Herc Holdings Inc. (HRI) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Herc Holdings Second Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Thank you and over to you.

Thank you, Spencer. Thank you all for joining us this morning and welcome to our second quarter and first half 2020 earnings conference call. Earlier today, our press release, presentation slides and 10-Q were filed with the SEC, and are all posted on the Events page of our IR website at ir.hercrentals.com. This morning I'm joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Irion, Senior Vice President and Chief Financial Officer. We'll review the 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 and our quarterly reports on Form 10-Q. 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 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 good morning everyone. Our business like all businesses in North America had to deal with the impact to economic activity in the second quarter resulting from the mandated shutdowns to mitigate the impact of the COVID-19 pandemic. The immediacy of the impact on our business as most major metropolitan areas were shut down was unlike any downturn any of us have previously experienced. We had to react quickly to put in place the recession playbook over two weeks instead of the one or two years that it usually takes a recession to play out. The experience of our management team at both the senior level and in the field has proven that maturity and experience really matter. Our Regional Vice Presidents averaged 25 years of industry experience and we're able to rapidly roll out cost control initiatives and implement new operating procedures following the centers for disease control and prevention guidelines for safety. As an essential service provider, our locations remained open for business and we were able to provide our customers with rental equipment as and where needed. We are proud of how our team responded to the sudden and unprecedented challenges that we overcame together. In the top tier, we are the third largest rental company serving North America with the scale and capital resources to provide a broad range of equipment that supports a wide variety of customers and industries. We've made strategic investments in terms of time and resources to build out our specialty rentals over the last four years and these investments were well placed in terms of the pandemic response. Our specialty fleet grew 4% year-over-year to nearly $850 million of OEC, representing approximately 23% of our total rental fleet. Our strategic customer and fleet diversification has helped to offset the business slowdown we've seen in other parts of the business. Our national account customers are also weighted towards essential services and many have remained active during the shutdowns. Our national accounts represents 46% of our rental revenues. These customers are a strategic advantage for Herc with an average relationship of over 25 years. We are committed to providing excellent customer service and providing stability and consistency to a significant portion of our revenue base. Our customer-centric culture and high priority for safety also provides a strong foundation as we serve our customers and keep our team and communities safe. Our operations began to see the effect of the shutdown in mid-March, April was the month with the biggest impact to our rental revenues, and we have seen a slow and steady improvement in May and June. As we adjust to this new and challenging operating environment the strength of our organization and our business has been more evident than ever. We have prudently managed our balance sheet and are well positioned with ample liquidity and modest leverage to sustain our operations even in the most difficult environments. Now, please turn to slide number four. We continue to follow the CDC guidelines across all of our operations and reinforced hand washing, social distancing, and infection control in frequent communications and in contact with our customers and communities. We restricted non-essential travel. And for the most part, field support and office staff continued to work remotely during the second quarter. And while we enhanced our operational and safety procedures to operate in this challenging environment, all of our regions continue to report at least 89% Perfect Days and an average of 94% Perfect Days for the six months year-to-date. Our team members have demonstrated resilience and professionalism throughout this pandemic crisis. And I want to thank each and every one of the Herc Rentals team for supporting this critical and essential work of our customers and communities. We're proud of what we have accomplished together as we've been adjusting to the new operating environment. The health and safety of our team, customers, and communities remains our highest priority, while we continue to provide the equipment and services required by our customers. Now, please turn to slide number five. Our weekly fleet on rent and equipment rental revenue increased sequentially from the trough in mid-April through the end of June. We maintained rental rates during the quarter and results were about flat compared to the prior year. Our focus on many of the cost-saving initiatives that were introduced last year intensified in the second quarter and we successfully improved our transportation recovery, controlled employee costs, and reduced professional services and consulting fees. We also generated approximately $179 million in free cash flow year-to-date and increased our liquidity to $1.3 billion by the end of the second quarter. Now, on slide number six is a brief overview of our second quarter financial results. Equipment rental revenue declined 19.6% or $80 million to $327.6 million as a result of the impact of COVID-19 on business activity in the quarter. Total revenues were $368 million, 22.5% or $107.1 million lower than the prior year, primarily due to the lower rental revenue and lower sales of used equipment. We reported net income of $2 million or $0.07 per diluted share in the second quarter of 2020 compared to $9.7 million or $0.33 per diluted share in 2019. Adjusted EBITDA declined 14.6% to $149.4 million in the second quarter of 2020 compared to the prior year. And the successful management of costs, despite the decline in revenue contributed to an adjusted EBITDA margin of 40.6% for the second quarter, an improvement of 380 basis points over the prior year's 36.8% margin. Now, I'm going to ask Aaron Birnbaum to pick up from here to discuss our second quarter operating performance and the current environment. Aaron?

