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Herc Holdings Inc. (NYSE:HRI)
Q3 2019 Earnings Call
Oct 23, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Herc Holdings third-quarter 2019 earnings conference call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator instructions] I would now like to turn the conference over to Elizabeth Higashi.

Please go ahead.

Elizabeth Higashi -- Vice President of Investor Relations

Thank you, Kevin, and thank you. Welcome. Good morning. I'd like to welcome everyone to our third quarter earnings conference call.

Our press release and presentation slides were filed earlier today and also posted on the Events page of our IR website at ir.hercrentals.com along with our third quarter 10-Q. This morning, I am joined by Larry Silber, our president and chief executive officer; and Mark Irion, senior vice president and chief financial officer. They will review the third quarter and the nine-month result, as well as our industry outlook. The prepared remarks will be followed by an open Q&A, which will also include Bruce Dressel, senior vice president and chief operating officer.

Before I turn the call over to Larry, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call.

Please refer to Slide 3 of the presentation for our complete Safe Harbor statement, as well as the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the Company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, a replay of this call can be accessed via dial-in or through webcast on our website.

Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. I'll now turn the call over to Larry.

Larry Silber -- President and Chief Executive Officer

Thank you, Elizabeth and good morning, and thank you all for joining us. Our team continues to focus on quality of earnings through the execution of companywide self-help initiatives to increase our operating margins and profitability. Our initiatives once again drove industry-leading year-over-year price improvements that contributed to higher adjusted EBITDA margins and dollar utilizations in the third quarter. We achieved excellent REBITDA flow-through and improved REBITDA margin by reducing expenses in the quarter.

In 2019, we focused on the management of our net fleet capital expenditures to maximize return on capital and held OEC about flat compared to the prior year. We are focusing on improving the utilization of our existing fleet control to more capital to expanding our fleet size. This does mean that we are more cautious about the strength of our end-markets which we consider to remain strong. Our interactions with contractors and customers reinforce our continued belief that the markets in which we participate must stable and grow albeit at a slower rate.

These factors contribute to our conviction that 2019 will be another good year for Herc Rentals and our adjusted EBITDA guidance for the full year to reflect an improvement of approximately 8% to 10% or a range of $740 million to $750 million. Our strategic initiatives on Slide 5 shows as our roadmap to improve dollar utilization and EBITDA margin, enhanced free cash flow and reduced net leverage. We expect to continue to make annual year-over-year progress in these important financial metrics and are committed to closing the gap between Herc Rentals and our industry-leading peers. On Slide 6, we discuss one of our most important internal metrics, safety performance.

We expect our entire team to focus on safety first while assisting our customers and communities with the equipment and services they require. Our team members provide the differentiating factor that makes us unique in the equipment rental industry. Throughout our locations, we focus on the simple concept of a perfect day which means no OSHA recordable incidents, no "at fault" motor vehicle accidents and no DOT violations. We celebrate those locations we reported are perfect safety month.

All of our branches recorded in the 90% perfect days through the third quarter of 2019 with many of our locations reporting 100% perfect days. Our goal is for continuous safety improvements throughout our entire organization. Now please turn to Slide number 7 for a summary of our financial results for the third quarter. Strong gains in pricings were offset by strategic reductions in the rerent revenues through improved profitability.

As a result, equipment rental revenue grew 2.4% to $459.6 million. Total revenues were $508.1 million, down slightly compared to the prior period in 2018. Total revenues were impacted by the planned reductions in used equipment disposals in the quarter which Mark Irion will describe more fully later in our presentation. We reported net income in the third quarter of 2019 of $9.4 million or $0.32 per diluted share.

This quarter included $53.6 million as pre-tax cost related to the redemption of our 2022 and 2024 notes and the transaction cost related to the issuance of our 5.5% notes and the new ABL agreement. Excluding the impact of cost relating to the refinancing spin-off and restructuring cost and related taxes, our adjusted net income in the third quarter 2019 increased 17.7% to $43.2 million and our net income per diluted share increased 16.5% to $1.48 compared to last year. Adjusted EBITDA increased 3.9% to $209.4 million reflecting reductions in SG&A and our initiative to control direct operating expenses. Adjusted EBITDA margin is 41.2% in the third quarter.

