Herc Holdings Inc.

Good morning. Welcome to the HERC Holdings First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi, Vice President of Investors Relations. Please go ahead.

Thank you, and thank you all for joining us this morning. Welcome, everyone, to our first quarter 2020 earnings conference call. We all hope you and your families are safe and well. We're conducting today's call following the Centers for Disease Control and Prevention guidelines, using both social distancing and the use of technology for remote access. Earlier today, our press release, presentation slides, and 10Q were filed with the FDC and are all posted on the events page of our IR website at ir.kerprentals.com. This morning, I'm joined by Larry Silbert, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief Operating Officer, and Mark Erion, Senior Vice President and Chief Financial Officer. We'll review the first quarter, our view of the industry, and our strategic outlook. The prepared remarks will be followed by an open Q&A. 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 slide 2 of the presentation for our complete safe harbor statement, as well as the risk factors section of our annual report on Form 10-K for the year ended December 31, 2019. 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.

Thank you, Elizabeth, and thank you all for joining us this morning. It's been quite a start to 2020. The quarter began as expected with volume on rent and pricing relatively solid and moving in the typical seasonal patterns. Then in late March, our business was impacted by wave after wave of COVID-19 related disruptions to activity in major metropolitan markets that has significant impact on rental volumes. While the velocity of the economic downturn is unlike anything any of us has ever experienced, The senior leadership team on this call has, on average, more than 30 years of experience in the equipment rental industry. We've experienced several recessions and other unexpected events that temporarily impacted rental equipment demand, and while this pandemic surprised everyone, we're taking steps to manage through the changing environment. When business conditions recover, we intend to be optimally positioned to assist our customers in the turnarounds. The impact on our end markets has been fast, and we had to react very quickly, putting in place our recession playbook in short order. First and foremost, our reaction to the onset of the COVID-19 pandemic was to focus on the health and safety of our team, our customers, and our communities. And we quickly communicated and implemented actions to take precautions to prevent the virus from spreading. We have a resilient business model and rent equipment to a diverse group of customers and industries. many of which provide essential and critical business services. That diversity should help mitigate some of the impact of the COVID-19 pandemic on our business results. Our leadership team worked quickly to evaluate the rapidly developing trends we were seeing in the market and adjusted our business to take into consideration the potential impact of the pandemic. In evaluating the changing environment, we took steps to cut variable costs and net capital expenditures. Aaron will cover in detail the steps we have taken to adjust our business activities. We also developed various downside scenarios to assess our ability to manage in an increasingly challenging environment. Mark will discuss those assumptions later on our call. We have prudently managed our balance sheet and are well-placed with modest leverage and ample liquidity to sustain our operations in even the most difficult environments. Our disciplined capital management approach is an important element of our strategy. and we'll continue to make adjustments as necessary to efficiently operate and support our customers in this uncertain environment. Now, please turn to slide number four. We implemented CDC recommendations across all of our operations and reinforced hand washing, social distancing, and the avoidance of touching your face, as well as infection control at work and in the home in frequent communications. We restricted non-essential travel, and moved 95% of office staff to remote work in early March. We put in place policies regarding sick individuals and self-quarantining and stepped up procurement of essential cleaning materials, protective gear, and disinfectants. We implemented additional cleaning procedures for our branch operations and for returned equipment. We are now monitoring and following CDC recommendations with respect to screening employees and instituting protective measures for employees interacting directly with customers. And while we enhance our operational and safety procedures and have been operating in a challenging environment, all of our regions, I'm happy to say, have reported at least 85% perfect pays. Before I began the discussion of our results, I want to thank all of our team members for their work supporting the critical and essential work of our customers and communities in this challenging environment. I'm proud of the can-do attitude of our team as we work together to navigate this challenging time together. We remain ready to support our customers' operations in whatever capacity we can in this uncertain time, and especially when construction and business activities resume. The health and safety of our team, our customers, and our communities remain our highest priority while we continue to provide the equipment and services required by our customers. Now, please turn to slide number five. We're pleased with our performance in the first quarter, despite the COVID-19 related disruption that started in mid-March. We improved pricing once again. We achieved excellent flow through from better operational efficiencies, and we continue to generate strong operating cash flows and are well positioned with ample liquidity to fund our business needs in 2020. Now, please turn to slide number six for a brief overview of our first quarter financial results. Equipment rental revenue grew 2.4% or $8.9 million to $386.5 million. Total revenue declined to $436.2 million due to lower sales of used equipment and lower retail activity. We reported a net loss of $3.7 million or 13 cents per diluted share in the first quarter of 2020, and improvement from last year's net loss of $6.7 million or 23% per diluted share in 2019. Adjusted EBITDA increased 3.8% to $147.7 million in the first quarter, reflecting the success in our cost control initiatives. Adjusted EBITDA margin was 33.9% for the first quarter, which was a 400 basis point improvement over prior year. Now, I'm going to ask Aaron to pick up from here to discuss our first quarter operating performance in the current environment. Aaron?

