Custom Truck One Source, Inc. (CTOS) Q3 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Nesco Holdings Third Quarter 2020 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Preston Parnell of Nesco Investor Relations. Sir, you may begin.

Thank you, Operator; and welcome, everyone, to Nesco's Third Quarter 2020 Earnings Conference Call. Yesterday afternoon, we issued a press release announcing our third quarter results and filed an earnings presentation to accompany our prepared remarks, both of which are available on Nesco's Investor Relations website at investors.nescospecialty.com. I'd like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call and the press release issued yesterday. I will now turn the call over to Nesco's Chief Executive Officer, Lee Jacobson. Lee?

Thank you, Preston. Welcome, everyone, to Nesco's third quarter earnings call. I am pleased to announce that the third quarter marked the beginning of a recovery for Nesco. While the effects of COVID have lasted longer than we would have liked, our team has performed extraordinarily during these challenging times. I would like to highlight the contributions of our workforce, who kept us operational with virtually no interruptions to any of our locations throughout this pandemic. Their adaptability of new safety protocols and operating procedures and uncertainty in the business environment enabled us to deliver essential services to our customers, further strengthening our relationships as a trusted specialty equipment partner. Our culture focused on quality, reliability and safety was reinforced through this time of crisis. We were measured in our response to evolving conditions, and Nesco is well-positioned for success both in the short-term and the long-term. We executed disciplined cost-cutting and reduced capital investments to preserve liquidity and provide flexibility through economic and market uncertainty, but were careful not to cut so far that it would impact our ability to pivot quickly as demand recovered. With improving market conditions and a strong demand outlook, we are focused on executing for our customers and investing for the future growth of Nesco. We reported solid financial results in the third quarter despite a challenging operating environment for the first 2 months of the quarter. Compared with the same quarter last year, our revenue increased 11% to $69.3 million, and our adjusted EBITDA decreased 9% to $28 million. Our revenue increased as a result of improved equipment sales and the acquisition of Truck Utilities, but the profits earned on these revenues were not high enough to offset the impact of the decline in our higher-margin core rental revenue. ERS rental revenue declined 9%, or $4.3 million, as a result of lower fleet utilization caused by COVID-related project delays. OEC on rent and utilization hit yearly lows in July before beginning to improve in late August. OEC on rent recovered by the end of September to $489 million, up more than 10% from the start of the quarter, approaching pre-COVID levels. Nesco capitalized on positive trends, experiencing the typical seasonal uptick in August, in addition to a release of some of the pent-up demand from the second and early third quarters as some projects previously delayed due to COVID resumed. In addition to delayed projects coming back online and normal seasonal factors, we also benefited from increased storm activity in late August and early September, further increasing demand. These trends resulted in a significant ramp-up in new projects and demand in the distribution, transmission and telecom end markets. Rail was relatively stable throughout the quarter. These positive trends have continued into the start of the fourth quarter, with current OEC on rent of $512 million. As we progress through the year, Nesco and our customers have gotten smarter about operating safely in the COVID environment. While this year has taught us that we cannot take anything for granted, we are cautiously optimistic that the worst of COVID is now behind our company and industry. Our customers have not canceled many projects; only put them on hold. Those delays are expected to provide incremental future demand as these projects continue to ramp up. As we look longer-term, our customers continue to have record or near-record backlogs. End market demand drivers remain intact as significant capital projects and transmission distribution are in the pipeline, which will support grid maintenance, fire hardening and alternative energy; and in telecom, to increase connectivity and rollout of 5G. During the quarter, we continued to improve our financial flexibility through cash management and cost discipline. We generated positive free cash flow for the second consecutive quarter and maintained liquidity of approximately $69 million. Our operational focus continues to be adapting to rapidly changing business conditions. I credit the entire Nesco team and our company culture for the successful implementation of these initiatives and the ongoing adherence to safety protocols. We learned to adapt to a hybrid way of working with our customers and with each other, utilizing technology to meet virtually. We continue to manage expenses, working capital and curtail capital expenditures. In the late second and early third quarters, we reduced fleet repair expenditures by servicing the limited numbers of units required to meet demand. As we progressed through the third quarter and market conditions improved, we pivoted quickly to rapidly get units rent-ready and deploy to meet increasing demand. Even as activity returns, we are seeking to maintain much of the savings from cost-cutting actions taken to address COVID. The cumulative effect of these initiatives undertaken would be approximately $5 million per year. While some of these cost savings are temporary, related to lower rental activity and the elimination of most travel, we are targeting maintaining at least 50% of these cost savings indefinitely. We also expect to reduce our net capital spending for 2020 to approximately $30 million to $35 million as we slowed capital outlays and focused on selling underutilized units in our fleet to preserve flexibility and maximize returns. We are currently engaged in a returns-based capital planning exercise to develop a 2021 capital expenditure plan that will maximize our growth and cash flow. By focusing our investments on in-demand units with attractive economics, we expect to drive top-line growth, EBITDA margin growth and free cash flow growth through calculated capital allocation decisions. With many customer projects expected to come online in 2021, we expect there will be plenty of opportunities to deploy capital with high returns. In summary, COVID has not impacted our fundamental business strategy or the positive growth outlook for our end markets. We will continue to focus on critical infrastructure end markets, offering a young, specialized fleet of rental units. We expect continued strong end market tailwinds with an increasing number of capital projects in each of our markets, bolstered by the ongoing secular shift from ownership and toward rental among Nesco's North American customers. We believe Nesco is the market-leading pure-play rental company in the electric transmission and distribution, telecom and rail construction end markets. We operate in very attractive end markets with significant growth ahead. Nesco has created significant barriers to entry with its young and broad fleet of specialty rental equipment, a national service network, the hard-earned trust of our customers and a reputation for reliability. With recent additions to our management team, we have the right team in place to make the most of near-term and longer-term opportunities. This is a very exciting time to be at Nesco. With that, I will turn it over to our CFO, Josh Boone, for a more detailed discussion of our financial performance. Josh?

