United Rentals Inc. (NYSE: URI) Q1 2020 Earnings Call Transcript

United Rentals Inc. (URI) Q1 2020 earnings call dated April 30, 2020

Corporate Participants:

Matthew J. Flannery — President and Chief Executive Officer

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Analysts:

Tim Thein — Citigroup — Analyst

Rob Wertheimer — Melius Research — Analyst

Jerry Revich — Goldman Sachs — Analyst

Joe O’Dea — Vertical Research Partners — Analyst

Ross Gilardi — Bank of America Merrill Lynch — Analyst

Seth Weber — RBC Capital Markets — Analyst

Steven Fisher — UBS — Analyst

Steven Ramsey — Thompson Research Group — Analyst

Courtney Yakavonis — Morgan Stanley — Analyst

Presentation:

Operator

Good morning and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company’s press release, comments made on today’s call, and responses to your questions contain forward-looking statements. The company’s business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the company’s press release. For a more complete description of these and other possible risks, please refer to the company’s Annual Report on Form 10-K for the year ended December 31st, 2019 as well as to subsequent filings with the SEC. You can access these filings on the company’s website at www.unitedrentals.com.

Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company’s press release and today’s call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA. Please refer to the back of the company’s recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin.

Matthew J. Flannery — President and Chief Executive Officer

Thank you, operator and good morning everyone. Thanks for joining us. The sequence of today’s call will stay the same as prior quarters. I’m going to share my comments and then Jess will take you through the numbers and then after that, we’ll go to Q&A, but I’m going to skip my usual recap of the financial highlights for a couple of reasons. First, although we had a solid start to the year with our business performing well until COVID hit, it’s not much of a barometer for 2020. Still, from January to mid-March, those first 10 weeks showed promise and it’s possible to take that as a positive sign when the economy gets back on its feet.

Second, we can’t predict how COVID-19 will impact specific end markets this year or when those impacts will come and go. So, like many companies, we’ve withdrawn our guidance until we have more clarity. To give you an idea of how quickly things changed, our OEC on rent was running in line with expectations, actually a little bit ahead until mid-March. That’s when we felt the impact of COVID-19. From that point, volumes declined about 15% in the three weeks, before stabilizing around current levels. One thing we have going for us is a lot of flexibility, which in this environment is priceless. We’ve been able to keep almost all of our locations open so our people can continue to serve our customers. Our teams know that we’re in a tunnel and not a hole and that there is light on the other side. That’s why our contingency planning is focused on both the near-term and a range of potential future states.

Since early March, we’ve been assessing a multitude of scenarios for how the year might play out. Each one uses different assumptions about timing, magnitude, and duration and our analysis confirms that our liquidity is more than sufficient for even the most challenging end market scenarios. We want to make sure that we not only weather this storm, but also retain the ability to be responsive to the opportunities on the other side. My main goal this morning is to talk about how we’re adapting our business to the current reality, not just our thinking, but also our actions. We’re thinking about our COVID defense strategy as five work streams: employee safety, taking care of our customers, capex, opex, and our capital structure, particularly liquidity.

I’m going to start with the most important part of our company, our people. It’s easy to think of United Rentals as an equipment business, but we never forget that we’re a service business. The safety and well-being of our team is always our top priority and that could be challenging when you operate every day at almost 1,200 locations, but we’re getting it done. It takes fortitude and also experience and we have both. Most of the field leaders have been in the equipment rental industry for years and many, like me, for their entire careers. We know that there are two sides to operating as an essential business. There is the responsibility that comes with that designation and also a sense of pride. Our employees are proud of their role in providing critical services to their communities.

We’re working on projects that are a first for all of us like a COVID screening area at Children’s Medical Center in Dallas, in temporary hospitals in Calgary, Seattle, New York and other areas. It feels unfair to just mention a few because believe me, the pride is everywhere. And on the flip side, there is a natural anxiety that comes from leaving your home and going to work under these circumstances. So a huge thank you to all United Rental employees for showing true leadership in the face of so much change. I want to give you a taste of some of the many actions we’ve taken to keep our employees and our customers safe.

They include guidelines for social distancing and disinfecting facilities and equipment as well as providing millions of dollars of additional protective gear. We’ve also implemented a contactless drive through option for customers who want to pick up or drop off equipment at our locations and our online ordering platform has been a big differentiator here for us. The customer reserves the equipment online and then drives through a special lane at the local branch. We load the equipment while they sit in their truck and if we’re bringing the fleet to the job site, our drivers follow a new safety protocol we call last touch, when the driver disinfects the commonly touched surfaces before leaving like control panels, door handles, and seat belts and I could keep going down the list and it’s a long one, but I’ll cut to the chase, these measures are working and that’s critical because it means our team can continue to provide continuity of service for our customers and they can do it safely.

All of our branches in North America and seven out of our 11 European branches are operating. We’ve had a relatively small number of branches where an employee tested positive for the virus and when that happens, we have the branch professionally disinfected to make sure it’s all safe and then we follow the CDC guidelines on when and how we can resume operations. And I want to be clear that while COVID is obviously impacting many parts of our economy including the construction and industrial vertical markets that we serve, our markets remain broadly active and this holds true across non-residential and residential construction, infrastructure, and industrial production and there’s only a handful of U.S. states and two Canadian provinces, both Ontario and Quebec, that have put meaningful construction restrictions in place and most of those make exceptions for essential projects like infrastructure or emergency medical capacity and many of these restrictions that are in place expected to lift in early May.