Thank you, Larry. Before I begin our discussion today, I'd also like to thank our team members for the professionalism and dedication they are exhibiting throughout this new COVID-19 environment. This has been a shock to what is typically the beginning of our seasonal uptick in rental activity. Our branch managers, our counter staff, mechanics, truck drivers, yard workers, and our sales organization have been serving our customers and continuing to deliver what we call flight glove service while anticipating and meeting the needs of our customers. They're on the front line every day, and we want to make sure they know they are appreciated by all of us. I also want to thank our support teams in operations, fleet procurement, and safety, as they have provided tremendous field support. Now, let's move on to our discussion of first quarter operating results. Please turn to slide eight. Shelter-in-place directives had an immediate effect on our entertainment business starting in mid-March. Film and TV productions, music festivals, and sporting events were postponed or canceled. In a few major urban cities, construction sites were closed down as municipalities and states began to limit activity by non-essential businesses. Our OEC on rent peaked in mid-March. We immediately worked with our customers who were forced to stop activities midstream to help them consider how to handle fleet they wanted to take off rent. Where possible, if the equipment was secure, we left the equipment on site but took it off rent. This enabled us to keep transportation costs down, assist the customer, and should make it easier to start renting once activity returns. We are closely monitoring our rental activity and rental volume in all of our branches. experience lessening demand and are making adjustments to our staff hours on a branch by branch assessment. We are regularly reviewing branch rental volume transaction activity, rental revenue trends, fleet utilization, and other key metrics. About half of our branches have reduced certain staff hours. They're either rotating one week off a month or taking one or two days a week reduction in hours affecting about 10 to 12% of our employees. We monitor these trends closely and will take additional action as necessary. We are maintaining health and welfare benefits for all of our furlough team members as we value their experience and expertise. Please turn to slide nine. Specialty includes pro solutions and pro contracts are now accounts for approximately $840 million of OEC fleet or about 22% of our total fleet as of the end of Q1 2020. Our core fleet of aerial, material handling, trucks and trailers, and earth moving are also broken out on the slide. Our fleet expenditures at OEC were $109 million in the first quarter, about slapped with the prior year's quarter. The COVID-19 market impacts began in late March, so we were well on our way into the normal Q1 capital expenditure cycle. We responded immediately by canceling purchase orders and cutting back on deliveries. These adjustments will show up in Q2 and Q3. OEC disposals were $110 million, substantially lower than the $193 million of OEC we sold last year. Our disposals were down in the beginning of the quarter as part of our strategy to minimize replacement CapEx requirements. Then with markets shutting down in the end of the quarter, the resale channel started to tighten up. We are okay with selling less fleet. Our fleet age is young enough that we can sweat the fleet a bit, even incur a bit more maintenance as we keep the fleet rental ready. We could possibly push used equipment sales out until next year when we hope to see more normal economic and equipment sales activities. We sold approximately 47% of our fleet through auction in the first quarter, down a bit from prior year due to the tightening of auction channels in late March as metro markets started sheltering in place. Average fleet age as of March 31st, 2020 was 46 months, flat with the same period last year. There's plenty of room for us to age our fleet while we manage through this COVID-19 induced economic slowdown. A quarterly breakout of this information along with a rolling balance of our total fleet is also in the appendix. Please turn to slide 10. We have a diverse customer mix with many of our large national account customers operating in essential business sectors. Most of our locations are open for business and our team is on the ground looking for opportunities to support our communities. Our rental revenue by major customer segment for 2020 is shown in the composition chart on the left side of the slide. Contractors represented 32% of equipment rental revenue, followed by industrial customers with 31%. Other customers represented 19%, and infrastructure and government increased 18% of the total. National account revenue represented about 45% of the total for Q1, with local rental revenue now representing 55% of total rental revenue. Our national accounts are primarily considered essential businesses as they include major industrial customers such as utilities and energy, healthcare, and agriculture. This segment of business has been a lot more resilient in the COVID-19 slowdown and is a key strategic advantage for HERC. Our work for local, state, and federal government and infrastructure projects is ongoing and, as noted, accounted for about 18% of rental revenue. in the first quarter. We're also supporting the health and safety initiatives of private and public responders through rental of power generators, climate control, temporary containment wall structures, and lighting. Our sales organization is staying focused in a difficult environment. Our near-term sales efforts are focused on essential businesses and activities that are continuing within the shelter-in-place