Herc Holdings Inc (HRI) 2020 Q3 法說會逐字稿

Good day, and welcome to the Herc Holdings Third Quarter and 9 Months 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

Thank you, Sarah. Good morning. Thank you all for joining us, and welcome again to our third quarter 9 months 2020 Earnings Conference Call. Earlier today, our press release, presentation slides and 10-Q are 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 third 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 to the closest GAAP equivalent can be found in the conference call materials.

Finally, a replay of this call can be accessed via dial in or through a webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call.

I'll now turn the call over to Larry.

Thank you, Elizabeth, and if we can start with Slide #3. 2020 will certainly go down in the record books as the year that Herc Rentals rose to the challenges of COVID-19 and numerous natural disasters. Based with the impact of COVID-19 on economic conditions in our markets, our team has continued to deliver outstanding cost savings and efficiencies despite the challenges of extra safety precautions relating to social distancing and wearing protective personal equipment while serving the needs of our customers. Our inherent strengths and our quick reactions contributed to better-than-anticipated results in the third quarter, and we are cautiously optimistic about the balance of the year. As an essential service, our locations remained open for business, and we have continued to provide our customers with rental equipment as and where needed, with the exception of our dedicated entertainment business locations.

In the top tier, we are the third largest rental company serving North America with ample scale and capital resources to provide a broad range of equipment that supports a wide variety of customers and industries. We have made strategic investments in resources to build our specialty equipment rental business over the last 4 years. These investments were well placed and have expanded our ability to proactively assist customers in respond to the pandemic and weather-related events this year. Our strategic customer and fleet diversification has also helped to offset the COVID slowdown we experienced in certain parts of the business. Our National account customers are also weighted towards essential services and many remained active during the shutdowns.

Our National accounts represented 44% of our rental revenues. These customers are a strategic advantage for Herc with an average relationship now of over 27 years. We remain committed to providing excellent customer service and providing stability and consistency to this 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. As we adjust to this new and challenging environment, the strength of our organization and our business have been more evident than ever. We produced our highest EBITDA margin since the spin-off as we continue to close the gap with our peers. Our Specialty ProSolutions business delivered double-digit year-over-year rental revenue growth in the quarter, We continue to manage rates successfully with positive average rates for the first 9 months compared to last year and would prudently manage our balance sheet and are well positioned with ample liquidity and modest leverage to sustain our operations in even the most difficult environments.

Now please turn to Slide #4. Our weekly fleet on rent and equipment rental revenue increased sequentially from the trough in mid-April through the end of September. Our focus on many of the cost savings initiatives that were introduced last year, continue to contribute to our bottom line in the third quarter, and we continue to improve our transportation revenue recovery and controlled variable costs. We also generated approximately $252 million in free cash flow year-to-date and increased our liquidity to $1.4 billion by the end of the third quarter. With better-than-anticipated Q3 results, we've raised our fiscal year 2020 estimates for the full year, which Mark Irion will discuss in a few minutes.

Now please turn to Slide #5 for a brief overview of our third quarter financial results. We continue to experience the normal seasonal cadence coming off a low base due to the COVID-19 shutdowns in the second quarter. Equipment rental revenue was $402.3 million in the third quarter, and while we reported a decline of 12.5% or $57.3 million compared to the prior year, our volume improved sequentially throughout the period. Total revenues in the third quarter were $456.7 million, 10.1% or $51.4 million lower than the prior year, primarily due to lower rental revenue. Adjusted EBITDA was $196.7 million, an improvement from the second quarter from a decline of 6.1% compared to the prior year. We very successfully managed costs and despite the decline in revenue, we delivered an adjusted EBITDA margin of 43.1% in the third quarter, an improvement of 190 basis points over the prior year's 41.2% margin as we continue to close the gap with our larger peers. We also reported a substantial increase in net income to $39.9 million or $1.35 per diluted share in the third quarter of 2020 compared to our $9.4 million or $0.32 per diluted share in 2019.

Now I'm going to turn over to Aaron and ask him to pick up from here to discuss in more detail our third quarter performance and the current environment. Aaron Birnbaum?

Thank you, Larry. Our ability to manage our operations and sales in this operating environment highlights the traction of our business strategy and the experience of our operations team. We've been through downturns before, but this year has been a true test of our operating model and the resiliency of our team. Before I start my discussion of our results, I would like to take this opportunity to thank all of our team members. They have continued to effectively serve our customers in this challenging environment, and we greatly appreciate all that they do every single day. Great job team Herc.