Thank you, Larry. Please turn to slide eight. We remain committed to keeping our team, their families, our customers, and our communities safe. I would like to thank our team members as they have pushed through this past quarter to serve our customers. We have been through downturns before, but this was an exceptionally unusual period and continues to be so. Our ability to manage our operations and sales outreach initiatives in this challenging operating environment reinforced our commitment to our business strategy. We are focused on our customers' needs, operating efficiently, opening greenfield and specialty locations, and enhancing sales initiatives to generate new business and new revenue streams. We are getting good at virtual meetings and many of our senior leaders have joined our sales teams and strategic sales meetings with our customers virtually. We strive for a diverse customer base as a broad base of customers, industries, and segments served can help offset severe or seasonal effects at all times. Our diversity and growing specialty business are helping to mitigate some of the impact of the COVID-19 business slowdown and we remain focused on managing our fleet and controlling costs to improve our return on capital. Please turn to slide 9. All of our branches are open and operating in normal weekly schedule. But to control costs, we continue to make adjustments to our hours or operations on a branch by branch assessment, which controls variable costs such as overtime. Through a continuation and acceleration of cost initiatives introduced in 2019, we also dramatically reduced transportation, travel and other variable costs in the quarter compared with last year. We are regularly reviewing branch final volume transaction activity rental revenue trends, fleet utilization and other key metrics and we'll continue to adjust our operations as necessary. Some of our markets and branches have returned to or surpassed March 22 or even 2019 on rent levels. When we reported to you in the first quarter, we had approximately 10% to 12% of our workforce on some form of reduced work or furloughed at the center of the crisis, but today only a small group of operations are on furlough and those are predominantly in our entertainment operations. We monitor these trends closely and have the flexibility to adjust as economic activity improves. Please turn to slide 10. Specialty includes ProSolutions and ProContractor now accounts for $848 million of OEC fleet, an increase of about 4% over last year's comparable period and now about 23% of our total fleet as of the end of Q2 2020. The investments we have made since 2016 in developing our specialty business have really paid off in this current challenging operating environment. Our ProSolutions business grew 19% in the quarter and has proven to be a key strategic advantage in providing support, solutions and white glove service to many of our key customers as they navigate the challenging environment in their various end markets. Our core fleet of aerial, material handling, trucks and trailers and earthmoving are also broken out on the slide. Our fleet expenditures at OEC were $88 million in the second quarter, significantly lower than the prior year's quarter. Expenditures were made up of pre-COVID orders and some targeted fleet to meet specific customer requirements. OEC disposals were $83 million lower than the $123 million of OEC we sold last year. Our disposals were down as part of our strategy to minimize replacement CapEx and avoid the auction markets. Approximately 20% of the fleet was sold through auction with retail and wholesale channels representing the vast majority of sales in the second quarter. Proceeds were approximately 38% of OEC. Our fleet age for the period ending June 30, 2020 was 47 months and remains young, young enough to allow us to continue to sweat the fleet a bit. A quarterly breakout of this information along with the rolling balance of our total fleet is also in the appendix. Please turn to slide 11. Business activity is slowly improving from April, but still trending lower than last year. Construction sites that were shut down in March and April began to reopen as municipalities and states started to implement Phase III openings. By the beginning of June, most of the fleet that had been left idle on construction sites was back on rent. Our ProSolutions business stood out in the quarter as we improved average fleet on rent and revenue year-over-year. The expansion of our business to serve the health care and certain other industry verticals helped offset the downturn in rental revenue experience in nonresidential construction and government spending. The entertainment content part of our business the studios that create film, network and cable productions started to perk back up in early July after a nearly four-month hiatus. We have a diverse customer mix with many of our large national account customers operating in essential business sectors. Our locations remained open through the quarter and our team is on the ground looking for opportunities to support our communities. We enhanced our sales CRM model in Q2, providing our sales force with improved customer activity, new project data and mapping to drive efficiency and activity. We also launched a new lead share program through our CRM at the end of the quarter connecting sales opportunities across our North American landscape. Our second quarter rental revenue by major customer segment is shown on the chart on the left side of the slide. Contractors represented 34% of equipment rental revenue followed by industrial customers with 31%. Infrastructure and government represented 18% with other customers at 17% of the total. National account revenue represented about 46% of the total in the second quarter with local rental revenue now representing 54% of the total revenue. Our national accounts are primarily considered essential businesses as they include major industrial customers such as utilities and energy, healthcare, warehousing and distribution. This segment of business, as well as our government business has been a lot more resilient in the COVID-19 slowdown and is a key strategic advantage of Herc. Our sales organization is staying focused in a difficult environment. We invested in new sales training programs to assist our sales organization in new virtual sales techniques. Despite the overall slowdown in activity, we're encouraged that our new account revenue as a percent of rental revenue remained in the double-digit range. Ours is a relationship and solution business and via the virtual meeting or phone call our sales organization is focused on staying in touch with our customers and reaching out to new potential customers, despite any shelter replaced mandates. And now I'll pass the call on to Mark.