Thanks, Lee, and good morning, everyone. As Lee said, we reacted and performed solidly during the quarter, where we saw our OEC on rent swing significantly due to the pandemic, followed by the start of a recovery. Our revenues increased 11% to $69.3 million. ERS revenue increased 5% to $54.2 million. Core equipment rental revenue declined 9% to $42.6 million, primarily due to a 4% decline in OEC on rent to $464.3 million and a fleet utilization decline of 7% to 72.1%. The utilization decline was primarily a result of project delays in the distribution and telecom end markets in July and August and a late seasonal uptick in the transmission market. Average rental rate per day held up well, declining a modest 0.7% on a consolidated basis to $137. ERS equipment sales, which can vary quarter-to-quarter, grew 147% to $11.6 million, driven by customer-specific projects during the quarter. PTA segment revenue increased 39% to $15.1 million. PTA rental revenue grew 10% to $3.5 million, primarily due to investments made in 2019 to establish a national footprint for PTA. PTA sales and service revenue increased 51% to $11.6 million, primarily as a result of the acquisition of Truck Utilities. Most of our PTA revenues stem from new project starts, and many new projects were delayed due to COVID. We began to see improvements in PTA during August, aligned with new project activity and the ramp-up in electric transmission. These improvements accelerated through September and into October. As PTA revenues grow, we expect to experience significant operating leverage from our new PTA locations. We believe future revenue growth and higher margins on incremental revenue will drive strong EBITDA growth in this segment. Adjusted EBITDA declined 9% to $28 million during the third quarter. The decline in adjusted EBITDA was primarily due to a combination of lower utilization, which resulted in lower equipment rental gross profit. Rental gross profit, excluding depreciation, declined 10% to $33 million. This decline was partially offset by increased sales and lower margin equipment sales, reduced SG&A and the acquisition of Truck Utilities. Our disciplined expense management and cost-cutting initiatives during the second and third quarter helped drive SG&A down 12% compared to the prior year and 22% sequentially from the second quarter. Our free cash flow improved $29.8 to $0.5 million in the third quarter of 2020 compared to negative free cash flow of $29.3 million in 2019. This improvement was primarily a result of curtailed capital expenditures as well as increased used equipment sales. Operating cash flow decreased $0.3 million year-over-year to a negative $4.8 million primarily due to working capital outflow. We expect this trend to reverse and working capital be a source of operating cash flows in the fourth quarter. Cash from investing improved $31.8 million year-over-year to a $5.4 million net inflow. This was the result of significantly reducing our capital expenditures in response to COVID as well as a concerted disposal of underutilized rental units. We plan to continue to spend less on cash flows from investing in the fourth quarter and now estimate full-year 2020 net CapEx to be between $30 million and $35 million. For the first 9 months of the year, total net capital expenditures were $30 million. We expect a combination of reduced capital expenditures and working capital management will drive strong free cash flows in the fourth quarter of more than $20 million, resulting in positive free cash flows for the year and further improving our liquidity. We have ample liquidity of approximately $69 million at the end of the third quarter. This includes $1.6 million in cash on hand and $67.4 million availability under our asset-based lending facility. At the end of the third quarter, we had net debt outstanding of $765 million and no significant debt maturities until 2024. In the coming quarters, we will remain focused on targeted capital investments with accretive returns, cash flow generation, debt reduction and deleveraging the business. We are committed to achieving long-term leverage levels in the range of 3.0 to 3.5x. We expect to achieve our long-term leverage target through strategic growth and disciplined capital allocation. As Lee said, we have enhanced the financial rigor of our fleet management and investment analyses. We expect our 2021 fleet investments will generate even stronger asset level returns than they have historically and drive incremental revenue, income and cash flow growth. We have also increased our focus on divesting underutilized assets and assets with low returns to free up capital and streamline our operations. We will continue to prioritize maintaining positive free cash flows and paying down debt as we resume new fleet investments heading into 2021. This will result in deleveraging through both debt paydown and EBITDA growth. I echo Lee's sentiment that it is an exciting time to be at Nesco. The third quarter marked an inflection point for the company. All of the pieces are in place to drive long-term shareholder value. We have phenomenal end markets, a strong management team and a winning business model. Looking ahead to Q4 and 2021, we are seeing positive growth indicators in our end markets and pent-up demand as projects delayed by the pandemic are rescheduled. Our customers are at near-record backlog levels and continue to reiterate their spending plans. If anything, COVID is likely to accelerate the decade-long shift to renting versus owning equipment as our customers focus on capital preservation. With that, I would like to turn the call back to Lee for closing remarks. Lee?

