United Rentals, Inc. Q3 FY2020 Earnings Call

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. These uncertainties are 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.

Thank you, operator, and good morning, everyone. Thanks for joining us. I'll start with some observations that will frame out our discussion about the quarter as well as our customers and our markets. What we saw in the third quarter was a continuing recovery, albeit at a moderate pace. Our end markets are improving. And for the first quarter since COVID hit, the trends were in line with normal seasonality. That said, volumes were still down year-over-year. Near term, we have good visibility. Market activity looks positive, and customer sentiment is trending up. Longer term, we expect that future events, including a potential vaccine, are likely to have a significant impact on demand. I'm pleased that we delivered strong results in this environment. We have our arms around the things we can control, and we're showing discipline and agility in our daily operations. You saw that in our numbers where we outperformed our own expectations for the third quarter, and we did it safely. It's a different world out there right now. And every time our employees interact with each other, or with customers, or a supplier, their behavior is guided by our safety protocols, and those protocols help the team turn in another safe quarter, with a recordable rate below 1. And that was a hard-fought win when you factor in the fires in California, or the storms in the Gulf, or just simply the daily challenges of COVID. So kudos to the team for their effort. In a few minutes, Jess will take you through our results. But first, I'll touch on a few highlights. Number one is margin. Rental revenue was about 13% below the third quarter last year, but we made the most of it by controlling our operating costs. And I give the team full credit for that because it's their discipline in the field that helps preserve our margin. As volumes in the quarter went up, SG&A as a percent of revenue went down. So clearly, we're being vigilant with controlling our variable costs. Another highlight for the quarter is our free cash flow. We generated over $2 billion of free cash flow year-to-date through September, and our ability to produce significant cash in a downturn is a key strength of our business model. The return to normal seasonality isn't enough to offset the impact of the pandemic, but it's definitely in the right direction. And it gives us a good line of sight on the fourth quarter. Based on that current visibility and our third quarter performance, we've updated our 2020 full year guidance to reflect higher targets for revenue, EBITDA, CapEx and free cash flow. Now looking at our operating environment, the recovery in North America has been fairly broad-based, and customer sentiment continues to trend up. We see business confidence improving in our own customer surveys as well as many external indicators. Used equipment sales are another helpful indicator of demand. Our third quarter revenue from used sales was essentially flat with last year, and used pricing held up as well. So demand is holding steady. In fact, we sold 35% more fleet through the retail channel in the quarter compared with third quarter last year. That tells us that contractors are buying fleet they feel confident they can put to work. We're also encouraged by the industry's discipline on supply, which you can see in available third-party data. We applaud this because a disciplined approach will serve everyone's interest as the recovery gains steam. In July, I noted that rental volumes in all of our geographic regions finished the second quarter above the trough for fleet on rent we saw in April. In the third quarter, we continued to gain ground, with rental revenue increasing sequentially in 15 of our 16 regions, and that one outlier region was essentially flat. The standout verticals so far have been the ones we've been talking about: power, biotech, and pharmaceuticals, and we see solid activity from warehousing and distribution, data centers, hospitals and other facilities in the healthcare