United Rentals Inc (NYSE: URI) Q4 2019 Earnings Conference Call
January 30, 2020
Corporate Participants:
Matthew J. Flannery — President and Chief Executive Officer
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Analysts:
David Raso — Evercore ISI — Analyst
Seth Weber — RBC Capital Markets — Analyst
Rob Wertheimer — Melius Research LLC — Analyst
Joe O’Dea — Vertical Research — Analyst
Jerry Revich — Goldman Sachs & Co. — Analyst
Courtney Yakavonis — Morgan Stanley — Analyst
Timothy W. Thein — Citigroup Investment Research — Analyst
Steven M. Fisher — UBS Investment Research — Analyst
Scott Schneeberger — Oppenheimer & Co. — Analyst
Steven Ramsey — Thompson Research Group — 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 31, 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 presentation 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 our call. Let’s start with full-year 2019. It was a solid year of profitable growth for United Rentals, both organically and through the impact of our acquisitions. And we expect to deliver more growth again this year. We’re continuing to gain ground in a cycle that’s not without its challenges, but one that we think has legs in 2020. You saw that reflected in the guidance we released yesterday. In many ways, 2019 was a year of transition for us. Now, we’ve lapped the large acquisitions and we have a clean slate and a much greater platform for growth.
To recap the full year highlights, both our revenue and earnings were up year-over-year as reported and also pro forma. We delivered record EBITDA of $4.4 billion and a record free cash flow of $1.6 billion. On the flip side, there were some stubborn headwinds that impacted our numbers. When we look at the fourth quarter specifically, we had some rough spots. We knew rental revenue growth would moderate, but Q4 pro forma growth was lower than expected at around 1% and some of our costs were higher. It’s created a drag on our margins.
The single biggest constraint was a slowdown in upstream oil and gas. Within our rental operations, it impacted not just revenue, but also our operating costs. When we spoke about this last quarter and Jess will discuss the impact in detail, including the expenses we had for repair, maintenance and repositioning of the fleet that we pulled back from the oilfield. We’re sending that equipment to other markets where it can generate revenue down the road. We didn’t have grand expectations for the upstream market, but frankly, the speed of the decline was a surprise. We expect the demand to stabilize early this year, although year-over-year, the comps will remain tough for a couple of quarters.
If I had to point to one metric where we’re most disappointed in overall, it’s fleet productivity. Our biggest opportunity to repair productivity in 2020 is with fleet absorption. We have the assets in place and the team is focused on getting excess capacity out on rent in a disciplined manner as activity ramps up. Based on what we’re hearing from our customers and the field organization, we’re confident that the demand will be there.
On the subject of fleet, I want to take a minute to comment on the capex ranges in our guidance. Our plan calls for $1.9 billion to $2.2 billion of gross capex this year. The low-end of that range represents our expected maintenance capex and the top-end accommodates growth as the year plays out. This would most likely be used for specialty fleet or equipment for specific projects.
Broadly speaking, the last three months of help confirm both the weakness and the strength we see in the cycle. We had a couple of regions hurt by oil and gas and a couple of others with strong increases in rental revenue, driven by large infrastructure projects and non-res activity. Aside from those, our regions were generally slightly up or slightly down.
Our specialty segment had another strong quarter. Rental revenue from Trench, Power and Fluid Solutions combined grew almost 9% and about half of that was organic and the highest growth came from our Power & HVAC business. This year, we’ll continue to invest in specialty with another 25 cold starts planned across our service offering, that’s following 34 we added in 2019. And this will bring our specialty network close to 400 locations by year-end.
Our ongoing investments in specialty are part of our broader strategy to differentiate our service offering. Customers see us as a solutions provider, not just an equipment rental company. In 2019, we made strategic investments in growth initiatives that we believe can be highly accretive long term and we’ll continue to invest in the business this year, even though it may have a short-term impact on our margins.
Now, here is where we come out on the landscape looking forward. We believe that our construction markets will continue to grow through 2020 but not at the same rate as 2019. With industrial, our base case assumes more of the same sluggish activity. Our industrial revenue in 2019 was essentially flat with ’18. If we exclude the impact of upstream oil and gas, industrial was up 3% for the year.
I can sum up our expectations for this year in four words; slowing, but still growing, and this jives with a number of external data points, including our most recent customer confidence index. It’s at the highest point since August. Construction backlogs are stable, the December ABI came in above 50 again and the CEO confidence remains strong. The combination of these indicators help shape our outlook. But we’re not taking anything for granted. If conditions change, we have a lot of flexibility built into our business model.
Our job now is to unlock the value of this big engine we’ve built. I made that comment on the third quarter call and it was a theme for our annual management meeting this month. We had more than 2,000 leaders in Minneapolis to kick off the year. They came away with concrete plans to achieve our goals and a powerful platform to do it with. Not just fleet and branches, but also digital capabilities, specialized solutions, and most importantly, our talent base. Our people are the Number 1 reason I can say with confidence. While no company can control the operating environment, we do have the ability to continuously improve our performance from the inside out. That’s our mantra. Bigger doesn’t really matter unless we’re constantly driving for better. Also, I want to give a shout out to our team on safety performance. They delivered another year with a total recordable rate below 1, despite the noise of the multiple integrations.