directives. These include sectors such as government services, healthcare, warehousing and distribution, industrial manufacturing, and emergency service contractors. Ours is a relationship and solutions business, and via virtual FaceTime or phone calls, our sales organization is focused on staying in touch with our customers despite the shelter-in-place mandates. Our entire team is doing an outstanding job, and we intend to continue to ensure that we operate safely and efficiently while serving the needs of our customers and communities. I'll now pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. On slide 12, we have the financial summary of our first quarter 2020 results, driven by rate improvements that offset a slowdown in volume on rent. The first few months of the quarter were consistent with their expectations going into the year and on a similar growth trajectory for the last couple of years. Then the COVID-19-induced shelter-in-place initiatives began in mid-March to have a significant impact on our rental volumes. This impact was only felt in the last couple of weeks of the quarter, so the quarterly results do not fully reflect the COVID-19 impact, and we will provide some more discussion on what we are seeing in April in a couple of slides. Equipment rental revenue increased 2.4% from $377.6 million to $386.5 million in the first quarter of 2020. Total revenues declined to $436.2 million, primarily due to to lower sales of rental equipment, which Aaron has already covered. Adjusted net income in the first quarter was $1.1 million, or 0.4 cents per diluted share, compared with a net loss of $6.5 million, or 23 cents per diluted share last year. More details regarding our net income bridge and the non-GAAP reconciliations are included in our appendix. Adjusted EBITDA in the first quarter of 2020 increased 3.8%, or $5.4 million to $147.7 million over the same period in 2019. Adjusted EBITDA margin improved 400 basis points year-over-year to 33.9% in the first quarter. The first quarter reflected excellent progress in terms of flow-through. We reported EBITDA year-over-year flow-through of 107.4%, which benefited from absolute reductions in SG&A and lower DOE. Our focus on rate growth, capex, and self-help cost initiatives has helped to turn a small amount of rental revenue growth into a decent amount of EBITDA growth and free cash flow. As a result, we grew EBITDA margin by 180 basis points to 38.1% during the first quarter of this year, a record for HURT. On slide 13, we highlight our progress on pricing and dollar utilization. The graph on the upper left illustrates our year-over-year pricing, with the latest quarter up 2.4% over last year. Our pricing improvement continued in the initial part of the first quarter, and we generated another quarter of good rates. The impact of the COVID-19 slowdown is not apparent in these numbers, and is still not yet clear. The initial COVID-19 impact was volume-related. Jobs shut down, work stopped, and the gear came in or got pulled off rent. demand was effectively shut down, so it wasn't really a rate negotiation type environment. Certain segments like oil and gas that are in a slightly different cyclical slowdown are also looking for rate concessions. But for the most part, the impact to date is in the volume. The chart on the top right of the slide shows average fleet at OEC was up 1.7% in the quarter over last year. As Aaron mentioned, We were on track with our normal capital expenditure cadence pre-COVID, which is typically front-loaded to Q1 and Q2. We had a decent amount of capex on our yards, all being delivered by mid-March when the economic impact of shelter-in-place initiatives became apparent. Since then, we have cut most capex that were scheduled post-April and are looking to reduce capex in 2020 to somewhere around half of our 2019 net capex. The bottom right chart shows a decline in average feed on rent or rental volume during the first quarter of 2020, which was 2% compared with the prior year. Rental volume was solid in comparison to prior year pre-COVID-19, then began to trend negatively in the back half of March. Despite the initial impact of the COVID-19 slowdown, first quarter dollar utilization reached 35.7%, an increase of 10 basis points over 2019. a historic high for the first quarter. The adjusted EBITDA waterfall on slide 14 shows adjusted EBITDA for the first quarter was $147.7 million, an increase of 3.8% or $5.4 million compared to $142.3 million in the first quarter of 2019. The chart starts with higher equipment rental revenue up $9.2 million over prior year. Despite growth in rental revenues, Direct operating costs were down by half a million dollars for the first quarter of 2019, primarily due to strategic reductions in freight and delivery costs. These reductions were partially offset in the first quarter by increased personnel and personnel-related expenses and facilities costs. SG&A expense declined 2.4% to 69.8 million as we reduced professional fees significantly. those savings were offset by higher personnel-related expenses and an increase in bad debt reserves. As you should all be aware by now, we like to focus on REBITDA, as this 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 policies. The combination of improved rental revenues and reduction in our cash operating expenses, it's a rebitda year-over-year flow through of 107.4% and drove a 180 basis point improvement of rebitda margin to 38.1%. Overall, a solid quarter, and we continue to deliver on our margin improvement initiatives. Aaron has thanked the ops team, but I'd like to take a little time here to thank the field support team for their contribution to these results. and their contribution to getting our results out in a seamless and timely manner. Our back office went from