Herc Holdings Inc. (HRI) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Herc Holdings Inc. First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi, Vice President of Investor Relations. Please go ahead.

Thank you, Cherry, and good morning, everyone. I’d like to welcome everyone for our first quarter earnings conference call. Our press release and presentation slide went out this morning and those are posted on the Events page of our IR website at ir.hercrentals.com. Please turn to slide 2. This morning, I’m joined by Larry Silber, our President and Chief Executive Officer and Mark Humphrey, our Chief Accounting Officer and Interim Chief Financial Officer. They will review the quarter as well as the industry outlook. The prepared remarks will be followed by an open Q&A which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer. Before I turn the call over to Larry, there are 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 risk and uncertainty. I would caution you that our actual results can differ materially from the forward-looking statements made on this call. Please refer to slide 325 of the presentation for our complete safe harbor statement. The company’s risk factor section of annual report on Form 10-K for the year ended, December 31, 2017 with this file of Securities and Exchange Commission contains additional information about risks and uncertainties that could impact our business. You can access the copy of our 2017 form 10-K by visiting the Investor section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. On a related matter, we expect to file our first quarter Form 10-Q later today which will be available through either websites. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call material which were also furnished to the SEC with our Form 8-K this morning and are posted on the Investors section in our website at ir.hercrentals.com. 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.