Finally, I want to speak to our stewardship of United Rentals on behalf of all stakeholders. The priority of our leadership team is to manage the business for the optimal balance of growth, margin, returns, and free cash flow. In 2020, we’re looking at another year of profitable growth and strong cash generation. We plan to use that cash in ways that will benefit our investors. First, we’ll continue to invest in strategic initiatives that we believe have long-term accretive value. Second, we’re planning to use about $1 billion to pay down debt. And yesterday, we announced a new share repurchase program that will return an estimated $500 million to our investors over the next 12 months. We have a lot of flexibility in the ways we can serve our stakeholders. The constant is that we’re a disciplined, resilient Company with a focus on driving returns in any environment. That’s what our investors expect and that’s what we’ll deliver.
With that, I’ll ask Jess to walk you through the quarter and then we’ll go to Q&A. So, Jess over to you.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks, Matt and good morning, everyone. There’s a lot to cover this morning. So, let’s jump right into the fourth quarter results, starting with rental revenue. On an as-reported basis, our rental revenue grew 3.7% or $73 million to just over $2.06 billion. Adjusting for BlueLine on a pro forma basis, rental revenue was up 0.8% for the quarter or about $14 million. Within rental revenue, as-reported OER growth contributed $62 million of the $73 million increase. Ancillary revenue was up about $15 million and re-rent revenue decreased by $4 million.
Here is the breakdown of the $62 million or 3.7% OER growth. We had growth in our fleet of 7.6%, which translates into $127 million of additional revenue. Fleet inflation cost us 1.5% or $25 million and fleet productivity on an as-reported basis was down 2.4% or a decrease of $40 million. I mentioned that year-over-year fleet productivity on a pro forma basis was down 1.8%. Time utilization remained a headwind in the quarter and the combined benefit we’ve had in rate and mix were not enough to offset the impact of lower time. That’s rental revenue.
Let’s move to used sales. Used sales revenue was up 31% or $58 million year-over-year. That represents $154 million more fleet sold at OEC. The environment continues to be strong with overall proceeds as a percentage of OEC of about 52%. That number climbs to 56%, if I exclude the auction sales we had in Q4. Sales at retail made up over two-thirds of sales in the quarter as we sold 40% more fleet through this healthy retail channel versus last year. Adjusted gross margin on used sales in the quarter was 43%, down from 51% in Q4 last year. That decline is mainly due to more auction sales of fleet with high operating hours, including units from the oil patch, as well as a 4% decline in retail pricing we experienced given the increased volume that we sold through that channel in Q4.
Taking a look at EBITDA. Adjusted EBITDA for the quarter was just over $1.15 billion, an increase of $37 million or 3% year-over-year. And here’s a bridge on the as-reported changes. In rental, OER contributed $7 million. Ancillary benefited adjusted EBITDA by $2 million, re-rent was a decrease of $7 million. Used sales added $11 million to EBITDA and better performance in our other lines of business provided $3 million. SG&A helped adjusted EBITDA by $21 million year-over-year. And I’ll note there that includes the impact of about $15 million in lower bad debt and we also recognized about $6 million in synergies year-over-year from the BlueLine stub period. Our adjusted EBITDA margin was 47%, which is down 140 basis points year-over-year. Adjusted EBITDA flow-through was approximately 25%.
Both margin and flow-through were impacted this quarter by a number of dynamics. First and most importantly was a slower rate of growth realized in the fourth quarter in large part due to the decline in the upstream end markets. As we’ve said before, our ability to reach our targeted levels of flow-through requires a combination of positive fleet productivity in revenue and cost productivity gains. At 0.8% pro forma rental revenue growth, which includes negative fleet productivity, the margin and flow-through were challenged, given slow growth in the quarter and our maintaining a cost structure that supports the capacity we expect to need to service growth in 2020. We also continue to make investments in growth initiatives that will drive value in the future.
Second, our cost base was stressed by repair and repositioning costs coming out of continued declines in the upstream markets. I mentioned in the third quarter call that some of those additional costs would play out through the fourth quarter and they did at around $8 million. Line of business mix was another headwind in flow-through. The fourth quarter included a sizable increase in used equipment sales, as well as growth in our non-rental lines of business, all of which are dilutive to margin and flow-through this period. A comment on adjusted EPS. We delivered a strong $5.60 in the quarter compared with $4.85 in Q4 of 2018. That’s an increase of 15%, primarily from better operating performance, lower shares outstanding and tax benefits that we recognized in Q4.
Let’s move to capex and free cash flow. For the full year, we brought in $2.13 billion in gross capex, with $158 million of that having come in during the fourth quarter. Excluding $831 million in proceeds from used sales, net rental capex for 2019 was $1.3 billion. We generated robust free cash flow in 2019, about $1.6 billion for the year or an increase of $258 million from 2018, that’s up over 19% and asked back about $26 million in merger and restructuring payments we made last year.
Our tax adjusted ROIC remained strong, coming in at 10.4% for the fourth quarter. And that continues to meaningfully exceed 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 margins this quarter and to a lesser extent as a result of the expected drag from our acquisitions.
Looking at the balance sheet. Net debt at December 31 was $11.4 billion, which is $300 million lower than last year. Leverage at the end of the year was 2.6 times. That’s down 10 basis points from the end of the third quarter and down 50 basis points for the full year. And a quick comment on liquidity, which at year-end was a very strong, $2.14 billion, comprised mainly of ABL capacity.
A few comments on capital allocation and our share repurchase programs. We completed our $1.25 billion repurchase program, purchasing $200 million of stock in the fourth quarter. Our 2019 purchases under that program reduced the total share count by about 7%. As Matt mentioned, we will prioritize the use of our excess free cash flow towards reducing leverage in 2020. We’re targeting $1 billion towards debt reduction this year. And I’ll speak to guidance in a minute, but based on the strength of the free cash flow we expect to generate this year, we also expect to return additional cash to shareholders through a new $500 million share repurchase program that will complete over the next 12 months.