Thanks, Josh. I will conclude by saying that my confidence in the future of Nesco is at an all-time high. With the recent hires we've made, we have a world-class management team and deep bench of talent, with multiple layers of expertise in every function. These individuals are elevating our level of analytics, decision-making and operational expertise to a tier we have not been in before. At the same time, we have maintained all of the dynamics that have made Nesco a great company. We have a young portfolio of rental equipment and a suite of ancillary services specifically geared towards serving very attractive end markets. Each of our end markets have strong growth drivers that have proven very resilient through challenging times. I can't think of any business condition that could be more unprecedented or disruptive than the COVID slowdown we just experienced and are continuing to navigate. We now think we have seen the worst of the pandemic from a business perspective. And despite this challenging environment, we were able to generate positive free cash flow by curtailing our capital spending. Our end markets held up despite the COVID slowdown, and now we are seeing a recovery and pent-up demand on the other side. We are very well positioned to capture this demand with limited additional investment. Capital investments made during 2019 and early 2020 mean that we have available capacity and young equipment to serve rising customer demand and drive revenue and EBITDA growth in 2021. We are now formulating plans for incremental capital investment to accelerate this growth. As we invest, we will continue to manage costs and target generating positive free cash flow to maintain financial flexibility. Our focus is on continuing to make strategic decisions and investments to support long-term growth, strengthen our competitive advantages and enhance our fleet portfolio. With that, I'll turn the call back to the operator and open the line for questions.

[Operator Instructions] And our first question is from the line of Stefanos Crist with CJS Securities.

First, I wanted to talk about utilization. Could you maybe give us some more color on how utilization progressed through Q3 and what that's looking like into Q4?

We continued into August, July and then succeeding into August at really the low level, the trough for the year. And then, very late in August, we started to see the seasonal uptick that we'd anticipated. We progressed to the mid-70s by the end of September. We've progressed past that. And at this point in time, we're approaching the level that we typically call out is within our sweet spot of utilization overall, somewhere high 70s to low 80s. And we see a good sustained run of this through year-end. Our expectation actually is that we'll have a more modest holiday off-take than is usual, and that's just the continued pent-up demand of projects. People are trying to get things done. And we'll see spillover of that into Q1. So it has the opportunity to be a really solid start to our Q1 demand as well.

