Q1 2021 Herc Holdings Inc Earnings Call
Good morning, welcome to Hook Holdings first quarter 2021 earnings conference call.
This happens it will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Elizabeth is that true.
Please go ahead.
Thank you Kate and good morning, everyone. Thanks for joining us.
Welcome to our first quarter 2021 earnings conference call.
Earlier today, our press release presentation slides and 10-Q were filed with the SEC and are all posted on the events page of our IR website at IR and got hurt rental dot com.
This morning, and I'm joined by Larry Silber expenses.
And Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mercury on Senior Vice President and Chief Financial Officer.
And I will review the first quarter, our view of the industry and our strategic outlook the.
And the prepared remarks will be followed by an open Q&A.
Before I turn the call over to Larry There are a few items I'd like to cover.
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 three of the presentation for a complete fleet Harbor statement as well and risk factors section of our annual report on form 10-K per the year ended December 31 and 2020.
In addition to the financial results per senses 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 equivalents can be found and the conference call materials.
Finally, a replay of this call can be accessed via dial in or through webcast on our website replay.
Replay instructions were included in our earnings release this morning, we.
We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call and I'll now turn the call over to Larry.
Thank you Elizabeth please turn to slide number four.
We're off to a great start in 2021, what a difference 12 months makes just a year ago, when we reported and our first quarter like other companies, we pulled our guidance due to the uncertainty of the potential impact of the COVID-19 pandemic.
And now a year later, we've continued to execute and grow the business and have the confidence to increase our full year guidance. We provided just a few months ago.
Our outstanding team of professionals, representing a company with a history of over 56 years and the equipment rental industry.
The purpose and that drives our 4800 employees is to help our customers and communities to build a brighter future.
And do this every day by staying focused on serving our customers safely and efficiently and effectively.
During the first quarter, we added three new Greenfield locations, and Pittsburgh, Pennsylvania, Santa Fe Springs, a suburb of Los Angeles, California, and Houston, Texas and.
In April we acquired two independent locations and the San Francisco Bay area, increasing our location count to 15 and that major metropolitan area as of today, we are operating 282 locations across the United States, and Canada, and 39 States and five Canadian provinces.
Now please turn to slide number five.
We entered the year with our fleet well positioned to meet anticipated demand and saw the normal seasonal improvement and volume on rent during the quarter.
As expected our volume did not quite returned to prior year levels and rates were still down slightly but we did generate rental revenue growth as a result of strong contributions from our specialty and entertainment businesses with.
With the return to positive rental revenue growth, we continued to excel and our strategic focus on operating leverage and delivered delivering excellent bottom line improvement.
With over 200% flow through we drove more than 25% year over year growth and adjusted EBITDA net.
The significant beat and not only exceeds our Q1 and 2020 results, which were mostly pre pandemic, but also Q1 19, which puts us on track from a record year.
Our strong first quarter performance along with the steady demand, we are seeing and our end markets have us confident and our ability to significantly increase our full year adjusted EBITDA guidance from a range of $730 million to $760 million to a new range of $800 million to $840 million we are.
And looking for a record year in 2021.
Stanley beats, our previous record in 2019.
Now please turn to slide number six for a brief overview from our first quarter financial results.
Equipment rental revenue was $404 million and the first quarter and increase of three 6% or $13 9 million compared to the prior year.
This increase was driven by positive mix as our <unk> solutions business continues to take market share and our entertainment business became a strong tailwind.
Adjusted EBITDA grew by 25% and prior year, which was a record first quarter from the company and our focus on operating leverage improved adjusted EBITDA margin by 680 basis points, we reported net income of $32 $9 million or $1 nine per diluted share and the first quarter compared with.
A loss of $3 $7 million or <unk> 13 per diluted share and last year.
As you can see from our results. We are indeed off to a strong start in 2021. This is an exciting time for teamwork and we look forward to break more records as the year progresses.
For more about the details of our operations and the quarter, Here's our chief operating officer, Aaron Birnbaum. Thank you Larry before I start my discussion of our results I would like to take this opportunity to both congratulate and thank all of our team members after and incredibly challenging 12 months, our team continues to perform effectively and professionally.
First quarter results speak for themselves and we greatly appreciate the contributions of each and every one of our team members. Congratulations team hurt now please turn to slide eight.
The strategic investments, we continue to make to diversify our customer base and industry verticals really paid off this quarter. Our pro solutions business continued its growth trajectory and took market share and the first quarter of 2021 with the growth driven by successful focus on providing specialty and E solutions as well as supporting the Remy remediation from weather.
Related events, such as the winter storm that hit Texas and the surrounding states are pro solutions revenue increased by double digits for the last four years and generated another excellent quarter and Q1 up by over 30%. Our entertainment business has turned from a headwind to a tailwind we remained focused on our customers and opportunities during the.
<unk> shutdowns and entertainment has now exceeded pre pandemic highs and will be a growth driver for years to come our core business experienced a normal demand and seasonally impacted first quarter and we benefited from solid operating performance and our regional operations. We saw early strengthening specifically and our northeast Carol.