I’ll wrap up with a few comments on guidance. Our 2020 outlook was included in our release last night. At first, we expect 2020 will be another year of growth in this cycle, albeit slower growth. Our guidance for low-single digit growth in total revenue assumes continued support from our construction end markets as well as certain industrial verticals, while working through tough comps from oil and gas in the first half of the year. We’re focused on increasing fleet productivity and our plan sees positive fleet productivity for the full year. But to be clear, we’ll likely continue to see some challenges in a seasonally slower Q1, closely managing our capex as we continue to reposition fleet in advance of the busier start of the season in Q2. We expect to sell more used equipment in 2020, as we leverage what is still a strong used market and we’ll keep our fleet refreshed with approximately $1.9 billion of inflation-adjusted replacement capex. That’s at the bottom-end of our growth capex range, we’ll add growth capital in 2020, primarily in support of our specialty businesses, but we’ll look to adjust capex accordingly as we monitor demand and look first to utilize the fleet we already have in the field.
Our outlook includes low-single digit growth for adjusted EBITDA as well this year. Cost management remains a focus for us and it’s balanced with continued investment in areas we know will generate better customer service and shareholder value over the longer term like in our specialty cold starts, the build out of our services businesses and our digital platforms.
Finally, while we continue to invest in growth, we will also generate higher free cash flow this year, the majority of it earmarked for debt reduction and the new share repurchase program.
So with that, let’s move on to your questions. Operator, would you please open the line?
Questions and Answers:
Operator
Certainly. [Operator Instructions] Our first question comes from the line of David Raso from Evercore ISI. Your question please.
David Raso — Evercore ISI — Analyst
Hi, good morning. Thank you for taking my call.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Good morning, David.
David Raso — Evercore ISI — Analyst
I think the key issue is the fleet productivity for ’20, the credibility of the guide that it can be positive. Jess, can you just take us through a little bit the thoughts on cadence. You mentioned the early part of the year, it’s still a struggle with productivity and it seems that key metric really is the fleet utilization within that productivity number. Can you give us some sense, do you expect fleet productivity to be positive year-over-year as early as 2Q or is it more 3Q? Just some sense of what kind of ramp do we need to see and I’m really — particularly in fleet utilization to give us confidence fleet productivity can be positive for the year.
Matthew J. Flannery — President and Chief Executive Officer
Good morning, David. Good question. This is Matt. I would say we’re no better at predicting fleet productivity that we were late in time, to be frank. But when we — we do have a lot more rate three levers combined than the two. In the one versus the two, and then mix. So we think that we’ve been very explicit that fleet absorption is going to be the greatest opportunity. The only reason we’re talking about that will take some time is because it’s not going to be a light switch, but we think the combination of our rigorous management of it. Some easier comps, quite frankly, as we get through the back half of the year is going to make it accelerating. But I wouldn’t necessarily take that to Q1 or Q2 as positive or negative, just that we feel it will improve throughout the year. We do feel, I mean, if this guidance holds up, these end markets holds up, everything that we firmly believe in, it implies a fleet productivity being positive, it almost have to. So we do feel firm on that.
David Raso — Evercore ISI — Analyst
Would you state — it would be fair, Matt, to say the capex, especially the cadence no less, if the fleet productivity is proving to be challenging as you get further into 1Q, into the key spring selling season you will look back — look to, sorry, pull back on the net capex because that’s more of the focus this year is making sure that the utilization improves? Is that a fair….
Matthew J. Flannery — President and Chief Executive Officer
Absolutely great — that’s an absolutely accurate and great point and that’s why you see a broader range this year in capex guidance than we normally have because where we end up in that range, obviously demand will play part in it, but this year specifically, absorption will play a part and how well we do in absorbing the fleet. So that’s why you see that broader range. So that’s the right way to think about it.
David Raso — Evercore ISI — Analyst
I guess my last question will, we can debate the credibility if you can get fleet productivity to be positive. But if you believe you can, the incremental EBITDA margins for the year seem very low. I mean, you basically have 38% incremental EBITDA margins, and a fleet utilization is getting close to flat to allow fleet productivity to be positive. I’m struggling with so many costs in 2019, right? $12 million in the last quarter alone on oil and gas, $8 million now in the fourth quarter, oil and gas hit. I mean, that’s $20 million of costs you would think wouldn’t repeat. And if you pull that out of the guidance, I mean you’re talking about almost no EBITDA incremental on the revenue growth. So I’m just trying to square up. If you really believe you can get fleet productivity positive, why would the incrementals with all those costs, not repeating be this week?
Matthew J. Flannery — President and Chief Executive Officer
So Jess, I think did a great job breaking down some of the issues in her prepared remarks, and I’d love Jess just comment in a minute, But I would — the most obvious one is a slower growth, right? So it’s just having to absorb both the natural inflation of the business when you’re in a low-single-digit environment, but also some of the choices we are making to continue to lean in to making sure we’re building out capacity for some of our other initiatives. If we were managing for a quarter, maybe you would make those investments. We’re certainly not nor would I think anybody want us to. So it’s just a little bit of headwinds from those two but slow growth is the main driver.
Jess, I don’t know if you want to add any more color.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Yeah, I think, the only thing I’d add is there’s really two other dynamics that are playing through. One is those comps in the first half for upstream, right, we really — we saw in 2019 that the rig count in the upstream business really started to decline in the third quarter of ’19, right? So we’ll to comp that through the first half.
