Herc Holdings Inc (HRI) 2017 Q4 法說會逐字稿

Good day, and welcome to the Herc Holdings Inc. Fourth Quarter and Full Year 2017 Earnings Conference Call. (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. And good morning, everyone. I'd like to welcome everyone to our fourth quarter and full-year 2017 earnings conference call. Our press release and presentation slides went out this morning, and both are posted on the events page of our IR website at ir.hercrentals.com. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer; and Barb Brasier, our Senior Vice President and Chief Financial Officer. They will review the quarter and the full year results 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 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 Slides 3 through 6 of the presentation for our complete safe harbor statement.

The company's Risk Factors section of our annual report Form 10-K for the period ending December 31, 2016, which was filed with the Securities and Exchange Commission, contains additional information about risks and uncertainties that could impact our business. You can access a copy of our 2016 Form 10-K and other filings by visiting the Investors section of our website at ir.hercrentals.com or through the SEC's website at sec.gov. On a related matter, our 2017 Form 10-K is expected to be filed today and will be available through either website.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call material, which were furnished to the SEC with our Form 8-K this morning and are 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 call the -- I'll now turn the call over to Larry.

Thank you, Elizabeth. And good morning, everyone, and welcome to our fourth quarter call. I'm pleased that you're able to join us this morning.

As I begin, please turn to Slide #7. I'm also pleased to say that our fourth quarter and full year results show that our strategy is working according to our expectations. That strategy, together with our performance-based culture, drove operational execution, which resulted in strong, positive results. As you can see from Slide 7, safety is at the center of everything we do, including our vision, mission and values. Our vision is to be the supplier, employer and investment of choice in our industry by doing what's right, achieving results and proving ourselves every day.

Now please turn to Slide #8. As presented in our press release and the earnings call deck of slides, we delivered substantially improved results for both the 2017 fourth quarter and full year. Additionally, we improved our safety performance in 2017, exceeding all of our 2017 target metrics. Our accelerating revenue growth was the result of strong customer demand, improved fleet mix and pricing as well as new customer attainment. Our urban market strategy, which focuses on optimizing our footprint by concentration on improving density and scale in targeted markets gained traction and contributed to our outstanding performance in the quarter. Our continued investment in new product categories also added to our record growth in equipment rental revenue, supporting the acceleration we achieved each quarter in 2017 on a year-over-year basis.

We continue to make investments to improve our operating effectiveness and are benefiting from those actions. We increased our investment of programs to professionalize our sales force and improve branch and back-office effectiveness, which provides a platform for improved customer service.

We made substantial progress with separation of services provided by our former parent and expect to complete the transition to our own stand-alone platforms in the summer of 2018. Our strong second half performance is setting the stage for continued strong growth in 2018 for our own initiatives, the overall health of the economy and the potential for incremental infrastructure spending and other investments resulting from the Tax Cuts and Jobs Act of 2017.

Now please turn to Slide #9. We achieved strong top line performance with improvement in year-over-year rental growth each quarter of 2017. Fourth quarter equipment rental revenue increased 16.2% to $415 million on average fleet at OEC growth of 3.6%. For the full year, equipment rental revenue increased 10.8% to $1.5 billion on average fleet growth of 4.2%. Year-over-year pricing improved 3% in the fourth quarter and was strong in both local and national customers. For the full year, pricing improved 1.9%. Net income increased to $214 million, which included the benefit of a $207 million associated with the enactment of the Tax Cuts and Jobs Act of 2017.

Barb will go into more detail on the impact of the 2017 tax act later in the presentation. Adjusted EBITDA increased 22% to $178 million for the fourth quarter. And for the full year, increased to $585 million, which was at the upper end of our guidance for 2017. Year-over-year dollar utilization increased 360 basis points in the fourth quarter of 2017 to 38.7% compared with the same period last year. For the full year, dollar utilization was up 180 basis points to 35.9%.

Now please turn to Slide #10. Rental revenue growth accelerated year-over-year in each quarter of 2017 and reflected double-digit improvement for both the quarter and the year. The 2 charts on the left-hand side of this slide show the year-over-year changes in rental revenue growth and average fleet growth over the last 5 quarters. The changes we've made in fleet and mix have contributed to the acceleration of rental revenue growth and improved fleet efficiency. Each of our regions reported positive growth over the prior year during the fourth quarter, reflecting our larger sales force and expanded fleet mix. In particular, our West region achieved exceptional performance compared with last year.