Thanks Aaron and good morning everyone. Slide 13 shows the financial summary of our second quarter 2020 results. We are generally pleased with our performance in the quarter. I'm pleased to demonstrate that we have a business of scale with a resilient business model that is less volatile than a lot of other industries in the current challenging operating environment. Despite a 20% drop in rental revenues in the quarter, we were able to rapidly adjust our cost structure and actually grow our EBITDA margins and REBITDA margins. This is a testament to the Herc team and our business strategy. We were already focused on margin improvement and adjusted to the COVID-19 shutdowns by quickly accelerating a lot of the initiatives that were already in place in addition to implementing furloughs over time control and other cost-saving measures. Equipment rental revenue declined 19.6% from $407.6 to $327.6 million in the second quarter of 2020. April was the toughest month in terms of the year-over-year decline in rental revenues and volume on rent and rental revenues have improved sequentially each month since then. We will cover some of the rental revenue drivers in the next slide. Total revenues declined to $368 million primarily due to lower rental revenue and lower sales of rental equipment. Most markets for the sales of used equipment including the auction channel were impacted by the COVID-19 shutdowns and live in person auctions remain closed. Our liquidity is sufficient that we can choose when we want to go-to-market with our used equipment and we will wait for market conditions to stabilize before moving our normal volumes back to auction. We have the ability to age our fleet without incurring substantial increases in maintenance costs and this is our plan for the next couple of quarters. We reported net income of $2 million or $0.07 per diluted share in the second quarter. Our adjusted net income in the second quarter of 2020 was $7.3 million or $0.25 per diluted share compared with net income of $16 million or $0.55 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 second quarter of 2020 declined 14.6% or $25.5 to $149.4 million over the same period in 2019. Based with key metropolitan markets effectively shut down for much of the quarter and the resulting declines in revenue we turn to aggressive management of our costs wherever possible and as a result actually improved margins. Adjusted EBITDA margin improved 380 basis points year-over-year to 40.6% in the second quarter. REBITDA was $145.7 million and REBITDA margin improved by 260 basis points to 44.2% during the second quarter. As a result of our cost control initiatives, decremental margin flow-through exceeded our expectations and was only 31%. On Slide 14 we highlight pricing and dollar utilization. The graph on the upper left illustrates our year-over-year pricing with the latest quarter reflecting rates that were flattish with last year. Despite the challenges we faced with lower demand, we were pleased that we were able to maintain pricing for the quarter with a marginal decline of only 30 basis points year-over-year. The pricing environment is likely to remain challenging with rental demand still impacted by the residual effects of COVID-19 related government actions. However we remain focused on utilizing our pricing tools and our experience with prior cycles to hold price wherever possible. The industry in general appears to be more disciplined on price and Herc team is focused on maintaining rate discipline in the current cycle. The chart on the top right shows average fleet and the second quarter was about flat over the comparable period last year down about 0.5%. We had a decent amount of CapEx delivered by mid-March before the impact of the shelter in place initiatives became apparent. As you know, we cut most of the CapEx that were scheduled for Q2 and the rest of the year and we are continuing to expect 2020 net fleet capital expenditures to be somewhere around half of the $414 million of net CapEx we incurred in 2019. In the lower right-hand chart, you can see rental volume in the quarter was down about 16.1% compared with the prior year. Rental volume began to trend more positively in May and June, but was clearly below prior year's results. We are currently experiencing a seasonal ramp-up from current levels, but as we go into the back half of the year with a lower base of rental volume we are likely to remain down year-over-year in terms of rental volume. The impact of the COVID-19 slowdown was evident in this year's second quarter dollar utilization which declined to 30.8% from 38% last year impacted by lower time utilization and flattish rates. The adjusted EBITDA waterfall on slide 15 shows the second quarter was $149.4 million a decrease of 14.6% or $25.5 million compared to $174.9 million in the second quarter of 2019. The bridge starts with lower equipment rental revenue down $79.1 million over prior year. Our successful efforts to manage our costs are clear with direct operating costs down by $44.4 million in the second quarter of 2019, primarily due to strategic reductions in freight and delivery, re-rent fuel and personnel-related costs. SG&A expenses are also well managed down by $14 million as we reduced sales expenses, personnel-related costs and professional fees over the prior year. As we have discussed previously, 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 importance of REBITDA margin becomes especially clear when equipment sales activity is not at normal levels. REBITDA was $145.7 million, a decline of $25.1 million or 14.7% with an improvement in REBITDA margin to 44.2% compared to 41.6% last year. I'm very pleased with the whole team's contribution to quickly react to a dramatic change in the operating environment with effective management of operating expenses as well as maintaining superior customer service to the 80% of the business that was not affected. I want to thank the operations team for such a great job of managing expenses as well as supporting our customers and communities in an extraordinary environment and our field support team for their contributions and for getting our results out in a seamless and timely manner. You will note