and technology sectors. There were some verticals that were a little less pronounced but still on a positive path. Food and beverage is an example of a vertical that's edged back to historical levels. By contrast, as I'm sure you know, all segments of oil and gas remain depressed, led by upstream. Looking specifically at construction, non-res markets as a whole showed mild improvement, while retail, hospitality and entertainment remained largely on pause. The individual verticals within non-res are still a mixed bag, but our core markets all have solid long-term fundamentals. There's also a broad range of new projects starting up across our operating landscape, and this was true in our second and third quarters, and we're seeing the same thing this quarter. This activity spans multiple markets, including manufacturing, automotive, and road and bridge work, as examples, along with other positive verticals I mentioned earlier. The team is doing a great job of getting in the door with these projects at an early stage. One side note worth mentioning is the possible shift to an on-shoring strategy by North American manufacturers. This year has highlighted the vulnerability of the supply chains, and on-shoring could be a way to reduce this risk. If that trend pans out, it could benefit two areas where our company is often the first call with customers in industrial construction and plant maintenance. Also, a word about our Specialty segment, which continues to be resilient overall. Our power and HVAC business, in particular, had another strong performance in the quarter. All of our specialty offerings are poised to capture incremental demand, and we're continuing to make strategic investments in the growth of this segment. Through September, we've opened a total of 13 new specialty locations, and we're on track with our plan for 15 openings for this year. I want to take a minute to talk about how we look at strategic investments because capital discipline is more critical now than it's ever been. I've mentioned that we're controlling our costs to benefit our margins, and we've reduced our full year CapEx significantly, but we haven't gone full stop on investing in the business. We're taking the long view. We're managing our capital to support our customers and to drive long-term returns for our investors. The ongoing expansion of our specialty network is one good example of that. As you saw in our guidance, we allocated some CapEx for fleet to address targeted areas of demand. Throughout all the disruption this year, we kept our eye on the big picture, and we're making sound decisions with the benefit of a robust balance sheet. I'll sum it up by saying all the things we've been doing right this year we're still doing right. That's the plan: execute well under all market conditions. With COVID, that means, first and foremost, protecting our people, serving our customers, running a tight shift, and doing all of this without limiting our capacity for growth. The strong third quarter results we reported show that the plan is working. We have higher expectations for the fourth quarter than we did three months ago, largely because we have more visibility into the near term. We’ll see how that plays out as we move into 2021. I'll close with some things that I can say with absolute certainty in what's been a very uncertain year. As I look around our company, I'm proud of the way our team has stayed together, and it's working safely. I'm glad that our operations have remained open to serve our customers because communities rely on these projects. I'm pleased that we continue to be responsive to all of our stakeholders. Finally, I'm confident that we have the right strategy in place to leverage our competitive advantages and convert our revenue into attractive returns. Every economic environment, weak or strong, has its opportunities, and this one is no different. We know how to use our strengths to make the most of any market conditions, and we did that on the downside of this pandemic, and we’ll do it on the upside as well. So with that, I'll hand the call over to Jess, and then we'll take your questions. Jess, over to you.