Now please turn to Slide 7. Volumes improved each week, and we began to see the more typical seasonal cadence of activity in the third quarter. We have made great strides in diversifying the customers and business segments we serve. Our diversification initiative was put in place to help offset seasonal and/or severe economic events. This year, that strategy paid off as our growing specialty business, particularly our emergency response initiatives helped mitigate some of the impact of COVID-19 business slowdown on the general economy.

The expansion of our business in the climate and remediation sectors as well as other targeted industry verticals helped to offset the downturn in rental revenue, experienced in nonresidential construction and government spending. In September, we responded to the needs of our customers in dealing with the damage sustained by Hurricanes Laura and Sally in the Gulf region, which contributed to our improved fleet on rent in the quarter.

And at the end of the third quarter, our ProSolutions team was there to serve and assist as soon as the storms passed and the flood water receded. Recently, I visited our team in Lake Charles, Louisiana, and we're so proud to be associated with the tremendous response to our local employees and Herc employees from markets all through the U.S. accomplished as they descended to the local market to help the community in and around Lake Charles. Our ProSolutions team delivered strong growth in rental revenue in the third quarter and recorded a 14% increase compared to the prior year. Our team is available 24/7, and they are quick to respond to the needs of our customers throughout North America. Our sales organization has stayed focused in a difficult environment, reaching out to current and potential customers in person and remotely. We partner with our customers by delivering reliable equipment, service and solutions to assist them in operating efficiently and profitably. Despite the overall economic slowdown in activity, we are encouraged that our new account revenue as a percent of rental revenue remained in the double-digit range.

Now please turn to Slide 8. I As a provider of essential services, our core operations remained open throughout this pandemic to serve and support customers. We remain focused on our customers' needs and continue to adhere to the CDC guidelines. We are pleased with how well our team is adjusted to these additional safety considerations, while balancing the impact of practicing new health and safety standards, our team continued to deliver outstanding cost savings during the quarter. We remain committed to keeping our team, their families, our customers and our communities safe. And while we enhanced our operational and safety procedures to operate in this challenging environment, all of our regions recorded at least 88% perfect days for the 9 months of 2020. Through an acceleration of cost initiatives introduced in 2019, we continue to improve adjusted EBITDA margins as we focused on ancillary revenues and the management of variable costs.

Please turn to Slide 9. We have a strong footprint across North America and continue to further our growth to the openings of new greenfield locations and the addition of select fleet in high-growth regions of the country. We operate 270 locations across North America and 39 states and 5 provinces. This year, we've opened new locations in Fort Lauderdale, Toronto, Denver and 2 in Dallas. Our goal was to open 6 to 10 locations this year. And depending on the timing of certain city permitting approvals, we expect to fall within that range. We intend to continue to grow with new locations in other high-growth urban markets for the rest of the year and into 2021.

Please turn to Slide 10. Our fleet composition is on the left-hand side of the slide. Specialty includes ProSolutions and ProContractor are now accounts for $853 million of OEC fleet, an increase of about 2% over last year's comparable period and about 23% of our total fleet as of the end of Q3 2020 The investments we have made since 2016 in developing our Specialty business have really paid off in this current challenging operating environment. Our core fleet of aerial, material handling, trucks and trailers and earthmoving equipment are also broken out on the slide. Our fleet expenditures at OEC were $90 million in the third quarter, significantly lower than the $172 million we reported in the prior year's quarter. Expenditures in the quarter were made up of targeted fleet to meet specific customer requirements. OEC fleet disposals were $124 million in the third quarter, higher than the $89 million of OEC we sold in last year's comparable period. The average age of our disposals was 85 months in the third quarter. Approximately 35% of the fleet was sold through auction, with retail and wholesale channels representing the other 2/3 of our channel sales in the third quarter. Proceeds were approximately 37% of OEC. Our fleet age for the period ending September 30, 2020, was 47 months and remains 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 and while still trending lower than last year, our daily OEC fleet on rent continues to close the gap with last year's levels. Our third quarter rental revenue by major customer segment is shown in the chart on the left side of the slide. Contractors represented 34% of equipment rental revenue, followed by industrial customers with 29% and Infrastructure and government represented 18% with other customers at 19% of the total. We continue to focus on high-growth segments of the economy. We have a diverse customer mix with many of our large national account customers operating in essential business sectors. They include major industrial customers and utilities and energy, healthcare, warehousing and distribution and manufacturing. This segment of business has been a lot more resilient in the COVID-19 slowdown and is a key strategic advantage for Herc. National account revenue represented about 44% of the total in the third quarter with local rental revenue now representing 56% of total rental revenue. In the quarter, our industrial manufacturing activity began to close the gap with pre-COVID-19. And our Entertainment Services business, the studios that create feature films, TV and commercials, also started to return to some normalcy in early September after a nearly 6-month hiatus. We see further growth opportunities in our end markets as we return to more normal times.