As shown at the bottom right of this slide, we've continued to improve pricing year-over-year. Prices improved over the last 7 consecutive quarters, with the fourth quarter showing a 3% improvement over the prior year. Pricing was positive for both local and national customer accounts. I'd like to thank our entire team across all of our operations for achieving exceptional year-over-year performance in the fourth quarter.

Now please turn to Slide #11. Our strategy includes an emphasis on shifting our customer and fleet mix to drive higher revenue growth and improve efficiency. Sales initiatives to drive new customer signings are focused on local customers. The expansion of our equipment line to include professional-grade equipment that can be used by professional contractors on a project basis has contributed to our growth. We added a significant number of new accounts each month, which contributed to local account revenue growth in the fourth quarter. Of note, local accounts comprised 56% of our total rental revenue in the quarter while at the same time we continued to see expansion in our national account business. Overall, we continue to grow and diversify our fleet through the purchase of new and targeted equipment categories that attract new customers, expand rentals to existing customers and improve dollar utilization.

In particular, ProSolutions and ProContractors now make up about 21% of our $3.65 billion fleet compared to 17% as of June 30, 2016. A comparison of the fleet categories year-over-year is included in the appendix of this earnings presentation. In addition to increasing our fleet in ProSolutions and ProContractor equipment, we continue to increase our investment in higher dollar utilization, core equipment categories such as Aerial-Scissors lifts, industrial material handling and compact earthmoving equipment. At the same time, we have moderated our fleet spend in heavy earthmoving equipment. The lower right-hand graph shows a bit more detail, comparing how categories of our fleet as a percentage of the total compared to the prior year.

Now please turn to Slide #12. As you can see from the chart on this slide, dollar utilization of the prior year began to increase in the second quarter of 2017 and held strong in the fourth quarter, increasing 360 basis points year-over-year to 38.7%. Our focus on higher dollar utilization categories in our classic or core fleet, ProSolutions product and ProContractor lines of equipment, is contributing to our improvement in volume, price and mix. We are currently operating 34 ProSolutions locations, most of which did not exist prior to 2016. We are extremely pleased with the trajectory of this initiative. Our ProSolutions performance continued to improve substantially over the prior year as we attracted new customers by providing solutions for remediation, climate control, pumping and power generation.

Let me put this in perspective. 2 years ago, we wouldn't have had the array of remediation and other critical recovery-related power equipment to support our markets in the event of natural disasters. This is what ProSolutions gives us in addition to other engineered solutions capability. Our ability to serve customers in Texas, Florida and California provided us with the opportunity to show just how much we can do to support communities and businesses in their time of need. And based on our performance in these extreme circumstances, we are building our reputation as a critical resource for day-to-day challenges. For example, during the cold snap that blanketed the Northeast region of the country this winter, known as the bomb cyclone, our team delivered equipment to customers to assist them in dealing with the severe cold and snow conditions on weekends and outside of normal operating hours. Our teams in the Northeast continued to demonstrate each day what customer-centric and supplier of choice means to us. The successful expansion of ProContractor gear to our equipment line has enabled us to offer current national customers a broader product line of equipment and attract new customers at the local level. Over 75% of our locations in North America now offer ProContractor equipment.

Please turn to Slide #13. We have built safety into the foundation in which we lead our team. How we serve our customers and how we drive our growth initiatives. In 2017, we improved our safety performance. The total recordable incident rate declined nearly 16% compared with prior year results. Of course, our ultimate goal will always be for 0 incidents and to provide a safe environment for our team and our customers. We are driving new initiatives in safety, including what we have termed the perfect day. That is a day without any OSHA recordable incidents, no at-fault motor vehicle accidents and no DOT violations. Achieving the perfect day requires a commitment to safe behaviors from every employee. For us, that begins every day with a safety huddle of our team at each of our branch locations.