Overall, our construction markets are holding up better than our industrial markets particularly, oil and gas, which could be challenged for a while. We’ve also seen industrial customers put off some plant maintenance and plant turnarounds for now. Eventually, this work will come off pause and we think that could happen as early as the back half of this year. More broadly, we could start to see an uptick in the third quarter in local economies as shelter-in-place orders are lifted and activity resumes, but it’s certainly slower and our team is making sure we’re in constant communication with our customers. We’ve been utilized as a trusted resource by customers who have more challenges today than they had a few months ago and in many cases, we’re working with customers to plan for the time when their projects come off hiatus.

We’re also partnering with our larger accounts to help them get the full benefit of our Total Control technology. As you’ve heard us say before, Total Control improves fleet productivity and reduces costs whether the equipment is owned by our customer or rents it from us and it’s always been a major differentiator, but today it’s value stands out more than ever. So that covers our first two work streams: employee safety and taking care of the customers.

The other three I mentioned are capex, opex, and liquidity. Capex is our largest lever to pull and we’re pulling it. For the first quarter, gross rental capex was down $50 million year-over-year and net rental capex was at zero for the quarter, reflecting our focus on improving time utilization and what this doesn’t reflect are any changes we instituted in mid-March to address COVID-19’s impact on demand. The effect of those actions will be evident in Q2 with dramatic reductions in the inflow of fleet and the outflow of cash. This is an example of the flexibility I mentioned earlier and while our capex level will ultimately depend on how our markets track over the balance of the year, I could say that our total spend on rental fleet will be down substantially for 2020.

On the operating side, our team is focused on aggressively managing costs and while a portion of our costs flex naturally with volume, others need to be driven by discrete actions and we’re taking those actions as well. Fortunately, we’re a lean focused organization and our employees understand the importance of being efficient. Now they are looking even higher and wider for more opportunities. For example, in our specialty segment, our Power and HVAC business has historically outsourced all their deliveries. Now, we’ve pivoted to in-source using trucks and drivers from our general rental operations to get this work done and it’s working really well. Our entire team is doing a great job of sharing resources to keep costs down and as a result, we’ve been able to in-source a ton of work and that’s a theme right now in a lot of areas. We’re being disciplined and creative in putting our resources to work across our network. This allows us to reduce costs, conserve capital, and most importantly, retain our labor capacity, which historically has been a very effective driver for growth.

Now I know Jess wants to get into our capital structure, so I’ll make just two quick points on that. One is that our business model is a cash generation engine. Even in this current environment, even if this persists through 2020, we expect to generate significant free cash flow this year and the other point is that our balance sheet is extremely strong. We have almost $3.3 billion of liquidity with no long-term maturities until 2025. We paused our current share repurchase program and we’ll continue to be very cautious with fleet purchases and other discretionary uses of capital and as I mentioned earlier, we’ve done the analysis and we’re confident that we have more than enough liquidity to navigate this crisis and pick up the pace when demand returns and it will return, the question is how much and how fast and no one has those answers right now with any certainty.

So let me leave you with a few important things that we do know. COVID-19 is unchartered waters, but our leadership team has been in unchartered waters before. It helps that most of our field and corporate leaders were with the company back in 2008 when the Great Recession was a massive shock to the economy. We were able to come through that crisis intact and the experience from that helped inform our strategy and our business model. 12 years later, our company has been reshaped by that experience. We’re dramatically stronger today, more diverse, more efficient, and more resilient as an organization. Our revenue diversity is particularly important because our end-markets, customers, and the geographies we serve don’t all have equal constraints. We can target pockets of demand and help mitigate the drag from more challenged areas and that’s a real strength in this environment.

So now you know the view from where we sit. Six weeks into COVID-19, we’ve battened down the hatches and amped up our partnering with the customers. We understand that things maybe challenging for a while, but that’s okay, we know how to get through this. Most importantly, we know that the value we preserve now will be the foundation for the value we create in the recovery. So Jess, over to you to talk about the numbers.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thanks, Matt and good morning everyone. I’ll cover the highlights of the first quarter quickly, so I can spend a little more time providing some additional comments on our liquidity, the scenario planning we’ve done, and contingency actions we’ve taken in response to the current environment. Rental revenue for the first quarter of of $1.78 billion, declined slightly year-over-year, down 70 basis points or $12 million. Within rental revenue, OER declined about 0.5% or $8 million while ancillary and re-rent revenues combined for a decrease of $4 million. The $8 million OER decline included growth in our fleet of 2.2%, which translates into $34 million of additional revenue. That was offset by fleet inflation at 1.5%, which cost us $23 million and fleet productivity was down 1.2% or a decrease of $19 million, largely reflecting the volume decline we saw in March. We actually had good momentum on fleet productivity to start the year and it was tracking flat versus prior year through the end of February.

Used sales revenue was up 8% for $16 million year-over-year due entirely to an increase in retail sales, which is our most profitable channel. That represents $38 million more fleet sold at OEC. Auction sales returned to more normal levels in the quarter, which was about 4% of the total sold. The used market was solid through the quarter, but volume did slow in the back half of March due to COVID-19. Adjusted gross margin on used sales in the quarter was 45.7% and while that’s down from 49% in Q1 last year, it’s up from 43% in Q4. Retail pricing was down 5% year-over-year and that’s flat sequentially from Q4. Proceeds as a percentage of OEC was a healthy 53%.