Please turn to Slide 12. Activity in the fourth quarter continued to improve, and we saw sequential volume improvement so far in October. We expect to see a return to normal seasonality for the rest of the year with the typical off-peak winter months. We recently realigned certain operations and responsibilities in the U.S. to better position the company to fully utilize the leadership and managerial skills of our talented team and pursuing growth opportunities to broaden and diversify our customer base.

We expect the newly aligned regions along with our Herc Plus and local sales teams and ProSolutions experts to accelerate improvement as we come out of this pandemic-related economic slowdown. Our strategy is still the same, and we are focusing on a lean cost structure, improving our margins and continuing to provide excellent 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 we generate in good times limits the amount of costs we can mitigate in tough times.

Our improvement in both EBITDA and REBITDA margin in the third quarter exceeded our expectations. We believe we can continue to manage costs and improve 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 still somewhat uncertain. Nonetheless, we estimate year-over-year fleet on rent in the fourth quarter should likely be better than the third quarter and are assuming about a 4% to 6% decline versus the prior year. That volume level implies a 6% to 8% year-over-year decline in rental revenue in the fourth quarter. Keep in mind that while we benefited from the typical seasonal ramp-up in the third quarter, we're also starting from a lower base going into the fourth quarter in 2021.

As discussed previously, we have taken actions to substantially reduce our planned capital expenditures in 2020. Our 2020 net capital expenditures are expected to be about half of what we spent in 2019. We're excited about our opportunities, and we have the team, the network, the equipment and the strategy to continue to drive further growth.

And now I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. We were very pleased with our performance in the third quarter. As we continue to demonstrate that we have a business of scale on a resilient business model that is less volatile than many other industries in this challenging operating environment. Our results exceeded our expectations, the assumptions we used for full year guidance. We've been really focused on margin improvement over the last couple of years and are pleased with how quickly we are able to adjust to the COVID-19 shutdowns. By accelerating initiatives that are already in place, managing variable expenses as well as other cost-saving measures to contribute to our margin improvement.

Slide 14 shows the financial summary of our third quarter and 9 months 2020 results. Equipment rental revenue declined 12.5% from $459.6 million, $402.3 million in the third quarter of 2020. The trends improved throughout the quarter, with rental revenues improving sequentially each month. We will cover some of the rental revenue drivers in the next slides.

Total revenues declined to $456.7 million, primarily due to lower rental revenue. Sales of rental equipment in the third quarter were $9.9 million higher than last year as used equipment markets began to stabilize, and we focused on tightening up the fleet. We reported net income of $39.9 million or $1.35 per diluted share in the third quarter. Our adjusted net income in the third quarter of 2020 was $39.8 million or $1.35 per diluted share compared with net income of $43.2 million or $1.48 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 third quarter of 2020 declined 6.1% or $12.7 to $196.7 million over the same period in 2019. Despite lower year-over-year rental volumes in the third quarter, our aggressive management of costs led to a continued improvement in our operating margins. Adjusted EBITDA margin improved 190 basis points year-over-year to 43.1% in the third quarter and a 250 basis point sequential improvement from the second quarter of 2020. REBITDA was $195.9 million and REBITDA margin improved by 340 basis points to 48.3% during the third quarter. As a result of our management of costs, decremental margin flow-through was only 20.9% in the third quarter.

On Slide 15, we highlight both pricing and dollar utilization. The graph on the upper left illustrates our year-over-year pricing with the latest quarter, reflecting rates down by only 80 basis points compared to last year. We're quite pleased with the flattish rate results in the quarter, given the dramatic impact rental demand since COVID-19 started to impact the general economy. The positive pricing momentum we had pre-COVID, our pricing tools and our experienced management team in the field have all helped to mitigate rate declines so far in this downturn. We remain focused on utilizing our pricing tools and our experience with prior cycles to hold rates as much as possible. And the industry, in general, has been much more disciplined on price in the current cycle and Herc team is determined to maintain discipline.

The chart on the top right shows average fleet in the third quarter was down about 4.5% over the comparable period last year. We picked up the pace of our used equipment sales in Q3 as the auction channel began to improve. And we would like the increased disposals in Q4 as part of our normal seasonal fleet management may incur book losses on sales as the majority of the sales volume will go through auction. Dollar utilization was 37.6% in the third quarter compared to 40.8% last year.

Dollar utilization was 37.6% in the third quarter compared to 40.8% last year. While this quarter's Dollar utilization was lower than last year's comparable quarter, the sequential improvement was meaningful, and an increase of 680 basis points from the COVID-19 impacted second quarter.