The other thing is we’re going to continue to make the investments that I mentioned, right, continue to build out some of our services business that frankly come in with lower margins. They are not as asset intensive. So the returns are really good in those lines, but in building those up off of a low base, right, there is going to be some investment that we’re going to continue to make in building those businesses out.
The other is continuing to invest in cold starts that also need time to build up and build out and some of the digital capabilities that we’re going to continue to grow and lean into in 2020.
David Raso — Evercore ISI — Analyst
All right. I appreciate the time. Thank you.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks, David.
Matthew J. Flannery — President and Chief Executive Officer
Thanks, David.
Operator
Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question please.
Seth Weber — RBC Capital Markets — Analyst
Hey guys, good morning.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Hi, Seth.
Matthew J. Flannery — President and Chief Executive Officer
Good morning.
Seth Weber — RBC Capital Markets — Analyst
Hey, good morning. Two questions. I guess, can you just talk about what your assumptions are for disposing of used equipment in 2020? Do you expect to continue to use the auction channel as much as you did in 2019 — here at the end of 2019? And then my follow-up question is just on these oil and gas markets — the energy markets, are you seeing any kind of knock on effect as of this point in more traditional construction equipment? Thanks.
Matthew J. Flannery — President and Chief Executive Officer
No problem, Seth. So first answer for the auctions. No, we think this year with all the fleet that we’re pulling out of the oil and gas and some of the excess capacity we had through the BlueLine acquisition, we had more than our usual by quite a bit of really tired old fleet and it was just the appropriate decision. Probably did four or five times more the options we have in any of the year we have, but we’re not going to sell that type of fleet to our customers. It’s just — we’re just not going to do that.
I think the good news is that and just pointed to this in our prepared remarks, the end market for used equipment retail was really strong. And so, we’ll continue to push that lever. We think that’s a unique strategy that separates us in our returns, in our ability to get the high proceeds per capex dollar for OEC dollar and we’ll continue to focus on that. The only thing we’ll send to auctions are the stuff that we’re just not going to sell to our customers.
On the oil and gas, we’re not really seeing a knock-on effect broadly, like you might have in ’15 because all that infrastructure was already built around it. What we are seeing though is that 31% drop in Q4 brought us to a 16% drop in upstream oil and gas full year, that was significant. And you saw a little bit of that drag on midstream as well. Those are the two areas that frankly surprised us at the — how fast they decelerated. Within our embedded guidance, we’re thinking maybe another 10% drop in the year. So we’re not counting on oil and gas to recover and we don’t feel there’s going to be any broad knock-on effect as a result of it.
Seth Weber — RBC Capital Markets — Analyst
And do you — and thanks, Matt. And do you feel like you’ve finished the moves, the relocation of the fleet out of those markets at this point or is there still more equipment that needs to come out? I mean, do you — can you just — can you characterize your utilization levels in the energy markets relative to where you want them to be? Thanks.
Matthew J. Flannery — President and Chief Executive Officer
Yeah. So if you think about the cadence of $12 million in Q3, $8 million in Q4, I think that cadence will continue. We don’t expect to see a big drag, probably one that — hopefully one that we wouldn’t even call out in Q1. Now to be fair, if it drops a lot more than 10%, I mean it’s only 3.7% our business right now, so we think we’re appropriately sized there. If you take 10% off of that, that’s still not a big number. And then the repairs on that shouldn’t need to be a call out. The only reason you hear me say caveat is because I didn’t expect it in Q4. But we don’t really expect to have a big number in 2020 for repair and repositioning in oil and gas.
Seth Weber — RBC Capital Markets — Analyst
Okay. Thank you very much, guys. I appreciate it.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks, Seth.
Operator
Thank you. Our next question comes from the line of Michael Feniger from Bank of America. Your question please. Michael, you might have your phone on mute. We’re still not hearing you, Michael. All right. We’ll move on. Our next question comes from the line of Rob Wertheimer from Melius. Your question please.
Rob Wertheimer — Melius Research LLC — Analyst
Yeah, howdy. Can I just ask another question….
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Hi, Rob.
Rob Wertheimer — Melius Research LLC — Analyst
Hey — a bigger picture versus what has been asked already. I mean, if you look at EBITDA margins over the past four or five years, and they are higher than today and you’ve absorbed obviously a tremendous amount of growth and some asset mix changes too, I guess, Baker and other things. So leaving aside the vagaries of this year, do you believe your intrinsic EBITDA margin potential is higher than today or is this the right level and you grow by capital redeployment from here? Thanks.
Matthew J. Flannery — President and Chief Executive Officer
Sure, Rob. I think it’s a great point. It really depends on how fast some of our other businesses grow. Generally, we feel like this is a kind of EBITDA margin we continue to drive longer term and maybe even improve upon as we get some of these lower margin businesses that we bought over the years to improve. I would say that the only thing that we are really focused on is, as we build out the service businesses, it’s not there, they’re very asset light. So there’s not a lot of — it’s not as high an EBITDA margin, but really good returns.
I think it’s too early for us to worry about that now, but I’m just — as I’m projecting to your point of a higher thinking longer term question, EBITDA margin could dilute and returns could be high, theoretically. This depends on how fast we grow some of these asset light and service businesses. But we’re going to be in this ballpark we feel now, around this area for a while.
Rob Wertheimer — Melius Research LLC — Analyst
And then just — we’ve chatted about this in the past, but how long does it take to get BlueLine fully up and operational at sort of your high levels? Is it a year, two years, three or four years, you’re still seeing benefits? How do you think about that?