working in the office to working at home with a short couple of days' notice. And thanks to the efforts of our IT, HR, and finance teams, we pulled it off pretty much seamlessly and without a hitch. We remain productive and effective in providing white glove service to our branches and customers. Please turn to slide 15. For the quarter ended March 31, 2020, free cash flow was $39.2 million. This quarter's free cash flow was impacted by the timing of an interest payment on our notes and lower disposals of rental equipment. Net average decreased to 2.7 times compared with 2.9 times a year ago, solidly within our targeted range of 2.5 to 3.5 times. And our credit ratings are a solid B1 and B+. Total debt was $2.1 billion as of March 31, 2020, about the same as the prior year, and with no near-term maturity as a result of the refinancing of the senior notes and ABL credit facility last summer. The actions we took last year to refinance our balance sheet have us well positioned to navigate through the challenges ahead of us. We have no material covenants on the senior notes and no material covenants to be tested on the ABL until availability is below 10%, or $175 million. We had ample liquidity of over $1.1 billion as of March 31, 2020, comprised of $954.4 million on our ABL credit facility and $127.1 million on our AR securitization, with cash and cash equivalents of $55.8 million. Our business model is resilient. And as a result of the adjustments we have made to Fleet CapEx and reducing our variable expenses, we are not a significant consumer of cash and should be able to generate free cash flow in 2020 under current projections for the economy to open up in the back half of the year. On slide 16, let's discuss further some of the COVID-19 impact we have seen today. A quick few things for change from our last quarter call. Many economists are now forecasting second quarter GDP could be down anywhere from 18% to 38% compared with last year. The consensus forecast suggests some recovery in the third and fourth quarters, but for the year GDP could be down 2% to 7%. Construction across the country has been slowed by either slight closures or lack of workers. Dodge forecasts that non-residential construction starts could be down 13% in 2020 with a 5% recovery in 2021. The situation is fluid and facts change rapidly from week to week. Luckily, Hurt has a leadership team of seasoned industry veterans and have rapidly implemented the Downcycle Playbook over the last month or so. Slide 17 shows how our business has been impacted to date. With the situation developing so fast in so short a time, We will discuss here what we have experienced so far in April, and you can extrapolate out based on your assessment for the remainder of the year. April rental volumes are trending down by approximately 15 to 20% in comparison to prior year, which could potentially have a negative impact to April rental revenues of 20 to 25% versus prior year. The entertainment business was particularly hard hit, with studios and the event business shutting down. The national accounts business has been more resilient as it has weighted heavier towards essential services and some parts of our specialty business are actively involved in setting up testing facilities and temporary healthcare facilities. This looks to be the extent of the impact in a fully sheltered North America. We have recently seen some positive signs that the decline in volumes may be bottoming out. At least the rate of decline has reduced significantly. We monitor activity on a daily basis and adjust accordingly. We believe that the length of the closures will determine the severity of the impact on our 2020 results, which remains highly uncertain. We have taken immediate actions to dramatically cut variable expenses, including overtime, outside transportation costs, hourly labour at impacted locations, free rent, etc. Our focus is on taking out external costs while maintaining our core team intact. We are not anticipating significant layoffs in the current environment and are maintaining all the healthcare benefits. Our focus is on TeamHerc and our customers. We have invested in our team and our team will be intact coming out of this crisis to respond to rental opportunities and service our customers and communities. We have a fixed cost business model to a certain extent. and the amount of flow through that we generate in the good times limits the amount of cost we can mitigate in tough times. There will be an impact to our margins despite the cost savings we have implemented. We should be able to manage decremental REBITDA margins in the range of 45% to 55% in current conditions. Emphasis here on REBITDA margins as EBITDA will have an impact from our lower equipment sales volumes. As discussed, we have taken action to substantially reduce our capital expenditures and should be able to reduce 2020 net capex to somewhere around half of what we spent in 2019. Even in this scenario, with rental revenues down by 20% to 25% for a number of months, we are unlikely to consume cash and could still end the year with positive free cash flow. Given the uncertainty of the impact of COVID-19 on future North American business activity, In our business specifically, we are withdrawing our 2020 guidance. At the beginning of this presentation, Larry focused on our business priorities on the same slide as the pyramid which shows our vision, mission, and values. These statements guide us in good times and challenging times. How we manage through these challenges will define us as a company, as leaders, and as individuals. We are committed to making HERC the employer, supplier, and investment of choice and we intend to emerge from this challenge better and stronger. And now I'll pass the call back to Larry.