Good morning. Please turn to slide number 6. Thank you, Elizabeth, and welcome everybody to our first quarter conference call. I'm pleased that you can join us on today's call. But before we get started, I wanted to update you on our Chief Financial Officer search. As you may know, Barb Brasier has retired. We're making great progress on our search for a new CFO and anticipate having an announcement in the next month or so. In the meantime, Mark Humphrey, our Chief Accounting Officer, is also acting as our interim Chief Financial Officer and will report on our first quarter financials this morning. Now, let me get started as we have a lot of good news to share with you in about our progress to date and the start of the year. Clearly, our team and our strategy of delivering results, our safety metrics continue to improve in the first quarter. Importantly, we are focusing on making every day a perfect day in terms of safety. As you can see from our strong first quarter results posted earlier this morning, our initiatives drove growth in volume and improved price, mix and flow through. While we continue to invest in people, training and operations, we are also focused on improving our operational effectiveness through initiatives that are expected to gain traction as we've progressed through the year. Given the strength of our first quarter results, the continuing strong trends in the economy and expectations for construction spending continuing, we are raising the range of our adjusted EBITDA guidance for the full year. Now, please turn to slide number 7. Safety is at the center of everything we do. Safety consciousness dictates how we operate, how we treat our employees, and how we work with our customers. We are a customer-centric organization focused on safety, efficiency and profitable growth. Please turn to slide number 8. Our total recordable incident rate commonly known as TRIR, improved 55% in the first quarter of 2018 and 27% for the rolling 12 months ended March 31, 2018 compared to the prior year periods. I'm pleased that both the first quarter and the rolling 12 months TRIR is below 1, which demonstrates the continuing progress our team is making in safety performance and towards our ultimate goal of zero incidents. You may recall last quarter I outlined a new initiative which focuses our team members on achieving a perfect day. A perfect day is a day which there is no OSHA recordable incidents, no at fault motor vehicle accidents, and no DOT valuations, something that is very difficult to achieve given our number of branches, drivers, mechanics, and overall total head count. Every day, we update our perfect day calculator on the homepage of our Internet for all of our team members to see. Through the month of April, we recorded 63 perfect days or 52% year-to-date. We're committed to increasing the percentage of perfect days through ongoing safety training and awareness programs. Every day, our safety focus helps us get a little safer, which also helps support our operational improvements corporate-wide. Now, please turn to slide number 9. For those of you who have been following us, you should be quite familiar with this slide summarizing our strategic initiatives. These four pillars are the framework that has been driving our strategy since our spinoff and which has supported our continuing improvement. Please turn to slide number 10. Our strategy is working. We had strong top line performance with growth in the first quarter. Rental revenues of 15.1% to $369.1 million compared to $320.6 million in the prior period, all on an organic basis. We grew our fleet, valued at original equipment cost, very modestly, on an average 3.3% in the first quarter. Year-over-year pricing increased 2.8% in the first quarter and was strong in both local and national contracts. We improved our net results in the first quarter by $29.1 million year-over-year. We reported a net loss of $10.1 million or a loss of $0.36 per diluted share compared with a net loss of $39.2 million or a loss of a $1.39 per diluted share in the first quarter of 2017. First quarter adjusted EBITDA increased 35.7% to $132.7 million compared to $97.8 million last year. Adjusted EBITDA margin increased 570 basis points year-over-year to 30.8% in the first quarter. Dollar utilization increased 330 basis points to 35.3% in the quarter, also on a year-over-year basis. Based on our strong first quarter results and the 2018 economic indicators, we are raising the lower end of our guidance range for 2018 adjusted EBITDA by $10 million to $630 million and raising the upper end of our guidance by $5 million for $660 million. We are maintaining our guidance range of net fleet capital expenditures of $525 million to $575 million. Please turn to slide number 11. In the first quarter of 2018, we generated strong equipment rental revenue growth of 15.1% year-over-year, keeping up with the double digit growth we generated in the second half of 2017. Supporting that growth, year-over-year pricing increased 2.8% in the quarter, which is our eighth consecutive quarter of improved pricing. Responding to requests from investors, we are also providing you with on-rent trends in the bottom right-hand graph of this slide. OEC fleet on-rent year-over-year changes are shown on a quarterly basis for 2017 and the first quarter of 2018. As you can see, average OEC on rent increased in the second, third, and fourth quarters of 2017, and in the first quarter of 2018. Average OEC fleet on rent increased 7.1% compared to the prior year The 7.1% year-over-year on rent growth in the first quarter of 2018 compares favorably to our year-over-year average OEC fleet growth of 3.3%, reflecting improvement in time utilization during the quarter. Now, please turn to slide number 12. The cornerstone of our strategy is the diversification of our fleet which drives higher dollar utilization and the diversification of our customer mix. Our classic line of equipment continues to revolve around aerial, earthmoving, material handling, trucks and trailers, air compressors, and lighting. Our ProSolutions equipment is focused on helping our customers with customized solutions in power generation, climate control, remediation and restoration, and studio and production equipment. ProContractor provides a wide variety of tools and gear that supports various types of contractors that fit our urban market strategy and square footage under roof focus. Please now turn to slide number 13. Together, ProSolutions and ProContractor equipment represented about 20% of our total fleet in the first quarter of 2018, an increase of about 8% over the prior year's first quarter. The strong increase in volume and improvement in price and mix, contributed to the improvement in our overall dollar utilization which increased 330 basis points to 35.3% in the first quarter of 2018 compared with the prior year's first quarter. Fleet at OEC as of March 31, 2018 was $3.73 billion. As you can see from the chart in the upper left hand corner, the largest percentage of our fleet consist of aerial equipment at about 26%. We’ve been reducing standard booms and favorable equipment such spider crane, atrium lifts, and scissor lifts all of which draw higher return and appeal to a more diversified customer base. Earthmoving equipment is about 15.5% of our fleet. We continue to favor investments in compact equipment and are reducing heavy earthmoving equipment. However, we are not abandoning the category thus making investment – better investment decisions. We also expanded our focus on industrial warehouse forklifts which have more application for a wider array of customers and support of our open-market strategy and our square footage under roof focus as well. Industrial material handling now represents nearly 4% of the total fleet and OEC. We are also one of the nation’s largest providers of commercial trucks and trailers for ramp, customizing 12.7% of our fleet or an OEC value of about $470 million. We now have three centers of excellence focused solely on trucks and trailers. Please turn to slide 14. Our customer mix continue to improve. Local rental revenue grew 19% year-over-year and accounted for about 54% of total revenue in the first quarter of 2018. Our national account growth continues to remain strong as we add new product