Thanks, Matt, and good morning, everyone. As Matt mentioned, we're pleased with our results in Q3, notably rental revenue that tracked to seasonal trends, as expected. The cost management our team delivered across the business was better than expected. We've generated significant free cash flow to-date and continue to strengthen our balance sheet. I'll speak to both in a bit, and also provide some comments on our updated guidance for the full year. Let's start with rental revenue for the quarter. Rental revenue for the third quarter was $1.86 billion, which is down $286 million or 13.3% year-over-year. Within rental revenue, OER decreased $259 million or 14.1%. In that, a 4.6% drop in the average size of the fleet was an $84 million headwind to revenue. Inflation of 1.5% cost us another $27 million, and fleet productivity was down 8% or $148 million on lower volumes. I'll note that fleet productivity improved by a healthy 560 basis points from Q2, mainly from better fleet absorption. Rounding out the decline in rental revenue for the quarter was $27 million in lower ancillary and re-rent revenues, or an 80 basis point headwind. Let's move to used sales. Used sales revenue was basically flat year-over-year at $199 million. The retail market continues to be quite strong for us, and we sold significantly more fleet through this channel compared to Q3 last year, with OEC sold up 35%. Used margins in the quarter were healthy as well. Adjusted gross margin on used sales was 44.2% versus 46% in Q3 last year. That change reflects softer year-over-year pricing, partially offset by improved channel mix. Importantly, cash proceeds, as a percentage of original cost, was a robust 51.4% on fleet sold that was, on average, 7 years old. Taking a look at EBITDA. Adjusted EBITDA for the quarter was $1.081 billion, down $126 million or 10.4% year-over-year. Here is the bridge on the dollar change. The impact from rental was a drag of $162 million, OER was a headwind of $168 million, offset by a combined $6 million of tailwind from ancillary and re-rent. Used sales were a headwind to EBITDA of $3 million, and other lines of business, together, were a drag of $6 million. Year-over-year, SG&A was a benefit to EBITDA in the quarter by $45 million, with the majority of that benefit coming from lower discretionary costs, including T&E and professional fees as well as lower bonus expense. Our adjusted EBITDA margin was very strong, coming in at 49.4%, up 90 basis points year-over-year. This reflects our continued commitment to aggressively manage costs. It was also benefited by certain one-time items contributing about $20 million to the quarter, including an insurance gain resulting from a flood event settled in Q3. Adjusting for the non-recurring benefits, adjusted EBITDA margin was flat despite a 12% decline in total revenue year-over-year. Flow-through, as reported, was approximately 42%. Again, adjusting for those one-time benefits, the resulting flow-through of just under 49% evidenced the flexibility we have in our business model to respond quickly on costs. Through the third quarter, we continued to bring delivery and repair in-house to reduce the use of third-parties. As a result, our overtime increased compared to Q2 but continued to be down versus Q3 last year. We continue to avoid discretionary spend where possible, mainly in G&A. A quick comment on adjusted EPS, which was $5.40, that compares with $5.96 in Q3 last year. The year-over-year decline is primarily due to lower net income from lower revenue. Let's move to CapEx. For the quarter, rental CapEx declined 49% to $432 million, bringing our year-to-date spend to $785 million in gross rental CapEx. Year-to-date proceeds from sales of used equipment were $583 million, resulting in net CapEx of $202 million. That's 85% lower than net CapEx at September 30 last year and reflects our continuing focus on capital discipline and fleet absorption given current rental volumes. ROIC remains strong, coming in at 9.2% for the third quarter. That continues to meaningfully exceed our weighted average cost of capital, which currently runs about 7%. Year-over-year, ROIC was down 150 basis points, driven by the decline in revenue. Turning to free cash flow, which, through the end of September, is a record for us. We have generated over $2 billion of free cash flow year-to-date, an increase of over $900 million year-over-year. With the majority of our cash flow dedicated to debt reduction this year, our balance sheet continues to be the strongest it's ever been. Net debt was down $1.5 billion to $9.9 billion at September 30. Leverage was 2.4 times, down from 2.6 times at the end of 2019. Liquidity remains extremely strong. We finished the third quarter with over $3.4 billion in total liquidity. That's made up of ABL capacity of just under $3.1 billion and availability on our AR facility of $165 million. We also had $174 million in cash. On October 15, we used the ABL to redeem our $750 million 4 5/8 senior notes due 2025. Our decision to do so included our views of continuing strength in liquidity and extends our next maturity on long-term notes out to 2026. Total liquidity, as of yesterday, October 28, was over $2.8 billion, and we expect that to increase to the end of the year, consistent with our free cash flow guidance. Speaking of guidance, I'll close with a few comments. We've tightened and raised the bottom of our total revenue range as our visibility increases, and we expect to see a normal seasonal trend in demand in Q4. We also expect used sales to remain solid. We've tightened our adjusted EBITDA range and raised our expectations for the full year, in part from the strength of Q3's results. Our gross CapEx guidance of between $900 million and $950 million is higher than our prior guidance as we manage fleet mix in support of customer projects. Finally, our free cash flow update continues to signal the strength and resiliency of our business model as we plan to generate over $2.2 billion in free cash flow this year and, in turn, plan to use the majority of it to reduce our debt. And with that, let's move on to your questions.