that we now report two weeks earlier than we did last year. Most of our field support staff has been working remotely since mid-March. We remained productive and effective and committed to providing white cloud service to our branches and customers. Please turn to slide 16. For the six months ended June 30, 2020, free cash flow was impressive at $178.8 million. Our business model is resilient and we reacted quickly to cutting our capital expenditures as soon as it became clear that COVID-19 shutdowns would impact our end markets. Net leverage decreased to 2.6 times compared with 2.8 times a year ago at the lower end of our targeted range of 2.5 times to 3.5 times. In addition, our credit ratings were maintained at a solid B1 and B+. Total debt was $1.9 billion as of June 30, 2020, a reduction of about $132 million from December 31, 2019. With no near-term maturities, we have ample liquidity for the year and into the future. The actions we took last year to refinance our balance sheet positioned us well to steer through this challenging time. 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 total liquidity of $1.3 billion as of June 30, 2020 comprised of $1.1 billion availability on our ABL credit facility, $13.4 million on our AR securitization and cash and cash equivalents of $83.2 million. Our business model is resilient. And as a result of the adjustments we made to fleet CapEx and reducing our variable expenses, we are not a significant consumer of cash and should be able to continue to generate positive free cash flow in the final quarters of 2020. We remain cautious in our capital allocation and will apply free cash flow to pay down debt. On slide 17, we take a look at the latest industry forecasts. Coming off the worst quarter in modern economic history, the forecast is still a bit fluid and subject to more than the usual amount of estimation and supposition. The updated ARA forecast for North American rental revenues is probably the best estimation of rental revenue trends, taking into account the current macroeconomic environment and forecasting forward 2020 North American rental revenues to be down by 15% to $49 billion. With everyone looking to the upper bit for latest shape, the downturn in the recovery, North American rental revenues from 2019 to 2024 look a little bit like a Nike Swoosh. This looks reasonable based on what we have experienced so far in 2020, assuming there are no further economy wide shutdowns in the back half of the year. This would reset rental revenues -- rental industry revenues back to 2016 levels and to 2017 levels in 2021 before returning to 2019 levels in 2022. Now 2016 and 2017 were certainly not the worst years to be in the rental industry and there will be plenty of rental activity for Herc to target, although there will be a certain amount of fleet reduction required to adjust to the new environment. Our industry is resilient and tends to benefit in some ways in recessionary times such as these when the secular trends of ownership to rental accelerate as customers can serve capital. Our industry is also not dependent on any one end market and the fleet can move freely to where the demand is both geographically and by end market. We support industrial customers, local governments, maintenance and repair customers, restoration and an emergency response, as well as nonresidential construction. Bigger is also better in a challenging environment. And Herc Rentals as the third largest rental operator with a national footprint and a long history of established customer relationships has the capital to take advantage of growth opportunities and we'll be able to grow share. We have a leadership team of seasoned industry veterans and we intend to take advantage of our scale and customer service capabilities to expand our footprint and penetrate our target market. On slide 18, our strategy remains the same. The COVID-19 induced market shutdowns developed so fast and was so broad that the best analogy I have heard is that it's like taking the elevator down and taking the stairs back up. It looks like we experienced the worst impact to our top line in April have been steadily increasing rental volumes and rental revenues in the month since then. Our strategy is still the same. However, we will focus on a lean cost structure, improving our margins and providing excellent customer service and rental equipment to our diverse customer base. We have a fixed cost business model to a certain extent and the amount of flow through regenerating good times limits the amount of costs we can mitigate in tough times. Our improvement in both EBITDA and REBITDA margin in the second quarter exceeded our expectations. We believe we continue to manage margins for the rest of the year given current conditions. While fleet on rent has increased from the trough in April, future business conditions related to COVID-19 are uncertain. Nonetheless, we estimate fleet on rents in the second half is likely to decline approximately 8% to 13% year-over-year as a typical seasonal ramp is starting from a lower base going into the balance of the year. As a result, we estimate equipment rental revenue in the second half will be down about 10% to 15% year-over-year. As discussed, we've taken action to substantially reduce our net capital expenditures and plan to reduce 2020 net CapEx to about half of what we spent in 2019. On page 19 -- on slide 19, we have a guidance update. With a certain amount of stability returning to our business outlook, we are comfortable reissuing guidance for 2020. Assuming no further economy wide COVID-19-related shutdowns, we currently estimate adjusted EBITDA to be in a range of $625 million to $650 million in fiscal year 2020. As we have previously discussed, 2020 net CapEx is expected to be about half of what we spent in 2019 in the range of $190 million to $210 million. In this scenario, we are likely to continue to generate free cash flow, which we will apply to reduce debt. We're proud of the way that the Herc team has managed through a rapidly changing and difficult operating environment. And we remain committed to making Herc, the employer, supplier and investment of choice. And now I will pass the call over to Larry.