And just to follow up, as you think about Q3 like we communicated, it really was a tale of 2 quarters. Utilization hit that trough in that July or early August time period and really dampened the quarter. From an overall utilization and revenue perspective, we exited Q3, as we talked about, at $489 million of OEC on rent, and we're at today at $512 million of OEC on rent relative to $638 million in our fleet at the end of the third quarter. And so, as we really progressed through Q3, it was sequentially better, really week-by-week. when we hit that trough in late July and early August. And we continue to see that momentum here in the first half of Q4. And as Lee talked about, the sweet spot of utilization, we talked about on the last call, we felt like we could get back in the high 70s to low 80s from a utilization perspective in Q4 and really leverage that momentum going into next year with the backlog of projects and the delays and postponement related to COVID. And I would say we're well on track to do that right now.

Great color. And as we see utilization improve, how should we think about gross margins, going forward?

Yes. On the equipment rental side, gross margins were impacted due to utilization in Q3, a little bit of fixed cost in our service centers. But the big driver of equipment rental gross margin decline was we got whipsaw on the off-rents coming in in the first part of Q3 spilling over from Q2, and then having to get those units rent-ready very rapidly as we saw demand pick up very quickly. And so Q3 gross margins were really depressed due to that in the third quarter. As we look at Q4, we're going to have a much more normalization of off-rent and on-rent we approach more minimalized utilization levels. And so we should see sequential improvement in gross margin on the equipment rental side. Jumping over to PTA as well, just from a gross margin perspective, we hit an inflection point on PTA consistent with the ramp-up of equipment rental in the transmission side in September. And so, with that inflection point on PTA, we should realize operating leverage there as well in Q4 and expand our gross margins, both in the equipment rental and on the PTA side, which should ultimately drive, combined with our cost cuts, EBITDA margin expansion in Q4 relative to Q3 sequentially quarter-over-quarter.

And if I could just squeeze one more in, can you maybe give us a little more color on how the end markets are progressing, and maybe any major differences you're seeing and have they been affected by COVID?

Sure. I think the one consistent thing across the end markets is delay, but that does not equal cancellations. So the planned project activity is there. It's actually likely to be a scenario where, as we finish the year, a great deal of planned project activity from '20 is kicked in 2021. And '21 we believe has always been planned to be a very solid or robust year. If you break down the markets; transmission, there are several large-scale projects which we haven't seen enough of for a few years that are kicking off in this fourth quarter or may spill into Q1 that will be extremely helpful. These are multiyear projects, 2, 3 years, and are terrific projects to allocate and deploy equipment to to make sure that we're in a position of sustained utilization. We're also seeing distribution projects under MSAs being let to our leading distribution contractors, and we're in a position to participate in those. And again, those are multiyear projects, 2, 3, even more years as those MSAs are rolled over and extended. And that, again, is a great opportunity to realize sustained utilization and OEC on rent. In telecommunications, I wish I could say when is 5G really going to become real. Anybody who stands up on their soapbox and talks too strongly is still guessing. And we do think, though, that '21 is going to see reality to it. If you certainly look at the simplest thing, the retail manufacturers of the phones themselves, they've got the equipment out there. Isn't that going to create enough pull that the telecom companies finally themselves get their act together? And in a sneaky way, COVID has been a deterrent to some of the momentum that I think all the carriers would like to realize, the most simple thing. How do you get a permit out of a city or a county that basically has got all its workforce at home? That's a point of friction that we expect to see diminish on an ongoing basis, and that will turn loose the carriers to engage the contractors and engage Nesco and supply of equipment. From a rail standpoint, our market there remains steady and has been a great surprise over the course of this difficult time, and we don't see any issues with continued demand in that market space.

Our next question is from the line of Tim Thein with Citi Group.

So just to circle back on the utilization point earlier, as you think about the sequential change last year; obviously, it's a very different environment and backdrop in many ways. But you just pointed, as you think about kind of where you exited 3Q versus what you've seen thus far, and given the visibility you have through all the pent-up demand, do you think that 82% utilization number is a good one for us to kind of anchor around for the fourth quarter?

Tim, this is Josh. I think 82% in a true normal state is definitely realizable. For sure. I mean, Lee talked about our sweet spot, high 70s and low 80s. I would say 80% to 82% gives us enough flexibility to work through work-in-process with our fleet and make sure we have the demand to meet our customers. To hit 82% in Q4, it's definitely achievable. We're knocking right there with where we're at today in the high 70s to low 80s to sustain that for the quarter at 82% for a blended average. You got to think we were ramping up sequentially as we exited September into October into where we're at today at $512 million of OEC on rent versus $489 million at the end of September. So 82% blended for the quarter, maybe a little higher than where we would expect to achieve, but we definitely think we could touch 82% at any point here in the quarter.