<unk> and southeast markets, and our South Central region and successfully integrated our December acquisition of champion rentals, we will continue to leverage our operational capabilities to execute our strategy and take advantage of opportunities and our end markets now please turn to slide nine.
As a provider of essential services. Our most important commitment is focused on health and safety. We will continue to enhance the wellbeing of our team and by investing and training and operating a safe environment for our employees customers and communities. We continue to adhere to the CDC guidelines and all of our operations and and business travel and we are encouraging our team.
Members to be vaccinated.
We're also and the process of implementing a new health and safety management system. This year, which will help us record track and review, our health and safety performance, even more efficiently and effectively as.
And as you've heard us talk about various safety initiatives one of our major internal safety programs focuses on perfect days that is with no osha recordable incidents no at fault motor vehicle accidents, and no dot violations and Q1 2021 on a branch by branch manager measurement our branch operations achieved nine.
6% of days is perfect. We're always striving for 100% perfect days and our commitment to safety and means continuous focus through communications and training and it also means supplying the team with the equipment that will help and perform efficiently and safely part, particularly in their daily driving activities. Please turn to slide 10.
And.
Our fleet composition at OFC is on the left hand side of this slide total fleet was $3 63 billion as of the end of the first quarter about four 6% lower than the end of Q1 2020, we continue to invest and our specialty fleet, which includes pro solutions and pro contractor and now accounts for 841.
$1 million of always see fleet about 23% of our total fleet as of the end of Q1 2021.
<unk> solutions and entertainment were important growth contributors for us this quarter.
<unk> drives a more profitable return and contributed to a dollar utilization improvement of 290 basis points to 38, 6% a record for the first quarter on the right hand chart you can see OCC fleet expenditures in Q1, 2021 or $117 million, a slight increase from our first quarter and <unk>.
And then 20 fleets disposals were $111 million and the first quarter compared to $110 million and although we see sold last years comparable period. Our police department has done a great job getting in front of what looks to be a tight supply market for new equipment from the Oems we have all of our 2021 purchase orders placed.
And delivery scheduled to arrive over the next several months, we have not experienced any material increases and equipment costs over prior years. The average age of our disposals was 84 months and the first quarter equivalent sale proceeds as a percentage of OCC returned to pre pandemic levels at 40% with strong demand for used equipment.
And our refocus on retail and wholesale channels of disposals, Please turn to slide 11.
Our diverse customer mix with a broad national account and local customer base is core to our strategy. The specialty business drove growth in Q1, our entertainment business drove growth in Q1, and our other segment and major industrial customers and utilities and energy healthcare and warehousing manufacturing and general construction are gearing up and look to.
Supported growth in upcoming quarters, where we experienced strong seasonal demand and we're focused on high growth segments of the economy and our end markets are showing the momentum to generate a strong recovery in 2021, and now I will pass the call onto Mark.
Thanks, Darren and good morning, everyone.
Our first quarter results continued to demonstrate that we are a business of scale and a successful strategy that is capable of performing in all environments and it is clearly performing exceptionally well and the current environment.
And we're really pleased with our performance in Q1, our results exceeded our own expectations and based on current performance and the trends. We are seeing we've adjusted our outlook for the rest of the year and race day out guidance.
And our results speak for themselves, we're rapidly expanding our margins and are executing on our strategy to provide excellent customer service and premium equipment to our customers throughout North America for both large and small projects.
Our focus on margin improvement over the last couple of years continues to pay off as.
As the economy recovers, we have the capital available to accelerate growth and have a track record of utilizing operating leverage to accelerate profitability.
Slide 13 shows a summary of our first quarter results.
Equipment rental revenue increased three 6% from $396 5 million to $400 4 million and the first quarter of 2021, primarily due to improved mix and flattish pricing. We will discuss these drivers on the next slide.
We continue to deliver solid profitability with adjusted net income and the first quarter of 2021 of $33 3 million or $1 10 per diluted share compared with adjusted net income of $1 1 million or <unk> <unk> per diluted share.
We continue to execute on our operating leverage model driving an increase and adjusted EBITDA of 25% from revenue growth of only 4%.
This drove an increase and adjusted EBITDA margin of 690 basis points to 47% and the first quarter a historic high.
EBITDA was $176 9 million with flow through of over 200% Rebit margin increased by 570 basis points to 43, 8% and in the first quarter.
For EBITDA margin for the quarter was also the highest and our history.
On slide 14, we highlight pricing and utilization trends by quarter.
The graph on the upper left illustrates our year over year pricing with the latest quarter, reflecting average rates down by only 30 basis points compared to last year.
Looking back we are quite pleased with the nominal decline and rights that we managed through the challenges over the last four quarters and thanks to flattish pricing in 2020, we will swing to positive rates. This year, we continue to benefit from our industry, leading pricing tools and the discipline and professionalism of our sales.
<unk> team.
The fleet adjustments made by the industry as a whole and the estimates we announced being.
On lead times per fleet orders suggest that we're in an environment that is likely to support positive pricing in 2021.