Thanks Mark. Before we go to Q&A, let me summarize where we are today on slide number 20. 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 to 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 with ample liquidity, as Mark outlined with no near-term maturities. We're sticking to our stated goals through solid execution. And we intend to improve value for our shareholders, customers and employees in the long-term. And now operator, we'd like you to open the lines for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Ross Gilardi from Bank of America. Please go ahead.

Thanks. Good morning everybody.

Good morning, Ross.

Hi, Ross. Good morning.

Thank you and congratulations on the – very resilient performance of this quarter. And glad you all are well. Your CapEx guidance it seems to imply that if you finish 2020 with fleet on OEC about flat year-on-year at about $3.8 billion first of all, do you agree with that?

Yeah. I mean, it's good to trend down slightly with limited CapEx coming in for the back end of the year.

Okay. Where I'm going with this so, you're saying that the demand is probably down 8% to 13% -- or fleet on rents down 8% to 13%, in the second half. And I guess first of all, what's the -- just broadly speaking the composition of that down to 18% -- the 8% to 13% in Q3 versus Q4. Are you -- is it more down like 15% in the third quarter and down 5% in Q4, or are you down roughly that level for the second half? And what I'm really trying to get at is what your implied exit rate is on time utilization into 2021? Because if fleet is flat and you're still running down on -- obviously on fleet on rent, the math would just suggest that you go into 2021 with high utilization down, a fair amount. I'm trying to get a sense of what that implies on pricing and CapEx in the next year? Thanks.

Right. So I think the commentary is that, we're coming out of a hole in Q2. We are ramping up with our normal -- with typical seasonality. But we're coming off a lower base. So we'll be closing that gap on prior year, steadily between now and the end of the year. And have a lower gap at the end of the year going into 2021, than we currently do. And that we're likely to have in Q3.

Okay. Great. Got it, got it Mark. And then pricing, you're calling fleet on rent down 8% to 13% and total revenue down 10% to 15%. Is the residual mostly pricing or is it mix or just some other type of adjustment? I'm just curious what you're seeing month-to-month, on rental pricing what was the exit rate coming out of the second quarter?

So most of the gap is, due to mix, much more than mix than pricing which is coming out of some of the specialty business, just with the changes in volumes there. And some of the year-over-year changes. So it's mostly mix-related as opposed to -- as opposed to pricing.

Okay, got it. And then just lastly, any comments on Florida, Texas, California, the big states that have seen spikes in COVID cases, in the last month. Have you seen activity level off in any of those states? And just what are you carrying on new project activity and deferrals into 2021? Any color there would be really interesting.

Yes Ross, this is Aaron. At the beginning of the COVID crisis some of the markets behaved differently as they went down. But as we've been coming back out and even with the recent resurgence of some cases, all markets really are up, behaving the same way right now and pretty balanced and all gradually moving back upwards. So in other words, the recent cases in Texas and Florida really hasn't slowed our rebound from the troughs.

Okay, got it. Thanks very much. I will turn it over.

Thanks Ross.

Thank you. The next question comes from the line of Jerry Revich from Goldman Sachs. Please go ahead.

Good morning everyone.

Good morning Jerry. How are you?

Doing well, thanks. And you Larry?

Just fine. We are safe and sound.

Good to hear it. I'm wondering if we just start on the cost structure side, it's not often in your business that we see operating costs down more than revenue in a downturn. Can you talk about how much of the operating cost decline was by furlough and travel temporary actions that will come back versus any parts of that reduction that should stay with us?

Right. Yes. No Jerry it was a really good quarter on cost control. We're very happy with the results we got there. I think a lot of the tools were already out. So it's kind of an acceleration of the strategy that we're already working on. So we didn't really have to sort of go to the book and work out what to do we just had to accelerate what we were already doing. So a lot of that cost control does continue to roll through the year. The furloughs were something that will go away going into Q3 and Q4. So that's part of -- we won't continue these sort of decremental margins in that 30% zone, more likely to sort of trend back towards 50% to 60%. So maybe half of the cost control came from the furlough and sort of dramatic changes to the way we operated and about 50% will likely to continue as a part of our sort of culture going forward.

And as we look at gross margin seasonality Mark typically you have a big step-up in 3Q versus 2Q just based on normal seasonality and we're talking about an inflection in fleet on rent based on what you laid out earlier. So it sounds like we should be on track with meaningful improvement in margin sequentially with their costs coming back and notwithstanding, but I'm wondering if you could just confirm that we got that cadence right and there are no other moving pieces we should keep in mind?