In the lower right-hand chart, you can see the average fleet on rent in the quarter was down about 8.8% compared with the prior year. We experienced a typical seasonal ramp-up in volume on rent in the third quarter, but due to the impact of the slowdown in Q2, we have still not closed the gap on a year-over-year basis. We expect to continue to close the gap, but are likely to remain down year-over-year in terms of rental volume by 4% to 6% in the fourth quarter.

The waterfall on Slide 16 shows adjusted EBITDA for the third quarter was $196.7 million, a decrease of 6.1% or $12.7 million compared to $209.4 million in the third quarter of 2019. The bridge shows equipment rental revenue was down $57 million over the prior year. Our success at managing direct operating cost is clear, with DOE down $28.8 million from the third quarter of 2019. Primarily due to reductions in rerent, personnel-related expenses and lower delivery and freight costs. We also reduced SG&A expenses by $17.8 million through lower selling expense, controlling travel and entertainment expenses and reduced bad debt expenses.

This will lead to an improved adjusted EBITDA margin of 190 basis points in the third quarter to 43.1%, the highest quarterly margin since the spin-off.

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 $195.9 million, a decline of $12 million or 5.8%, with an improvement in REBITDA margin to 48.3% compared to 44.9% last year.

We're all very pleased with the whole team's contribution and responding so effectively in this operating environment as they continue to deliver outstanding management of operating expenses while maintaining superior customer service in a very challenging environment. Of the staff in our general rental business is now back full time, our field support staff is slowly beginning to come back into the office. They've done an outstanding job of working remotely since mid-March. We continue to remain productive and effective and committed to providing white-glove service to our branches and customers.

Please turn to Slide 17. For the 9 months ended September 30, 2020, free cash flow was $252.4 million. We reacted quickly to cut capital expenditures as soon as it became clear the COVID-19 shutdowns would impact rental demand. And should continue to generate free cash flow for the balance of the year. Net leverage decreased to 2.5x as of September 30, 2020, at the low end of our target range of 2.5 to 3.5x and compares to 3x a year ago. And our credit ratings were maintained at a solid B1 and B plus.

Total debt was $1.8 billion as of September 30, 2020, a reduction of about $236 million from December 31, 2019. 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 $1.4 billion as of September 30, 2020, comprised of $1.3 billion availability on our ABL credit facility, $15 million on our AR securitization cash and cash equivalents of $53.8 million. With no near-term maturities, we have ample liquidity for the year and into the future. We remain cautious in our capital allocation, and we'll apply free cash flow to pay down debt.

On Slide 18, we'll take a look at the latest industry forecasts. Coming off maybe the worst quarter in modern economic history, the industry forecasts are starting to get more consistent with the outlook for the next few years. The 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 North American rental revenues. The most recent industry forecast for 2020 is $50.5 billion, with a modest improvement going into 2021.

This looks reasonable based on what we have experienced so far in 2020 and assuming there are no further economy-wide shutdowns. This estimate resets rental industry revenues back to 2016 levels before returning to close to 2019 levels in 2022. We need to remember that 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 may need to be a certain amount of industry fleet reduction required to adjust to this level of rental demand. We've said this before, 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 our customers conserve 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 emergency response as well as nonresidential construction. And Dodge Analytics projects infrastructure and health care non-construction spending will be up by 9% to 10% in 2021. Scale is also a strength in this challenging environment. Herc Rentals is the third largest rental operator with a long history of established relationships as the capital and the strategy to take advantage of growth opportunities.

We're committed to growing our market share and closing the gap with our larger peers. Our leadership team is comprised of seasoned industry veterans, and we intend to take advantage of our size and customer service capabilities to continue to expand our footprint and penetrate our target markets.

On Page 19 with the guidance update. With a certain amount of stability returning to our business outlook and our better-than-expected third quarter results, we are raising our adjusted EBITDA guidance for the full year 2020. Assuming no further COVID-19-related shutdowns, we estimate full year 2020 adjusted EBITDA should be in the range of $655 million to $675 million, an increase from the previous range of $625 million to $650 million. We expect 2020 net CapEx to remain in the same range of $190 million to $210 million. In this scenario, we will continue to generate substantial free cash flow in 2020, which we will apply to reduce debt. We are proud of the way 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'll return the call back to Larry.

Thanks, Mark. And please turn to Slide 20. Before we go to Q&A, I'd like to summarize where we are. You've seen this slide before. It's the blueprint of the 5 strategic pillars we developed nearly 5 years ago to accelerate growth and close the gap in financial performance between Herc and our larger peers. That strategy has really delivered.