Taking a look at EBITDA, adjusted EBITDA for the quarter of $915 million was down $6 million or 70 basis points year-over-year and here is a bridge on the change. In rental, the impact on adjusted EBITDA was a drag of $18 million; OER was a headwind of $23 million offset by $5 million in better ancillary and re-rent combined; used sales helped adjusted EBITDA by $1 million; and SG&A was better by $11 million with the majority of that benefit coming from lower third-party professional fees, which are largely discretionary and lower bonus expense year-over-year. Our adjusted EBITDA margin was 43.1% which is down 40 basis points year-over-year and there were puts and takes in that margin decline and as I mentioned a minute ago in the bridge, the dollars are small. The flow-through calculation isn’t very helpful given the disruption in the quarter. So I’ll make a few comments on costs specifically.

Operating cost trends were as expected through the end of February. As soon as it was clear to us in early March that our end markets would likely be disrupted, we quickly took action to manage our costs in response. Matt talked about our focus on cost management and some of the actions we’ve taken so far have been to reduce over time, bring delivery and repair in-house to leverage our capacity instead of using third parties, and cancel or delay discretionary spend, mostly in G&A and that’s costs like T&E and professional fees. The actions we took in March have a small impact on Q1, but the benefits will play out over the rest of the year.

Broadly, the few I just mentioned represents savings of about 8% of our monthly cash operating expenses, but even before we get to Q&A, I’ll tell you that because a good portion of our costs are variable and will flex with volume, it’s impossible for us to tell you right now, how much these cost actions will in total impact 2020. Safe to say though its a major focus for us. As we aggressively manage costs, we won’t cut so deep that we risk not having the capacity we’ll need to service customers as the economy opens up. There is a balance there and we’ll continue to prudently invest in the longer-term albeit at a slower pace than we might have been planning earlier this year. Cold starts will slow as will some of our investments in building out our services businesses.

Back to the first quarter results and a comment on adjusted EPS, which was up slightly at $3.35. That compares with $3.31 in Q1 last year. Biggest drivers here are lower interest expense and lower shares outstanding. Let’s move to capex. Through Q1, we brought in $208 million in gross rental capex. Proceeds from sales of used equipment were also $208 million. So there was no change in net rental capex at the end of Q1. We’ve talked with investors consistently about capex being the first and most significant action we would take in our contingency plan. Right now, the environment is unclear and difficult to provide a range of where we think we’ll land, but I can tell you this year’s gross capex will be significantly less than what we brought in last year, less than half of that number and we will continue to focus on selling used fleet in a solid market, but we won’t fire sale our fleet if that market turns.

Turning to free cash flow. We had another robust quarter for free cash flow generating $608 million if I add back a couple of million dollars in merger and restructuring payments. Year-over-year free cash flow is up $25 million. Our tax adjusted ROIC remained strong coming at a 10.3% for the first quarter. That continues to meaningfully exceeded our weighted average cost of capital, which currently runs south of 8%. Year-over-year tax adjusted ROIC was down 60 basis points due in part to the decline in margin this quarter and the expected drag from our acquisitions.

Looking at the balance sheet and our capital structure, I’ll add a little more color than normal given the importance of both these days. Our balance sheet is the strongest it’s ever been and we have no long-term debt maturities until 2025. Net debt at March 31st was $11.1 billion, which is down $470 million year-over-year and down $290 million quarter-over-quarter. We continue to earmark free cash flow this year towards paying down our debt. Leverage at March 31st was 2.5 times. That’s down 10 basis points to where we ended at December 31st and down 40 basis points versus the first quarter of ’19.

Our current $500 million share repurchase program was authorized by the Board in January. Through mid-March, we had purchased $257 million of stock. That included about $175 million of purchases we made in addition to our normal systematic buy given the sudden dislocation we saw in the stock price beginning the third week of February. Now as soon as the potential severity of the COVID impact on the U.S. and Canada became clearer in March, we decided to stop purchases and we’ve paused the program to preserve liquidity.

Speaking of liquidity, it is extremely strong. We finished the first quarter with $3.1 billion in total liquidity. That’s made up of ABL capacity of just over $2.5 billion and availability on our AR facility of $62 million. We also have $513 million in cash. As of yesterday, we had total liquidity of $3.3 billion, that’s up about $200 million from quarter-end. The ABL facility expires in 2024 and is covenant light with maintenance tests that springs on when we’re 90% drawn. At the end of the first quarter, we had drawn only a third of the ABL. The 364-day AR facility uses our receivables as collateral. It expires in June in the normal course and we’ve already started negotiations to renew that facility. We don’t expect any issues in refinancing it later this quarter. One last point on liquidity, beyond the collateral supporting the ABL and our Term Loan B, we have approximately $3 billion in excess collateral available to source additional liquidity should we need it.

I’ll close with a comment on the scenario planning we’ve done since the start of the pandemic. Of course, no one knows the ultimate impact from the virus or what the economic environment will be after restrictions lift. That’s why we’ve decided to withdraw guidance. It’s difficult for us to point to one or two cases at this point as most likely. So we’ve run numerous cases, each with varying levels of severity and duration in part to ensure we have adequate liquidity to meet our needs and we do, even in the most severe scenarios. We also generate significant free cash flow in those scenarios. These cases help us to hone the timing and level of action we’ll need to take, and those will vary too as we look to maintain a balance between the short-term financial impact in the next quarter or two with longer-term support for the business. We’ll continue to tighten these scenarios until our view to the year is clearer and we can update our guidance. And with that, let’s move on to your questions. Jonathan, would you open the line?

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Tim Thein from Citigroup. Your question please.