And our rates tuned and positive year over year and match and we expect rates to remain positive for the rest of the year.
Although utilization was 38, 6% and in the first quarter, a dramatic improvement of 290 basis points from prior year.
And part of this improvement came from the change and mix of our business with strong growth and the pro solutions and entertainment businesses during Q1.
Q1 is seasonally the strongest quarter. This is the toughest quarter per dollar utilization. So this is a big move up for us and fits us up for a record year in terms of seat utilization and returns going forward.
The mix impact is also apparent with rental revenue is continuing to climb the steps, but still down by one 7% year over year.
So rental revenues grew by three 6% and the quarter and the drivers of these results were rates down by 30 basis points and volume down by one 7% offset by a positive contribution from mix of five 6%.
The significant contribution to revenue growth from mix may decrease slightly going forward, but will remain positive and with the seasonal lift from rate and volume we are looking to accelerating growth in rental revenue.
Couple this with our operating leverage focus and our profitability also continues to lift.
On slide 15, we see adjusted EBITDA for the first quarter was $184 6 million and increase of 25% or $36 9 million compared to $147 $7 million and 2020 and.
A key focus on operating leverage and improved profits on the sale of rental equipment contributed to the strong improvement.
BOE decreased $6 2 million and compete with the first quarter of 2020 savings and personnel related expenses.
Rent and maintenance costs were the primary contributors.
We reduced SG&A expenses by $4 3 million, primarily to lower bad debt and travel expenses and.
Adjusted EBITDA margin and the first quarter was 47% and increase of 600 by 680 basis points year over year.
Primarily due to continued focus on operating leverage with revenue growth on top of cost control.
We also generated some gain on the sale of equipment this quarter with a focus on the retail and wholesale channels, improving our proceeds contribution as a percentage of OCC.
The EBITDA margin improved 570 basis points to 43, 8% and flow through was 201% and the first quarter, which highlights our execution on operating leverage.
This chart highlights and impressive change and our margin profile over the last few years and especially in the last quarter we.
And we've been focused on margin improvement for a long time and learned more lessons in 2020 in terms of our operating leverage going forward, we will see cost increases connected with increases and reasonable volumes and revenue, but expect our costs to run at similar or slightly smaller percentage of rental revenues.
We start to roll over some unusual base of fix and Q2 and Q3 that had some unnatural COVID-19 shutdown impacts in 2020.
This will affect our short term flow through somewhat and we are focused on operating leverage once we get past. These COVID-19 quarters will continue to flow through or at least 60% of our rental revenue growth to EBITDA each year and look to continue to expand our margins.
On slide 16, we generated $73 million of free cash flow after net rental capex of $51 million and the first quarter, we are guiding to $400 million to $450 million and net fleet capex for the full year. So the first quarter is not fully reflective of the cash expenditures that we will incur and the second and third quarters.
Strong results from operations also contributed to the reduction in net leverage which decreased to two two times as of March 31, compared with $2 seven times a year ago.
We are now and to the lower end of our guided range of two times to three times net leverage.
Total debt was $1 6 billion as of March 31st a reduction of about 67 million from December 31st 2020.
We had total liquidity of over $1 4 million as of March 31 comprised primarily of availability on our ABL credit facility and cash and cash equivalents of $32 9 million.
With no near term maturities, we have ample liquidity for 2021 and into the future and ample capital to grow our fleet to support rental revenue growth and to the new cycle.
We remain conservative and our capital allocation and will apply free cash flow to pay down debt after making strategic investments and fleet growth and new locations and and strategic M&A.
Our continued focus on a strong balance sheet and a consistent improvement and operating margins also resulted and upgrades and net debt ratings earlier this year SMP and moodys raise the ratings on our corporate debt, which is now rated a solid BB minus and B plus.
On slide 17, we share the latest industry forecast.
It's a bit difficult this quarter discretely, what looked to be quite tip. It in markets with the strength of our results.
Looking at the chart on the top left.
And is forecasting industry rental revenues to grow at around 2% from 2021.
We are close to double that growth rate in Q1, but this is not inconsistent with past experience rental companies of scale with broad rental fleets and a well diversified customer base have consistently grown faster than the rental industry in general and as we have seen in Q1 Covid.
The company and scale with a well diversified mix of customers.
So to speak that.
And I re forecast will end up a bit like for 2021 as it's typical for the growth rate in Q1 to accelerate into the rest of the year, we and favorable seasonality kicks in.
We're also looking to be and the early stages of a receding cycle and tight supplies of construction equipment also tend to benefit the rental industry.
In terms of end markets non residential starts were up slightly and it does feel as though this level of activity will be supportive and 2021 and our equipment is fungible and we will rent to wherever the activity is so the level of activity tends to drive rental demand and rental demand does not necessarily impacted by struggles and one or two pockets of non resin and.
<unk> speed.
Nonresidential spending is only about 40% about business. So the diversification of our revenue base over the last couple of years is also a big benefit and the current environment.
As a result, the majority of our business is not directly connected to nonresidential construction and <unk>.
Specialty business is a real strategic benefit and we look to continue to gain share and grow that business and <unk>.