Yes. We -- I mean, we are focused on maintaining margins going forward. I mean there were some one-offs in Q2 that will widen their way off in Q3 and Q4. But directionally, we're looking at maintaining margins on the way through the balance of the year.

Okay. And then from a pricing standpoint, can you talk about -- if you're implementing normal seasonal rate increases? Obviously, utilization is picking up sequentially but it's not at a very high base. So are you getting the normal seasonal rate uplift that you would normally get in July or August?

There's not much normal out there in the current environment Jerry. So we're focused on holding rate and sort of -- it is a challenging rate environment with volumes down. The industry does seem to be a lot more focused on rate and maintaining rate this time around and that's the focus of our management team is really to hold rates and minimize any big fines.

Okay. And lastly obviously too early to talk about '21 in much detail, but with fleet on rent still declining year-over-year through the fourth quarter, if utilization holds steady at those levels entering '21 should we be thinking about in that scenario of CapEx next year looking similar to this year? And potentially moving up if demand moves higher or how should we think about your replacement needs? Any color there would be helpful?

So yes it's still very early. And we will learn a lot over the next couple of months in terms of sort of where '21's looking. But I would say 2020 is buttoned down real tight just about as tight as you can get. 2021 will be buttoned down tight, but probably not as tight as 2020. So probably somewhere in between 2020 and 2019 would be where we'd start off thinking. We've got flexibility to adjust CapEx if demand comes in stronger than we expect. So we could go in with a conservative CapEx program and flex up if necessary to any sort of environment.

Okay. Appreciate the discussion. Thanks.

Okay. Thank you.

Thanks, Jerry.

Thank you. The next question comes from Mig Dobre from Baird. Please go ahead.

Yes. Good morning. Thank you for taking my question. I guess, I'm looking for a little more color on how business has trended through the quarter and what you're seeing into 3Q. My recollection is that in April, you were seeing rental revenue down 20% to 25%. I mean what you posted here is down 20%. So obviously things have gotten better. But I'm sort of, curious at the pace maybe June versus May. And then as I look at your second half guidance for call it down $10 million to $15 million, it's a market improvement from what we've seen in Q2. So how do you think about getting there Q3 versus Q4? And what do you -- what are you seeing live in the markets right now that give you confidence that this outlook is appropriate?

All right. I mean, I think, the right analogy is if we took the elevator down, we hit the basement in April and we've been taking the steps back up. So it's a slow steady incremental improvement. As more businesses open and people work out how to get back to work and the economy starts to sort of, reopen. And that's kind of what we've experienced in May and June and into July and that's kind of our expectations going forward. So we've got seasonality in our favor it's coming off a lower base. The business is operating similar in terms of a seasonal trajectory than it usually does, but just off a lower base. So a slow steady improvement from here on out as our expectations through into November and December when the seasonality starts slowing off and we head into the winter.

I guess not to put too fine a point on this, but as you're looking at the month of July or exiting Q2, however you want to define it are you close to this down 10% to 15%, or does that require yet an additional step-up in activity because this number is year-over-year right? I mean, we're not talking seasonality here just a year-over-year number?

Yes. No, you're right. So the -- there's a steady sequential improvement in volume on rent through the year that we expect. But we're coming up against last year's seasonality so that gap -- net gap continues to close as well. So I think both trends the sequential growth and the year-over-year gap continue to sort of shrink as we go through the year.

Understood. Then last question for me. I'm looking for a little more clarity on SG&A if you would. Obviously, really good performance in the quarter. I for one expected this line item to be perhaps a little less flexible. So as you think about the back half of the year can you give us a sense as to what's embedded in this line item as far as the contribution to your overall EBITDA guidance? Thank you.

We've sort of, been focused on flattish. SG&A has kind of been our guidance pre and post, I think it remains post-COVID. Some of the line items that went into the second quarter aren't necessarily going to recur. So you can maybe average out Q1 and Q2 to, sort of, get a feeling for how that sort of trends through into Q3 and Q4.

Just to be clear are you talking about averaging the dollar amount for Q1 and Q2 or the year-over-year progression?

Fixed dollars right. So our approach is flattish -- just holding SG&A flat for the next -- flat to flattish for the next couple of years just to sort of improve the margins in that direction.

Understood. Thank you.

Thank you. The next question comes from the line of Brian Sponheimer from Gabelli Funds. Please go ahead.

Hey everyone.

Good morning.

Another great job. I mean you put yourself in position for some real flexibility as you come out of this. And I guess along those lines you said that cash flow will go towards debt reduction. I'm just curious whether there are any other components from an M&A perspective purchasing some yards that may need a little help from an operational standpoint. Any thoughts on more external growth as opposed to internal improvement?