categories to the mix that we are supply our long-standing national account customers enabling improved dollar utilization and a greater level of service and capability. Our national account rental revenue grew 6.9% over the prior year above ARA market growth estimates. Our rental revenue by customer is now divided into four categories: contractors, which includes contractors in non-residential and residential construction; specialty trade; restoration, remediation, and environment; and facility maintenance, which represented 34% of total revenue in the first quarter. Industrial, which contributed 30% of revenue, rental revenue, representing customers in a broad range of industries including refineries and petrochemical operations, industrial manufacturing, including automotive and aerospace, power, metals and mining, agriculture, and pulp and paper and wood. The third area, infrastructure and government, comprise 80% and represents customers across a wide range of projects such as highways and bridges, sewer and waste, railroads and other transportation, utilities as well as federal state and municipal government spending. Finally, the fourth area which we term other includes rental revenue from a diverse range of industries including commercial facilities, entertainment, production, and special event management, which represented about 18% of total revenue. Please turn to slide number 15. Our strategic initiatives go beyond just growth on the top line. We know we must stay focused on improving flow through and operating effectiveness. The use of SmartEquip software helps our branches utilize national contracts that provide better pricing and improve our operating efficiency regarding gear-related requisitions, work orders, and purchase orders. Approximately 50% of our parts were ordered to SmartEquip during the first quarter. Overall, our software systems and future upgrades will continue to help us improve parts management, reduce costs and improve response time to reduce equipment downtime. We have also engaged XPO Logistics to help improve our delivery efficiency and reduce logistics cost. Formerly, each of our branch locations was responsible for managing outside delivery logistics. We are now implementing a process for our long distance deliveries which we expect will help save time, money and effort on the part of our staff and branch level, as well as streamlining our back office processes. The logistics programs will roll out in the United States in June. We are also implementing a more centralized fuel purchasing program, which is intended to reduce cost and maximize efficiency. We have contracted with two primary suppliers in the U.S. to handle the majority of our requirements. Both logistics and fuel initiatives are scheduled to roll out in Canada during the third quarter of this year. We continue to implement the Herc Way operating model through our field support productivity experts via online and in-person training. Milestones in the process are measured thus identifying bottlenecks and opportunities for improvement. Please turn to slide 16. Our technology is intended to enable superior customer experiences and we're focused on helping our customers work more efficiently, effectively and safely. We are focused on those customers in both urban markets and whether it is a high concentration of gear. Customers utilized ProControl capabilities such as account management, location tracking, utilization and service update information. We work closely with our customers to develop customized solutions to make them more productive and effective. For example, a customized dashboard might provide one customer with information on equipment refueling needs while another maybe is focused on tracking the usage and location of equipment on a multi-acre work site utilized by multiple contractors. Our technology teams work closely with our sales team to deliver the right solutions for the right path. Herc on the Go, our proprietary mobile application, was rolled out across the United States earlier this year. Approximately 80% of our U.S. Classic and ProSolutions locations used Herc on the Go for over 80% of their deliveries in the first quarter, and that percentage continues to grow. This new technology helps our branch staff and customers track delivery and pick up times, and importantly also facilitates electronic signature capture, thus reducing possible errors on our billing process and providing a higher level of customer service. Now, please turn to slide 17. Our customer service representatives are supported by our informative website, which provides equipment guide, solutions, credit applications, and other information to make it easy to establish credit as a new customer and order equipment. With E-Apply, we have been able to improve turnaround for credit applications even while credit applications have more than doubled from a year ago. In the first quarter of 2018, approximately 60% of our applicants received approval in less than 15 minutes, and 99% of applicants received approval in less than one day. Our incoming call volume in the first quarter increased more than three times last year’s comparable quarter. The volume includes Web, chat and phone requests for equipment needs service issues and other general inquiries. While our activity in 2018 is much higher than a year ago, we've been able to improve our response time and increase our staff productivity to meet the needs of our customers. In addition, we continue to improve other technology applications for our sales organization to enhance their ability to serve our customers through immediate ability to place a job and create a contract using our mobile optimized technology. We remain fully committed to enhancing technology and mobility to provide our customers the tools they need to drive efficiency and effectiveness. Please turn to slide 18. The fourth pillar of our strategy is focused on disciplined capital management. Through the improvement and adjusted EBITDA on flow through, we continue to make good progress as flow through is the [indiscernible] of the change in adjusted EBITDA over the change in revenues was over 80% in the first quarter of 2018. We have steadily reduced net leverage from 4.1 times in March of 2017 to 3.3 times as of March 31, 2018. With ample liquidity projected and projected net fleet capital expenditures of $525 million to $575 million this year, we expect that the net leverage ratio will be in our targeted range of 2.5 times to 3.5 times by the end of the calendar year although it may fluctuate higher during the year based primarily on the timing of fleet purchases and receipt of equipment. Now please turn to slide number 19. All of the key industry metrics remain positive as evidenced by the Architectural Billing Index which we remained over 50 through March. Industrial spending forecasts for 2018 remain solid. Expectation for U.S. construction spending for 2018 and 2019 continue to be strong in both residential and non-residential segments. The ARA forecast also remains robust with compound annual growth projected at 4.8% for 2021. Conversations with general contractors in one of our largest regions indicates a two- to three-year pipeline, mostly in public projects. That positive reflection of the cycle is supported by announcements of major projects being funded by local municipalities, states and the federal government on a regular basis. Longer term, the continuing secular shift from ownership to rental is expected to drive growth in the equipment rental industry over time. We believe that these factors will continue to fuel revenue growth and extend the current market cycle. While our transformation continues, the changes we are making are working as evidenced by our positive results. We're making great progress on executing our strategy and driving improvements in our operating performance. We are also not finalizing the plans for the full separation from Hertz when we move our Oracle Financial System and related applications to our own hosted platform. When this has concluded, we will end our transition services during this summer. And now, let me turn the call over to Mark Humphrey. He'll discuss our quarterly financial results in more detail. And then at the end, I'll summarize before we open it up to questions.