Please turn to Slide #14. Overall, training and sales, branch operations, systems and safety will be an ongoing area of investment for both new and seasoned personnel. For example, over the last 2 years, we've added a significant number of new sales reps to our organization. Typically, the learning curve on a new sales rep is between 18 to 24 months. Before that, the rep is achieving an optimal level of sales performance. With such a young organization, it's been imperative for us to focus on training. The successful implementation of our Herc Way operating model is an important contributor to our continuing improvement. It provides the blueprint for our branches to manage our operations safely and effectively, while driving performance in key branch metrics. These metrics include warranty reimbursement, vendor performance, spare parts costs as well as logistics and fuel expense. Fundamentally, the entire organization is focused on other significant operational expenses to enhance overall productivity and reduce costs.

Please turn to Slide 15. Our technology enhancements are centered on providing superior customer service and greater efficiency. Our E-Apply platform streamlines the credit application process for new customers, making it easier to do business with us. Our proprietary technology, Optimus, provides realtime price quotations, and our new Optimus mobile application provides our sales staff with quick quoting capability and the ease of viewing pricing guidance by equipment category. Quotes are created and are easily e-mailed, texted, saved or printed right from a handheld device, all of which improves our response time to customers. Our Herc on the Go app was rolled out in the fourth quarter and lets our customers know when their deliveries are estimated to arrive. At the end of December, nearly 3/4 of our U.S. locations were dispatching a majority of their deliveries using this app. We believe our customers will benefit from the ability to get an estimated time of arrival for their equipment delivery, while our drivers also improve productivity by capturing electronic signatures, allowing us to track and confirm delivery to the customer more quickly. Technology and mobility are going to be important differentiators in the future, and we intend to provide our customers with leading-edge tools, such as our popular ProControl telematics platform to continue to help drive efficiency and effectiveness.

Now please turn to Slide 16. The economic cycle continues to remain strong as measured by all of the key industry metrics we follow. The architectural billing index has been positive for several months, with January 2018's index measuring 54.7. The ARA forecast also remains robust with the current industry projections of 4.8%, with the expectation that the North American market should reach $62 billion by 2022. Expectations for U.S. construction spending for 2018 and 2019 continue to be positive in both residential and nonresidential segments. And industrial spending forecast -- is forecast to grow 5.9% in 2018 and looks solid over the longer term. The continuing 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.

Please turn to Slide 17. We are making great progress in the execution of our strategy to drive improvements in operating performance. We rolled out many business transformation initiatives concurrently, which are producing the results we anticipated. We are also making good progress in completing the separation from Hertz's support services. We achieved an important step in the fourth quarter when we separated our front-end point of sales system in North America, RentalMan, from Hertz. We are now implementing our plan for the separation of our Oracle financial systems and related applications from Hertz. We expect to complete this project this summer.

And in January, we signed an agreement to set our joint venture interest in Saudi Arabia and Qatar and we are in the process of exiting our operations in the United Kingdom. These strategic actions reflect our decision to simplify the company's business to focus primarily on growth opportunities in North America. We remain focused on improving our operating effectiveness and continue to roll out our initiatives to reduce logistics, fuel and other operating costs and are taking a hard look at other projects across the company to make us more efficient. We know we still have much to do as we continue to transform the company to reach our optimal fleet mix and long-term financial targets. But as you'll be hearing momentarily, we are building the foundation that will help us generate future profitable growth. And now let me turn the call over to Barb Brasier, who will discuss our quarterly financial results in more detail, and then I'll summarize before we open up to questions.

Thanks, Larry. Good morning, everyone. Before I cover the financials, I want to highlight 4 takeaways from the quarter, all of which I'll expand upon in my remarks. First, the implementation of our strategy is continuing to drive strong performance, with year-over-year rental revenue growth accelerating each successive quarter of 2017. Second, our fleet and customer diversification strategies are driving the improvements we're seeing in volume, price and mix. Third, we continue to invest in our people and operations to drive future growth. And lastly, our 2017 performance met our expectations, with the second half of the year offsetting the slower start of the first half and setting the stage for strong growth in 2018.