Tim Thein — Citigroup — Analyst

Hi. Good morning. The first question is just on the fleets that came off rent. If and when these projects do ultimately resume, how should we think about the costs that you would expect to incur to put it back on rent. I don’t know if there is maintenance or delivery that would be involved and then I guess more importantly would you expect those rates to get renegotiated or just how should we think about that from both a cost as well as a rate perspective?

Matthew J. Flannery — President and Chief Executive Officer

Sure, Tim. Good morning. It’s Matt. So when we think about that $1.5 [Phonetic] billion that we put on the chart, there’s been a portion of that, about a third of that, that we actually put on suspend and what we did there is any one of our key accounts, you had to be a key account for us to offer this to you, we ask them, are you just doing this because your access has been turned off or they closed the job down, are you going to need it back when they turn on the job, day one. If the answer is yes, then we left the equipment there, we put a new system markation in our operating system and put it on suspend. That stuff is going to turn on immediately with no lag for the customer and no additional operating cost for us.

The other, let’s call it roughly $1 billion that came off, I mean there is churn going in every day and if you look at that chart that we put in the investor deck on Page 35 or in the press release, you see that we’ve been bouncing up since that three week — since we hit that three week trough and that’s the net of what still is a lot of activity going on, both off rent and on rent. So I wouldn’t necessarily take that — that $1 billion is not going to go back on rent. It just didn’t meet the requirements we had to put it on suspend and we wanted to make sure we weren’t — or it might not have been in a secure place, so that was the other challenge. Some customers said, you know, I am going to need it back, but I don’t want to deal with the security of it, I don’t know how long we’re going to be out of there. So for a portion of that, there’ll be zero incremental costs and then for the rest of it, it is just going to be business with our customers as usual. They ask and we respond.

Tim Thein — Citigroup — Analyst

Okay, that’s helpful and then Matt from an end customer perspective, one of the points that or attributes of URI over time has been how you’ve grown the national account base and when we do get to that downturn that in theory should help to cushion the blow with the perception that, that customer base is maybe less cyclical than the traditional local accounts. Just curious how that — I mean its early days of this, but has that kind of played out just in terms of what you’ve seen from an activity and just overall rental perspective again split between your large versus your more traditional local accounts. Thank you.

Matthew J. Flannery — President and Chief Executive Officer

Sure. Thank you. And you’re right, that has been part of the strategy when I talked about we experienced a big disruption back in the Great Recession in ’08 and ’09 and part of our strategy going forward was to focus on large accounts, large projects, large plants and that has been holding true. So as you guys know, somewhere around two-thirds of our business, over 60% is with our key accounts and the national accounts are about 45%, just that demarcation and they’ve all held up stronger than what we’ll call our territory or transactional accounts, whatever level you are at. So the strategy is working and we’re very fortunate for that. I think the other big issue is the value prop that we have for those accounts is real important and creates a unique value that we can bring that maybe not as many competitors in the space can bring such as technology investments, diversity of fleet, diversity of footprint. So all that plays into why our national accounts are holding up better.

Operator

Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question please.

Rob Wertheimer — Melius Research — Analyst

Hey, thank you and good morning to everyone. So obviously, you’re saying your capex is going to be half or less, it depends on obviously how things turn out than [Phonetic] last year. So you’re willing to see the fleet age out and/or shrink. That’s obviously substantially less than replacement, which I think is a positive. The leaders in the industry are going that direction. We’ve had a lot of questions. I mean, what happens to fleet in the field. What is the average competitor, the smaller competitor, not maybe — not maybe the biggest couple, does their fleet tend to be older and does it tend to be that, if nobody is buying, does the fleet really age out and shrink in a year or two. So if we do end up with an economy that’s 5% or 10% smaller that you can age it out that fast or do you think it that it just sort of hangs out there for substantially longer than that. Thank you.

Matthew J. Flannery — President and Chief Executive Officer

Thanks, Rob. So a couple of points there. First off, as far as fleet age, we have intentionally managed our fleet age, as we’ve talked about numerous times, to a place where we feel comfortable we have a year plus worth of headroom and different products have more headroom. If you think about aerial products, right, you can age them out a little bit longer. If you think about dirt engaging products, maybe not and all that pulls into our rental useful life calculations and when we target disposal, but we’ve left room there very, very intentionally for a rainy day and unfortunately, it may be raining outside.

So we’re taking care of that, but as far as fleet size. I don’t think you’re going to see a meaningful change given a middle of the road scenario, let’s say, because we’ve done much scenario planning, but you’re not going to see a meaningful change in size of fleet up or down this year. We’re going to manage the new fleet coming in for replacement to also match demand. I think the real point we’re making there is we talked about our flexibility and our cash resiliency and that was really more of the point of that we can cut — we have put a ceiling on our fleet purchases this year of half 2019 because it really can help people get comfortable about how are these guys going to generate robust free cash flow in any scenario. Well, that’s the lever and where that ends up between the $208 million that we spent in Q1 and let’s just call it roughly $1 billion that — the ceiling we put on it is going to depend on how fast the markets return to normal.

Rob Wertheimer — Melius Research — Analyst

Thanks. That’s very helpful. And then — sorry, go ahead please.

Matthew J. Flannery — President and Chief Executive Officer

Yeah, yeah as far as the small players, I apologize, I forgot that part of your question. I think they are probably in a position where they would want to age their fleet even more and everybody is starting off their own baseline and some folks, this is all about capital constraints. There’s probably varying levels of capitalization within that other three-quarters of the industry that doesn’t report public and I think they are all going to be managing to conserve capital and I would imagine aging their fleet is going to be a big part of that.

Rob Wertheimer — Melius Research — Analyst

Okay, thank you.