Thank you, Larry, and good morning, everyone. It's my pleasure to be on the call today. Please turn to slide 21. Larry already provided an overview of our key metrics for the quarter. I'll reiterate a couple of highlights then I'll walk you through the year-over-year changes. In the first quarter of 2018, equipment rental revenues grew 15.1% year-over-year to $369.1 million. While total revenues increased 10.8% to $431.3 million. We have reported a net loss in the quarter of $10.1 million or a loss of $0.36 per diluted share compared with a net loss of $39.2 million or a loss of $1.39 per diluted share in last year's first quarter. Adjusted EBITDA in the first quarter of 2018 improved 35.7% or $34.9 million to $132.7 million over the same period in 2017. Please turn to slide 22. Total revenues in the first quarter of 2018 grew 10.8% or $42 million to $431.3 million compared to $389.4 million in the first quarter of 2017. Excluding currency, equipment rental revenue increased $46.4 million compared to the same period last year and was offset by a decrease in sales of revenue earning equipment of $7.4 million. The higher year-over-year equipment rental revenue results we achieved in the first quarter reflect above market growth. The increase in rental revenue was due to our volume improving 7.1% as measured by fleet on rent, a 2.8% year-over-year increase in pricing, and the remainder from improved mix and other. The improved mix is evidenced by the revenue growth from pro solutions and pro contractor, both of which increased substantially compared with the prior year. The decline in sales of revenue earning equipment of $7.4 million compared to the first quarter of 2017 was related to quarterly timing differences. Proceeds from the sales of used equipment in the first quarter of 2018 benefited from the tightening used equipment market. The sales generated proceeds of 43% of OEC during the quarter. As a reminder, last quarter we said that given our fleet rotation, we would be replacing approximately $590 million of gross expenditures made in 2011. We currently estimate we will dispose of approximately $490 million to $525 million in used equipment at OEC in 2018. Please turn to slide 23. The net loss in first quarter was $10.1 million compared to a net loss of $39.2 million in 2017. Interest expense for the first quarter declined primarily due to the absence of the cost of the partial redemption of our senior secured second priority bonds of $5.8 million in last year’s first quarter. In addition, spin-off costs declined $2.7 million to $4.9 million in the quarter compared to the first quarter of 2017 as we continue to execute on our plan of full separation from Hertz. The benefit from income taxes declined $10 million over the same period in 2017 primarily driven by the significant reduction in our pretax loss. We had initially estimated the effective tax rate would be 25% to 27% for the 2018 year. We have now determined our effective tax rate for the full year would be approximately 30% driven by certain permanent differences. However, we continue to assess the impact of the Tax Cuts and Jobs Act of 2017. The all other category which is the largest item on this chart includes the positive impact of our improved operating results. Details of the components are included on slide 36 in our appendix. Adjusted EBITDA for the first quarter was $132.7 million, an increase of 35.7% or $35 million compared to $97.8 million in the first quarter of 2017. Direct operating cost increased $23.7 million over the first quarter of 2017 primarily related to the higher equipment rental activity and related costs such as maintenance, logistics, fuel, and additional staff. Selling, general and administrative costs improved by nearly $6 million in the first quarter of 2018 compared to the prior-year quarter due primarily to the reduction in professional fees in 2018 resulting from a more efficient year-end audit process. Adjusted EBITDA margin in the quarter improved more than 570 basis points over the prior year, from 25.1% to 30.8% this year. Please turn to slide 24. We have broken out fleet expenditures and disposals on an OEC cost basis and provided a rolling balance of the OEC value of our total fleet. A quarterly breakout of this information for 2018 and 2017 is in the appendix. For the first quarter of 2018, fleet expenditures at OEC were $198 million and fleet disposals were $109 million, resulting in a fleet of $3.73 billion as of March 31, 2018. The average age of our fleet remains approximately 49 months. Dollar utilization increased 330 basis points to 35.3% in the first quarter of 2018 compared to the prior-year quarter. Please turn to slide 25. Total debt was $2.1 billion as of March 31, 2018, $84 million lower than year-end 2017. We continue to maintain ample liquidity Availability under our asset base revolving credit facility plus cash on hand totaled $720.2 million as of March 31, 2018. Net cash flow from operations for the three months ended March 31 improved from $89.9 million in 2017 to $129.2 million in 2018 or $39.3 million increase. On a GAAP basis, net fleet capital expenditures increased in the first quarter from $11.5 million in 2017 to $29.6 million in 2018. Free cash flow for the first three months of 2018 was $86.4 million compared to $61 million in the same period of 2017. A reconciliation of free cash flow is in the appendix of the deck. We are continuing to execute on our disciplined financial strategy to fund organic growth opportunities. Please turn to slide 26. As Larry mentioned earlier, we raised both the lower and upper end of our guidance range for 2018 adjusted EBITDA. The revised guidance range is $630 million to $660 million or an increase of 8% to 13% compared with our 2017 adjusted EBITDA of $585 million. We are also affirming our guidance range on net CapEx of $525 million to $575 million for the year. By increasing our investment through the period and diversify our fleet, we intend to build additional operating scale and fuel growth in revenue and profitability. Given the current industry conditions, our fleet rotational requirements and the mid-range of our adjusted EBITDA guidance range, our free cash flow is expected to be negative in 2018. Assuming that industry conditions remain favorable, our expectation is to generate positive free cash flow in 2019. Our overall strategy is expected to continue, to provide ample liquidity and the financial flexibility to fund our strategic growth, serve our customers and create value for our shareholders. And now, I will turn it back to Larry.