Please turn to Slide 19. Larry already provided an overview of the key metrics for the quarter. I'll reiterate a couple of highlights, then I'll walk you through the year-over-year changes. My comments today will focus primarily on fourth quarter results although the slide reflects full-year results as well. In the fourth quarter, we delivered excellent overall revenue growth and pricing improvements. Our Q4 rental revenue grew faster than our fleet, and adjusted EBITDA grew faster than revenue when compared to the prior year. 2017 rental revenue in the fourth quarter grew 16% to $415 million compared to last year. Total revenues in the fourth quarter grew 21% to $492 million. Adjusted EBITDA in the fourth quarter of 2017 improved 22% or $32 million over the same period in 2016, reflecting strong market performance. Net income in the quarter was $214 million compared with a loss of $13 million last year.

Please turn to Slide 20. This year's net income included an estimated one-time net benefit of $207 million associated with the 2017 tax act, consisting of 2 components: a benefit of $245 million for the year ended December 31, 2017, associated with the revaluation of the company's net deferred tax liability to the new U.S. federal tax rate of 21%; and a one-time transition tax of $38 million on unremitted foreign earnings and profit. We are electing to utilize net operating losses to offset the repatriated income, so no cash tax is payable. After doing so, we will have approximately $136 million of federal NOL carryforwards, which we expect to fully utilize in future years. In light of these remaining NOLs and the provisions of the 2017 tax act, we do not expect Herc Holdings to pay federal cash income taxes for at least the next 5 years. The projected effective tax rate for 2018 is estimated to be 25% to 27%.

Now let's get back to our 2017 results. Please turn to Slide 21. In the fourth quarter, equipment rental revenue grew 16.2% to $415 million compared to the prior year. We achieved our strong performance with the contribution of positive growth in all of our regions, particularly in the West. The growth was due to a combination of higher volume, improved price and mix. ProSolutions and ProContractor continued to make good progress compared with the prior year. Our outstanding results clearly demonstrate the benefit of diversification and expansion as we optimize our customer and fleet mix. Our urban market strategy continued to gain traction as we successfully added density to select markets to provide a wider range of equipment through expansion of branches. We closed the same number of branches as we opened in 2017, so our net count remains approximately 275 locations. We also benefited from the continuation of strong pricing improvement in the fourth quarter with a gain of 3% compared to the prior year period. Additionally, the stabilization of upstream oil and gas markets contributed to the positive year-over-year growth in the quarter.

Please turn to Slide 22. Total revenues in the fourth quarter grew 21% to $492 million, benefiting from strong rental revenue growth and higher sales of revenue earning equipment in the quarter. Our sales of revenue earning equipment in the fourth quarter and full year were substantially higher than 2016 as we aggressively shifted the fleet towards higher dollar utilization equipment and rotated older equipment. In the quarter, the average age of our disposals was 80 months, and we achieved disposal proceeds as a percentage of OEC of 43%, benefiting from fewer sales through auction channels and strong used-equipment pricing. We also continue to strategically de-emphasize the sale of new equipment, which showed a slight decline from the prior year.

Please turn to Slide 23. Our net income in the fourth quarter was $214 million compared to a loss of $13 million in 2016. This year's net income includes the estimated one-time net benefit of $207 million associated with the U.S. Tax Cuts and Jobs Act of 2017. For the quarter, spinoff costs of $8 million were lower than 2016 by approximately $3 million. For 2017, spinoff costs were $35 million, at the low end of the range we provided, which was $35 million to $40 million. Spinoff costs are now comprised primarily of IT costs related to the systems separation from our former parent. We estimate spinoff costs will be about $20 million in 2018, primarily in the first half of the year. Fleet depreciation costs were nearly flat in the fourth quarter and increased for the full year due to fleet growth and the carryover effective of depreciation adjustments made in 2016. There were no material adjustments to depreciation rates in 2017.

Interest expense reflects debt on a stand-alone basis for a full year in 2017 versus a half year in 2016. In the fourth quarter, interest expense was higher, primarily due to $6 million of cost we incurred in October for the redemption of 10% of our senior secured second priority notes. For the full year, the expense associated with 2 redemptions was $11 million. The all other category, which is the largest bucket on this chart, includes the positive impact of our improved operating results. Details of the components are included on Slide 35 in our appendix.