Pricing improved 4.5% compared with last year third quarter reflecting demand in our targeted markets and the strength of our pricing. We would reject rates likely even less markets are stable and our customers recognize the value of professional services and support we provide. Improvement in pricing and mix contributed to the year-over-year improvement in dollar utilization in the third quarter of 2019 with an increase of a 160 basis points to 40.8%. Moving to Slide number 8 which illustrates the continuing improvements we made in the quarter of 2019 third quarter compared with 2018.

The graph in the upper-left illustrates our year-over-year pricing over the last two years. But we have improved rates year-over-year for an even longer period, now 14 straight quarters with the latest quarter up 4.5% over last year. This slide also shows average fleet at OEC was up 0.4% to $3.94 billion in the third quarter of 2019 over last year. We took a conservative approach this year to average OEC fleet in the quarter about flat with last year while controlling our fleet spend and disposal of older equipment.

Our goal is to improve our volume growth by improving utilization. Our average fleet on rent during the third quarter of 2019 was down 1.6% compared with the strong 2018 third quarter. While we did invest the time utilization improvement we had hoped for in the quarter, we are still pleased with the overall revenue growth which was driven by our pricing gains. Now please turn to Slide number 9.

We can see the steady improvement we made year over year in dollar utilization, as well as the seasonal impact of volume in the business. Third quarter dollar utilization reached 40.8%, an increase of a 160 basis points and up from a strong third-quarter performance in 2018. This increase reflects the improved pricing and mix we achieved. Average fleet age as of September 30, 2019 was 44 months compared with 46 months to the same period last year.

Together, our ProSolutions and ProContractor equipment now accounts for approximately $836 million of OEC fleet or about 21% of our total fleet like at the end of the third quarter of 2019. You can see the detailed rate count of our fleet categories in our appendix. Now please turn to Slide number 10. Our strategy is driving further diversification of our customers and markets, as well as industry mix.

Third quarter local rental revenue grew by 4.9% year over year and accounted for about 61% of rental revenues. Continued growth in infrastructure projects at the local level contributed to positive gains. National account revenue represented about 39% of the total in the third quarter and increased 1.7% compared with last year. Our rental revenue by major customer segments to 2018 is showed in the composition chart in the upper right-hand corner of this slide.

Contractors represented 34% of equipment rental revenues followed by industrial customers with 27%, other customers which include commercial and retail service, hospitality, healthcare, recreation, entertainment and special events represented 21% of equipment rental revenue and infrastructure and government increased to 18% of the total. Growth in new customer accounts continue to be solid throughout the quarter both at the local and national account level. We continue to focus on maintaining a solid pipeline for future growth opportunities in all of our targeted end-markets, as well as growing the portfolio of equipment used by our current customer base. Please turn to Slide number 11.

Certain economic and indiscrete metrics have begun to show some mix signals regarding the accounting. The architecture billing index predicts activity nine months to 12 months out fell below 50 in August. The index recently has been reporting in tight range around the 50 level. U.S.

industrial annual spending forecast for 2019 estimate close to 5.5% over 2018 and seven tenths of 1% in 2020. The contracts or conversations with our industrial customers and contractors and on markets indicate confidence with continued growth in spending in both the short and medium-term horizon. U.S. non-residential spending is expected to be positive in 2019, up 1.1% with strong growth in public spending dollars.

Current estimates for 2020 suggests a slowdown in spending with a decline of 2.9% with clearly volumes in absolute dollar levels are sufficient to create favorable rental demand. Longer-term, the North American ARA forecast for industry equipment rental revenues growth remains robust with compound annual growth projected at 3.8% through 2023. Our strategy to focus on urban market coverage should support our growth as urban customers increasing to use rental to offset space and cost constraints. These secular trends will contribute to steady industry growth as rentals expand the untraditional rental equipment categories.

Please turn to Slide number 12. We've added four new rental locations so far this year in high growth urban markets such as Boston, Raleigh, North Carolina, Orlando, Florida and we might hit in several branches in other urban markets so that we could have more fleet to support our urban density model. The map on this slide also shows the growth expectations by state and province over the next five years based on forecast by the American Rental Association. They currently forecast growth of 4% to 6% over the next five years in the west, southwest and southeast regions of the U.S.

and in Western Canada. We expect our end-markets to remain strong into 2020 and we'll continue to focus on self-help initiatives to improve our operating margins in a positive environment. Now, let me turn the call over to our CFO, Mark Irion to further discuss our financial results in more detail and then at the end I will summarize before we open it up to your questions.