Yes. Look I would say that we have not really focused on M&A as part of the overall strategy. We will maintain our direction relative to greenfields for the year. We are still on target in that 6% to 10% range from a greenfield opening perspective and we'll continue our focus in that area. We have completed during the last quarter the sale of our Chinese business. And so that's off the table now and we really have a clean operating environment in North America. We'll certainly look at any opportunities that might present themselves as we go through the balance of the year in terms of geographic footprint within our defined area that we want to grow which is large metropolitan areas over one million people or more. We'll look to add density. And if there are opportunities as a result of COVID, we'll certainly jump on them. But quite frankly it's not at the moment first on our mind. First on our mind is operating the business as we've been doing for the last quarter and putting forth the results as we've demonstrated.

If you're thinking about your fleet on rent or the fleet in general that goes towards film, TV, live events, et cetera what's the thought on 2021 at this point as you're engaging with your customers there obviously a lot of planning goes into the co-television and other events of the world. So, just any small thought -- any thoughts on that particular part of your business?

Yes, we like that segment. I would break it in two parts. This is Aaron, Brian. From the TV production feature film side, it's starting to percolate back as we said at the beginning of July. So, that volume is starting to come -- started to gradually come back. We're taking the stairs back there. On the event or the music event side, I don't -- we don't expect that to return this year at all we'd be surprised if it happened. And don't really have good visibility on how that's going to work in the first half of next year. So, we'd be prepared for it if it began to come back on the event side, but really the TV film commercial side is bigger part and that is starting to percolate back up.

Thank you very much and good luck for the back half of the year.

Thanks.

Thank you.

Thank you. The next question comes from Rob Wertheimer from Melius Research. Please go ahead.

Hey, good morning everybody. Exceptional results. It's very impressive to see.

Thanks Rob and thanks for the book.

You’re welcome. Hope you enjoy it. I had two questions really. And the first one do you guys have a clean look at what the industry revenue was like in the quarter? Your revenues are kind of where we forecast but I wondered if there might be a little bit of upside. So, I didn't know if you were a little bit below on the entertainment mix or on operational disruption or anything else? Do you lose share in the quarter? Not that it matters the whole time, but I'm just curious operationally if that was the case?

We don't really have a good look into industry revenues. Our entertainment mix anticipates and fill stuff probably a little bit heavily weighted, more weighted than the industry in general. And we had a look into sort of industry volume and I think our trends were generally in line with what we saw through the industry.

So, maybe mix. Okay, fair enough. And the next question is you guys have given a nice in the past long-term look at what you're doing with margins. And you've mentioned a couple of times on the call some of the actions you took this quarter may have been accelerated or may have been more permanent. So, could you just like give us a narrative around what you did that you think is more -- is going to stick with us into 2021 and 2022? And what was accelerated -- just the kind of actions that you do think are permanent? Thanks.

Well, the furloughs and those sort of dramatic cutbacks and hours worked in operations at the branch were a good example of an action that happened in the quarter that will – going into Q3 and Q4, in terms of impact. In terms of maintaining outside delivery expenses and some of these external spends, we were concentrating on cutting them back as a proportion. So they were reducing as a percentage of our – as our revenues going into the COVID shutdown, with the big dramatic drop down in volume they took an additional couple of steps down that will come back as we go into Q3 and Q4. So maybe half of those costs savings remain going forward as we're just more efficient with how we run our operations. But as the volume comes back some of those costs will return.

Yeah. And then in addition to that Rob, probably our use of external repair versus internal repair was adjusted to where we use our own labor force more exclusively during the quarter some of that will probably remain as well as a continued focus on reducing our re-rent activity, and it will be our intention to keep minimizing the re-rent and utilizing our own fleet.

Okay. Thanks, Larry. I'll try it again. Thank you.

Okay. Thanks. I'm looking forward to reading your book.

Thank you. The next question comes from the line of Steven Ramsey from Thompson Research Group. Please go ahead.

Good morning, everyone.

Good morning, Steve.

I guess to focus on specialty first. You decided how it helped mitigate some of the demand drawdown due to the virus. What drove that in Q2? What kind of projects and market demand drove that maybe pricing and volume? And then maybe, how specialty takes you into Q3?

The type of projects – this is Aaron. I can answer that part pretty clearly. So it was the initial wave of responding to the healthcare sector, the government needs for climate control, temporary power all across North America there was a lot of specialty equipment deployed for that and it continued to stay on rent through the quarter and even some of it remains today. The – I think your other part of the question was how the – part of that drove the volume I'll let Mark take that one.

Yeah. So I mean definitely an increase in volume. And then it had really to respond to the pricing and mix question without getting too granular. It really depends on the size of the customer that it's going out to and whether there's a contractual price or whether it's spot pricing. So I think the takeaway is just big increase in volume a big positive to us as a strategic growth part of the business and something that we continue to focus on and that should benefit us in Q3 and Q4.

Great. And then on new accounts you guys talked about the addition of new customers. Can you talk to what end markets were these in? Was it totally driven or majority driven by health care on a temporary basis or other customer types that is driving that?