Please turn to Slide 24. Adjusted EBITDA for the fourth quarter was $178 million, an increase over last year of 22%. For the full year, adjusted EBITDA increased to $585 million, which, as we said before, was at the high end of our guidance range. Our strategy is working, and the increase in equipment rental revenue reflects the benefits of the investments we are making in people, processes and facilities. The improved equipment rental revenue growth was accompanied by higher costs related to the higher sales activity. Transportation, fuel and investments in additional personnel drove a $24 million increase in direct operating expense. SG&A increased $10 million in the fourth quarter compared to the prior year, driven by variable costs associated with higher rental revenues, such as additional sales personnel and commission. For the full year, SG&A, excluding spin costs, was 16.3% of total revenues. We expect that number to be approximately 16% for 2018. We also saw improved results from the sales of revenue-earning equipment in the quarter, realizing a small gain in the quarter compared to a loss a year ago.

Please turn to Slide 25. For the 12 months of 2017, fleets expenditures at OEC were $524 million and fleet disposals at OEC were $442 million. As of December 31, 2017, the fleet value was $3.65 billion with an average age of 49 months. Dollar utilization increased 360 basis points to 38.7% in the fourth quarter, reflecting improved pricing, volume and mix and showing the impact that our fleet and customer diversification programs are having overall.

Please turn to Slide 26. Total debt was approximately $2.2 billion as of December 31, 2017, largely unchanged from year-end 2016. Our net leverage improved from 4.1x to 3.6x at year-end 2017, moving us closer to our targeted leverage level. We maintained ample liquidity during the quarter. Availability under our asset-based revolving credit facility, plus cash on hand, totaled $639 million as of December 31, 2017, and we have no near-term maturities. For the full year 2017, net cash flow from operations totaled $342 million, with net fleet capital expenditures of $341 million. Free cash flow for the 12 months of 2017 was negative $61 million as we made investments in fleet and facilities to drive growth. A reconciliation of free cash flow and net leverage are included in the appendix of the deck. We continue to exercise discipline in our financial strategy to fund our operations and growth opportunities.

Please turn to Slide 27. Based on the traction our initiatives are generating in our markets, along with the forecasted strong economic environment for the equipment rental industry, we estimate that our adjusted EBITDA in 2018 will be in the range of $620 million to $655 million, an increase of 6% to 12% over 2017. We plan to spend between $525 million and $575 million in net fleet capital expenditures this year. That's an increase of $185 million to $235 million over our 2017 net fleet capital expenditures of about $341 million. As a reminder, our net capital expenditure plan is addressing fleet rotation as well as fleet growth. On the rotation side, we will be replacing fleet acquired in 2011, which was the first year of heavy investment after the recession when we spent approximately $590 million in growth expenditure. That rotation, along with our fleet mix and growth objective, results in a higher year-over-year spend.

Now let me hand the call back to Larry.

Thanks, Barb. Before we begin our Q&A discussion, I want to thank our 4,900 Herc Rentals team members for all of their hard work throughout the year. We've introduced many new initiatives throughout the organization since our journey began, and our team has remained committed to serving our customers and advancing every day towards our vision of being the supplier, employer and investment of choice in our industry. We are encouraged about the prospects for a strong 2018. Now we'll accept your questions. Operator, please open the lines.

(Operator Instructions) Our first question comes from Seth Weber of RBC Capital.

So I wanted to go back to Barb, to your comment on the CapEx, I'm trying to make sure I'm understanding what you're messaging. So the fourth quarter sales of used equipment was higher than what we were expecting. And it sounds like, what I think I heard was, you added a lot of equipment 6, 7 years ago. And so should we expect this fourth quarter used equipment sales number to continue to be elevated here in 2018? I'm trying to get a sense for gross CapEx versus what you're selling. If we could start there?

Seth, this is Bruce. I would say that, yes, there's going to be increased rotation capital spent in 2018 because of the buy -- as Barb said, we purchased gross $590 million in 2011. So you're going to have to take the balance between that and then the additional we'll spend for growth. And as you saw, we grew the fleet overall 3.6% in the fourth quarter.

Right. I mean is that the right type of growth number to think about for the fleet for 2018? I'm just trying to get some sense for how much is gross CapEx versus how much is equipment sales that are going out the back door, really.

Yes -- no. I understand. We don't give guidance on that, but you kind of have to back in -- you have back into the guidance we've given on the EBITDA, and you have to build some pricing gains in there, a little bit at efficiency from the mix and then what we'll need in kind of growth. But I wouldn't say that it's going to be much greater than that.