Mark Irion -- Senior Vice President and Chief Financial Officer

Thank you, Larry, and good morning everyone. Please turn to Slide 14 for the details of our third-quarter 2019 results. Equipment rental revenue increased 2.4% from $449 million to $439.6 million in the third quarter of 2019. Year-over-year growth was driven primarily by improved pricing, but was partially offset by a reduction in rerent revenue.

As part of our self-help initiatives for 2019, we are being successfully focusing on utilizing our own rental fleet and rerenting less fleet. Excluding rerent revenue from our results, pure rental revenue increased 4.5% year over year. Pricing clearly drove our rental revenue growth as fleet on rent declined 1.6% compared to a strong third quarter last year. As Larry mentioned, our strategy for 2019 with self-help with a focus on utilizing existing fleet.

In the third quarter, we got the rate structure right but not the utilization. We've always stated that we have deferred – rate as reported time utilization that our expectation going into the quarter was that we could drive annual growth by improving our time utilization. We did not quite get the results we expected. It's a challenge for the team to grow all in the organization is holding OEC fleet flat but we remain focused on the challenge however and expect that results going forward with ongoing focus.

In addition, the third quarter is seasonally one of the slowest for equipment rental sales as we reduced our sales of rental equipment and sales of new equipment parts and services in the third quarter. Our strategic reductions impact to total revenues has increased 1.6% year over year to $508.1 million. I'll talk to that in more details in our revenue comparison slide. We reported net income of $9.4 million or $0.32 per diluted share in this year third quarter compared with a net income of $46.2 million or $1.60 per diluted share in 2019.

This year's results also included 32.6 million in pre-tax costs related to the financing of our debt. Excluding these costs, as well as spin-off expense, restructuring cost and related taxes, adjusted net income in the third quarter of 2019 was $43.2 million or $1.48 per diluted share, compared to $36.0 million or $1.27 per diluted share last year. More details regarding our net income bridge and the non-GAAP reconciliations are included in our Appendix. Adjusted EBITDA in the third quarter of 2019 increased 3.9% or $7.9 million to $209.4 million over the same period of 2018.

Adjusted EBITDA margin improved 220 basis points year over year to 41.2% in the third quarter. The third quarter reflected excellent progress in terms of flow-through. We reported REBITDA flow-through of 83.3%, which benefited from reductions in rerent expenses, as well as reductions in SG&A and flattish growth in DOE. Our REBITDA margin rose to 24.9% during the third quarter of this year, an increase a 90 basis points for the third quarter in 2019.

The increased average OEC in the third quarter of 2019 by 0.4% over the prior year. We are focusing carefully on fleet at the location level to ensure that we are maximizing fleet utilization before we make any further additions. OEC at the end of the third quarter was $3.94 billion. Our focus on rates delivered excellent results in the quarter, pricing improved 4.5% year over year holding up with special results concerning with a year ago rates in the third quarter were up by 3.3%.

Slide 16 focuses on the changes in total revenue for the third quarter and nine months period. Equipment rental revenue grew 3.4% to $459.6 million, although the increase was impacted by strategic reductions in rerent revenue compared with last year's quarter. Pure rental revenue was up 4.5% year over year. In the third quarter of 2019, sales of rental equipment declined $14.6 million excluding currency.

The lower year-over-year sales in the third quarter, reflected the company's net capital plans for 2019 as we continue to improve fleet mix and age while focusing on improving time utilization. The largest portion of our sales of rental equipment in the third quarter went through auction channels and accounted for 52% of the total sales volume, compared with 45% in the prior year. We generated proceeds of approximately 40% of OEC, due to the larger concentration of auction sales during the quarter. On Slide 16 we review the Q3 adjusted EBITDA bridge.

Adjustment EBITDA for the third quarter was $209.4 million, an increase of 3.9% or $7.9 million, compared to $201.5 million in the third quarter of 2018. The bridge shows that the largest contributor was increased equipment rental revenue with growth of $11.1 million as compared to the prior year. Direct operating costs rose slightly by $3 million with the currency compared with the third quarter of 2018 as we continue to control expenses of improved operating efficiencies, such as lower, deliveries and freight expenses. Those reductions were partially offset in the third quarter by improved facility costs, as well as increased personnel and personnel-related expenses.