Matthew J. Flannery — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

Jerry Revich — Goldman Sachs — Analyst

Hi, good morning everyone and glad to hear you are all doing well.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thank you.

Jerry Revich — Goldman Sachs — Analyst

I’m wondering if you could talk about what proportion of your incoming order activity in April or late March was digital because that’s an area where you folks have obviously invested over the years and I’m wondering is now the point where we’re going to see a big benefit as a much more efficient ordering mechanism in this environment.

Matthew J. Flannery — President and Chief Executive Officer

Yeah, it’s still a relatively small portion. It’s grown significantly, but it’s still a relatively small portion of our overall revenue stream, it’s less than 5%, but I think the more important thing is we’re all going to have to realize what’s changing in a post COVID world and does this accelerate customers’ adoption for it and when it does, I do believe it will be a sea change. More importantly, as the leader in the industry, we have to be at the forefront of technology.

So we’ve had this procure-to-pay system — seamless system, touchless system for a couple of years now and there is a — it’s a very fair question, it’s something we’re watching carefully is will the current environment change people’s acceptance of that opportunity and we think this could be an accelerant, but early days here. It’s still a small piece of the overall business. I would say that the rest of our technology enhancements of touchless systems are probably getting more adoption internally and externally, but we do think this is — it’s just a matter of when, not if.

Jerry Revich — Goldman Sachs — Analyst

And Matt, in your prepared remarks, you spoke about lessons learned from the Great Recession and something that’s come up with folks within the company is that United Rentals at the time was less disciplined on pricing than I think a lot of people thought the company should be. I don’t know if you’d agree with that assessment and then today, given the growth in the key accounts business, national accounts business, the Total Control, I’m wondering if you could talk about how the company’s approach to pricing within this cycle will be different or step change different hopefully than what we saw in the last cycle?

Matthew J. Flannery — President and Chief Executive Officer

Yeah, the less disciplined — I think that’s probably fair to say about the industry overall. There was less information. So, therefore, when you don’t have information, you work on fear and I think there’s been a lot of change since then both for United Rentals, but for the industry as a whole, where there is much more information access whether it’s the public companies having to — more public companies reporting information, the routes data that represents more than half the industry right now. So there is a real data to help and I think that in itself helped the industry overall, but I also think our go-to-market strategy changing with customers that value our needs and we’re not a me-too supplier and we think back to the early days as United was rolling up [Phonetic] companies and building, we didn’t have the diversity of customer base.

We were very much relying on non-res and even specifically the commercial retail part of non-res and that was a very, very volatile end market at that point in time and it was a very crowded space. So that’s how this strategy has informed us where I think we’ll be much more resilient from a pricing perspective, at least on that two-thirds of our business that’s very targeted for us on who we’re doing business with and what products and services we’re offering them. So I think we’ll see a better outcome. I think the industry will do a better job, quite frankly.

Jerry Revich — Goldman Sachs — Analyst

Okay, appreciate the discussion. Thanks a lot.

Matthew J. Flannery — President and Chief Executive Officer

Thanks, Jerry.

Operator

Thank you. Our next question comes from the line of Joe O’Dea from Vertical Research. Your question please.

Joe O’Dea — Vertical Research Partners — Analyst

Hi, good morning. First, just as we think about current demand trends that you’ve shown. I mean if we just run that kind of scenario and a steeper than normal decremental given the cash flow or the capex range you’ve talked about, we could look at free cash flow that might be actually flattish year-over-year and the question is just thoughts on that and then in addition, how you think about cash deployment with that potential and when you could be back in the market and does your thinking about deployment change at all in terms of a mix of debt reduction and buybacks.

Matthew J. Flannery — President and Chief Executive Officer

So I’ll just touch on the demand part first and have Jess talk to you about the capital deployment. So the truth is, when you look at that chart that I referred to earlier, we don’t know how fast and how high that black line is going to climb, but we’re happy to see that it is climbing and hopefully as restrictions lift, we’ll get into a more normal seasonal pattern and that is sure to have a tremendous impact on the two big levers of free cash flow. How our EBITDA shapes up and how much capital we spend, but in either one, those are going to be in some sort of balance and I agree with you, we’re going to generate significant free cash flow. So I think your depiction of that is accurate without pegging a number on it, it’s why we’re comfortable saying significant and then Jess, if would you take the other half of the question.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Sure, absolutely. Good morning, Joe. So based on where we are right now. As you know we’ve paused the share repurchase program and as we look forward, not knowing exactly where the business is going to go once restrictions lift and how the end markets will set up, our focus is going to be to use free cash flow generated to take down the debt. What we’ll do is we’ll reassess once things open up and we have a better feel for that demand curve whether or not it makes sense based on what we’re seeing as far as our liquidity position, what we’re seeing as far as our forward scenarios at that point to turn the share repurchase program back on, but for right now, our priority is liquidity and so our priority is going to be continue to take down debt with free cash flow.

Joe O’Dea — Vertical Research Partners — Analyst

Got it. Thank you. And then just a question in terms of end markets and whether you can parse it out a little bit by regional trends or end market exposure trends, but to understand where you’ve seen kind of the steepest declines and then in the early days of seeing some movement off the bottom, sort of the concentration of some of that improvement.