Now on Slide 21, since the 2016 spinoff, we've made substantial progress. As you can see from this slide, from 2016 to 2019, we achieved 8% compound annual growth rate for rental revenue, all through organic growth. With improving efficiencies each year, we increased in adjusted EBITDA and even a faster CAGR of 11.4% in the same period.

In 2016, we set a goal of closing the gap in adjusted EBITDA margin with our larger peers. And as you can see, we have made substantial progress. We were burdened with high debt at the time of the spin-off. And with disciplined capital management, we've reduced net leverage from 4.1x in 2016 to 2.5x as of the third quarter of 2020. We've accomplished all of this with a consistent and steady strategy that delivers results. Our business model is resilient with a strong balance sheet and improving free cash flow, we have the flexibility to continue to invest in our fleet, particularly in our specialty businesses and to take advantage of other opportunities for growth. Through solid execution, we intend to continue to improve value for our shareholders, customers and employees in the long term.

And now I'd like to have the operator open the line for questions.

(Operator Instructions) Our first question comes from Jerry Revich with Goldman Sachs.

Really pleasantly surprised by the fleet on rent progress that you made over the course of the quarter and the outlook for the fourth quarter, which looks like implies a sequential increase in fleet on rent, which is better-than-normal seasonality. I'm wondering if you could just talk about which end markets are driving that sequential improvement into the fourth quarter and the trend that's obviously better than we normally see in the fourth quarter.

Jerry, this is Aaron. In the third quarter, what drove that was just a stronger comeback to the non-res commercial markets that we participate in as well as the markets for the emergency response, such as down in the hurricanes. And those were the bigger drivers. We also saw just our industrial manufacturing segment start to pick back up, as we mentioned, it was starting to close the gap on pre-COVID levels.

And then in the fourth quarter, so it looks like based on the year-over-year comments you made on fleet on rent, you're looking for a sequential increase in fleet on rent 4Q versus 3Q, which is very good versus normal seasonal. Can you comment on what's driving the improvement into the fourth quarter?

Yes. B, the same -- the 2 of the 3 are growing specialty business. The commercial markets still are trying their best to improve. We're participating in that. And we see our industrial manufacturing come back to emergency response piece, that probably won't repeat. But we do see the fourth quarter as long as there's no other COVID impacts, closing down of cities, et cetera, we continue to see improvement in the fourth quarter.

Yes, Jerry, we're also seeing a slow beginning of improvement in our entertainment, especially the -- or primarily TV and film as that slowly comes back as those content producers get back.

Yes. I think we all look forward to that content coming back. And in terms of the EBITDA guidance for the fourth quarter, your margin execution has been really outstanding this year. And I think the guidance points to margin compression in the fourth quarter compared to normal seasonality. And I'm just wondering, is that just because we're so early in the cycle, there's a lot of uncertainties, or do you have any costs that are coming back? Can you just give us a bit more context there?

I mean I think Q3 is typically the seasonal peak in margin as it is in rental revenues and rental volume. We are looking to see some losses on equipment sales in Q4, which will have an impact on Q4 EBITDA margins. And other than that, just, I think, conservative forecasting the environment still -- it's becoming clearer, but it's still a little bit cloudy out there as to which way things are going to go.

Our next question comes from Mig Dobre with Baird.

So I just kind of want to follow-up on the fleet discussion. If my math is right, then fleet ending OEC is down, call it, 5.5% versus the prior year, exiting the third quarter. And you're also saying here that you're going to further tap the auction channel and sell a little more equipment in the fourth. So in theory, that should put pressure on fleet yet again. So if I'm thinking about that, and then I'm looking at your comment that the guidance is embedding a fleet on rent decline of 4% to 6%. Should we interpret all of this as utilization being flat to up year-over-year in the fourth quarter?

We don't really guide to utilization or time utilization. I mean, I think the best way to phrase it is, we've seen a massive whack to rental demand in Q2. We're still working on catching back up to year-over-year levels in Q3 and Q4. So closing that gap, but there is still a gap. And within that, there's room to adjust our fleet. So I think running a reduced fleet size in that environment is completely appropriate. We typically take down fleet in Q4 in any sort of normal year. And we're sort of just working our way back to that normal fleet management in Q4 of this year.

All right. And I understand you don't guide to utilization. It's just that, that's sort of to me what the numbers would imply. And really, the essence of my question is more along the lines of equipment supply and demand versus where you see current market -- levels of market activity. And frankly, what that implies on a go-forward basis in terms of equipment investment beyond the fourth quarter? So that's really kind of what I'm trying to get at. I'd appreciate some color there, if you could.