Thanks, Mark. Before we turn to Q&A, I’d like summarize how we expect to continue to drive margin growth. Please turn to slide 27. This last slide summarizes the multiple initiatives we’re driving to improve revenue growth and enhance operating effectiveness. I'd like to point out a few of those items that have the most impact. Under revenue growth initiatives, the most important initiative is diversification of the fleet through ProSolutions and ProContractor products. That fundamental change drives our second initiative, the diversification of our customer mix. Third is the impact of our optimized proprietary system and technology which drives our fleet and customer strategies through price optimization throughout our branch network. While we have several initiatives to improve our operating efficiency, I'd like to point out four high priority areas. First and foremost, we are focused on safety and training initiatives to continue to improve safety in our business. Second and third, our initiatives to reduce logistics and fuel costs. Lastly, we will complete the migration of our financial systems from Hertz this summer. And now, we look forward to your questions. Operator, can you please over the lines?

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Adam Seiden of Barclays. Please go ahead.

Hey. Good morning, everyone.

Good morning, Adam. How are you?

I'm all right, Larry. Congrats on the quarter and thank you for all the detail you guys gave in the slides.

You’re welcome.

So, I guess my first – yeah. My first question here, I guess, is just thinking about Q1. It's been well documented. It was wet and cold across the U.S. I was just hoping if you can talk a little bit about the volume progression that you saw from January through, I guess, today?

Yeah. I'll let Bruce answer that. He's pretty close to the operational activity that took place in the first quarter.

Yeah. Great. Thanks. So, I don't – really, we had pretty strong demand throughout the entire quarter and there was a little bit of cold weather in the northeast, but to some degree we think that probably it was a positive. It's extended out to snow season a bit and extended out our heat season all the way into April. So, overall, just a good – across North America, good, strong demand throughout the entire quarter.

Excellent. And then, I guess, secondly, just want to make sure that I heard correctly that you said time utilization was up for the quarter and I assume that was on a year-over-year basis. And then beyond that though, how would you say would that vary by product line within your mix of fleet?