Matthew J. Flannery — President and Chief Executive Officer

Sure, Joe. I’ll talk a little bit about that. Let’s just — let’s use that 1.5 [Phonetic] immediate three weeks decline as a proxy for it. When we think about that, the heaviest areas are places that shouldn’t surprise anybody which is think about Pennsylvania, which is one of the most restrictive states on construction all the way up to Boston. We all saw the news cycle [Phonetic] and everything going on in Boston and the State of Massachusetts overall. So that whole corridor, Philly, PA, New York, Connecticut, Massachusetts got hit hard and the one that may surprise people is up in Canada, Ontario and Montreal both had pretty restrictive guidelines here and those got hit harder than even I would’ve expected once we got underneath the numbers, not as big a part of our business as that northeast corridor but still, I was surprised and then go all the way to the West Coast and think about Northern California up to Washington, which was all in the news as well, very, very, very hard hit. When you think about that’s maybe somewhere less than 20% of our overall markets, it was over 50% of the fleet that we had to put on suspend and big part of that decline. So we’ll use that as a proxy.

As far as the climb up, it’s been pretty broad-based and outside of the Gulf states where oil and gas is really, really, really in a little bit of trouble right now, right, very, very quiet, you’d see pretty much broad-based the rest of that climb in activity, and that’s why we’re able to keep what is it, 1,177 locations out of 1,181, all but four locations open and operating because there is broad activity.

Joe O’Dea — Vertical Research Partners — Analyst

Thanks very much.

Matthew J. Flannery — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question please.

Ross Gilardi — Bank of America Merrill Lynch — Analyst

Hey, good morning guys.

Matthew J. Flannery — President and Chief Executive Officer

Hey, Ross.

Ross Gilardi — Bank of America Merrill Lynch — Analyst

I wanted to delve into some of your scenarios and maybe you could just help us flush through some of the assumptions behind them. I mean, Matt, you’re saying you think fleet is going to essentially be flat and if you spent $1 billion — all the way up to the $1 billion, I realize you might not spend that, but if you did and you sold what you sold last year and I calculate your fleet on OEC is down 5% to 6% by the end of the year assuming you’re selling it like 50% of OEC. So are you planning on divesting a lot less fleet in your base case scenario relative to last year?

Matthew J. Flannery — President and Chief Executive Officer

So there’s couple of things. First of all, we do not plan on at all diminishing our efforts on retail. So think about that as 60% plus on a normal base case of our used sales, but when we think about auctions, we think auctions are getting hit pretty hard right now. So we’re not going to participate. We don’t need to participate in that area. So we’re not going to participate. So think about auctions being net down and then if we don’t spend as much capital, you can think about our trade being down.

So the retail portion, which has been holding up pretty well here even as we sit here in April is what we’ll be focused on. So that would naturally if we de-emphasize the other two avenues of trade and auction, it would bring a natural decline and then you have to think about just overall what is activity going to be. So if it’s $200 million gap [Phonetic], $300 million gap on a base of $14 billion plus, I would call that, not a huge move, but it’s going to depend tremendously on what the capital spend is and what the retail sales are to your point. Either way, I don’t find the moves to be what I would say significant.

Ross Gilardi — Bank of America Merrill Lynch — Analyst

Okay, so just to follow-up on that. So if fleet is flat and demand by the time the year is over is negative which is not going to — is not a draconian assumption I don’t think, I mean time to you is mathematically down going into 2021. So can you describe the scenario that triggers not only capital spending reduction but also URI de-fleeting more aggressively and what are you looking at and when do you make that decision to de-fleet more aggressively if you need to?

Matthew J. Flannery — President and Chief Executive Officer

So for us to get to a place where we would de-fleet aggressively, it would have to be a significant demand drop and we do have that in some scenarios, but it’s not something that we’re betting on or calculating, but we would have that opportunity. Then there is a whole other question of if the end market is going [Phonetic] to give us a return and I don’t want to go here because I actually think we’re starting to see signs that we’ll end up on the good — better side of our scenario planning. If I went to the darker side, we had said before, we would not be fire selling fleet, we wouldn’t need to.

We would just dispose of the fleet that should have natural disposal and we would focus on that and that would be our focus. We wouldn’t naturally say I have to de-fleet by 5% and I’m going to take $0.20 on the $1 like some people might have done because they needed the liquidity. We’re in a fortunate position we don’t need that liquidity and as I said at the end of my prepared remarks, we know that the value we preserve coming out of this is the foundation that we’re going to leap from going forward. So I think that’s a real important delineation versus people that may have liquidity issues and may need to get the cash sooner, maybe they’ll have different disposal actions than we would.

Ross Gilardi — Bank of America Merrill Lynch — Analyst

Could you keep gross capex at $1 billion or below into 2021 as well if you need to or how do you think about that?

Matthew J. Flannery — President and Chief Executive Officer

Could we, yes. I would be very disappointed if that’s the world we’re living in, but could we, you know, we certainly could. That’s the lever that we have to pull even if we decided we’re going to put a little bit more R&M or refurbs. I mean, there’s so many options. There’s so much flexibility and optionality in that decision, we’ll do what’s right for the liquidity and the purpose of the business, but I mean we’re not even giving you guidance on the quarter, so it be silly for me to talk you about what I think we’re going to do in ’21.

Ross Gilardi — Bank of America Merrill Lynch — Analyst

Thanks, Matt.

Matthew J. Flannery — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Seth Weber from RBC Capital. Your question please.

Seth Weber — RBC Capital Markets — Analyst

Hey, guys. Hope everybody is doing well. Good morning.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thanks, Seth.

Seth Weber — RBC Capital Markets — Analyst

Wanted to ask another — I guess another fleet question. I think in response — following up on Rob’s question earlier, Matt, I think you said you could age the fleet like another year or something or maybe it was just on the aerial, but are you saying that repair and maintenance costs would not go up here in this scenario where you are aging the fleet or can you just try and help us think through the puts and takes around higher repair and maintenance costs in a scenario where you are aging your fleet. Thanks.