Matthew J. Flannery — President and Chief Executive Officer
So I think that all the sales challenges and repairs are pretty much done externally, and that’s what I meant when I say clean slate. So I think as we get through the seasonal build of this year, get passed some of the comps that Jess was talking about for the first half of the year on oil and gas, I think we’re in pretty good shape as an organization, including the teams that came from BlueLine. When you’re thinking about some of the legacy acquired shops, I’ll point to — I think we played a video a couple of years ago at Investor Day where we had the branch manager from Boston, did a real good job talking about year one, they were just drinking from a fire hose and all the new tools. And year two, they really started to comprehend how to utilize them. And then into that third year is where they ramp up. So if I take that. I think the BlueLine team may be — they’re a little bigger company, maybe they’re even faster learners. But I think that when we really think about the full maturity of productivity out of those acquired stores sometime in the back half of this year, ’21, I don’t know when exactly, I think they’re really catching on to the tools and being able to focus on utilizing them at scale, which is really the difference that we’ve done here in our legacy United stores. The scale is new due to a lot of folks outside of our company.
Rob Wertheimer — Melius Research LLC — Analyst
Okay, thanks.
Matthew J. Flannery — President and Chief Executive Officer
Thanks, Rob.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks, Rob.
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 — Analyst
Hi, good morning.
Matthew J. Flannery — President and Chief Executive Officer
Hey, Joe.
Joe O’Dea — Vertical Research — Analyst
First question is just on capex and an implied growth range of flat-to-up $300 million. It seems like based on the specialty growth targets that you revised recently, you should be at least at the midpoint of that, if not higher. And so I don’t know if it implies that the GenRent fleet, if anything could even shrink this year? And so just how you’re thinking about that path of specialty growth? And then maybe what’s implied in terms of GenRent fleet thinking?
Matthew J. Flannery — President and Chief Executive Officer
Sure. So as I had answered, I think, it was David who asked the question first. We’re going to — where we end up in that range depends on how fast we absorb, and that absorption is real primarily in the GenRent business. So you’re active. We are going to fund our specialty growth. When I think about at the midpoint, that’s probably in the range of between the cold starts and the organic growth that we’re driving through the specialty team. We’ll need to fund over and above the replacement capex. So we’re not really guiding to that we will shrink GenRent, unless, all of the demand can be filled with the latent capacity. We’re not betting on that, we’re not even hoping for that. But it is a fair observation, so don’t think that that 1.9, if we have to use some of that 1.9 because we’re not absorbing best device and specialty assets, that is what we will do.
Joe O’Dea — Vertical Research — Analyst
And then on the time-ute side of things, just trying to understand a little bit better why that surprise in the quarter, a lot of attention on oil and gas. I mean was it all oil and gas or were there other things that you saw develop over the course of the quarter that wound up shaking out just a little bit differently from what you anticipated in say end of October?
Matthew J. Flannery — President and Chief Executive Officer
Yeah. So oil and gas is certainly a big driver. But to your point, the back half of Q4, what we call that — lovingly call the Turkey drop. In my 29 years I never got used to how much we drop after Thanksgiving. A little bit steeper than we usually do. That was transient. We feel comfortable that repairs as we sit here and guide here. Today, we obviously feel comfortable that that will repair. And that was, that was — those were the two major contributors.
What we’re encouraged about is that you see the — you see that the OEMs backlog seems to be that the industry is responding to that little bit of a slower growth. So think about everybody has been building their fleets for this high-single-digit, double-digit growth. It’s appropriate for people to take a pause and absorb. So that really shows me good discipline from the industry overall. And I think that’s a big, big part of the confidence we have that we’ll be able to repair the time utilization in 2020.
Joe O’Dea — Vertical Research — Analyst
And then just a question on the fleet productivity because it’s my impression from your comments there, is that, it wasn’t a matter of you might have been a little bit more disciplined on the rate side of things and suffered on the utilization side of things that the industry at large would probably be trending with the kind of rate experience that you had?
Matthew J. Flannery — President and Chief Executive Officer
I don’t really know. I can’t — I don’t want to say that because I don’t know that answer what the industry is doing. What I can say, and thanks for giving me the opportunity to reiterate. Our opportunity to drive time utilization is because we’re going to drive it through one or two ways; more fleet on rent or better discipline on the inflow. It’s not because we’re — if any change in strategy that we’re going to trade off any kind of rate to get higher time utilization, that is not the goal at all. We think it’s important to continue to have rigorous rate management to go forward as we absorb inflation. So I think this is just more about as the growth decelerates to lower-single to mid-single digits, it’s just appropriate that, that pace the industry paces and I think that’s what I was referring to the backlogs that you’re seeing from the OEMs being down year-over-year is a good response.
Joe O’Dea — Vertical Research — Analyst
I appreciate it. Thank you.
Matthew J. Flannery — President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.
Jerry Revich — Goldman Sachs & Co. — Analyst
Yes, hi, good morning, everyone. I’m wondering if you could just expand on the specialty discussion. At the Specialty Day, I think we spoke about 32 cold starts plan for ’20, which if we look at the midpoint of the capex guidance range, the entirety of $300 million in growth capex would be accounted for by specialty. So, I just want to make sure that we have those pieces right and if there are any other moving pieces we should keep in mind relative to what we spoke about it at the Specialty Day. Would love an update. Thanks.