Yes. So we are looking to close the gap to 2019 as fast as possible. We are looking to increase our rental fleet on rent. The actual size of the fleet doesn't necessarily control that. So we can increase volume and take the fleet size down. We're seeing 2021. I mean you look at the macro stats is looking flattish off 2020. We're looking -- we're probably going into 2021 relatively balanced in terms of our CapEx sort of expectations, and we can adjust that as necessary. So if we go in with a small fleet, we can adjust to the actual demand that we see as that shows up during the year and react accordingly.

Understood. And my last question, since you brought up that Slide 18. I understand that these forecasts that you have on this slide are not yours, they're sourced from third parties. But as you kind of think about the industry, if, say, for instance, the nonresidential building start forecast for 2021 is correct and industrial is obviously recovering, should the North American equipment rental market be flat in '21 versus '20? How do you think about the moving pieces there?

Yes, I'm not really that good an economist to be able to sort of put it together myself. I think there has been a big impact to the U.S. economy this year, for sure. That's going to have an impact on 2021 that we really don't know. I think our end markets are probably more resilient and in better shape than a lot of the end markets. But as I said, I think we'll just position our fleet as normal in Q4, and we'll be ready to react to the activity that we see in 2021. I don't think it's going to be a bad year. There's going to be challenges in certain end markets, and there's going to be opportunities in certain end markets.

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

I just wanted to ask -- I think I asked a similar question last quarter. Just with Q4, your fleet on rent down 4% to 6% in Q4 and your rental revenue is down 6% to 8%. Is the delta more rental rate erosion? Or is -- are those mix or other impacts you elaborate on that?

Yes. I would say it's more mix and other impacts rather than rate. We're seeing positive movement in rate, and we'll continue to drive rate as aggressively as we have been over the last 16 or 20 quarters. And so I think it's more of the other areas.

Got it. And then your SG&A, like where do you exit the year on a quarterly basis because some of the other questions alluded to, rental revenue certainly seems very resistant into Q4 was not a little bit counter seasonally positive. But if my math is correct, I think you've still got EBITDA down like 20% at the mid on a year-on-year basis in the fourth quarter. Is most of that just SG&A coming back in the business and whatever you do in Q4, should we view that as sort of an appropriate run rate for 2021 at this point?

Well, I'll let Mark comment to the specifics, but we are having people back out traveling, back seeing customers, more things are happening. So it's natural to assume that our SG&A will -- costs will pick up. Same with the OE as we begin to ship more gear as we begin to utilize the different types of services that maybe we were able to contain and completely turn off during the high peak of COVID. But as we return to normalcy, I would expect some of those categories to also return to more normalcy. That said, we've been able to sort of figure out some new things, adjust our business model, learn some new ways to contain cost, and we'll expect to continue focusing on those new methodologies to keep cost down. But Mark, you may want to comment on his specific request.

I think -- I mean, there will be some costs coming back as the volume increases. We are focused on margin improvement. And I think you'll continue to see margin improvement as a result of that. So some of these cost changes are permanent and are just utilizing operating leverage as revenue base comes back. So we'll look to give you 100 to 200 basis points of REBITDA improvement over the next couple of years, it's going to be a little bit challenging to sort of keep on running at the sort of plus 300 basis point pace, but we will continue to sort of look for 100 to 200 basis points each year.

Got it. And then just lastly, could you guys elaborate a little more on the ProSolutions up 14%? That's obviously pretty impressive in this environment. And what the number look like if you maybe script out the emergency response tied to COVID and the hurricanes?

Well, we've invested in the ProSolutions business for the last 4 years, with fleet footprint across North America, opening up new locations, adding in technical expertise and professional sales people into the business. So we've invested more rapidly than our general rent business. So we do have expectations for it to continue to grow faster than the rest of our business. And I think this year, that model has proven out. And then any time there's an emergency disaster like we saw with the hurricanes, they do have relationships where they can move in and really solve the problems of those communities pretty quickly. And so we like that part of our business very much.

Is your CapEx in that part of the business actually trending up yet at this point, and it would certainly seem, given the growth there that's probably on my comment. I was wondering if you agree with that and what types of equipment would that entail if that was the case.

That's true. When we gather together when the COVID situation began in March, we decided where should we reduce our CapEx and where should we not, and we did not pull back on our ProSolutions CapEx.

Our next question comes from Brian Sponheimer with Gabelli Fund.

Look, another great quarter. I'm just curious about the visibility you have on the entertainment business and to the extent that you can if you can kind of dimension what you expect to come back and what's still -- whether it's the festivals or things like that with still potentially a concern for 2021?

