terms of our depreciation policies and if you feel like digging for case and comparing them to other rental companies, you can sort of see there’s a bit of a distinction there. The primary distinction being in our depreciation policy tries to have a zero gain on equipment sales at the end of the life. And I mean that is what it is. And you can see that there is a big distinction in our used equipment margins when we sell it. There’s not a big distinction in the proceeds that we get as a percentage of OECs that we’ll get in the same proceeds. That’s purely a function of the depreciation schedule and that’s sort of the main distinction that we’ve got. And that’s why we are sort of focusing our attention and our internal focus and trying to communicate to you guys that EBITDA is the real way to sort of measure our performance just given that distinction in depreciation.

[Brian Sponheimer]

Right, certainly. Well, I’m trying to get at so if you start to sell less equipment in 2019 and 2020 because you have refreshed the fleet, just for those that are looking at the EBITDA line as opposed to the REBITDA line from a margin perspective that should be less impactful and less negative for you at that line, correct?

[Larry Silber, President and Chief Executive Officer]

That is correct. If you sort of just mathematically took used equipment sales down to zero, then you are left with REBITDA and you have got a clean comparison between EBITDA and REBITDA at that stage.

[Unidentified Analyst]

Right. Well, congratulations to all of you. Look forward to talking to you after the call and best wishes for 2019.

[Larry Silber, President and Chief Executive Officer]

Thanks Brian.

[Operator]

Thank you. We will now go to our next question. Please go ahead.

[Steven Ramsey, TRG]

Good morning guys. This is Steven Ramsey at TRG. Thinking about Greenfield locations this year, made a few last year, can you talk about kind of how you are targeting cities for this year and are those connected to existing branches and will the fleet in those Greenfields, are they more weighted into the pro-category in the targeted range of that 25% to 30%?

[Larry Silber, President and Chief Executive Officer]

Well, I will maybe start with your last question first. Generally when we look at adding a location we would tend to look at primarily a classic location that most likely would have ProContractor product and may have a smattering of ProSolutions equipment in it. So we wouldn’t necessarily be targeted for those as a standalone per se. They would be perhaps contained within that business. But our main focus continues to be rounding out and filling out our urban markets where we can add capability and also improve our operating effectiveness by having additional facilities in urban areas that allow us to move and transfer fleet and maintain fleet to be more accessible to our customer base in large cities and large urban markets. Perhaps, Bruce do you want to that?

[Bruce Dressel]

No Larry, I think you covered it well. We’re just focused on the large urban markets, large MSAs within the kind of footprint that we are already covering and filling in those markets to gain better efficiencies of our fleet, better utilization. And we will add some pro-solutions specific locations in those markets we call it kind of a green growing market. Once we have that we can layer in a pro-solutions business, especially a business that kind of benefits from dealing with our existing customer base and gaining more wallet share from that customer that we are already serving.

[Steven Ramsey, TRG]

Great. Thanks. And then thinking about CapEx that’s non-rental in the mid-70, high-$70 million in the past couple of years, is that where the Greenfield where we would see most of that on a CapEx basis and should we see since you are talking Greenfield in ‘19 being similar should we see some ballpark range in the $70 million ish on non-rental CapEx?

[Mark Irion]

This line includes I hope the Greenfields leasehold improvements and build-outs are included in that line, but the main driver is delivery vehicles and delivery fleet, so the Greenfields aren’t really a significant amount in that number. I think for ‘19 you can probably look at that as reducing similar to as of the net rental fleet CapEx. So you would probably expect that to sort of drop down a little bit going into 2019.

[Steven Ramsey, TRG]

Great. Thank you.

[Mark Irion]

Thank you.

[Operator]

Thank you. We will go to our next question today. Please go ahead.

[Seth Weber, RBC]

Hi. It’s just a quick follow-up, Seth Weber. Just a clarification the 60% to 70% pull through number I think Mark that you cited is that EBITDA or REBITDA?

[Mark Irion]

REBITDA.

[Seth Weber, RBC]

Okay, super. Thank you, guys. I appreciate it.

[Mark Irion]

Thank you.

[Operator]

Thank you. We have no further questions at the moment.

[Elizabeth Higashi, Vice President, Investor Relations]

Okay. Well, thank you all for joining us on the call today. And if anyone has any further questions as always please don’t hesitate to call me. We look forward to seeing you all soon. Thanks a lot.

[Operator]

Thank you. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.