And also looks to be a growth engine for the next couple of years with our investments and supporting content production and paying dividends and the live events business.
And this is also likely to rebound later this year.
Industrial is still a bit soft and pockets, but there is pent up demand from maintenance and turnarounds and a lot of plants and this segment should also rebound in 2021.
It may not be fully showing up and the macro stats, yet having enough great day to survive. The last three cycles. It sure feels to me like we might be and the beginning of the next up cycle.
No matter, where the economy has put us in the current cycle. The hood teams, certainly executed well and Q1 and took advantage of all the opportunities that came our way when we put together our 2021 plan and formulated our initial guidance that we rolled out. This February we were looking at Q1 2020 of their toughest comp being pre pandemic for the most part.
And.
And let me do we meet our own expectations and a big way, but the way we beat our expectations meant we had to sit down and sharpening our pencils to rethink our expectations for the year.
Q1 is our seasonally weakest quarter.
And it's typically list and 20% of our annual results.
Our performance in Q1 translates to a big beat and our annual projections for the year.
We improved dollar utilization by 290 basis points.
Dollar utilization doesn't go backwards as we move into seasonal strength. So we needed to re forecast rental revenue for 2021, and now looks like we will generate record rental revenue with lease fleet and we utilized in 2019.
We generated 600 and by 80 basis points of the EBITDA improvement and Q1, taking margins to 47%.
Margins also and I'll go backwards as we head into the seasonally strong quarters of 2021. So it looks like we are on track for a record year of EBIT da margins the.
And the magnitude and makeup of the Q1 beat US has us forecasting and really good year and we are now taking our guidance up to $800 million to $840 million.
Net greensville equipment Capex guidance is unchanged at $400 million to $450 million.
We're very pleased with the performance we have reported for the quarter and we're very excited for the poll.
<unk>, we anticipate over the next few years as we get into a hotspot.
With what looks to be a new industry up cycle.
With that I will turn the call back to Larry.
Thanks, Mark and now please turn to slide number 19.
This slide shows how far we've come over the last five years and closing the gap with our industry peers.
Our first quarter adjusted EBITDA margin has increased from a low of 25, 1% and 2017% to 47% and 2021.
EBITDA margins or even better and a cleaner comparison with 2021 EBITDA margins of 43, 8% and improvement of 570 basis points over the prior year.
As you can see we've improved our net leverage substantially since we went public in 2016, reducing net leverage from four one times to two two times.
As we build into what appears to be a new industry up cycle, we intend to focus on topline growth and operating leverage our strong free cash flow provides liquidity for new growth initiatives.
Our leadership team is comprised of seasoned industry veterans and we intend to take advantage of our scale and customer service capabilities to continue to expand our footprint and penetrate our larger markets and rental equipment market is huge and continues to be fragmented there are plenty of rental activity.
To target.
We are committed to growing our market share and closing the gap with our larger peers.
And thank you and now operator, please open the lines for questions.
We will now begin the question and answer a question to ask a question you May press five and one on your cash Stonestown.
And the speakerphone, please pick up your handset before pressing the keys.
And your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Ross Gilardi from Bank of America go ahead.
Thanks, Good morning, everybody.
Good morning Ross.
I just wanted to.
Just to run some quick math by to see if my my logic is correct and your fleet out and oases down 5%, but fleet on rent down only one 7%.
And that imply your time Ute is actually up like 330 basis points year on year are there other factors like mix that are you moving that number around and if that's the case could we see rates up.
Greater than.
Probably I would think most investors are assuming up 1% and 2% or something this year, but it seems like the tightness and the market is paving the way for rates to perhaps outperform expectations and I just.
And I wanted to get your take on what I just said.
Yeah. Good question, we normally don't comment on time mute, but let's.
And certainly Directionally and what Youre, saying is accurate.
And Mark you may want to comment on the margin.
Yes.
You're right, there's a mix component and there, but it is directionally up.
In terms of rate, yes, no we've swung positive in March.
A slight decrease in 2020, so it's not likely to be a big increase in 2021 also early in the year.
But positive trends and yet to be seen what the.
And the tightness and fleet is likely to do to rate as we go through the year also early in the year to see as sort of tightness and fleet. So the indications are out there, but it is a seasonally impacted quarter and as we get into the seasonality.
And the back end of the year, then that should show up.
Okay, and then maybe a little bit more color on the decision not to raise the capex outlook unless unless the gross versus net formulas moving around a little bit.
And just given the strength and your business and just curious could you get more fleet and time for the season. If you wanted it or are the lead times as two extended and this equipment is not available. Yes look I think we are well positioned and we placed our capex early.
Last year and.
We're well positioned to receive that.
I think we're at a point, where we want it we still have some room to drive up our utilization so we'd like to continue to drive utilization.
And you are correct I think anything going forward now and Youre, probably looking at late in the year and receiving gear and.
And Theres, no sense and receiving gear and in December.
And Thats a seasonal seasonal time when gear comes off rent are and you may want to further comment on the fleet.
Thanks, Larry I would just echo what you said mostly.