Selling general and administrative costs were low in the third quarter of 2019 primarily due to the reduction of consulting and professional fees. These reductions were partially offset by additional selling expenses. REBITDA measures the contribution from our core rental business without the impact of sales of equipment, parts and supplies. We believe REBITDA provides a better comparison with our industry peers as it excludes the impact of varying depreciation policy.

Third-quarter 2019 REBITDA flow-through was once again strong at 83.3% and drove the margin of 44.9%, an increase of 90 basis points compared with the Q3 of 2018. On Slide 17, we have broken out our fleet expenditures and disposals on an OEC cost basis and have provided a rolling balance of the OEC value of our total fleet. A quarterly breakout of this information is also in the Appendix. Total fleet at OEC was $3.94 billion as of September 30, 2019.

The average OEC of our rental fleet during the quarter was about flat with an increase of 0.4% over the prior year quarter. For the third quarter of 2019, fleet expenditures at OEC were $170 million with fleet disposals of $89 million. The average age of our disposals in the third quarter was 80 months. On a cash basis, net Fleet capex for the nine months was $349.8 million, compared with $428.4 million in the prior year.

Non-fleet capital expenditures for the quarter totaled $34.9 million, down from $58.5 million in 2018. We reduced the average age of our fleet to approximately 44 months at the end of the third quarter from 46 months in the comparable period last year. On Slide 18, we can see the total debt was $2.2 billion as of September 30, 2019, about the same as the prior year. Net leverage decreased to three times, compared with 3.4 times in the comparable quarter and solidly within our targeted range of 2.5 times to 3.5 times.

We had ample liquidity of over $1 billion as of September 30, 2019. For the nine months ended September 30, 2019 free cash flow was a positive $55.5 million, compared with a negative free cash flow of $108 million last year, a substantial improvement. On Slide 19, based on our expectations to focus the demand in our market and our continued margin improvement focus we tightly manage operating expenses. We are updating our guidance range for adjusted EBITDA for 2019.

Our new guidance range is $740 million to $750 million or an increase of 8% to 10% compared to 2018. We are narrowing our guidance of net fleet capital expenditures to the top of our previous range to $400 million to $410 million. The planned reduction in capital spending over the prior year, along with expectation of improved EBITDA should contribute to strong free cash flow for the year. Our overall strategy is expected to continue to provide ample liquidity and the financial flexibility to fund our strategic growth, to improve our operating margins, to serve our customers and create value for our shareholders.

And now, I'll pass the call back to Larry.

Larry Silber -- President and Chief Executive Officer

Thanks Mark. I'd like to summarize where we are today. Our strategic initiatives are continuing to drive growth in rental revenues and improved dollar utilization. We improved our adjusted EBITDA margin by 220 basis points to 41.2%.

We increased dollar utilization to 160 basis points to 40.8%. We improved year-to-date free cash flow from negative $108 million in 2018 to positive $65.5 million in 2019. Our operating initiatives will continue to contribute to strong REBITDA flow-through for the full-year 2019. Net leverage is expected to be at the lower-end of our targeted range to 2.5 to 3.5 times by year end and the full-year 2019 dollar utilization and EBITDA margin are expected to improve leading to our updated adjusted EBITDA guidance.

We've assembled an outstanding team and I want to thank each and every one in our team Herc for their hard work and commitment to our business and our customers. We are committed to achieving our stated goals through solid execution to improve volume for our shareholders, customers and employees. Now, we'd like to open the line for questions.

Questions & Answers:


Operator

[Operator instructions] We will now take our first question from Jerry Revich of Goldman Sachs. Please go ahead sir.

Ben Burud -- Goldman Sachs -- Analyst

Hi, good morning this is Ben Burud on for Jerry Revich.

Larry Silber -- President and Chief Executive Officer

Good morning, Ben. How are you?

Ben Burud -- Goldman Sachs -- Analyst

Good. How are you?

Larry Silber -- President and Chief Executive Officer

We are wonderful, thanks.