Thank you, Mark. Before we go to Q&A, I'd like to summarize where we are today. Throughout this challenging period, we will stick to our purpose, and that is to equip our customers and communities to build a brighter future. We intend to support our customers in this challenging environment with a team that is committed and dedicated in a safe and healthy environment. Our business model is resilient and we're committed to the strategy we laid out four years ago. We believe our response through this changing environment has been swift and executed well. We have taken steps to cut costs and reduce capital requirements. We have a solid balance sheet and ample liquidity with no near-term maturities. We're sticking to our stated goals and through solid execution, we intend to improve value for our shareholders, customers, and employees in the long term. And now for your questions, operator, please open the lines.

We will begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Jerry Rebich from Goldman Sachs. Go ahead.

Hey, everyone. How are you folks? Good.

Good morning, Jerry. How are you?

Doing well. Thank you. I'm glad to hear you're all doing well. Can we expand a little bit more on the pricing comments that you folks made in the prepared remarks? You mentioned there's some price concussions coming in the oil and gas market. Can you just expand on order of magnitude and just update us on what proportion of your business could be impacted and, you know, how do you expect that? to play out relative to your other end markets as well?

I mean, the whole pricing situation is fluid and very hard to sort of give a lot of clarity on. Oil and gas in total is something, you know, low single digits in our business that's upstream and downstream. You know, typically the pricing impacts on the downstream business, which say is, you know, less than 5%, But just given the magnitude of this oil and gas, we're also seeing downstream conversations taking place, and that's, say, mid-single digits in terms of that sort of low teens that we're talking about. It's case by case. It's customer by customer. So it's not really something that we can give you, not even something that we've got clarity in terms of how that impacts us directly. I think we'd be happy to get out of the quarter with flat pricing. but, you know, it's still early days, and we kind of have to play the rest of the quarter out.

Okay, thank you. And then in terms of the CapEx outlook and the free cash flow comments, should we essentially think about CapEx going next to zero for you folks? Are there any areas where you folks will be investing and plea to, because I don't think we've had this type of, decline, at least as long as financials are available for this business?

Yeah, so the direction we're giving for the year is about half of 2019. So that's still a positive. There is still some positive CapEx in there. And we still will be spending a small amount of CapEx every month. There are opportunities in the specialty business that we invest in. pockets of the business that have slowed down. So there's a small amount of capex that happens in no matter what the environment is, but it will be dramatically reduced. And as I said, you know, somewhere around half of what we spent last year.

Okay. And lastly, the flow through comments were pretty encouraging of 45 to 55% decremental margins. Can you just talk about what parts of the cost structure you're able to scale back? It looks like that implies Correct me if I'm wrong, Mark, but that you're able to reduce operating costs by, call it 70% of the sales decline. Maybe just flesh that out for us in terms of what's enabling you to cut costs so significantly.

Yeah, so we've, you know, it's an experienced team. You know, we've hit all the sort of key notes in the playbook really quickly. You know, this happens so fast. It's been a busy couple of weeks. Outside Haula, we've effectively taken out of the business. We've adjusted hourly wages at certain locations that have seen a dramatic volume drop, so there's a cost savings there in terms of our wages. We have maintained healthcare costs throughout, so that's something that we're continuing to focus on support. We think that's very appropriate in this environment. Over time, so, you know, just about any variable cost that we've been able to make an adjustment to, we've sort of gotten into and just taken out that spend. Anything that's sort of leaving the business for outside consultants or outside expenses, we've looked to cut and we've sort of looked to maintain our expenses in terms of payroll and internal costs as much as we can.

Thank you.

Cool. Thanks, Jerry.

Thanks, Jerry. Stay safe.

Our next question is from Ross Gilardi from Bank of America. Go ahead.

Good morning, guys, everybody. Good morning, Ross. How are you? Hanging in there. Glad to hear you guys are doing okay and managing the business as best you can through this environment. Mark or Larry, I was just wondering if you could elaborate on the decline in fleet on rent of 15% to 20% in April with total rental revenues down 20% to 25%. Is the difference pricing or mix, or maybe it's both, but can you help us bridge that gap a little bit?

Yeah, so this is, like I said, there's a small impact on pricing that we really haven't, you know, haven't got completely mapped out on the month. But it's mostly volume, you know, so it's mixed in volume. The HES, the HES and entertainment business does price at a premium. And the mix of some of the business coming off rent is having that sort of slightly different ratio in terms of volume to rental revenues.

I was curious about the comment that you think the declines in fleet on rent have bottomed out. Are you suggesting that initially that down 15% to 20% was down by a greater amount and now it's only down 15% to 20% or are you run rating down something less than 15% to 20% as we sit here today? I mean, I realize this is like day-to-day.

Yeah, look, I think initially it started out with the major metropolitan markets, things coming off rent, and it's been trailing and been holding at that level that we talked about in that 15% to 20% now for a couple of weeks. So that's why we say we think we've We may have, you know, hit a point in which it's, you know, somewhat near or at the bottom, and we're optimistic that as businesses and customers open up over the next several weeks and months, that we can impact that in a positive direction.