Right, okay. And then just from a cadence perspective, the last couple of years, your gross CapEx cadence has been kind of 1/3 first half, 2/3 second half. I mean, it sounds like that you should probably be more balanced in 2018 as my guess is just based on the strength of the markets, your improving financial condition. Is that fair?

Well, look. Generally what you'll see in our CapEx spend, it will be more front loaded and most of that will come in, in the second and third quarter of our year. That's -- typically, we plan the fleet to arrive when we -- when the market picks up during the stronger spring and summer months. And I think if you sort of look at the year as a ramp up through the third quarter and then we ramp it down in the fourth quarter. And that's typically when we try to sell equipment in the fourth quarter, so we don't carry it into the new year, the older equipment.

Our next question comes from Kathryn Thompson of Thompson Research Group.

This is Steven Ramsey on for Kathryn. Wanted to ask about the energy end markets, I know you're not breaking it out, but in these oil and gas regions, are you continuing to see improvement? Are you seeing good utilization and rates? And if so, is competition increasing in those markets?

Well, look, what I'll tell you about the oil and gas markets is that they've -- for us they've stabilized and they're no longer a headwind for us as they were in the first half of last year. It's an area that, as we've said, we want to reduce our dependency on. We have seen some minor improvements, but it's not an area that we intend to chase in our model going forward. Bruce, you may want to add some more color?

Yes, I don't mean -- just a follow on to that would be, fortunately, our strategy that we put in play over the last 24 months to focus on large urban markets to diversify our mix and our customer base that we're finding growth opportunities greater than we could find in the oil play right now. And as Larry said, they've stabilized. We've constrained capital to those markets. Could we have grown more in those? Yes. But we have better opportunities to grow in our large urban markets.

Great. And then one of the -- make sure I heard right and is -- you said you had 34 Pro locations now. Is there a desire to increase this location number over the next year or 2? And if so, will that be in new geographies or existing?

Yes, so it's 20 -- 34 what we call ProSolutions location that offer consulted selling to our customer base. Yes, we continue -- we'll continue to build that business through locations and just pushing more revenue through our existing locations. We've stated that we want that to be at a -- as a percentage of OEC in the 25% to 30% range, in the stated remarks said it's now at 21%. So early days in growing that business out.

Our next question comes from Neil Frohnapple of Buckingham Research.

You continued to deliver accelerating rental revenue performance, but adjusted EBITDA margins were roughly flat, maybe up modestly on a year-over-year basis despite the 3% pricing growth. So is it just going to take more time to leverage the new sales hires? Or are there other type of costs that will start moderating that will help the margin flow through going forward?

Yes, look, I think what you're seeing is still a reflection of continued investment in our organization and in the training and in the, what I'll call, the maturing of the sales organization. At this point, we're -- a great deal of the organization still has a 2017 hire date in front of their name and they're not at the matured point of their cycle in terms of productivity. It takes about 18 to 24 months for these folks to reach maturity. And I think as we continue to move down the road, you'll see the maturity happen, you'll see the development of their territories and you'll see some other things take hold. But we intend to continue to invest in their development and contest -- invest in the tools that they need to run their business effectively, as you've seen in the many applications -- mobile applications that we've introduced in a very short period of time.

Okay, great. And then I guess maybe as a follow-on to Seth's question on CapEx. I mean, are you able to say how much of the step up in CapEx of the, call it, $185 million to $235 million is driven more by growth capital for your strategic initiatives? I'm just trying to get a sense for, if we should expect -- I know you're not giving 2019 CapEx guidance, but if we should expect this higher level of CapEx for a few more years as you guys continue to rotate the fleet mix?

Well, look, I think we'll have to take each year as it comes, and we're not going to give guidance in the future. But if you back up to 2011, '12 and '13, all 3 of those years were pretty heavy investment years for the industry, not only ourselves, but the industry back in those years. So there's probably a little bit to be learned from history. But that being said, we're not on a strict rotational replacement-type cycle. What we are really doing is, as we rotate fleet out, a lot of that fleet that may not be the fleet that we're going to in the future in terms of our model is replaced with fleet that really is growth CapEx. So there's a moderation and adjustment. As I mentioned in my presentation, you'll see less procurement of heavy earth, more procurement of industrial products like forklifts and scissor lifts and things like that. So we're not replacing straightaway like-for-like. We're moving towards higher dollar utilization products in our replacement.