Ben Burud -- Goldman Sachs -- Analyst

Great. Just wanted to start on the topic of pricing discipline. Is there any reason to believe that the industry pricing discipline will be less volatile in this cycle than it was maybe in the past? Are there any tools or specific industry dynamics that you all think would dampen pricing volatility as we progress through the later stages of the cycle?

Larry Silber -- President and Chief Executive Officer

Yes, look, I think that just as a matter of course, the industry is much, much better situated today than it was during any previous cycle, partly as a result of consolidation, but more importantly as a result of the tools that we all have and employed today in the market. So, I would think and I would expect that there will much more discipline as we go into any kind of a cycle. Bruce, you may want to comment.

Bruce Dressel -- Senior Vice President and Chief Operating Officer

Yes, I would second what Larry is saying. Just with all the consolidation kind of the big gets bigger and the investment everyone has made in technology, you can see that LAR pricing with our proprietary Optimus tool, we are all – the industry is driving better pricing and I think that's – this leads to better discipline.

Ben Burud -- Goldman Sachs -- Analyst

Got it. And as we began to think about 2020 equipment procurement, can you give us an idea of what type of price inflation you might face on new equipment purchases? And how is your ability to manage that potential inflation evolve in recent years?

Larry Silber -- President and Chief Executive Officer

Yes, look, I would say, we are in the very early stages of discussing 2023 requirements with our key vendors. But I would expect our inflation at being similar to what we experienced last year.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Larry Silber -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from John Healy of Northcoast Research. Please go ahead.

John Healy -- Northcoast Research -- Analyst

Hi, thank you.

Larry Silber -- President and Chief Executive Officer

Hey, John.

John Healy -- Northcoast Research -- Analyst

Hey guys. Congrats on a great quarter.

Larry Silber -- President and Chief Executive Officer

Thank you.

John Healy -- Northcoast Research -- Analyst

I wanted to ask about 2020 potential. Is it revenue growth level in the business today and it's very clear that you are closing the gap relative to peers on margins is the main objective? What sort of revenue growth level do you think the company needs to get to show further contraction in net spread versus peers?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. Hi John. I mean, we are still looking for sort of high-single-digit revenue growth going into 2020 in market still similar to what we've got in 2019 so it should be supportive. We'll be looking to continue rate growth challenging ourselves on approved time utilization and with sort of mid-levels consistent with 2019 we can still be sort of low-single-digits growth in fleet.

So that sort of adds up to sort of high-single-digits and that diversification going into 2020.

John Healy -- Northcoast Research -- Analyst

Great. And then when I think about just the SG&A line, you guys have done a really nice job there managing that lower for the last three quarters. How much more trending is there? And how do we think about SG&A growth relative to revenue growth at this point in the cycle?

Larry Silber -- President and Chief Executive Officer

Obviously, John, we feel really good about where we are. We would probably try to hold that flattish going forward and try to leverage volumes in our locations. There might be some marginal inflation increases and obvious commission structure as we grow volume. But we are going to try to hold it flattish and leverage volumes.

Mark, do you want to add to that?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. I think that the-most of consulting costs in 2018 for the run-off by the end of this year in terms of the RBA comp. So we are sort of hitting into a sort of flat line for SG&A going forward.

John Healy -- Northcoast Research -- Analyst

Great. I think a final question for me. Could you guys mention the better lower end of the leverage range in 2020 of EBITDA growth, I would imagine that free cash flow would only be stronger. So is there are any priorities or anyways that we should be thinking about you guys deploying that incremental free cash flow in 2020? Or is it a situation where you might get a little bit cash on the books kind of the urban having rainy days on December?

Mark Irion -- Senior Vice President and Chief Financial Officer

I think we've been pretty consistent with our, sort of messaging as we will continue to pay down debt with free cash flow for the short to medium term. So and that's the same primary goal going forward.

John Healy -- Northcoast Research -- Analyst

Thank you guys.

Larry Silber -- President and Chief Executive Officer

Thank you, John.

Operator

We will now take our next question from Seth Weber of RBC Capital Markets. Please go ahead.

Brendan Shea -- RBC Capital Markets -- Analyst

Hi, this is Brendan on for Seth. Good morning.

Larry Silber -- President and Chief Executive Officer

Good morning.