Once again, I think it was really strong demand across the entire product line. You had some seasonal rotation in some of specialty product, but if heat is strong then HVAC might be seasonally weak, but overall just strong demand throughout. And I think we did a really good job, the fleet team did, in kind of adjusting all through last year. If you remember, we had pretty strong disposal throughout the fourth quarter. So, we did a pretty good job of adjusting coming into the first quarter.

Excellent. Kind of dispersing fellows, and thank you for letting us question.

Great.

The next question will come from Seth Weber of RBC. Please go ahead.

Hi. This is Brendan on for Seth. You’re now on your eighth consecutive quarter of rate growth, but you had previously said that you kind of started below some of your larger peers. How would you describe the current rate environment? Did that rate growth kind of continue through April? And then any color you can provide on the sort of remaining pricing delta between you and your peers?

Yeah. Well, look, without giving you future guidance relative to April, I would tell you that we have seen continuing trends through the first quarter. We believe we are pretty much on par with our peers. We may have started a bit lower particularly in our national account business, but we've been able to adjust that accordingly over the last eight quarters, and I would say we believe certainly we're on par with our peers, but we'll continue to push for rate improvement in our business on a regular basis.

Great. And then, I mean, you mentioned that you saw the strong demand across pretty much the entire product line. Is that the same for all of the end markets that you rent to? I mean, did any areas get notably stronger or weaker, maybe more so than you would have thought?

No. This is Bruce again. Once again, it was really strong across. And actually, our Canadian business outpaced our growth, our 15.1% run rate rev growth in the quarter. So, where it may have been a drag in the past, it's actually outpaced currently. So, really, a strong growth across all of North America for us, no weak pockets that we saw in the first quarter.

Okay. Thank you. Congrats on the quarter.

Thank you.

The next question will come from Brian Sponheimer of Gabelli. Please go ahead.

Hi. Good morning, everyone.

Hey. Good morning, Brian.

Just to stay with that question and kind of open it more broadly from Canada, oil patch markets, an area where maybe you had some greater exposure in the past. Talking about what you're seeing there in and how you're thinking about your fleet maybe relative to how you were a year ago in those areas.

Yeah. Well, look our strategy really has not changed. We want to continue to reduce our dependency on upstream LNG. As I've said in the past, it's a volatile market, and you can have a sustainable business over the long term if you chase that type of activity. So, we will selectively utilize capacity in those opportunities with the more favorable customers or the customers that are what I consider and Bruce considers to be better customers, those that pay on time and those that take care of your equipment. But we’re not going to chase upstream oil and gas regardless of the economic improvement. That said, certain branches that are located in there have performed better and will continue to service that customer base. But we will be constrained on the amount of capital – we were constrained in the amount of capital that we put into those markets.

Okay. Great. Just a couple clarifications and then I'll hop off. If rental res were up 15%, you said you saw volume up 7%, pricing up 3%, and then mix with the other 5 points?

Yes.

Okay. When we're thinking about this mix, looking at the local accounts, is it the type of equipment? Is it the net pricing to those customers relative to national? Just talk about that and then maybe extrapolate that to how we should expect your operations to look going forward?

Okay. Hey, this is Bruce. So I can help you understand it better, but I don't think I can extrapolate how the last part of that question. But it is a mix of both. So we've said prior that these local customers pay a pricing premium compared to. So, they’re accretive to our overall pricing. And then you get to think of the mix. So we're going to invest – you can back into about what our total capital spend is going to be now that we’ve given you what we're going to dispose of and what our net CapEx number is going to be. So you can build a little growth capital in there. But don't think of it as a 1:1 replacement. So, if I'm taking out a certain type of equipment that drives an X dollar yield, and I’m bringing in equipment that drives a much higher yield, it really doesn't matter which category of equipment or customer – segment the customer are running to, that individual piece drives a better return than the piece that I took out. So it’s that mixed shift that we've always talked about that we need to do to the legacy fleet that we have at Herc. And then it’s this bringing on these new customers as we diversify also drive some price.

Okay. That's helpful. I mean. obviously really good there. Just one more for me if I can. Looking at the SG&A line, down $7 million year-over-year, you talked about professional fees. If we were to straight line the $7 million improvement, that’s $28 million year-over-year. Am I thinking about that potentially correctly, or are there other pockets that maybe jump on that as simple?