And that decremental margin range that you mentioned for businesses the rental business, I'm assuming that that assumes you don't have any material price degradation, which I totally understand the reasons to believe that in the immediate term. But I just wanted to clarify that. And at what point, Larry, or any members of the team, do you think the pricing conversation changes? Like when does the industry – maybe have to blink. Like, if this goes on for another, if you're sitting here at, you know, low to mid-50s or even something below 60 time utilization, you know, getting into, you know, mid-summer, is that kind of the point where the pricing environment starts to get more difficult? Or any thoughts on that as to how long this remains just a time mute event versus... something with potentially more severe pricing pressure?

So two things. There was an assumption of modest pricing decline in that 20% to 25% number. You know, like I mentioned, certain segments that have been impacted are sort of premium priced, but not dramatic, as you said, not material. And then it's pure speculation as to what happens on the way out. So just my gut would say that if it's a slow creeping rollout, then that gives more opportunity for pricing negotiations and sort of, you know, a supply-demand imbalance. And if things open up pretty quickly, you know, the same way that they shut down, then I would think it's more of a just get back to work and get the seat on rent and less of a sort of price, you know, price environment?

Remember, look, you can't generate demand with pricing. Demand is going to be what demand is. Generally, our customers that we've been fortunate enough to supply in the past are valuing the service and the reliability that we provide them. We would expect that need to continue and we'll continue to try to maintain our pricing structure that we had going into this coming out of it.

Just the last one I wanted to ask, and I'll turn it over. The free cash flow, I understand you're saying you expect to be positive free cash flow, but the comment sounded a little bit tentative. I would think, given the CapEx reductions and what you're doing on the cost side, that you know, positive free cash generation, essentially pretty significant free cash generation would be kind of a given, and you're one of a downturn, or this is a very unique downturn. Can you elaborate on that a little bit, and what, I don't know if I heard that wrong, but what are the variables that you're considering, like, is it a matter of whether or not you have sizable cash restructuring charges to take, or Why wouldn't it be kind of a slam dunk that the company is going to be very comfortably free cash positive this year?

I mean, there's just not a lot of slam dunks out there where we sit today. So the variability is just how long we're sheltering in place and what the extent of the shutdown is. Assuming that this is a couple of months of shutdown and we start opening up in the summer, then yes, we should be free cash flow positive. But if this was to drag on for the whole year, then that starts becoming a little bit more of a challenging scenario.

And I would add to that, Ross, the used equipment market has tightened up, and so we're going not selling used equipment, which generates cash. We're going to be aging our fleet, sweating it a bit, and not generating cash from the sale of used equipment, which is another variable.

Okay. Slam dunk was an inappropriate term. Sorry, I used that, obviously, a lot today here.

The NBA is still shut down. There's no basketball.

Thanks so much. All the best. Thanks, Ross.

Our next question is from Rob Widener from Milius Research. Go ahead. Hey, Rob.

Hey, good. Hi, guys. Good morning, everyone. Good morning. So thanks for the clarity on April. It's obviously very helpful in an uncertain world to know how far things are down. If I can ask her just a bit more, and I understand it may be too much, but I mean, is there a wide variation in the end market? So if you were to take California or the East Coast, was that down like 30 and that's the true bottom and an actual shutdown, you know, parts of the states not being? I don't know if you have any color on that or on, you know, declines on your, you know, contractor versus infrastructure versus government kind of thing.

Yeah, I'll let Aaron pick that up for us.

Yeah, sure. Thank you. We do have sectors that are performing as usual. A lot of the government's infrastructure sectors are still performing very well. As we mentioned, our specialty business is performing well. And then when you look at geography, you know, it tends to be a lot of the more rural markets have had less of an impact. And then the urban markets is really dependent upon the actions the stay-at-home actions and the severity that the governors have put in place. So there is some variations out there for sure in our entire network.

Okay. Okay, that's helpful. And then maybe this is just for you, Larry, and it's early. I understand that in a very uncertain environment. But you talk about sweating the fleets and aging out the fleets. When you look at the forward indicators, you know, we may have a construction slowdown for a year or two. You know, who knows? What do you think about sort of shrinking the fleet? You know, just allowing, you know, some sales and shrinking it down is maybe the right thing the industry should do. I don't know if you consider that to be the right thing for you to do.

Well, you know, at the moment, you know, we're at a point where we aren't really considering that. There will be some natural attrition on some retail sale of used equipment out of our branches. but we're not going to really focus on the wholesale or the auction activity of the fleet out of the branches. Our fleet age is about 46 months going into this COVID period. We can easily age this fleet to the mid-50s without too much additional cost on R&M, you know, pick up a couple of percent on R&M over the next year, year and a half. and we can age the fleet. But I don't think at the moment, unless some industries absolutely, you know, dry up and go away, I don't see us shrinking our fleet at the moment. We were planning to grow our fleet, you know, modestly this year. We have, you know, a number, we said earlier in the year, we're going to have six to ten branch openings this year. So we can, instead of buying capital for that fleet, move capital around into those locations and consume that fleet in those new markets.