Our next question comes from Rob Wertheimer of Melius Research.

So I wanted to ask just a general question on -- as you're continuing to make progress on this turnaround, could you give us an update on how much of the -- and I don't mean to say this in the wrong way, but the easy pricing recapture has come through versus -- is still left to go. I don't know if you could pull up in the quarter what was repricing versus market pricing. And really the same questions on operations, on stuff that you've talked about in the past on for -- just how much continued catch up do have to do versus continuous improvement once you get there?

Yes, this is Bruce. First on the pricing question, so you think about 7 consecutive quarters of price gains. And I honestly, I think, that's attributed to this investment and the strategy we set out 24 months ago. Investment we made in the pricing tools, the fleet mix. The investment we made in the sales team that we talked about, that to grow that local market, and we've talked about how that local market gets a premium price point over some of our large, strategic customers and national customers. But also then that continued focus to grow the national base -- strategic customer base. So I wouldn't say that those are low-hanging fruit. I would say that with the investment we've made in the strategy we've laid out, as long as the economy stays how it is currently in the foreseeable future, we should be able to continue to see price gains in the future.

And Bruce, you could see price gains -- not to ignore the second half of the question, but you could you see price gains above the market as you work on all these initiatives that they discussed?

I mean, I guess, it's whatever you determine the market is. I don't compare myself to let's say other than the 3 -- our 3 large -- 2 other large peers. And I think everybody's seeing pricing gains in a pretty robust economy right now, and I think a pretty balanced fleet out there in the marketplace.

Okay. And if you don't mind, I mean, are you able to talk about operationally, how far your comments you're going to give any metrics around that. And whether you still see large margin gains from catch up on operations? Or is it really just steady-steady progress?

Yes, I think it's steady progress. But as Larry commented to the last question, right? We built out a pretty large sales force over the last 24 months. They're -- the sales force now is kind of efficient and balanced to the sized fleet we have. So there's not a lot of additional staff we need to add. Now it's all about getting production out of this 600-plus sales people that we have out in the field. And then it would come to kind of direct costs. It's a little bit -- over the last 12 to 18 months we're messy in the middle, kind of, where we need to get some efficiency out of some of those costs. And so we should start to see improvement in that margin overall.

Our next question comes from Jerry Revich of Goldman Sachs.

This is Corinne Jenkins on for Jerry Revich. So it looks like pricing was stronger than normal seasonality in 4Q. Did that momentum, can you comment, if that continued into January and February?

Well, look, we're not commenting on the current quarter at this point in time. Other than to say that we see that the current year or in 2018 remains robust and remains something that we're very confident in and feel good about where we're going. So we're not prepared to comment about actual performance in the quarter.

And if I may, another question on CapEx. Can you talk about what the mix of specialty versus the rest of the platform is within that CapEx guidance?

Yes. Well, look, what we said before is our -- what we call our ProSolutions and ProContractor product represents about 21% of our fleet today. And we intend to grow that to the 25% to 30% of our fleet. So we'll continue to invest, probably, at a disproportionate rate, in the, what you refer to as specialty, what we refer to as ProContractor and ProSolutions. We'll probably get a heavier weight on investment going forward than our core or classic product.

Our next question comes from Ross Gilardi of Bank of America.

Look, I just was curious on M&A environment when we've see a bit of a pick up in M&A in rental over the last year. So what are you guys observing with respect to acquisition multiples, particularly in specialty rental as you're trying to grow that ProSolutions line? And are -- do you anticipate getting any more active on M&A as you get closer to your targeted leverage level?

No, well, look, it really doesn't impact us. As I've said from day one, we are not going to be a consolidator in this industry. We have ample opportunity within our existing footprint and our existing capability to continue to focus and become more efficient. So it's -- our growth is more around organic growth today. And that's where we're focused and making sure that we're getting the utilization out of our existing footprint. Remember, [Hertz] built 275 robust, purposefully built locations that all have ample capacity to put more volume through it. And we need to make sure we're focused on doing that. So the M&A market and environment is not something that we are paying attention to. And that's where we're at.