And get our orders and early as we communicated as we feel pretty comfortable as we go through that and maybe part of the year and.
And so like we're well positioned for this year specifically.
Additionally, we have sort of changed our focus on used equipment Ross.
And we've sort of shying away from the auction channel and focusing more on retail and wholesale and that will naturally slow down.
And the disposals cycle a bit.
Okay, and then just lastly, guys I wanted to ask you about this and our entertainment business because <unk> seen a real excited about it and it sounds like it's.
Amped up quite a bit can you give us a little more color about that I don't think youre talking specifically about the live events business specifically.
Right.
Yes, a little more color there and did you say your pro solutions business was up 30% year on year on the first quarter I'm not sure if I heard that correctly.
This error and again, yes, the product solutions business for the quarter was up 30% year on year and the entertainment business as you recall from.
Last year, it really went to zero during the pandemic and its come back very very strong the team did an amazing job tour and the pandemic phase to build the relationships and and we came out really strong and the first quarter with the entertainment business. So as we said we are that those revenue levels are high.
And then they were a year ago before the pandemic manifested. So we're excited by what the team has done and our entertainment Division and.
We expect a lot more of that as you as we all know the content the content traced out there a lot of people want new content. So we're benefiting from that.
And we can finish.
Yes, one last thing we continue to invest in and that segment as well too.
Fueled the growth.
Okay. So it's more like sit more filmed entertainment as opposed to just live events, which are coming back, but it <unk> seem like they're a long way from where they were at least here and the northeast at the moment at the moment live events are not back. There is there may be later in the year. There is talk about that but what we're specifically talking about Q1 is.
Television film and commercials, Okay got it thanks, so much guys.
Thank you thanks Ross.
Our next question is from Rob Wertheimer from Melius Research. Please go ahead.
Hey, good morning, everybody good morning, Robin and Ryan.
So good. Thank you I'm not sure my questions are all that different from from those Ross.
A little bit of a crystal ball or your experience versus past years, how does this year and shape up on starting on fleet tightness on utilization and one of his time and disclose I understand but.
Are we starting out average tightened a little bit more and then as availability of equipment.
Less than in prior years, and the worst and we set up for at least the potential for a.
A tighter summer then sometimes the case. Thank you, yes look I would say for sure and we're starting out a little tighter than maybe we have in past years.
And we use the end of the year last year to dispose them a fair amount of fleet.
To purposely and tighten up the fleet going into this year and knowing that we had a fairly sizable growth capex spend coming in.
Beginning the end of Q1 into Q2 and Q3.
And so it was tighter and that was purposely done.
Had some room to tighten up and.
And then coupled with the we did have surprisingly strong start.
In Q1 with with our pump solutions business.
And by the EMA.
And with Texas saw a freeze and the Texas area and the surrounding states and then the entertainment business and our and just discuss sort of.
Picking up a little corporate.
And as far as fleet being tight.
<unk>.
I think the industry fleet and is tight because of availability and supply chain and startup, but that benefits from rental industry in terms of we have $3 $6 billion of fleet on and we have and available and that gives us the opportunity to address those areas were where supply might be limited from the <unk>.
Manufacturing standpoint, we are not in a position, where we're where our company will not experience.
A shortage of gear and we're in good position and receive all of the gear and we have on order and utilize our gear, but yes. There is.
We are hearing it.
And from all of the Oems and there is a supply chain and.
Tightness.
Great. Thanks, Mike.
Yes.
Our next question is from day Roderick from Goldman Sachs Go ahead.
Yes, hi, good morning, everyone.
Good morning, Harry.
I'm wondering if you could just talk about the sequential cadence.
Our pricing and nice to hear that pricing was up year over year, a mark and <unk>.
March.
I think to get that pricing would have to be moving up 50.
<unk> 50 to 100 basis points in March versus February is that the cadence that you're seeing and how is that cadence and pay April.
Without getting into sort of too much monthly sort of granularity you can kind of see it you know and the chatter on page 14, and we've been picking up.
A few basis points.
A quarter going forward, so and its typical flow for pricing to sequentially improve and to match off the fear of anyway.
As you move through Q1, so and.
It's not dramatic.
We'll work out there I think we are probably continuing to lead the industry in terms of pricing and right.
And we will look to sort of continue that going forward. So we're looking where it was slightly down and 2020. It looks like it's going to be slightly up and 2021, and we'll continue to take opportunities wherever we can.
Well the reason for the question as you know normal seasonality is about 150 basis points per quarter, and an up cycle and <unk> and <unk> and so a few folks.
Wind up running at that normal seasonal rate given the way the comps look you'd be exiting.
With pricing up 5% plus in the fourth quarter. So I just wanted to make sure I understand how that.
How you see that cadence playing out versus normal seasonality because given the comps the exit rate would be pretty attractive I think.
Yes.
Like I said, we sort of looking at it being slightly up for 2021, I think your I think 150 basis points might be some 0.5.
Back until I was certainly was in 2019 or 2000.
And maybe 2019 for IC industry in general has not been.
And putting up both sort of price trends for quite some time.