Brendan Shea -- RBC Capital Markets -- Analyst

Just wondering if you could give more color on the positive commentary that you are hearing from your customers. Is there any particular end-market that you are seeing that are more optimistic than others? And then, could you remind us your exposure to upstream oil and gas and comment on customer demand there?

Bruce Dressel -- Senior Vice President and Chief Operating Officer

Hi, Seth. This is Bruce. End-market demand and what we are hearing from our customers pretty much across all regions where we serve in North America. And then on the LNG part, our LNG market actually ticked up a hair year over year.

So we are seeing – even though there is a bit of weakness in that market, I think we are performing well. We were very focused on the capital that we deployed into that market over the last year and so we are doing well there. So, overall, it's pretty good market across North America.

Larry Silber -- President and Chief Executive Officer

Well, and I would add to that. Remember, over the last four plus years, we have dramatically reduced our dependencies on the upstream oil and gas markets. So, we've been very selective about where we participate and where we play.

Brendan Shea -- RBC Capital Markets -- Analyst

OK. Great. Thank you.

Operator

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

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning.

Larry Silber -- President and Chief Executive Officer

Good morning, Steve. How are you?

Steven Ramsey -- Thompson Research Group -- Analyst

Good. Thank you. I wanted to start on the capex plans. Net capex now is near $50 million with fleet on rent down a tick.

And then rising – it was always at a high-end of the net capex range. So what – does it sounds like it would be tilting to lower end. So what is driving you guys or the factors driving you to add fleet now at this point of this year?

Mark Irion -- Senior Vice President and Chief Financial Officer

So I think, Steven, I think it's important to notice that our capex spending this year is down significantly from prior year. So, I think it's almost 20% reduction and new capex year over year at the top-end of our range. So that's the main driver why the fleet is down year over year and it's not in range to our guidance range with it hitting in on the top-end and there is still opportunity to commit capex and both fleet and to locations and we've taken advantage there. This is substantially be good year over year.

I want to remind the main driver of fleet growth range.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. And then, by seeing on the growth of infrastructure projects, maybe talk to how that impacts your specialty fleet or is the specialty fleet utilized as much on the infrastructure?

Larry Silber -- President and Chief Executive Officer

Yes, look, infrastructure continues to be a growth market for us, particularly, as we are focused on urban markets, high-density markets in North America and with running of a paramount of some being toward the local and state level. So, infrastructure is strong for us. It continues to be strong and grow. I would say that our specialty equipment doesn't necessarily impact that infrastructure business too much.

Certainly, there is a little bit on the fringes. But our specialty gear and ProSolutions and ProContractor products more supports our general recreation, remediation and local contractor business. So, it's more of our classic gear which is the 80% of our total, that supports the infrastructure activity.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. And then, lastly, I think one on rerent. Is the bulk of this opportunity, the benefit of reduced rerent revenue, is that now past us? And this is more reflective of kind of ongoing rerent impacts? Or is that still kind of a tailwind to results because you would use that from the high levels of that?

Mark Irion -- Senior Vice President and Chief Financial Officer

I think the rate of change will slow down going forward. So, lot of the dramatic reduction. It's not really a tailwind. It's a tailwind, sort of recorded revenue I guess, but it sort of a revenue shift and a margin improvement also.

So the rate of change will change with what we have stated to the rerent and that will get through, but it is likely to continue at – although at a slower rate or with the mix couple of quarters.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. Thank you for the color.

Mark Irion -- Senior Vice President and Chief Financial Officer

Sure.

Operator

[Operator instructions] Our next question comes from Brian Sponheimer from Gabelli Funds. Please go ahead.

Brian Sponheimer -- Gabelli Funds -- Analyst

Hey, good morning everyone.

Larry Silber -- President and Chief Executive Officer

Good morning, Brian and how are you?

Brian Sponheimer -- Gabelli Funds -- Analyst

I am excellent. Hope you are doing well.

Larry Silber -- President and Chief Executive Officer

Thank you.

Brian Sponheimer -- Gabelli Funds -- Analyst

One clarification on the net capex. Is that buying more or selling less fleet?

Mark Irion -- Senior Vice President and Chief Financial Officer

It's – I mean, we are really just hitting toward the higher end of the range. Q3 fleet was down, but that's really just seasonal. So you will see an uptick in Q4 as per the normal seasonality and in terms of the cadence of our fleet sales. So, it was really just hitting in on the higher end of the range rather than bringing more or selling less.