Our first question comes from Dave Raso from Evercore ISI. Please go ahead with your question.

Just trying to think about the fleet for next year. How should we consider the base case as of now? How do you view the size of the fleet in comparison to what you expect at the end of this year? Also, can you remind us about the balance between replacement capital expenditures? Additionally, what kind of used equipment sales do you anticipate?

Sure, Dave. This is Matt. As we look ahead to next year, we are currently in the midst of our planning process. We anticipate that our sales of used equipment will be similar to this year's volume. From that point, we will assess demand to determine if we can replace our entire fleet. Ideally, we hope to say yes. If that’s the case, we will evaluate the additional capacity we have in our current fleet to meet any increased demand. Depending on the strength of that demand, we will decide if we need to pursue growth capital expenditures. One positive aspect for us is our ability to remain flexible in our approach to capacity management, as demonstrated this year when we adjusted our expenditures by over $1 billion after identifying challenges mid-March. We will repeat this process in the coming year. We plan to reassess in the spring, by which time we expect to have a clearer understanding of demand. This flexibility gives us optimism about market conditions, while also equipping us to respond if they change. Although we haven’t yet made any commitments for 2021, if the economic recovery continues, we expect to replace the used fleet we sell at a minimum. We will monitor how demand evolves from that point.

If that's the case, unless there's a radical change in what you get for used values versus the OEC of that equipment being sold, if your base case is not thinking about shrinking the size of the fleet, wouldn’t that speak to gross CapEx of $1.6 billion or so? Because I think we've spoken in the past, roughly that's a replacement type number anyway. So it sort of seems to triangulate to that sort of the base case. Is that just a fair assessment when we think of the size of the fleet?

I think that would be the right way to think about a base case. Everything else would be demand-based. In a year like this year, we didn't even replace all the used sales because we had extra capacity existing. So we took that opportunity to take the fleet down as you saw. But we're not anticipating that next year. Once again, we won’t have to make those decisions until the spring, and we'll react to the demand environment.

Our next question comes from the line of Tim Thein from Citi. Your question please.

Matt, you mentioned the near-term visibility. Could you elaborate on that a bit, particularly regarding the branches? What are their overall visibility levels? How does that compare to this time last year? Are there any benchmarks you can share? We have significant questions as we navigate through this project pipeline, so what insights do you have from the branches about project activity and overall visibility?

Sure, Tim. As I mentioned in my opening remarks, we're hearing the same feedback that we're experiencing from our field leaders, which is that activity continues to incrementally improve with normal seasonal patterns. They're seeing that. The visibility question, frankly, if they thought they had more visibility than through Q1, I would worry about it anyway, and they're not pretending to it. It all depends on how the macro environment responds this winter. I think we will have a much better take on that from January, but near-term, their visibility is strong, which is why we've had the confidence to change our guidance. Beyond that, we're going to take the time we have between now and January to get a better look at how the world, specifically for us, how the U.S. and Canada respond to COVID. I’ll say that we're hopeful; this healing that's going on in the macro environment via green shoots and new projects that we're seeing outside oil and gas, most verticals are showing some growth or are maintaining the growth that we've seen since the trough we talked about in Q2. They’re encouraged, and I’d say cautiously optimistic is the best way to think about it.

Okay, I'd like to ask one more question regarding operating costs. Considering what you've learned this year about the cuts discussed in the second quarter call related to third-party expenses and delivery, how much of that do you think can be sustained as volumes improve? Essentially, how enduring are these cost benefits? I understand that some of it relates to travel and entertainment as well as discretionary spending, which may eventually return, but I'm really interested in the longevity and sustainability of the operating cost benefits you've achieved this year.

Yes. I think the term of necessity is the mother of invention is appropriate here, right? We thought about how we would really want to hold the team intact. When we get on the other side of this COVID tunnel, as we’ve been calling it, to ensure we have the ability to respond. We were able to do that through the in-sourcing, which you referred to. To give you a data point, our headcount year-over-year is only down about 3%. Our revenue volume for the quarter was down about 13%. We were able to do that without having to sacrifice margin because we took some of our most expensive costs, like outside hauling, third-party repairs, and we in-sourced. This way, we're keeping our people busy and, frankly, employed during a very difficult time. But we have the capacity to respond quickly as projects and markets continue to heal and grow. This is something I think is a silver lining through COVID that we'll utilize in the future. We have not put the math to it yet, the extent of how much we can vary our headcount keeping flexibility as demand increases. So I think that's a key learning for us that this in-sourcing opportunity is a great way not only to control that variable but to do it in a more efficient way.

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

This is Ashok Sivamohan on for Jerry Revich. The 51% recovery rate in the utilization environment was a pleasant surprise. What would you attribute the strength in the used market to? And why did the used market recover ahead of the industry utilization cycle?