I think we guided in Q4 that we would have approximately 16% SG&A run rate to total revenue and we're not coming off of that. We do expect that our – the spend cost, right, we also guided to a $20 million number for the year, we would expect that expenditure to occur primarily over the first three quarters and holding at 16% to total revenue at this point.

All right. Great. Well, best of luck. And we’ll see you soon.

Thanks.

The next question will come from John Healy of Northcoast Research. Please go ahead.

Thank you. Guys, I want to ask a little bit about the people in the business. I know a big part of the margin recovery story is the sales force productivity, and I know you’ve made investments there. But could you talk a little bit about the tenuring and the retention that you’re seeing there and have the investments that clearly you look like you’re making progress? But as you look at the metrics associated with those people, are they ramping as fast as you thought? Are you holding on to them enough? Are there any plans to kind of do anything more on the headcount side?

Yeah. Look, clearly, we are seeing improvement and certainly tenure and longevity to our people. We're probably right around what industry standards are for turnover, but we've implemented a number of programs both in terms of training and career progression and a number of different things that allow our people to continue to grow and develop in their jobs. So, we're pleased with the progress. We've seen the appropriate shift happen over time, and I don't think you'll see any major wholesale changes. Right now, we're tweaking and looking for opportunities for improvement along the way. But, by and large, the wholesale changes that we implemented two and three years ago for the most part over.

Great. And then just wanted to ask just about from a geographic standpoint. Yeah. I was curious to know if the geographies in the U.S. if there's anything you would call out in terms of any regions that really showed above average growth or any regions that you feel like that urbanization strategy or just some of the other changes you’ve made are really having an impact for you guys.

Yeah. Look, I would tell you we're seeing sort of really good growth now across all of our regions, and, yes, we are focused on urban market centers and we define urban market centers as MSAs above 1 million people. And those are continuing to provide excellent growth, new customers, local contractors and we're having the opportunity to put our ProContractor and ProSolutions products into those markets along with our Classic products. But generally, I couldn't point out to any region that is outperforming any other region. They're all performing very well.

Got you. And then just one final question, the tax rate floating up to about 30% or so that you mentioned, is that something that we should be thinking about kind of as a going forward number 2019, 2020 for you guys, hypothetically or are there some onetime items that are causing it to be a little bit outside this year?

There are a couple of permanent differences that are driving the rate up as of now for 2018. There is still guidance to be written on the new tax code, and so obviously, we will continue to evaluate that. But I think going forward, the 25% to 27% kind of future looking is probably more appropriate than the 30% that's being driven up by a couple of firm differences in the current year.

Excellent. Thank you, guys. Congrats on the quarter.

Thanks.

The next question will come from Kathryn Thompson of Thompson Research Group. Please go ahead.

Good morning. This is Steven Ramsey on for Kathryn. Are you seeing an increase in the competitive environment, in your initiative to increase density in the high-growth urban markets or what are the odds these geographies in the next year or the two or three years gets overcrowded?

Hi. This is Bruce. So, I guess the way I would answer that is remember we have 4% share of a $50-billion plus market that’s growing at give or take 5% compounded over the next three to five years. And, so really, our real competition is this conversion from ownership to rental. That's the biggest opportunity, the secular trend. And so, I wouldn't say that there's any specific competition we're feeling in any one market.

All right. And then can you talk about if the ProSolutions and contractor sites, are these fundamentally safer than the more traditional equipment locations, and is that a driver of improved safety?

No. This is Bruce again. Absolutely not. It's all the same, and it's all about the culture of driving safety through our entire business.

Excellent. And then last question, and as you reduce your reliance on earthmoving fleet, are you reducing the absolute units of fleet there, and is there a certain amount of fleet you need to maintain for the sake of cross-selling?

Yeah. Look, just for clarification, we're not reducing our reliance on earthmoving equipment. We're reducing our reliance on certain types of products within the earthmoving. We're moving to more compact equipment from what we call large or big earth that is traditionally a dealer-type model and a dealer-dominated marketplace. We’re very much engaged in the earthmoving market. We’ll continue to be engaged in it, but our focus will be on what I'll call midsize and compact earth. That said, we're not going to abandon large earth. We’ll just be more selective on the customers and the markets that we choose to address.

Excellent. Thanks.

The next question will come from Bill Mastoris of Baird & Company. Please go ahead.