And Josh, maybe just to come back to the comments on how you're thinking about fleet investment and kind of balancing de-levering and while also trying to target EBITDA growth; just given that 30% to 35% spending level this year and then combined with the visibility and some of the big project activities and runway you see, any help just in terms of -- I know it's early and you're still in planning, but how are you thinking about directionally CapEx for '21?

Yes. So if we think about Capex, we curtail CapEx related to COVID here in Q2 into Q3. And we want to be very disciplined in our capital allocation strategy, going forward. We're disposing of underutilized, underperforming assets. We're going to take those cash proceeds and look to either; one, pay down debt and de-lever the business or, two redeploy that capital back into the business. As we think about 2021, we spent $80 million of net CapEx in '19, so pretty considerable amount, and even a significant amount in '18 as well. We're going to spend $30 million to $35 million in 2020. I think as we think about 2021, we're taking a very targeted, focused effort on looking at the asset level returns on the fleet that we're investing. We want to make sure we invest in the right fleet with the highest asset level returns, with the highest utilization, combined with what we think is going to be in demand with the market trends. And so for 2021, you could think of a CapEx number higher than 2020, but, probably from a net CapEx perspective, not at '19 levels yet. And so what that's going to do, it's going to allow us to continue to reinvest in our fleet, to grow our fleet, keep the age at an appropriate level, but we're going to balance that with generating free cash flow to reduce debt and de-lever the business. And ultimately, we're going to de-lever through both EBITDA growth and reduction of debt. And those 2 aren't mutually exclusive. We feel like we can do both with a disciplined capital allocation strategy in 2021 and really executing and driving this business for next year.

And Lee, maybe just one last one for me. The whole discussion of renewables, and listening to some of your larger customers in the record backlogs that you referenced, it seems like they're referring to or pointing to some renewable energy-driven transmission activity focus on even some battery projects and hydro development, some solar projects. Obviously, I don't imagine you're big in the offshore wind category, but just maybe talk about how Nesco plays just in that world of an increasingly renewables-focused world.

We absolutely welcome any change in our sources of generation, but particularly renewables. Any renewable energy source, generation source, is so highly likely to be put in place in a geographic location that is not served by the existing transmission, substation, and breaking it down to distribution infrastructure. As a result, any of those renewable generation sources coming online are followed by or concurrent with is the development of the transmission activity. And as each of the major contractors is commenting, they expect a significant level of investment and renewable support over the next decades. I believe the count is now up to somewhere in the 35 range of states that have mandates to blend traditional generation sources with now renewables, escalating all the way to 100% with California in I believe that's either 2040 or 2050. So a tremendous amount of conversion from historical to renewables. We participate fully in all of the transmission development, and we do participate in the construction of solar fields, wind farms and so on. It's secondary to the intense contribution of participation in transmission line construction, but it's still a plus. And obviously, with the political result that appears to be the case, we will see, first off, a joining again, the Paris Climate Accord. That should be followed by continuation of the tax incentives around both renewables, both forms of renewables, primary wind and solar. And again, we love a change in generation, and renewables will probably be something that comes to the forefront over the next several years.

Our next question will be from the line of Mike Schilsky with Colliers Securities. [Operator Instructions]

I maybe want to start off by asking about rental rates. We did see they were down a little bit in the quarter over the prior year. It wasn't huge, but did you see any bounce-back here in Q4 so far for the rail rates?

Mike, I wouldn't say that we've seen a bounce back, but we saw very isolated pricing challenges over the timeframe of significant decline. And the rebound in demand has been quick enough that we think that's really the end of it. Our industry tends to first focus on availability and who they're getting equipment from, from a responsiveness standpoint, price falling fairly far down the list. Obviously, with the soft demand around the pandemic impacts, there was a little bit of pricing challenge. And I have to acknowledge, we did face it and we made decisions to adjust where we wanted to retain a business and not where we didn't, but it's pretty modest in its impact. And again, it's moved solidly to the background around availability is paramount, exactly when you're going to have availability and how are you going to support me in the field. So we're, I think, at a steady state, and next step will be the opportunity to take a look at increases.