So this is Jessica. The strength that we have here at United Rentals is that a large portion of our used sales are in a retail market that are essentially sales to our customers, right? We continue to see strength through that retail channel. As a matter of fact, we had 35% more volume move through that channel this Q3 versus last. The strength of that is really indicative of our customers needing that equipment. The continuing recovery that Matt also mentioned that we're seeing pretty broadly across the majority of our end markets translates to the strength that we're seeing in used sales, which is directly attributable to that same recovery pace throughout the business.

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

I just wanted to go back to the expense and cost question again. Really good job on the quarter here. It looks like the EBITDA margin is going to be down quite a bit year-over-year based on the midpoint of your guidance. I'm trying to tie a couple of these things together, where you're talking about some of the in-sourcing is a permanent change and stuff like that, but it looks like margins are going to be kind of down meaningfully year-over-year, even though they were just about flat year-over-year, if there's anything I'm missing there?

Seth, I want to emphasize two points. I've mentioned this before, but it's crucial this quarter not to rely solely on the midpoint. We've conducted extensive analyses on potential revenue outcomes and their implications for EBITDA and cost trends. So I'm reiterating the importance of not just focusing on the midpoint. Additionally, in the fourth quarter of last year, we experienced a favorable shift in bonus expenses. This will affect our fourth quarter margin this year, resulting in a decrease of approximately 50 to 70 basis points if we consider the midpoint revenue. This factor will also impact Q4.

Sure. Okay. That's helpful. And then just a follow-up on the specialty business. We've been hearing more from national players talking about getting bigger in the specialty space. Can you just characterize what you're seeing in the specialty market concerning more competition or just asset valuations going up for M&A? Just kind of characterize what's happening in that market?

Sure, Seth. We're continuing to feel very strongly about our specialty business; the performance, as well the resiliency of the businesses have been doing great. They've been performing better than the business overall. This was all part of the strategy and expected. We do hear a lot of people talking about getting into the specialty business, and we understand what that dynamic could cause. We're still seeing positive trends in specialty. The performance tells us there's either more penetration opportunity, or the competition is not moving as quickly as it may sound like. Either way, we're very pleased with what we're doing from a specialty perspective. Last year, they had some transient issues with margins that we discussed. They're doing this in a tough environment with improved margins.

Our next question comes from the line of Mig Dobre from Baird. Your question please.

If we can, I'd like to go back to the guidance. I'm just trying to understand the moving pieces here as well. Can you maybe comment on how you're thinking about equipment rental revenue specifically from a sequential standpoint, relative to used?

Yes. Is your question from a year-over-year comp perspective? Or what exactly do you want to get at, Mig?

I'm trying to understand how you're thinking about revenue sequentially rather than year-over-year, right? I recognize that you commented on seasonality. But, obviously, there are a lot of moving pieces here as we're dealing with yet another big spike in infections, and activity is choppy in some end markets like you called out. So I'm trying to understand specifically here, are you thinking that this line item can be flat sequentially? Maybe a little bit down? How do you think about it?

We would expect Q4, in any environment, over Q3 to be sequentially down. You've heard us talk before; once we get around mid-November, we start to see what we lovingly and I'm going to use that tongue in cheek called the turkey drop. For the 30 years I've been in this business, I've never quite gotten comfortable with it. A lot of fleet will come off rent during the last half of the quarter. Therefore, we always expect sequentially that Q4 revenue will be lower than Q3 revenue by a little bit. When you look at our change in our guidance, we're actually overall feeling better than we did a few months ago for total rent revenue for the year. I think that sequential dip would be normal seasonality, and part of what we've been discussing is that normal seasonal trend. If you think about the increase in CapEx, that's for specific projects coming out of the ground here in Q4. We view that as a positive sign that rent revenue will continue to trend with normal seasonal patterns.

Okay. I appreciate that. And then a follow-up on the cost side, given the way you're kind of thinking about equipment rental revenue. As far as the cost of equipment rental sequentially, should that follow revenue as well? Or are there some inflationary items that can impact the fourth quarter?