Yes. Look, I think our visibility on TV and film is pretty good in terms of what we see coming back and where that's coming back in the, what I'll call the pure entertainment area, live events. That's probably a little more cloudy at this point and no certainty as to when that might come back in terms of any great strength until we have more visibility on the pandemic and that diminishing or there being some kind of a vaccine. But you can just locked on sports and things that you're watching on TV. There's not many people at these venues today. So that's a little more cloudy. But TV and film is slowly coming back. Aaron, any more color on that?

Yes. During the 5 months after the COVID began, it went from growing pretty well to 0. And in the month of September, we have started to come back to life, as we said, maybe it's 25% or 30% of normal. But we believe from talking with our teams that it will continue to pick up pace and maybe sometime in the first quarter, if nothing else comes along that disrupts business will be getting a lot closer to what it was. On the live event business, I think that might be a slower churn. That's -- we kind of divide our entertainment into film, TV and commercials and then live events. So the live events, we'll have to wait and see. I know there's things being planned for next year. And our customers are talking about needing equipment, but we'll have to see how much of that materializes.

That's really helpful. And just -- this is about a low to mid-single-digit business when it's normalized as a percentage of your total revenue?

That's correct.

Yes.

Our next question comes from Steven Ramsey of Thompson Research Group.

I guess, yes, to start with on the unique factors for Q3 results, like energy, hurricane and then entertainment coming back online. If you add those up, what did rental revenue do maybe ex those items?

I think that's a little bit granular for us to really be able to respond to. I mean, as Aaron alluded to, the entertainment business was coming off of 0, so that might have add a bit of percentage increase. But I think just in general, the economy was shut down, and the economy is reopened. So most end markets grew at a similar sort of pace outside of it -- outside of maybe the entertainment and film, which was really locked out.

Yes. And to give you a little bit more color on the number, the revenue attributed to the hurricanes and the fires was only about 1% of our third quarter revs.

Got you. Okay. And I guess, maybe thinking how some of these unique factors of hurricane and entertainment coming back online. How does maybe that carry over for Q1? I know there's generally a sequential decline from Q4 into Q1, but given this is an odd year and those starting to come back, will that seasonality change much from Q4 into Q1?

I mean I think we'll see the normal seasonality. It's been an unusual year, but there's still going to be a winter. So it will drift off towards the end of Q4 as it normally does and continue to sort of drift down into January and start picking up again March, April. The question -- the real -- you start to see the real impact to -- or the real strength of 2021 into that sort of spring season, and we'll be working our way through the winter and keeping a keen eye on just activity sort of kicking back into the spring.

Great. And then last question for me. On pricing, specifically for the entertainment market as that business comes back on, is pricing similar to what it was pre-pandemic as you put that fleet back out on rent?

Yes. I think you can see from our results in the third quarter, with all the businesses coming back in, the pricing has been relatively stable.

Our next question comes from John Healy with Northcoast Research.

Congrats on just a strong year-to-date performance despite everything that's been going on. Just one question for me. When you look at kind of the change in revenue in Q3, I imagine you have a better handle of it versus what you saw in Q2. But if you just looked at kind of like the industrial and the non-res customer activity, how would you describe the breakage in revenue? Is it projects that are delayed? Is it projects that are canceled? Is it limitations in terms of the capacity in which these customers can act? I'm just trying to understand the composition of the revenue decline that you guys are seeing in the business kind of more of how in the tangibility of how it's developed?

Sure. John, this is Aaron. To break it down a little bit. On the industrial side of the business, we've seen projects delayed early on right after March. And now coming back, we believe that, that work has to get done. So whatever doesn't get done this year, it will probably happen next year. We've seen some industrial projects actually get delayed indefinitely. We read one yesterday that was related to the vaccine and the pandemic, and they were just delaying indefinitely. But on the commercial side, we've seen our national customers on the non-res commercial side hold up better than our local customer business. And the way I would describe the non-res commercial business is just the projects that were in place are coming back and they're going back to work, and we'll see next year what the pipeline really looks like. But they're just getting back to work on the non-res side. On the industrial side, they're delaying, more or less. But as we get into the latter parts of the third quarter of 2020 and fourth quarter, we're seeing them -- those delays actually starting to kick back in.

And there is some impact relative to the availability of workers -- of construction workers of trade, skilled trade, as a result of the pandemic with there being breakouts and things like that on various projects that are certainly impacted numerous projects across the nation. So I think that's part of the delay and part of the issue relative to that returning more quickly.

Our next question comes from Seth Weber with RBC Capital Markets.

I guess, maybe for Mark. The fleet age is up to 47 months. I think it was up from 44. I mean, can you just talk about your ability to continue to sweat the fleet further? At what point does repair maintenance become prohibitively expensive? Or how much more room do you feel like you have to sweat the fleet?