Mike, the other one component I'll add is price. What we show for price blended for the quarter is also a function of mix. And if you look at Q3, transmission market was down for us in the quarter. It bounced back pretty rapidly, latter part of August and September. But overall, that's the most expensive equipment and the highest rate per day. And the market that actually performed the greatest was rail, and that has the least expensive equipment and the lease rate per day. So the elements within the quarter on kind of isolated pricing challenges that Lee had commented on was maybe an impact. But I would say the biggest impact in the quarter related to price wasn't necessarily pricing challenges. It was more a function of mix, with transmission being down quarter-over-quarter and rail and distribution being up, and those have just less expensive equipment and less rate per day.

I wanted to turn to your CapEx budget for this year and how it's gone so far. I'm kind of curious, do you get a sense that competitors are making some of the same adjustments to their fleets that you're making? I think certain ones are in a different position. They are out there renting out units, but they're also manufacturing their own units. So have they done the same things that you've done? Or have you gotten maybe one step ahead of the competition here, given the other company's challenges out there.

Our primary competitors in 2 of our leading markets are manufacturers or a final stage manufacturer. And they use their rental fleet clearly to support steady-state manufacturing processes. They obviously curtailed their manufacturing to a reasonable degree; but at the same time, they've got existing inventory in the pipeline and so on. We did not see any flood equipment into the market new. We did see everyone looking to transact some of their more used equipment and different approaches. Overall, there's been a relative state of stability within the competitive landscape. I guess the short way to say that, nobody appears to be dumping equipment, creating chaos, whether it's pricing around rental or pricing around used equipment sales.

Mike, I would just add that us curtailing CapEx is not at the expense of growing the business. We have a very healthy fleet, healthy age. We've invested significantly in 2019 of $80 million of net Capex. We front-loaded our CapEx this year. And so as we are disciplined with our capital spending here in Q3 and Q4, as we're positioning the organization to be in a solid financial position as we exit 2020, to then put forth a disciplined capital allocation strategy that's going to invest in the right fleet that drives the highest returns and the highest utilization. And so it's just a little bit of a transition here as we're navigating through what we see on the backstage of COVID related to our business. But us curtailing CapEx in this environment, we don't believe it's at the expense of growth in the business. We still have plenty of upside and momentum within the fleet that we have today, in addition to what our planned investments for 2021.

Maybe lastly, turning here to the PTA business. Do you have any goals for the penetration of PTA as a percent of rental revenues for 2021? Or is it still too early to figure out how that might turn out?

It's still too early to identify a precise goal, but we certainly anticipate a solid growth in that performance number. We've got the infrastructure in place across the country with the super-regional locations. We're in a good position from the standpoint of being able to grow our strong alliances with the major contractors, the super-regional contractors across the country. And so we think we'll see a really solid growth in that on a multiyear sustained basis. Our goal in the intermediate term is literally to double the scope of that business, and that will put us in a position of looking at the next step of additional locations. But until we've doubled-plus, we really don't have that need. And so it's an attractive place to invest in rental fleet. It's an attractive place to invest in the right team to develop the business, because there's great upside in it.

Our next question is from the line of Rich Kus with Jefferies & Co.

They've already gotten to most of them, but the one question I do still have here is that you guys were talking about your fleet on-rent being down 4%. Rate looks like it was down about 1%, but your rental revenue was down 9%. So what drives that difference there? Is that mix related? Or is it something else? And how do you expect that to trend as you go through Q4 and into Q1 next year?

Yes, this is Josh. It's going to be mix-related. We talked about transmission being down significantly, and the supplemental presentation that we provided highlights transmission down 14% in the quarter and really didn't snap back until the September timeframe. And that's going to be the largest driver of the rate and largest driver of our OEC. And so that's really going to impact the revenue side of things. As we think about Q4 going forward, we expect that mix to shift. We've seen it shift in September, and we are experiencing the shift now in October and November with transmission ramping up considerably, which should help. We will flip that the other way.

We've got a clear visibility to participation in some of the most significant transmission projects that will be executed in the latter part of this year, or starting in '21 and continuing really '22, even '23. And so we're in a great position to supply equipment to those long-term projects. And just overall, that is the big gear with the high rates, and we're excited about that opportunity that we've earned.

And for those projects, I guess, do you guys have a sense of the magnitude of OEC that would be going into that to the extent that you guys are able to participate? Or do you have to buy more equipment to actually participate in those projects, or you already have it?

As we progress through the sequence of some of the large projects coming online, first opportunity is simply to deploy what we've got in the fleet to really get our utilization and transmission to where we typically are and where we expect it to be. And as you look at the remainder of '21, then, you'll see us purchase to address some of the additional opportunity. We've got a pretty discrete list in several cases of the equipment that is going to be needed, and we're keenly focused in our planning for 2021 to match supply to that clear and obvious demand.