Okay, and then conceptually how are you thinking about the magnitude of price increases that you are willing to push through to customers, obviously, a year and a good position with lead times for new equipment winding out used equipment inventories for the industry down significantly conceptually.
How are you thinking about your willingness to push pricing as annual renewals.
Can you just talk about the philosophy and.
Heading into the up cycle here.
I think it's I think it's still a little bit too early I mean Q1 is still seasonally challenged in terms of demand and there is still.
Our specialty businesses have been outperforming, but there's still a certain amount of pressure and the classic business. So we've got to focus on right. We've got it and we've got a track record on rate, we will take opportunities where we can.
So I mean net to our ongoing philosophy, we will look for increases on renewals.
But there's still.
We're still shaking out.
Out of the impacts from last year and so.
And so we're really and this little and and milk and honey.
Already so.
And moving into the seasonal part of the year. The indications are out there that it's going to be tight, but we're not really living net at the moment and we will continue to sort of keep our eyes open and execute where we can.
Okay and lastly for.
And for our rental gross margins you know normal seasonality is your full year gross margins are 400, or so basis points above first quarter levels, which is obviously seasonally impacted as you point out so.
What can we think about.
Seasonality like this year versus what a typical year might look like or any of your.
Direct cost of rent and operating expenses artificially low and the quarter that will be ramping up beyond the point you made about volume mark or anything we should keep in mind versus normal seasonality.
Yes.
This quarters margin improvement was real and and really impressive there were no.
Adjustments or unusual sort of created through the quarter that drove that so it is it is a new baseline for us.
So you would expect to see margins improve as we get into the seasonally strong Q2 and Q3.
Guidance I think that sort of worked into the transcript was if you just you just sort of run.
And SG&A as a percentage of rental revenues and trim that down slightly.
And with operating leverage and that should sort of get you there.
But the margins real and will improve as we get into the seasonally strong quarters with more revenues.
Okay, great. Thanks.
Thanks, Darren and thanks Gerry.
Our next question is from Brian and then from Gabelli funds go ahead.
Good morning, everybody good morning, Brian and Brian Good morning.
Just to kind of piggyback on what Jerry was we're speaking to and maybe what you've learned over the past.
And the past year or so.
Things like travel and entertainment and maybe some other fixed costs.
Anything that from.
From a cost out standpoint that you think is.
A little more permanent than you would have otherwise thought before COVID-19 happened.
Well I think we obviously learn some new things over the course of the last.
12, 13 months or so since we went into sort of pandemic mode.
And it's helped us.
From our standpoint.
Whether it's SG&A or on.
And on how we deliver material and how we man our branches, how we service customers, how we engage with customers and I think some a lot of that learning will sustain now as Mark said look we as we seasonally go into the year and have higher volume those cost.
It will go up and absolute volume, but as a percent of revenue and we ought to be.
And the flattish along the way.
Yes.
Okay. That's that's more on the cost side.
I wanted to talk about leverage.
Yeah.
That 2.2 is trailing by year and you'll be below two given.
Given and 820 million or so and EBITDA against 151, 6 billion and net debt.
You've made one acquisition of no.
What's the environment out there.
Like for your ability to pick up.
Pick up incremental yards and and.
And what are you looking for.
Primarily and when Youre going to put that capital to work.
Yes look we did.
And additional two acquisitions and early April.
And that we closed on up and the San Francisco Bay area further increasing R.
Our footprint count and our density and that major metropolitan market and now have 15 locations and in and around the San Francisco Bay area, and we continue to look at.
M&A and Greenfield activity.
As a focus going forward.
Preference would be greenfield activity and if we can find the locations and.
Reasonably put them in place and those large large markets and.
And we will look at M&A as an alternative or.
Whats the buy versus make.
Scenario so.
And we're actively engaged and continue to.
And to scout out opportunities, both for Greenfield and M&A.
Anything that might be out of what is.
Your.
And are you from your core fairway of both pro solutions Pro contractor and Gen rent and I guess I refer obviously to.
Some of the acquisitions debt.
You are is made.
Kind of gone outside there, but I would say that their core rental business was.
And I don't think Youll see us go outside of our core we're very near Adjacencies to our core.
And you won't you won't see us do anything sort of that will put us.
And something completely new and we're completely a field from our current business or current geographies.
Okay, Alright terrific well this is.
And it's a broken record now and keep doing a great job and.
Best wishes for another successful year.
Thanks, Thanks, Brian and thank you.
Our next question is from Neil Tyler from Redburn.
Brad.
Hi.
Yeah, Thanks, very much good afternoon.
Hello, everybody and good morning to you.
Free from me please firstly.
On the power solutions business.
I've lost track of.
And whether you think they you know the weather events in Texas, where a meaningful net contributed to that growth or or whether actually.
And the opposing effect net of desktop.
And <unk>.
Secondly back to the entertainment the growth and entertainment that your research and in the and have you been able to cross sell and yet to any of those customers.
And with whom you'll achieve has built relationships or is that something that you're still anticipated.
The other opportunity.
And then if you could just.