Matthew J. Flannery — President and Chief Executive Officer
Yes. Glad you viewed that. I heard that was very widely and broadly enjoyed from the investment community and Paul and the team did a good job. I would say we’ve got that number right now pegged for 25. Whether it accelerates will have a lot to do with — actually capex will be the last part of the decision here. We’re getting in the facilities of people that we need to accelerate it to maybe a goal of above 30 as we did frankly in ’19. We increased the amount that — from what we originally thought. So this is no change in the overall strategy. But just to be clear, the number that we’re focused on right now is 25 cold starts planned for ’20 and that may lessen that capex need more to the $200 million range as the way we’re thinking about it right now.
That will be prioritized, because as I said in my prepared remarks, this is a differentiator for us and solving more customers problems we think is a real part of why people do business with United Rentals. So, no change in strategy, just numerically might be a little bit less than what you may remember from the Specialty Day.
Jerry Revich — Goldman Sachs & Co. — Analyst
Okay, thank you. And then as you folks have used more and more data analytics, can you just talk about the decision for capex for ’19 to come in at the high end of the prior guidance range, because if we have capex at the low end of the guidance range, time-ute [Phonetic] would be 50 basis points, 60 basis points stronger and obviously you folks made those decisions in the field on a case-by-case basis. But any comments that you can make, and I appreciate the seasonality comment post-Thanksgiving, but any additional context because given the time you pressure, I guess, we would have thought capex would be at the low end of the guide.
Matthew J. Flannery — President and Chief Executive Officer
Yeah. I — so unfortunately and we joke about this internally a little bit, I can’t cut off the 60-foot boom and create generators and light towers. I will tell you that when we look at the fourth quarter capex, which we managed very tightly, we had a significant amount, almost 25% of that was just power HVAC assets. So, between heaters, temporary power, stuff like that. So that probably would be in the range of — with the math that said $50 million, $100 million less, if it was just — if we weren’t bringing in assets where [Phonetic] we had some time utilization opportunity. It was more the mix of assets that we’re bringing in from — for different businesses into support as to your question earlier on specialty growth and some seasonal items as well.
Jerry Revich — Goldman Sachs & Co. — Analyst
Okay. And lastly on the cadence, as we look at the time in the second quarter of ’19, it was, call it, 150 basis points lower than normal seasonality versus the first quarter. So, it does look like you could potentially turn the corner for fleet productivity in the second quarter of ’20. I just want to make sure we’re not up over our skis with that thought process. Any comments that you can share on that?
Matthew J. Flannery — President and Chief Executive Officer
I think you’re directionally correct. How the mix comes in, right, we talk a lot about time, the mix will be a component of it as well, but as long as we do think that we have that opportunity and we think our guide kind of embeds that, but as I talked about, I think it was a question that we had earlier on, we — regardless of where the number is, we do believe that it — we expect it will accelerate throughout the year because of the tough comps you mentioned.
Jerry Revich — Goldman Sachs & Co. — Analyst
Okay. Thank you.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Great. Thanks, Jerry.
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, thanks for the question. So, just back on the comments about oil and gas being down another 10%, just wanted to clarify that, that is for the full year ’20, not an incremental 10% off of the fourth quarter. And secondly, when you’re thinking about the guidance for next year, I know you’ve talked about kind of the slowing environment, but are there any other end markets, geographies that you are baking into your guidance to be down next year either for the first half or for the full year?
Matthew J. Flannery — President and Chief Executive Officer
So, first on the — on this — on the oil and gas, probably flat from year-end. So that 10% would be the deceleration that’s already continued. So think about that as flat. It’s just the impact full year of that back half of the year decline, right? So, not an additional 10% [Phonetic]. Then, when we’re thinking about other end markets, as you heard me say in the opening remarks, the industrial market is a lot of puts and takes, right? We talked a lot about upstream and then even midstream were down. Downstream was great, downstream was a good guy. Chemical processing was down, power was up. So there’s a lot of puts and takes presented, which is why we’re looking at industrial overall is flattish and embedded in our guidance is that expectation. If something happens, then industrial picks up and that would help puts us towards the higher end of the guidance, but we’re really relying more on a continued strength even if it’s a little bit slower growth in our — not in the construction verticals, right, non-res specifically.
Courtney Yakavonis — Morgan Stanley — Analyst
Got you. And how would you characterize MRO activities this quarter? I think you’ve historically talked about close to half of the business in industrial being MRO. Have you seen any impact to that from some of those puts and takes that you mentioned?
Matthew J. Flannery — President and Chief Executive Officer
Nothing that we can quantify. We certainly have heard some delays from the field team about turnarounds here in Q4. So that could have impacted that sluggish Q4 result. Whether they pick those up in Q1 or try to stretch it to Q4 next year, who knows. Those are usually time periods when they would do turnaround. That would be the only MRO thing that was a little bit lagging. We don’t think it was structural or continual, just some push offs that we had seen, specifically in the Gulf Coast.
Courtney Yakavonis — Morgan Stanley — Analyst
Okay, great. Thanks. And then just lastly on the debt pay down. I think, based on your guidance, that should be getting you guys close to 2 times exiting next year. Just curious how we should be thinking about your targets from there? And whether any of this when you talk about seeing construction markets up at least through 2021? Is any of this kind of planning that you could possibly see some EBITDA declines beyond 2020?
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
So, I’ll — let me take the first part first. The debt reduction that we have targeted for 2020, that $1 billion, we feel comfortable is going to continue to get us, call it, into the middle of the lower half of our range. Looking out to 2021 is a little too early for that right now. I mean, we’ve talked about prioritizing leverage reduction and working towards 2 times at the peak. We’re going to obviously continue that path in 2021. The quantum of it, I just don’t know yet, Courtney, so I don’t want to go too far on that.