I would say that’s just tactically right, as a lifelong operator. One of the interesting things in Q4 is when all that fleet comes off rent, you’re going to still have an enormous amount of activity, although you're not increasing your volumes of billable revenue. You’re going to get all that fleet back and you're going to repair it when you get it back. There is a little bit of cost disconnect in Q4 to that dynamic, but nothing out of the ordinary. Nothing that we haven't managed for years here, and nothing to call out specifically. But it's just important to think about saying the cost would drop to the same level of revenue. It's usually not quite accurate in Q4, but once again, nothing to call out, nothing out of the ordinary.

Okay. Understood. And if I may one more. If we're looking at your fleet, the actual number of units came down maybe, call it, 30,000 through 2020. Can you provide some perspective in terms of what the mix of these units were? I mean, was there maybe a little more concentration in earthmoving or aerials? Anything you'd call out here would be helpful.

I wouldn't say that the fleet profile has changed significantly overall. We continue to outspend our way in specialty products versus general rental. Outside of that, the mix was general rental. It will vary a little bit depending on projects and needs, but nothing material that I would call out.

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

Just to clarify with the base case you talked to David Raso about reflects in terms of market activity year-over-year next year. Does that base case assume a modest decline in the market? Or flat or some modest growth? Or really it doesn't assume anything at all for the market? Just wanted to clarify that, please.

Sure. The latter. To be clear, we’ll use the replacement CapEx as a starting point, then that will flex to meet demand. First, with existing capacity. In this year, that existing capacity we had was greater, and we had more opportunity that told us that we didn’t need to replace all that sold fleet, going one direction. The other direction is filling any incremental demand beyond the existing fleet size. Thus, keeping fleet constant is our starting point. Whatever gap we couldn't fill with existing capacity, we would then get incremental capital. It's not a forecast usage tool; you should think about that in a continually improving macro environment. That's illustrated through the replacement capital number.

Got it. I wonder if you could just talk about the lessons learned in the post-election period in 2017? And how you manage the fleet? I know macro environments are always a bit different. But I'm curious, we're going to be coming up against another post-election period. There may be some optimism on infrastructure. Anything that you learned last time that you're trying to incorporate now and over the next few months as you plan for what you may or may not need to do?

I would say, from a political perspective, outside of some type of infrastructure funding, which I think has bipartisan support, the issue there is how they're going to get funded. Outside of that, we're not really watching that political environment from a macro perspective too much. We understand there may be winners and losers in certain sectors, but the impact on our business will be that we will shift the assets to the winning verticals. That's part of the resiliency of our model, which is the flexibility of very fungible assets. Personally, I think how we get through the pandemic will have a much bigger impact on how fast the economy recovers than the political environment. We have the time to wait and see and react.

Our next question comes from the line of Chad Dillard from Bernstein. Your question please.

It's probably fair to assume that we're going to see a shift in non-residential construction away from the commercial side, probably more towards data centers, renewables, warehouses. Just trying to understand how your equipment needs change? If you could give some color on the classes of equipment, the mix between general versus specialty mix, that would be super helpful.

Yes. I would say that shift within non-res wouldn't be as pronounced there. You might get a little heavier to some larger scissor products versus smaller electric scissors and maybe a shift in forklift usage. These are businesses and end markets we’ve been supporting for quite some time. I wouldn't view a huge profile change from our asset base. Specialty is all about penetration. I see infrastructure being a major area, and with turnarounds coming back in refineries, that could be more opportunity for our specialty business along with our general rental. I wouldn't say that shift within non-res means a huge fleet profile change; it could be a bit more industrial changes giving us some overweighted opportunity for our specialty products, because the industrial end markets tend to use the sole source broader fleet usage. Petrochem has really been a challenge this year, led by upstream. The rig count for Q3 was down 73% for upstream. This has been the biggest challenge within a challenging petrochem environment. The good news for us is it's kind of bottomed out and constitutes only about 2% of overall revenue. We're not counting on or expecting a recovery there anytime soon. If it comes, we'll measure how quickly we'll react and how we'll react with specific key customers that hold bigger value for us. I'm not chasing the oil rush and I don’t anticipate us doing that again. Downstream is totally different and they've been challenged, but we're very well positioned with these refineries; as the world opens up again and the need for their output increases, we’ll be poised for future opportunities. Whether that happens and at what point in 2021? We don’t yet have a position on it. I can tell you that fourth quarter turnarounds/shutdowns have been delayed again as people are really conserving cash and trying to control costs. We’ll be patient and see this as an opportunity. Excluding petrochem, industrial has been flattish and moderating, which is a better story once we take that headwind out. I mentioned the potential for offshoring as another leg of growth we could look at to offset challenges in the industrial end market.