Matthew J. Flannery — President and Chief Executive Officer

Sure, so how we think about this, we feel we can age the fleet at a minimum of a year without any significant R&M costs, right. So without really any change. If we decided that we wanted to lengthen, if you wanted to go down what Ross was just talking about, you need to lengthen a couple of years. I mean when we were all independents, you’d keep equipment quite a bit longer because you didn’t have all these liquidity challenges, you didn’t have all these issues and you weren’t serving these large national accounts. We need to keep our fleet fresh and whether we decide to do that with natural rotation through our rental useful life and fleet repurchases or more R&M is a decision we’ll have, but we won’t have to make that decision for at least another year, which is what we mean by having a year of headroom on our fleet age.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

So, hey Seth, it’s Jess. I just wanted to add one thing, that’s not to say that the maintenance and repair expenses won’t be naturally higher, but as we look at that headroom that we’ve built intentionally into our RUL calculation, it’s not something that would be a significant increase, right and it would be highly dependent cap cost by cap cost and what would be required to keep that fleet at a maintenance level that’s right for us.

Seth Weber — RBC Capital Markets — Analyst

Okay, that’s helpful, thanks. And then, can I just clarify your response to Ross’ question. Matt are you saying the fleet OEC is going to be flat in 2020 versus 2019? Is that what I heard?

Matthew J. Flannery — President and Chief Executive Officer

No, I’m saying that relatively. So whether we end up — it’s going to depend on used sales demand and fleet — and [Speech Overlap] So where we end up in that up to $1 billion range and where we end up in used sales. I’m saying if you think, at least for me, as I think about it logically, I don’t think that movement of whether it’s 200 [Phonetic] up or 200 [Phonetic] down, I think that’s the range we’re talking about, I don’t think we’re seeing meaningful changes in the fleet size for when we end 2019 — I mean 2020. I’m just not seeing that.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

And when we talk meaningful, I mean we’re talking relative to a $14 billion base, not the year-over-year change necessarily.

Seth Weber — RBC Capital Markets — Analyst

Okay and then, sorry, just if I could, just one other follow-up, can you just on the specialty cold starts, are they basically — are they going forward and just at a reduced level here or are you putting all of that under review?

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Yes, so they are moving forward. We have a few that are going to continue. They absolutely make sense when we do review them even given the current environment. What we expect is we’re going to slow the pace of the 25 or so that we said we were going to do because to your point, exactly right, we’re going to make sure to take a really deeper look given the environment post restrictions lifting and make sure that those are still cold starts that we want to do in the very short-term.

Seth Weber — RBC Capital Markets — Analyst

Okay. I appreciate guys. Stay safe. Thanks.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thanks, Seth.

Operator

Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please.

Steven Fisher — UBS — Analyst

Thanks, good morning. Just curious you guys, how sustainable is it to do this in-sourcing that you’re doing now, is that going to change the way you do business in the long-term and then I guess more broadly, what do you see as the longer-term lasting impact of this? Are you hearing from contractors that they’re planning to increase their shift, their mix of rental just because they’ve now proven that they can just shut that on and off pretty easily.

Matthew J. Flannery — President and Chief Executive Officer

Yeah, so I’ll take the second part first, which is while its fresh in my mind is the penetration play. We do think there could be an opportunity for secular penetration after this. If we think about any time there is a disruption in people’s capital situation or there is constraints or there is fear, whatever term you want to use, people that normally wouldn’t use a rental channel and we learned this very much so coming out of the Great Recession start to turn to rental channel and once people start turning to the rental channel, they realize the flexibility and all the soft costs being eliminated that you would have from owning. The math works right, that’s why penetration is usually going only one way. I mean I haven’t seen penetration in this industry for the 29 years I’ve been in it ever go backwards. So I do think this could be an accelerant, don’t know for sure, but it’s a strong hypothesis and we’ll be ready for that opportunity.

As far as the in-sourcing, there’s going to be a lot of silver linings that we take out of this cloud that we’re dealing with right now and that’s one of the ones that I think we’re going to find. I think how we can be more creative and work more efficiently is one of the opportunities that we’re going to learn about and when you think about in-sourcing stuff that we were outsourcing, which is one of our most expensive ways and we had to do it at our peak periods, because that’s how we fill that capacity gap without getting too heavy on headcount.

The fact that we were able to in-source that is, is a great way to take out capacity when volume is down without having to take out your future capacity and that opportunity to turn back on first over time and then if you needed to in a peak period, outsourcing any. So we think this is something that will stick and something that will probably be able to get a lot of positive learnings from to use in the future.

Steven Ramsey — Thompson Research Group — Analyst

Great and then just a follow-up. Is anything changing on the capex mix within that $1 billion of capex ceiling that you have. You have been obviously favoring specialty versus gen rent over the last couple of years. Does that concept still generally hold in 2020 or does it maybe even intensify?

Matthew J. Flannery — President and Chief Executive Officer

I think at a minimum it will hold and then there’s some of the specialty businesses like power and trench that are holding up really well right now. So if I had to lean, I’d say increase, but it’s really going to depend. We’re going to be real rigorous on capital spend, it’s going to depend on how that climb goes throughout this year and as everybody works through the other side of COVID-19 and that will dictate what we spend, but if I have to lean I would lean, it will probably increase the blend of specialty as a overall spend.