Thank you. Larry, a lot of your larger competitors now have talked extensively about the fragmentation in the industry. I think you’ve touched on it in past conference calls and they've actually followed through on some of their actions. So do you have any current appetite for acquisitions even bolt-on acquisitions? And if there are larger acquisitions, how far are you willing to stretch the balance sheet?

Yeah. Look, as I’ve said and stated since day one, our strategy is more about an organic growth strategy. We are not in acquisitive mode nor do we intend to be reliant on that. We inherited this unbelievable network of 275 underutilized branch locations. We still believe we have ample opportunity to grow the volume within that existing footprint. We will look for opportunities for improvement on a one-off. We'll do four to six greenfields a year. At some point, we may choose to look out to make versus buy decision which if there is a small local competitor that happens to be opportunistic for us, we may decide to do a one or two or three branch type of an acquisition versus opening up a greenfield. But I would say we are not what I would call a roll up company nor should you expect us to be one.

Okay. Thank you very much for all the color. I appreciate it.

The next question will come from Justine Fisher of Goldman Sachs. Please go

Hey. This is Jack [ph] on for Justine. Just one quick question on your capital structure. I know your – both of your bonds starting June 1 you can redeem 10% of the original principal amount at a lower redemption price than sort of otherwise. So, have you guys sort of thought about sort of utilizing that at all as it would help out your deleveraging plans as well as reduce interest expense and improve your free cash flow?

Look, we are always looking at the opportunity to improve our capital structure. Certainly that’s within our vision screen, but I'm not prepared to talk to you about what we intend to do in the future.

That would be great. Thank you. That's all for me.

The next question will come from Jerry Revich of Goldman Sachs. Please go ahead.

Hi. Good morning. I'm wondering if you could talk about the opportunities set from the logistics outsourcing plans that you laid out. How should we think about what the ultimate upside is and cost of implementation? Can you just frame that for us, please?

Yeah. Look, we continue to work on improving our operating efficiency in our business. We’ve implemented some very key strategic programs both on logistics and fuel in the recent time frame. That’ll both begin to take hold in the back half of the year. And quite frankly, we reviewed these as opportunities for avoidance rather than opportunities for inflation. And because we've been inefficient in the past, it's an opportunity where we have been able to improve our guidance and you have to look at that has been valued and balanced into our guidance going forward.

Okay. And then as I look at your pricing versus the industry, 2017 was a big year of – you post getting your fair share if you will from a pricing standpoint and driving dollar utilization improvement. What's the next leg of dollar utilization improvement for you folks from here? If I heard you right on the call earlier, Larry, I think you mentioned you're now in line with the larger peers from a pricing standpoint. So what are the levers that are going to be most significant over the next one to two years in terms of continuing to narrow the dollar utilization gap for you folks as you see it?

Yeah. This is Bruce, Jerry. So as we talked about earlier or as I answered the other question for the gentleman, you know, mix plays a lot into this. Our PCT business that drives much higher pricing, our local customer base is driving higher pricing. So if you – we can't – I can't give you guidance on what we expect in the future, but I would say that we feel comfortable we – well, first, I think I would like to kind of put away this kind of rumor of we were underpriced to the market to begin with. I think the actions we've taken in our proprietary Optimus pricing tool and the science behind it is what helped us drive pricing gains again for the last 8 quarters. And I think that we will continue to use your term, get our fair share.

And, Bruce, just a clarification, so with the disclosure of super helpful slide 13, as you lay out that ProContractor solutions and the ProSolutions mix is up 150 basis points year-over-year, is that the trajectory that we should see from an evolution standpoint? Is that enough to drive a meaningful mix benefit to dollar utilization or are you saying that mixed shift will accelerate from 150 basis points we saw in the quarter?

Yeah. So, we stated all along, from the very beginning, so we're at about 20% now, and we stated from the beginning of this journey that we wanted to see that somewhere between 25% to 30%. We even got a question, I think, last time of could you see it over 30%? We were on a five-year journey. I don't know if we'll get over 30%, but our goal has always been to get somewhere between 25% to 30%. And you can see that can drive significant yield out of that product so that you drive pricing and continued dollar yield improvement.

Okay. Thank you.

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

Thank you, Kerry, and thank you all for joining us today. If you have any further questions, obviously please just don't hesitate to give me a buzz. We look forward to talking to you or seeing you all soon. Thanks, again. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.