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

Matt, I have a short-term and a long-term question. In the short term, you've made significant progress on adapting your cost structure and industry pricing, which has been stable according to the PPI and other indicators. Based on past downturns, when do you believe you can confidently say that this situation has been managed differently? It seems like prices should have already dropped, but they haven't, so I'm curious about your thoughts on when this will be definitively proven. For the long-term question, should we anticipate ongoing strategic initiatives? Looking three years ahead, will you be entering new specialty sectors? Is there any update on your progress in that direction?

Sure, Rob. On the first part of your question, that is a wildcard. This is where our lack of visibility of trying to time out when this dislocation, downturn, pandemic future term ends. I say that’s still an open-ended question for us. I think we’ve been seeing signs of resiliency: the used sales volume holding up, still seeing new projects starting here in Q4 as there are still concerns about when the broader economy will accelerate. We feel cautiously optimistic because we’re seeing good signs, but they could all pause and go back. We’re positioned with flexibility either way, with no template nor boilerplate for a pandemic-related downturn to reference off of. Our M&A pipeline activity keeps moving. We continue to focus on strategic opportunities that make sense for us, going through rigorous evaluations on the timing and financial sense of it. For the past six months, it hasn’t been a large focus, but our M&A team is still taking inbound calls and will continue to do that. We lean towards anything we can do to serve our customers with more products and services, broadening our value proposition.

Our final question for today comes from the line of Scott Schneeberger from Oppenheimer. Your question please.

I guess, I'm curious about your fleet productivity metric. Could you just give us some high-level thoughts on the cadence of that and inflection? And some of the considerations, perhaps how you're seeing smaller competitors behave in this environment that we're in?

Scott, hi, it's Jess. We're encouraged as we think about fleet productivity in an environment where this healing continues and the recovery, a moderate recovery extends into 2021, as we talked about fleet productivity getting better, right, and starting to turn, particularly in the back half of next year. It may come a little sooner, depending on how that recovery works through, but we are encouraged that with a focus on continuing to have better absorption with each quarter that passes, fleet productivity will improve as 2021 goes on.

And then as a follow-up, just on the fleet aging, we're in that type of environment. Just curious, your comfort level in how high you can go on average? I know what is announcement by asset consideration, but efficiency efforts and advancements you've made in repair and maintenance over the years, does that make you comfortable with demand at the moment?

When we consider how much we've focused on the fleet, the positive aspect is that due to the volume of used sales this year, we’ve managed to extend the rental useful life of our fleet, resulting in about a 5-month increase in fleet aging. Given the challenges we've faced, this is actually better than we anticipated. We always aim to have at least 12 months of buffer in any category, and surprisingly, we haven't even had to utilize half of that in such a challenging year. We believe that if we needed to repeat the circumstances of 2020 in 2021, we could do so from a fleet age standpoint without a significant rise in repair and maintenance costs. This approach to managing our assets throughout their lifecycle is crucial.

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

Thank you, operator. To everyone on the call, we appreciate your time. Thanks for joining. I'm glad we had, what we feel, is a positive story to tell. Our Q3 investor deck has the latest updates, including some key ESG data from our new Corporate Responsibility Report that we released last week. Please take a look at that. As always, if you have any questions, feel free to call Ted. Until we talk again in January, stay safe, have a good holiday season, and look forward to talking to you soon. Operator, you can end the call.

Thank you. Ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.