I mean, as far as EBITDA going forward, again, that’s — 2021 is just a little too far out at this point.
Courtney Yakavonis — Morgan Stanley — Analyst
Okay, great. Thanks.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thank you.
Matthew J. Flannery — President and Chief Executive Officer
Thanks, Courtney.
Operator
Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question please.
Timothy W. Thein — Citigroup Investment Research — Analyst
Great, thank you. Good morning. So the first question, just on the latent capacity that you’ve highlighted and the focus on driving absorption, how does that — how should we expect that plays into our deliveries kind of move through the year? I’m just thinking from the standpoint of ending OEC sequentially. I would assume, we have a — we should assume a bigger than normal seasonal decline from where you ended ’19. Is that fair, i.e., if you sell more fleet than you bring in?
Matthew J. Flannery — President and Chief Executive Officer
So, when you say deliveries, Tim, I’m assuming you mean capex inflow?
Timothy W. Thein — Citigroup Investment Research — Analyst
Yeah, yeah.
Matthew J. Flannery — President and Chief Executive Officer
Yeah. So, I think you could expect us to see pretty close to a normal cadence. Q1 will be a little bit softer, but it’s a small number, right? So, when you’re talking about whether it’s $50 million or $75 million smaller on a $15 billion base, not meaningful, but technically a little bit softer in Q1 and then the rest of the cadence and really the meat of our capex spend is in that Q2 and the first — and the beginning of Q3 range, where we really are in a peak build season of our fleet on rent. And that will flex directly correlated to how we end up doing with time utilization, fleet absorption, whatever term you want to utilize. So that’s how we’re thinking about it and hopefully that answers what you are looking for.
Timothy W. Thein — Citigroup Investment Research — Analyst
Yeah, yeah. Okay. And then Matt, just on the kind of the interplay between fleet age and operating costs or R&M costs. There’s been a lot of discussion here in the last, I guess, that was in the second half about elevated R&M costs and I guess that a lot of that was moving stuff in and out of the oil and gas regions and repositioning fleet, but at almost 50 months, do you — is that start to put some pressure on R&M or is that, I mean, I know used sales are up, so presumably that’s somewhat a response to that, but can you just maybe speak to that in terms of that interplay?
Matthew J. Flannery — President and Chief Executive Officer
Yeah, on the margin, right, and you could pick apart how much of it’s inflation, how much of it’s just fleet age, but it’s on the margin. The real opportunity and what you pointed to is that take advantage of a strong used market and a strong retail market to make sure we continue to manage that fleet age because when that market is not there, whenever there becomes a downturn, we don’t know how to predict that, but we’re not predicting it certainly for 2020, we’re going to need to age that fleet. And then there may be some trade-off for R&M as you age it a year and you really turn off the inflow for a while, that’s when you may see a little bit more of an impact on R&M, but the trade-off between that and having too much fleet and the positive free cash flow is the way we plan — think about it long term, which is why it’s so important we drive used sales here, so we’re not aging the fleet too quickly, while there is still growth to be had.
Timothy W. Thein — Citigroup Investment Research — Analyst
Okay. All right. And then maybe last one, Matt, just on the large project pipeline. What’s the feedback and just in terms of the quoting levels and just size of the pipeline in terms of what you’re hearing from the national account team?
Matthew J. Flannery — President and Chief Executive Officer
Yes. Still good, I mean, the team still feels really good and specifically about where we are aligning strongly with our national accounts, in our large accounts and large projects. As you know, that’s a specialty for us [Indecipherable] strong and in fact, more importantly, we’re not hearing of any cancellations. So that’s — that would be a sign of something different. So we think overall most of the macro indicators, as well as our internal intelligence from our managers and our customers is that there is still growth in 2020. So, big projects will continue to play a big part of that.
Timothy W. Thein — Citigroup Investment Research — Analyst
Got it. All right. Thanks for the time.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks, Tim.
Operator
Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question please.
Steven M. Fisher — UBS Investment Research — Analyst
Thanks. Good morning. Just maybe to follow-up on that last point there, just curious how much visibility you feel like you have for the business, Matt, as you think about the second half and the growth you forecasted and curious how it compares to that second half visibility that you had at this point in the year over the past few years?
Matthew J. Flannery — President and Chief Executive Officer
So, I wouldn’t say it’s any better or worse than over the past few years and it’s not just from our customers, but obviously from the macro indicators. As we say all the time, we talk about our customer confidence index being higher than it was and all, which we think it’s turned a little more positive than maybe what it was full year for our customers and really for most industries outside of maybe industrial. So we think that’s a general indication of 2020. Admittedly, we are skewed by large customers and large projects. So, as I was answering Tim’s question, I realized the local customers depart where maybe our visibility isn’t as long as opposed to larger customers, larger projects, where just the pipeline and the supply chain of what it takes to build these large projects gives you inherently more visibility.
Steven M. Fisher — UBS Investment Research — Analyst
Okay, that’s helpful. And then for Jess, what’s the right way to think about SG&A over the course of 2020? Is it a dollar level, is it a percent of sales? How much focus do you have on that number?
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Yeah, [Indecipherable]. That’s a great question. The percent of sales is definitely the way I would recommend you think about it. The number might move a little here or there, but it’s really we’re managing it more so from a percent of sales perspective.
Steven M. Fisher — UBS Investment Research — Analyst
And what do you think that percent of sales is? Do you have a target for that? How do you kind of quantify that?