If we're able to.
Give me up.
Such there on what proportion of the revenue.
Our revenue base the entertainment business currently contributes thank you.
Hey, Neil this is Eric.
Yes, we do a tremendous amount of cross selling with our entertainment business such as.
Our our rolling equipment, such as forklifts and aerial booms, our pro solutions business that supplies climate and our our lighting products that we rent. So yes, we are.
Absolutely cross sale there.
And with products and with the sales teams.
And in terms of the slides.
5% to 6% of our revenue so it's not a huge portion of the.
The business, but it's having an unusual impact just given the fact that the Swan from almost zero last year too.
Strong growth this year, so the <unk> is considerable and.
Your first question about the Texas weather event.
And it was like any other weather events that we normally experience.
And.
Not unusual and not sort of overly.
Overly meaningful.
<unk>.
Different than a normal weather event.
Okay. Thank you what if I could just.
And so a follow up as well.
Laurie I think it was the last call.
Discuss the.
Fight and administration infrastructure plan and you referred to that as soon as noted in the full cost and still gravy.
Is that crazy makes his journey.
To the table so to speak.
And where whereabouts hold and the journey do you see it as and do you.
And our line.
Your line of sight on those projects would you have enough a lot and cycle and those projects to be able to equip them given the.
And given the tightness, you've described and the OEM supply chain.
Well I guess the news is a little different and the U K and it is here.
The journey.
Far enough along to really give it credence, yet or have any impact and to me, it's still somewhat and the future and then.
And when and if it ever really develops.
And it'll be 18 months.
Down the road until they're shovel ready projects from that.
<unk> prepared so.
And there is no visibility today certainly every state has wish lists and we're aware of those wishlist, but until they get funded.
And then get the plans and the engineering plans behind them and it's a long way off look I think.
Do you think that's having a positive mental impact on the business where people are genuinely.
Excited and hopeful.
As we would be but I don't think theres any gravy yet.
That's very helpful. Thank you.
Our next question is from Steven Ramsey from Thompson Research go ahead.
Hey, good morning.
Good morning.
And I wanted to.
Dig in a little bit too on the national and local accounts. It appears the national accounts are still outperforming.
And the local accounts, maybe what does this tell you about the market.
This dynamic to continue through the rest of this year and is that a pricing headwind.
Yes, I'm not sure Steven I think I mean, if you go back to 2020 National accounts were less volatile alright. So there was there was a it was a stronger sort of oil and list drop and that business and there wasn't the local accounts.
That should.
It should swing around this year.
Does any real dramatic differences in terms of relative strength.
And we sort of hitting into a slightly positive environment for both.
And we should look to to generate slightly positive rate improvement.
Both so the mix is good it's a balance that we like.
And that sort of.
60, 40 mix I guess will be a sort of ideal.
And we're around the air and sort of fluctuates from quarter to quarter based on.
And activity in certain accounts, but that does not Rio dramatic trade and change taking place here this year.
Okay, Great and then something to clarify on entertainment.
Or do you mean the volumes are also at pre Covid highs or is that total revenue and then also on the pricing side.
And I believe in the past you've discussed the entertainment has some sort of pricing premium.
Relative to other verticals is is the pricing on the entertainment for entertainment customers is that back to pre COVID-19 levels or do you see it getting back there and the near term.
Yes, all and all the above volume revenue, it's premium price and.
It's going well.
Great and then.
Last question.
On your strategy.
And supply highly populated areas.
Is this a strategy that you're pursuing.
More in the way of densify and current areas of strength or do you intend to planting new flags with Greenfields and M&A this year.
Yes look I think ever since.
We got here in 2015, we have said that our strategy is going to be around major metropolitan markets with populations of 1 million people or more and and.
That's been the focus I think our focus primarily hasnt been to densify markets, where we already have a footprint and improve that footprint. So we we have a base of business that we just like to continue to grow better be able to service and density add gear into that market and then better service that mark.
<unk>.
That said as we look at opportunities we will also consider some markets but.
We may not be as densely populated and to look to get a greater foothold on.
And that could come either by way of Greenfield or M&A.
Excellent. Thank you.
Alright, Thanks, Steve.
Our next question is from Ken Newman from Keybanc capital correct.
Hey, good morning, guys.
Yeah.
So my first question and I'm curious could you just talk a little bit about your ability to gain market share as the industry rebounds.
Specifically I am wondering if you have a sense on whether your smaller competitors are already feeling the impacts from the from the tighter supply chain and.
And just where do you think how tight and can the industry fleet utilization go up before you start to see any real impacts to.
And market share gains.
Well, we feel very this is Erin Ken and we feel very confident that we got our fleet orders for this year and early in the year.
So we think thats going to put us in a really strong position as the seasonality of the business picks up.
And of course of the year not exactly sure how to answer the small competitors I think if they didn't get their orders and early and are starting now.
Will probably have trouble getting equipment this year.
And because we went into the end of last year, we weren't exactly sure what kind of year. This would be but we felt like we wanted to get our orders and so we were ready.
And.
Today I think.