Steven Ramsey — Thompson Research Group — Analyst

Great, thanks a lot guys.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thank you.

Matthew J. Flannery — President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question please.

Courtney Yakavonis — Morgan Stanley — Analyst

Hi, good morning guys.

Matthew J. Flannery — President and Chief Executive Officer

Hi, Courtney.

Courtney Yakavonis — Morgan Stanley — Analyst

You gave some good color just geographically before, but can you also just help us understand kind of some of the trends that are more isolated to non-res construction versus maybe some of the MRO activity on the industrial side. Are you seeing kind of a reduction in both aspects of the business and then if you can also just comment a little bit on the specialty business. Obviously, that was much more resilient and maybe what the OEC on rent trends look like for that business in April.

Matthew J. Flannery — President and Chief Executive Officer

Sure. So when we think about the vertical markets that we serve as we kind of denoted, industrial is a little bit more challenged and just think about — you know, I made a mistake of oil and gas [Indecipherable] fall off a low stool. I think the legs are gone. So I think that’s down to a floor plank right now. So that’s really challenged in the industrial space. I think downstream, you’re going to see a little bit of challenge. We all know the demand for their output, for their end product has really been challenged with travel restrictions. So I think temporarily and I don’t know whether temporarily means a quarter, two quarters, they’ll have to decide.

I think that will eventually come back, but if they stop their capital spend, you could imagine that our MRO, right, our on-site abilities [Phonetic] inside the gate could be more highly utilized because if they are lengthening the life of the assets that are driving their volume, they are probably going to need to put some maintenance and repair in it and that’s — we’re well positioned for that. So I would say that space is pretty good. When we think about the non-res, I think we could all guess which ones are the ones that are struggling, right now, right, entertainment, travel, any kind of hospitality, hotels, they are all struggling as people are not moving around greatly and that may continue specifically, entertainment one may continue for a while, but then there’s others like infrastructure that are doing really well.

So I would call overall non-res holding up better, but with puts and takes in each one. And then to your point about specialty. Specialty has been holding up and I think about immediately after COVID-19 hit, some of our specialty businesses got a chance to participate immediately in adding more resources, specifically power and HVAC, trench as infrastructure has [Phonetic] grown — the little bit of traveling I have seen road work everywhere we go. I know a trench team is participating in that as well as our gen rent teams in the market. So specialty has definitely been holding up better and I think we’ll continue to expect that going forward.

Courtney Yakavonis — Morgan Stanley — Analyst

Great, thanks. And then you gave us some really good color on the OEC on rent, but just as we’re modeling this off of fleet productivity, can you just help us think through if there’s any other big impacts that we should be thinking about on the utilization or the rate side relative to that down 15% that the OEC on rent is trending at.

Matthew J. Flannery — President and Chief Executive Officer

Yeah, when we think about fleet productivity, we think about the drag that we’re going to have on fleet productivity in the near-term is absolutely time utilization and and the net of rate mix, we’re not really expecting to be anywhere near the variable that we have in time utilization. So that is where our focus is right now. Rate is always something that we’re going to manage to optimize and to make sure we’re getting a good return, but that’s not — the area that’s going to show the most numerical change is 100% probably for the balance of this year, going to be the time utilization impact of fleet productivity.

Courtney Yakavonis — Morgan Stanley — Analyst

Great. Thanks.

Matthew J. Flannery — President and Chief Executive Officer

Thanks, Courtney.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our final question for today comes from the line of Steven Ramsey from Thompson Research. Your question please.

Steven Ramsey — Thompson Research Group — Analyst

Good morning. Thinking about specialty equipment that’s been deployed at hospitals, temporary sites. I would guess a fairly small portion of the total fleet that’s on rent, but can you — do you have any indication from those customers, how long that fleet will be deployed?

Matthew J. Flannery — President and Chief Executive Officer

I don’t think they know. Now if you are a local here in the New York metropolitan area, you hear that some are coming down which thank god, great news. I’ve never been so happy to have a piece of equipment called off rent in my life as those dealing with — at the Javits Center for that temporary hospital there. So I don’t — we don’t really have that visibility. It’s going to vary based on what they’re dealing with in the market. So we haven’t really gotten much color on and to your point, it’s not — it’s really more of an opportunity to help support the community than necessarily anything that’s going to have a huge numerical change on our results. So don’t have any color on that to share with you.

Steven Ramsey — Thompson Research Group — Analyst

Great and then secondly, quickly, you talked about using free cash flow to paying down debt. Would also be interested, does that mean direct reduction in debt outstanding or is there a near-term interest in building up cash to stay on the balance sheet in the near-term. Maybe just how you’re thinking through that?

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Sure, sure, hey, this is Jess. It would be — we would take down the ABL. It would not be to focus on increasing cash reserves. We actually have a little more cash in the bank right now than we normally do. You can assume that the free cash flow will be debt reduction against the ABL.

Steven Ramsey — Thompson Research Group — Analyst

Great, thanks.

Jessica T. Graziano — Executive Vice President and Chief Financial Officer

Sure.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks.

Matthew J. Flannery — President and Chief Executive Officer

Thank you, operator and I’m glad that we had this opportunity to address everyone’s questions. I mean, we know that every piece of information helps at a very uncertain time like this. Hopefully, you also got an opportunity to look at our Q1 investor deck. You can download that online and if you want to talk before our next call, please reach out to Ted. We hope the business world and the world in general is in a better place in July when we get to speak, but for now, thank you everyone for being on the call and most importantly, stay safe. Operator, you can end the call.

Operator

[Operator Closing Remarks]