Our next question is from the line of Yilma Abebe with JPMorgan.

Just one quick one for me. It looks like in the quarter; the borrowing base declined a little bit from the June quarter at September quarter end. What's the driver behind that? And I guess, maybe related, what's the seasonality on the borrowing base?

This is Josh. So we have plenty of liquidity with where we sit today at $69 million, and that's kind of how we think about the business from a liquidity and cash flow perspective. We exited Q2 at about $84 million, $85 million of liquidity. The decline there is going to be twofold. The timing of working capital in Q3 with the timing of our interest payments is pretty significant cash outflow, offset by pretty significant cash inflows in Q4, which is what we're planning for here for the first quarter. From a borrowing base perspective, it's really a function of depreciating of the assets. That's just a time-based element to it as we progress through the quarter. So there's no seasonality from the borrowing base. It's going to be a function of pretty standard depreciation element through the quarter. But when we don't have significant capital spending, we're not really adding to that borrowing base. And so we peaked at $84 million, $85 million in Q2. From liquidity, we're down to [$69] million in Q3, which is plenty of liquidity to navigate with where we're at today, and we expect to add significant liquidity in Q4 from an exit perspective, in 2020 and in early 2021 as we expect to generate more than $20 million, $25 million of free cash flow in the fourth quarter.

Our next question will be from the line of Abe Landa with Stifel.

Most of my questions were answered, but I just do have one left. So it looks like your current net leverage is 6.3x, and you have a stated goal of 3.0 to 3.5x. You mentioned you're going to achieve that through repaying debt and EBITDA growth. Maybe just how do you see that progressing over the next couple of years, few years and maybe the timing to kind of reach your goal?

This is Josh. So we're going to de-lever the business like we talked about through both EBITDA growth and balancing our capital investments back into the business to drive that EBITDA growth, but generating free cash flow to reduce debt. Those 2 elements aren't mutually exclusive. We think we can generate higher returns moving forward into 2021 as we dispose of underutilized, underperforming assets and reinvesting that capital in the right fleet, the right mix with the highest level of returns. And so by doing that, we think we can amplify and drive exceptional EBITDA growth, and we're going to be disciplined with that capital as we allocate it. As you think of the sequencing and the cadence of that de-levering, we think over the next 3 to 4 years is a reasonable target to get to that leverage estimate range of our goal of 3.0 to 3.5x. I think it's just going to be a slow step down as you think of 2021 into 2022 and 2023, hopefully, sequentially improving every quarter; but for sure, it's sequentially improving every year. We saw leverage tick up just a little bit here with LTM EBITDA on the decline. But as we talked about, we really hit an inflection point in September, in the latter part of Q3, and that inflection point has carried us through Q4 as well. And so we're really capitalizing on this momentum that we have in Q4 and expect that to carry forward into 2021.

Our next question is from the line of Robert Rhoads with Deutsche Bank.

This is Robert Rhoads on for Sean Wondrack. My question was just answered. But, I mean, do you guys envision hitting the longer-term debt target through mostly debt reduction or EBITDA growth? Is there 1 or the other? I know you kind of just touched on it, but I appreciate it.

I would say, if you think about the ability to de-lever the business, we have tremendous earnings power. We have tremendous earnings power in our fleet that we have on hand. We have tremendous earnings power of allocating the capital in high-return assets, high utilization and capitalizing on our end markets that we believe have phenomenal tailwinds here in Q4 and 2021 and beyond. And so with that earnings power in our equipment rental, combined with the PTA potential, which Lee had talked about that we would like to double that penetration rate in the near-term and ultimately can double the revenues out of the PTA business without expanding our footprint as we've added -- we're at 8 facilities now with a super-regional national footprint. And so with that tremendous earnings power that we have, I would say that if you had to weight one to the other, it's probably going to be EBITDA growth that outperforms debt reduction from de-levering of the business. But we think we can do both. We think we can have a disciplined capital allocation strategy. We can do both of those and really hit our leverage target over that time period.

And it appears that we have no further questions at this time. I'll turn the call back to you. You may continue with your presentation or closing remarks.

That concludes our call today. Thanks, everyone, for your interest in Nesco. We look forward to speaking with you on our full-year 2020 earnings call. In the meantime, if you have questions, Josh can be reached at investors@nescospecialty.com. Have a great day.

This does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.