That's very helpful. Thank you. Thanks, Rob.

Our next question is from Brian Spannheimer from Gabelli Funds. Go ahead.

Hi, good morning, everyone. Hey, good morning, Brian. My best to all of you and also to everybody else that's on the call. I just have one question. I think there have been a lot of good ones that have been asked, but as you are putting Fleet to work in what would typically be thought of as kind of temporary support for this relief effort, does any part of that seem like it could be a permanent sort of rent? And could you maybe quantify what that might look like on a on an annual basis.

Aaron, can you pick that up? Yes, yes, definitely. There's been quite a bit of activity in what we call healthcare hospital pop-up tents, drive-through testing tents, and even some activity with the federal government, specifically the military, across different geographies in our business. A lot of it on the eastern seaboard and down the south central part of the country and on the west coast. So, a lot of that's still being put in place even right now. And as far as how long it will be put in place, it's hard to know. Some are being advised it will be for the rest of the year. Some of it is just, hey, you know, we don't know how long it might last. But it can't really clearly define how long, but there is a lot of activity in that place, in that segment, absolutely.

Okay. And – What are you seeing as far as the auction markets and when you see a thawing there just from a foot traffic perspective to be able to potentially, if you wanted to, use that as an outlet to dispose of equipment?

Yeah, good question. You know, right now I think all of the major auction companies have reverted to online auction events, you know, and I think that's predominant. activity going on today. It'll be when, you know, when the lifting of gathering with thousands of people in a location, you know, a live auction on the ground is no different than a sporting event, Brian. You got lots of people gathered close together, lots of frenzied activity. And, you know, that'll be, you know, I think akin to when you see sporting activities and related type of activities open up. So for the moment, you know, the online activity is not as attractive to us. We saw some, you know, degradation in returns at the end of March, you know, to probably 10%, maybe as much as 15% below where we would have expected and wanted to be, and that changed our mindset in terms of what we're going to do with our fleet, and obviously we cut back, uh, CapEx for new gear. And we knew we could, uh, you know, we have been working towards reducing the age of this fleet over the last four or five years. And, uh, we got it to a point where we can age it. So then we're comfortable with aging it and comfortable in the type of expense we might experience in aging it. So, um, look, I think, uh, the, the live auction, uh, activity is probably akin to when, uh, when Major League Baseball opens up again and they're putting people in stadiums.

Okay. And I guess just last one for me, just thinking about this longer term, I would imagine that you are potentially looking at this as a way to show your value proposition to customers where you could end up gaining some share, not only potentially from your competitors, but also just more of a secular shift to the rent versus own. Can you talk about that?

Yes, for sure. Look, I think anytime you have uncertainty like we have today in terms of the economic environment, when customers get work, they're going to be a little trepid in terms of investing in ownership capital, and it'll naturally create a shift to rental, and we'll certainly expect that coming out of this until there's a regular and more certain about the economic environment in the future, I think we'll see more shift. I think where we'll pick up, you know, share versus, you know, our competitors is probably more around the mom and pops that sort of fall out and don't survive this. And those customers that may have traditionally gone to, you know, an alternative or smaller channel will revert to those that are around and providing the type of customer support and operating the way we're operating in a safe and healthy environment.

All right, great. Well, best of luck to all of you. Thanks, Brian.

Thanks, Brian. Our next question is from Steven Randy from Thompson. Go ahead.

Good morning. Good morning, Steve. Morning. A few questions, I guess, centered around the local customers versus national customers and clustering. I guess to start with the clustering strategy, and since that naturally aligns around the metro areas, I guess maybe talk about if there is any near-term magnified headwind from the clustering in metro areas where it slowed down sooner, maybe how that gives you flexibility in the near term, but then is there an accelerated push out of this once things pick up because of the clustering strategy? Aaron?

Yeah, Stephen, I would say in our urban strategy, typically in our urban network, we have a very, very diverse amount of fleet. All of our segmented strategies are at play in those urban settings and to a less degree in our, you know, more rural or non urban setting. So I think that's allowed us to in urban setting, kind of weather this storm, because we're very, very diversified with products and customers. And I believe and that's in for most markets, they've remained to be allowing essential activity to go on. So I believe that once activity gradually starts to come back, let's say, through the month of May and April, that those markets will accelerate more rapidly. So, again, we like the strategy we've been deploying for a number of years.

Great. And then in the April decline of rental volumes, can you maybe discuss maybe on a range of were local accounts down, you know, 20-ish percent and national accounts down, you know, low double digits? I mean, maybe just kind of the dichotomy of the drivers in local versus national rental revenue declines.