Might be a better question for Aaron. But I don't have a problem so to fleet. So I'll do the better for a CFO. The maintenance does not ever really get prohibitively expensive. I mean, we've -- you've seen it pushed out to 51, 53, 55 months in other fleets before. You pick up maybe 1% or 2% of maintenance -- incremental maintenance costs, which doesn't really cost you a lot in terms of the replacement capital. The fleet has gotten better than it ever has been in terms of manufacturer quality and ability to age. The rental customer or the rental hold is maybe 30% of the actual life of that fleet. So once we've sold it, there's another 2 owners probably.

So it's not -- it's -- we're flexible based on market conditions. But these downturns don't tend to go past 2 years. This one looks like it's going to be real short and sharp. 44 is not a problem at all. And we'll be flexible as we go forward. But it's not a -- fleet age doesn't provide an issue. It's really just the economic environment that we're dealing with that puts most of the challenge on.

Okay. So you wouldn't be opposed to pushing it back into the low 50s. Is that what you're saying?

Not at all, but Aaron can jump in somewhere along the way. Yes.

Well, yes, the flow-through the last downturn, 8, 10 years ago, yes, I wouldn't be concerned about going 51, 53 months, if we had to. But our fleet makeup is a lot different in this company than it was back then. Again, the specialty business, that fleet has a lot longer life. So the averages look a little different, but I wouldn't sweat 51% to 53%.

All that said, our preference would be, let's see where this downturn is. If we see an end to it, we'll bring the age of the fleet down again methodically over a period of time to make sure that if we encounter another downturn, we'd be able to sweat the fleet again.

Sure. Okay. That's helpful. And then I guess just the follow-up to that would be you're kind of entering time of year when you start to have your negotiations with the OEMs, is it fair to think that you might be more cautious in your discussions initially to start on how you're thinking about CapEx for 2021 and just sort of relative to traditional cycles or traditional years, you might hold off on putting orders in until you have better line of sight, so maybe that happens early next year instead of late 2020.

Well, look, I think it's a little early in the game for us to really sort of comment on next year's capital. But I think we do have some categories that will get a jump on where we know we'll have the opportunity. And I think most of the manufacturers with there ability to respond quickly will be readily available to supply gear when and where needed.

Our next question comes from Rob Wertheimer with Melius Research.

Can you hear me now?

Yes.

So obviously, really excellent results on cost control and in the general. Just a couple of questions on that. I know you've gone into it. But did you pull any leverage more this quarter, like maybe in the yesterday in the rest of the business. And if we look at the SG&A line. How much of that save should we accept to sort of endure permanently versus bouncing back up and decline in the defined deficiencies from the operations in the rest of cost structure?

It's just little bit hard to just sort of get to granular on it. There were Q2 and Q3. There was some really unusual SG&A savings, just giving the amount of the shutdowns. So it is going to comeback a little bit. I think you can probably run it as the same percentage of rental revenues going forward. So we'll continue to try and lockdown the margin impact, but on the absolute basis. There will be cost coming back into the businesses as the volume improves.

Okay. Perfect. And what about the rest of the cost structures. I mean, is there a lot of extraordinary stuff there driving this kind of margin game and pricing wasn't the help it has been for you obviously, it will be again and your margins are great. So just a little bit of question if it's maturation of all the efforts you've been doing or whether there is any one-time lumpiness pulled cost down this quarter outside of SG&A?

Again, not really. So the DOE, we've been working really hard on a lot of those line items in terms of just maximizing operating leverage. So they will continue, I suspect, that the same sort of level of rental revenues. And I think maybe some of these questions are coming around in terms of the guidance for Q4. And it's more -- I think the EBITDA margin that we're sort of guiding towards as being impacted by equipment sales. So you're not going to see the same reduction in REBITDA margins going into Q4, as you will, in the EBITDA margin. So it's not going to pop up on your cost lines. It's more in the used equipment losses that we're factoring in.

That was a helpful answer. My question is more just structurally. I mean you've improved the cost position materially this year in a tough year. So I was just trying to sort of keep a hold of how much was permanent and the result of ongoing efforts versus crisis related. But anyway thanks for the answers.

Yes. No, you got it. And I think -- I mean, margin -- you will see margin improvement. We are definitely focused on continued margin improvement in '21 and '22 after this sort of 2020 levels that you're seeing.

And operator, we've come to way past an hour, so which is typically when we end this. So my apologies for the others that are lined up to take calls, but we can -- give me a , and we'll try to follow-up with you afterwards. So thanks again, everyone, for joining us, and we look forward to speaking to you all soon.

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