Got you. And then on aerials, as you point out on, I think Slide 38, you've got -- your fleet has a higher mix of scissors and a lower mix of booms. So what is -- what's behind that? And I was also just curious, did you have to -- incur price increases from aerial suppliers in early '18?

Yes, this is Bruce. So on the first question, we've stated all along that not only were we going to invest in new product and new mix to drive returns, but we would look at the large buckets of categories that we already own and kind of shift the mix within those categories. So we -- all along, we stated that we were too heavily weighted to what I would call the kind of middle center of the aerial or platform, the 60s and 80s size booms and we weren't heavy enough in scissors and some of the other products within the aerial category that tend to drive a higher return or higher dollar utilization. So as we get that mix right, we should also be able to drive in those big categories higher dollar utilization, higher returns, along with adding the other mix or product into the fleet. And then on the question about pricing, look, we have a lot of great partner suppliers that we deal with. We talked over the years on how we've consolidated that down to true partners that we work with. And we really don't want to comment on the kind of pricing we're receiving from our partner suppliers.

Got it, fair enough. And then just lastly on your disposals because as you point out, you got a lot of replacement CapEx coming in, and then you'll actually have higher disposals going forward. Like the fourth quarter, did you see any softening in used equipment prices at all as you executed those disposals? And do you anticipate that at all going forward?

So the way I would answer that is, over the year, we saw the market kind of reach a balance, the number -- the amount of disposal to the demand. And we saw the health of that market continued to improve into year-end. We have to take in mind -- and remember there is a large amount between the top 3 players in this market that will need to be rotated out. So we feel the market is improving, but we're being cautious.

(Operator Instructions) Our next question comes from Brian Sponheimer of Gabelli.

Staying on this idea of CapEx and the rotation that you're going to see for the next couple of years, is it safe to assume that based on your own projections and the improvements that you're making, both with fleet utilization, with training, et cetera that there's probably a step change in cash flow starting in around the end of 2019 and into 2020?

Yes, I think that's a fair assumption, Brian. We'll start to see the benefits of these investments that we've been making in our fleet, in our processes. And I also mentioned that we talked about we will benefit from the impact of the tax law as well that extends the time that we will not have to pay cash taxes. So yes, I would expect to see that -- our projections to step up.

Yes. And Brian, if you make the assumption that the market stays, let's say, positive or continues to improve in the used equipment market, as you dispose, you're bringing in more percentage of the OEC for each asset you're selling out. And then I would also say that Barb and I believe there's some improvement in overall working capital that we'll see over the next 12 to 24 months.

All right, that's helpful. Taking it even further on I guess thinking about maybe a 7-year replacement cycle, would you try to potentially smooth out the CapEx so that you're not -- in every 7 years, you're not seeing 2 or 3 years of major bumps, and it's a little bit more of a gradual climb there?

Yes. And I think you have to look at it this way, the -- it's an average of 7. There's some equipment that you might turn every 48 or 60 and there's some assets that you might keep 10 to 12 . A lot of the investment we're making in the ProSolutions side are assets that could be around for 15 to 20 years if well maintained. So you do smooth it, and what you've seen with us is we've -- as a lot of our large earth, which was a big portion of our OEC, if you remember in the beginning and it's kind of declining as the quarters go on, that equipment tends to get turned out in that kind of 60-month range. And maybe equipment we're buying and replacing will actually have a longer live life.

And remember also, Brian, some of that spend depends upon the robustness of the market during the time when we go into it.

Right. And I guess just one more. And I guess I have to ask it every quarter because you still seem to trade with your former parent. Can you remind me and remind us, in joint and several liability with Hertz as far as any sort of financial obligations beyond the IT break off that you have coming up?

Well, look, I said that we will complete our separation in the summer of 2018. And all of the issues around liability and related items relative to legal issues are contained in previous Ks and Qs. And I believe the K was just filed a few minutes ago, and it's all contained in the -- in that document.

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

Thank you, Nicole. And thank you all for joining us on today's call. If you have any further questions, as always, please don't hesitate to call me. I also wanted to point out that we'll be in New York City next week at the Evercore Industrials Conference and also we'll be following up in Boston later in the week. So thanks a lot.

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