Brian Sponheimer -- Gabelli Funds -- Analyst

OK.

Mark Irion -- Senior Vice President and Chief Financial Officer

And it is down 3% year over year. So, it's the high end of the range, but we started with and had a significant reduction from prior year.

Brian Sponheimer -- Gabelli Funds -- Analyst

OK. A really small mix in the quarter, any impact from the hurricane wasn't as far as branches that had shut down and then, nothing to clean up?

Larry Silber -- President and Chief Executive Officer

Yes, no, it was – the hurricane was sort of a bit nothing quite frankly. As much gear came off line in the impacted area went on right in preparation of a major storm. So it ended up being a net zero.

Brian Sponheimer -- Gabelli Funds -- Analyst

OK. And as you look at your disposal markets putting more through the auction channel this quarter versus other merchants selling as yourself, et cetera. How do you see that market shaping up? And what is your thought on the broader used equipment market right now?

Larry Silber -- President and Chief Executive Officer

Yes, let me sort of answer the first part, maybe Bruce can answer the second part. The first part is really a strategic decision for us to keep ourselves people focused on rental which is where we make our money and where the activity is and these are resources most appropriately. So, we have determined but while we still do a fair amount of wholesale and retail business, the vast majority of our activity will be through the auction market. It's just more efficient and margin with rental that are enough to distract the people on a regular basis to focus on leaving the retail and the wholesale markets.

So, I think, longer-term, and going forward, you'll probably see more of that of what we've evolved through and then maybe Bruce can comment on the market in general.

Bruce Dressel -- Senior Vice President and Chief Operating Officer

Yes, hey, Brian. So, just overall market is stable and it's positive market for us right now. And we see that continuing into the future.

Brian Sponheimer -- Gabelli Funds -- Analyst

All right. Great. And I look forward to talking to you later and nice job again.

Larry Silber -- President and Chief Executive Officer

Thanks, Brian.

Operator

Our next question comes from Bill Mastoris of Baird. Please go ahead.

Bill Mastoris -- Robert W. Baird -- Analyst

Larry, acknowledging that you are trying to increase on the utilization rates on your existing fleets, but also taking into account that your end-user seem to be expressing a pretty optimistic outlook. As we look to 2020 and as you continue to change your rental mix and reduce the average age of your fleet, is 2020 capex, is that going to go up and if you care to lay out a range that would be great. And then, I do have a follow-up.

Mark Irion -- Senior Vice President and Chief Financial Officer

Hi, you are still putting together 2020 sort of plans in detail. But our current expectation is that net capex will be in the same sort of range as what we're seeing in 2019. But more dramatic increase will decrease from here.

Bill Mastoris -- Robert W. Baird -- Analyst

OK. And then, my follow-up is and this one is for you Mark. This has to do with kind of the deleveraging strategy. Might we expect that we are going to see some debt pay downs on the ABL? Or is that deleveraging going to be a little bit more toward really the expansion of EBITDA? Or might we see some open market purchases of, let's say some of the bonds that you recently issued?

Mark Irion -- Senior Vice President and Chief Financial Officer

I think that there will be absolute pay down of ABL. So we are in a position where we expect to be generating free cash flow. So that will be applied to pay down the ABL unlikely that will be in the bond market in the short to medium-term.

Bill Mastoris -- Robert W. Baird -- Analyst

OK. Thank you very much.

Operator

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

Elizabeth Higashi -- Vice President of Investor Relations

Thank you, Kevin, and thank you all for joining us today. As always, if you have any further questions, please don't hesitate to call me and we look forward to seeing you all soon. Thanks a lot.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Elizabeth Higashi -- Vice President of Investor Relations

Larry Silber -- President and Chief Executive Officer

Mark Irion -- Senior Vice President and Chief Financial Officer

Ben Burud -- Goldman Sachs -- Analyst

Bruce Dressel -- Senior Vice President and Chief Operating Officer

John Healy -- Northcoast Research -- Analyst

Brendan Shea -- RBC Capital Markets -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Brian Sponheimer -- Gabelli Funds -- Analyst

Bill Mastoris -- Robert W. Baird -- Analyst

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