Yeah, sure. I don't think we want to get too specific segment by segment. And, you know, it does vary a lot, but it's probably not a lot of points. But the local business has obviously contracted a little bit more than the national account business. That national account business is bigger customers, focused on essential services, so it has been a much more resilient portion of our revenue mix than the local customers.

Great. Can you even talk to, when you talk about resiliency, is that like holding up at Flattish, I mean, or just any order of magnitude to think about what you mean by resiliency?

So, you know, maybe the national account business is off 5%, you know, and that's 40% of our book. So, you know, the other segments have sort of taken on a slightly bigger drop.

Excellent. And in conversations with local accounts, is there any concern, maybe it's too early to tell, but concern on survivability of local accounts or collecting data revenue receivables from local accounts?

So, yeah, I mean, in terms of survivability, no. I mean, it's too soon to see. We're right in the middle of this thing and there's not a lot of visibility to the other side. Understandably, collections are challenging in this environment. Some of the local accounts have been shut out of their office and, you know, some of their business shut down and it puts pressure on their cash flows. So, We have seen a slowdown in collections and do anticipate that our DSO is going to be impacted through this environment.

Thanks for the call, guys.

Sure thing. Thank you.

Our next question is from Seth Weber from RBC. Go ahead.

Good morning, everybody. Hey, most of my questions have been asked. But, you know, maybe this is for Aaron, but in your conversations with customers, you know, are they of the mindset that these projects that are being delayed or that are not occurring, are they just being postponed or delayed? Is that the view that these projects will happen or are projects just getting canceled outright? Can you just shed any color on discussions you've been having around that? Thanks.

Sure, Seth. I mean, going into this, the market was very strong, very solid. And I think once people get back to work on a regular, I don't know if regular is the right word, but go through May and June as we see markets and job sites kind of pop back up, I think there'll be a you know, a surge to finish the existing projects that were already programmed and finish that up. The question is, hey, what does it look like later on with, you know, pipeline work down the road with new projects opening up? But I think that there's going to be a fair amount of brisk return to work and volumes once we see a little bit more sunshine here in the hopefully the near future.

Okay. Okay. And then, you know, on the entertainment and the event business, I apologize if you've broken this out, but can you talk to how big that business is? You know, what does it represent as a percentage of your revenue at this point? Because I think it's kind of unique to what Hertz does versus some of the other peers out there. Thanks.

Yeah, it's like mid-single digits.

Mid-single?

Yeah.

Okay. Super. That's actually all I had. Thank you very much, guys.

Thank you.

This will probably be our last question. Okay. Our next question is from David Rasso from Evercore. Go ahead.

Hi. Good morning. Thanks for squeezing me in. Hey, on the Gen Rent side, I'm curious, of the jobs that were temporarily shut down due to government actions, with the assumption when the economies reopen, however uneven that is, they would see an immediate return to work. Can you give us some sense of what percent of your fleet is currently idled on those type of jobs? Well, then the assumption is the rest is just truly, you know, weaker in demand broadly. Can you give me a sense of that percentage?

Yeah, I could take that one. This is Aaron. David, about 5% of our fleet is idled. Right now it's on a job site, ready to go back to work.

All right, that was my follow-up. So they are still sitting idle, just turned off, payment turned off, but they can start immediately once those jobs are reopened from the government, correct?

Yeah, we have worked with our customers to post-date a return to starting the rental agreement back up. So once they get back to work, that amount of leave will automatically go back to work.

And then on the net capex cuts, Obviously, there's some assumption on how you manage your fleet with a time you that that would produce. Can you give us some framework with how you thought about those capex cuts gross to net? Because you're assuming X percent kind of time you with that level of fleet size?

No, I mean, it's not that it's not really that direct. So we just cut everything really. except for specialty business and, like I said, some hot cat casters that are still in demand. So really it was a matter of just chopping it back, preserving flexibility in terms of our free cash flow and just preserving cash. So as we open back up, there's a lot of fleet available to go back on rent just with the stuff that's come off rent. And we'll just manage demand on the other side. As we see it, we've got flexibility to adjust to that. But we really just took out everything that was considered non-essential and it wasn't going to be active through the slowdown.

That's helpful. That was a genesis of the question. Was the CapEx cut focused on cash flow priority or was it focused on we assume at this fleet size we should get this relative time use? enough the implications on rental rates. So, the cut to a little more of a cash flow-centric decision is a fair go.

Yeah, everything nonessential with a focus just to maximize flexibility on the way out.

All right, helpful. I appreciate it. Thank you so much.

Good luck. All right.

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

Thank you, everyone. And, of course, as always, if you have any further questions, please feel free to give me a call. Talk to you all later. Stay safe and stay well. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.