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Yeah, there is no target per se. We — as we’ve recognized the benefit of the synergies from the deals that we’ve done, right, we’re pretty comfortable with the percent that we’re running with right now. The biggest mover in that because it is total SG&A is what happens with stock comp and that’s really going to be dictated on whatever happens with the stock price, right? But in terms of the components of SG&A is that that we’re managing it. The pace that we’ve got right now is we’re very comfortable with.
Steven M. Fisher — UBS Investment Research — Analyst
Okay, terrific. Thank you.
Matthew J. Flannery — President and Chief Executive Officer
Thanks, Steve.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Thanks.
Operator
Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question please.
Scott Schneeberger — Oppenheimer & Co. — Analyst
Thanks very much. Good morning. In specialty, a nice trajectory in gross margin, certainly improving and I’m talking about getting synergies there as well. But just could — Matt, could you delve into cross-selling, how that’s progressing, how you’re integrating things like Total Control with Fluid Solutions perhaps? And can we see perhaps positive gross margins maybe in the back half of 2020 in the specialty?
Matthew J. Flannery — President and Chief Executive Officer
Yeah, absolutely. And I think also the maturation of it, it’s been a lot of cold starts for the last few months as well as, as we continue to get the whole Fluid Solutions team continuing to get momentum from being two separate companies, right? Our Pump business and Baker and how that continues much like I talked about the BlueLine integration, how that matures over time is another opportunity to get margins up in the specialty business. So, we absolutely feel good about that.
And the cross-sell opportunities is, as I said earlier, something that we view as a real differentiator and something we spend a lot of time with all of our leaders in Minneapolis and workshops on selling that continued value because we’re big believers in it. We expect that to contribute to margin expansion for specialty as well.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
So I’ll add just — I’ll just add one thing there. When you look at the specialty margins, right now they are burdened by acquisition activity, right? So, to the extent that we continue to absorb and leverage the scale and the opportunity in those acquisitions, that’s going to help margins over the long term as well.
Scott Schneeberger — Oppenheimer & Co. — Analyst
Great. Thanks, Jess. And then as a follow-up and it’s a follow-up to the prior question on SG&A, which you covered pretty well, but I want to delve into bad debt what you called out in prepared remarks that you got that $15 million lower. That was impressive and I don’t recall you calling out bad debt before. So, A, kind of what was happening in the fourth quarter and then, B, how does that play into the SG&A consideration in 2020? Thanks.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Sure. So that $15 million is actually, you could break that down. There’s about $10 million of that $15 million is just better bad debt expense experience, right? Doing better on collections, the DSO coming down, just the actual bad debt activity that we had this quarter versus last year. $5 million of the $15 million is actually a change. We had a change in the accounting standard for revenue. That moved $5 million out of G&A and actually moved it up contra revenue, right? So that’s actually a burden in OER.
Scott Schneeberger — Oppenheimer & Co. — Analyst
Understood, thanks.
Jessica T. Graziano — Executive Vice President and Chief Financial Officer
Sure.
Operator
Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question please.
Steven Ramsey — Thompson Research Group — Analyst
Good morning. I wanted to talk on upstream longer term, some of the stuff your control, I know, but if and when upstream picks up again, breakthrough active, would you move fleet back-end to take advantage or does the last six months change your perspective permanently on how you manage fleet in upstream areas?
Matthew J. Flannery — President and Chief Executive Officer
I think we’re — believe it or not, we were a little more cautious of how much we moved in this last upcycle from the one previously. If you remember, this used to be 10% of our business. We — I think we’re almost 11%. We managed it down to about 5%. I think you’ll see us come with that same caution again, but it’s not that the business full cycle isn’t profitable, it’s just — if we don’t need to, it’s just a little too variable. So it will depend on what’s going on in the other markets. If it’s a place where we need to put latent demand, well then, that makes all sense in the world. But if you’re talking about how you make your choices between each one of these cyclical challenges as upstream and that volatility certainly informs how much bigger we’re going in next time.
But to be clear, we’re also — it is still profitable business throughout the cycle. So it’s not something we would eliminate altogether, but we would look to optimize existing capacity, first and foremost, and even if we’re pushing the limit a little bit there rather than throwing new resources at it.
Steven Ramsey — Thompson Research Group — Analyst
Great. And then just thinking about — if I understand what you’re saying, non-rental capex, should we expect that to continue moving up based on cold starts, digital investments, etc. even though rental capex you’re being more disciplined on that line?
Matthew J. Flannery — President and Chief Executive Officer
Not really. When we’re talking about investments, we’re not just talking capex, we’re talking about and that’s why we really talk about — so maybe the word investment, it’s not the balance sheet form of investment, but investing into the cost that with a fixed costs and the additional costs that we have to support more tax for our service business or to build out the shops to do more work or trainers for safety training. Those are the service business we’re talking about, where we are investing more costs into.
As far as the hard asset capital investments, yeah, there will always be some incremental to cold starts. You need to put new trucks in there, you need to do some of that stuff, but that’s not anything extraordinary that we would call out.
Steven Ramsey — Thompson Research Group — Analyst
Okay. Thank you for the color.
Matthew J. Flannery — President and Chief Executive Officer
Thank you.
Operator
Thank you. This does conclude the question-and-answer session of today. I’d like to hand the program back to Mr. Flannery for any further remarks.
Matthew J. Flannery — President and Chief Executive Officer
Thank you, operator and thanks to everyone for joining us today. And just a reminder that our Q4 investor deck and 2020 guidance are available online. And as always, you can reach out to Ted with questions here in Stanford. So, thanks and we look forward to our next call.
Operator, go ahead and end the call, please.
Operator
[Operator Closing Remarks]