Well, we've been focused on generating new accounts for four or five years. And the strategy is so that we can obviously grow the revenue, but also replenish any kind of attrition that goes on in the business with accounts, jobs finishing and allows us to stay pretty healthy. So as far as segments of new accounts, it's really across the board. But I would say it's mostly in the local accounts, what I'd call like regional type accounts versus big industrial big accounts.

Great. And then to dig in again on special – the entertainment side of the business. I don't know, if there's any way to quantify maybe, I would guess Q2 revenue there was almost zero. But do you expect the second half to come back pretty quickly and get to half of last year's sales into that segment? And is entertainment the majority of the mix impact to rental revenue or are there other sectors?

Yes. The entertainment business was probably one of the only segments that went to zero during the second quarter and it is stair-stepping back up. It's hard to predict where it's going to go, but every week it's strengthening. And I would imagine, as we get closer to the end of the year as long as there's not another shutdown in North America due to COVID that we'll be closing the gap pretty rapidly on kind of where we were a year ago.

Great. Thanks for the color.

Thanks, Steve.

Thank you. The next question comes from Seth Weber from RBC Capital Markets. Please go ahead.

Hi. Good morning. Thanks. This is Brendan on for Seth. Related to your utilization, I guess, I was wondering was that maybe lower, because you were walking away from maybe deals that were aggressively priced, or is it more of a case where they were just simply no deals, because of everything that was going on?

Yes, I would say, it was a case of no deals, because of the shutdown particularly in the large metropolitan market areas, when cities across North America got shut down, so did our volume and that affected our utilization. So I don't think very much of it was as a result of any aggressive deals that we walked away on. We maintained our pricing pretty well and we really didn't chase a lot of miscellaneous activity. We focused on our strategy to attract the type of customers that want to have the type of service and solutions that we provide.

Okay. So it sounds like, but I guess just to confirm, right, you haven't really seen many players lowering their rates or acting irrationally in the market still on the pricing side acting pretty rationally at this point?

Look, I'd say the market generally is acting rationally. There's always deals here and there that tend to be competitive mostly by what I'll call either local or smaller players. But amongst the majors, I think everybody is rationally behaving in the marketplace.

Okay. Great. Thanks.

Thank you. The next question comes from the line of Jerry Revich from Goldman Sachs. Please go ahead.

Yes. Thanks for taking the follow-up. I'm wondering if you could talk about your fleet mix based on the CapEx that you outlined. Do you anticipate continued meaningful shift to specialty over the balance of the year? And as we look at the specialty mix now you're getting right up to your 25% target and I'm wondering if you have any updated thoughts on what specialty as a mix of business should look like going forward? What are you finding as you grow that part of the fleet?

Yes. Thanks Jerry. Look, we said our stated target was going to be somewhere between 25% and 30% of our fleet. We're at sort of the level that we wanted to go and then we'd evaluate it after that. We'll continue to invest in the specialty gear around power generation, HVAC, filter equipment and things that support, I would say, the medical environment and the clean air environment that we've had an opportunity to participate in here over the course of the last quarter. So that's where the focus will be. And look if we see the demand to take it above the 25% approaching that 30% range, we're prepared to continue to invest in our specialty businesses. It's great business for us. It allows us to provide a solution rather than just a product and enables us to be more important to our customer base.

Okay. Thanks. And then if you look at the business as a whole, can you just talk about how much visibility you have today on projects compared to a year-ago, presumably visibility is pretty good considering you're reinstating guidance, but I'm wondering if you can comment on that directly?

Primarily when you look at the landscape of our North American – our regions, the jobs that did get temporarily shut down or back to work, we're seeing jobs that were postponed that now are starting. And then from a – some KPI items that we follow like the ABI index, it's clear that it's starting to rebound in June from the prior month. So activity seems like it's bouncing back. The pipeline long-term is – remains to be the question.

Okay. And on that note, as you think about your fleet flexibility into 2021, can you comment on how you would allocate resources in the base case scenario if private non-res is down 10%, 15% in 2021, how would you allocate resources in that environment?

Well, I mean the fleet isn't necessary depending on anyone in market and the strength in other end markets where there's weakness in construction behalf. So in that environment we've got a big industrial base of customers that would continue to get their fleet. This year we saw the CapEx that we didn't cut went into the specialty lines, so we will continue to invest in those going into next year. And it's really just the level of expenditure as opposed to targeting any end markets. The volume works its way through to wherever the demand is.

Appreciate the conversation. Thanks.

Thanks, Jerry.

Thank you, Jerry. And I think we've come to the end of our hour. So thank you all for joining us on today's call. And obviously, as always, if you have any further questions, please do not hesitate to give me a call or e-mail me. We look forward to talking with you all soon. Thanks a lot. Thanks, Stanford.

You're welcome. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.