Captured your questions there unless I missed something.
That's good color I just.
That's helpful here.
And then my follow on here.
Can you just give us a sense or help us think about what's embedded in the guidance from a used equipment sales perspective, and you talked a little bit about more shifting towards retail versus auction.
But obviously used prices have been and elevate and and increasing over the last couple of months here.
Is there a new range in terms of fleet sales that you'd be able to give us today.
I mean, I think you've sort of got and Q1.
Transition to gains.
From from losses in 2020, with the improvement and we see a recovery as a percentage of original cost less likely to consider to continue through the year and.
Seems a volume and flat to down its if equipment is tight and it's not a great.
The environment for us to be ramping up equipment sales.
And we will look to probably maximize opportunity and tubes of price and limit opportunity in terms of volume.
Understood.
And then just one last one for me if you don't mind.
You've given some good color on.
And your ability to go after some more M&A.
And you kind of think about just where we are and the cycle. Obviously your leverage is and a really good position today.
Any color on how you think about the size of opportunities that are out there.
And especially as you kind of weigh the opportunities for improved and organically or green starts versus actually going out there and buying our competitors.
Well all of that depends on what's available for sale and <unk>.
Who might want to.
And engage in that activity.
And you probably know.
There are not a lot of large businesses left out there to consolidate so.
Most of the activity is around <unk>.
Smaller branch count.
Type companies that are out there so nothing sort of really big news.
And the horizon.
Is there and with our mainstream.
One of the questions was before mainstream of where our focus would be so.
I think that might sort of answer the question.
Okay.
It does thank you.
Thank you.
Our next question is from.
Nick Bray from book go ahead.
Thanks, Good morning, everyone.
We covered a lot here, but just conceptually wanted make sure that I understand this properly.
And you talk about record rental revenue on lower fleet and you had in 2019.
Your guidance seems to assume.
Low single digit type rental rates for the full year I guess the implication from me out of all of this is that from a from a utilization.
Nation perspective, after the utilization perspective.
Implying here that you're at record going to be back at record or pretty close to it.
Do I have that right or am I missing something.
Yeah, No I think you've got it right I mean net.
The step up in Q1 was was huge Q.
Q1 is a tough year to Q1 is a tough quarter.
And to move dollar utilization, so thats a reset for us.
We don't see that going backwards.
Get into the seasonally stronger part of the year. So dollar utilization improves as the year goes ahead. So.
And we're certainly looking at a record year in terms of dollar utilization.
19 and 20.
Okay.
And on that utilization concept, right and especially as we think about the growth algorithm in 2022 right.
What sort of do we need to see here for the business in order to be able to grow in 2022, presuming that rental rates are going to be part of that equation.
But I'm sort of wondering can you see further expansion and utilization of these record levels that youre assuming in your forecast for 'twenty, one or is this going to become truly primarily a factor of fleet growth and.
And rental rates, hopefully and as the driver of 'twenty to topline and earnings.
Yes, so as you sort of move through the rebound and the cycle to the sort of strength of the cycle. It would be typical to be embracing and fleet and driving revenue growth.
With fleet growth.
And we'll be looking to do that and.
We've got the platform we've got the operations day that we're executing.
So all our growth lever as of yet.
And but certainly volume becomes more important as you start moving through the cycle.
Understood and where I'm going to all of this questioning.
Here.
You talked about the Oems.
Experiencing tightness and durability too.
Supply equipment to the market and I understand that your Capex for 'twenty, one is sort of set in place and youre going to get your equipment allocation, but I'm sort of wondering where you're thinking is on 2022, because your business is going to need that incremental equipment.
Especially as the market is recovering yet.
I think we're far from certain.
And that the Oems are going to be able to ramp production maybe to the extent that equipment demand is going to be needed.
So I guess I'm curious what are you hearing from your partners in this regard and how are you approaching your ordering and your negotiations for 2022 equipment.
This year right and 2021, maybe relative to what you have done and the path. Thank you and I would say look it's.
Still a bit early in the game for us to be focused on 2022 at the moment and.
And.
We'll sort of pick that up as we get well into the.
The second quarter and approaching the third quarter, where we will we will look at it.
And what our fleet looks like what our utilization looks like and what the future holds but.
Having spent.
30 years on the manufacturing side and the table.
I think.
This year from a demand standpoint is a bit of an aberration because we are coming out of a time, where they slammed. The doors closed last March and April and turn off all of our supply lines and.
And I and ramping them back up is what's happening and causing the shortages here and 2021 I think by 2022.
And a major manufacturers a lot and their supply lines up and running and have ample capacity to deal with volte.
Volumes that might be prevalent and 2022.
Understood, but just to clarify something here when you were talking about looking at this dynamic in Q2 and Q3 I'm just trying to understand how that would compare relative to what you'd normally do and your planning process.
And I assume that Youre earlier or are you similar.
Similar to what we did last year.
Okay.
With the third biggest customer for a lot of these guys. We've got an ongoing relationship with this constant dialogue taking place.
Our fleet team has done an excellent job and <unk>.
And I'm just anticipating.
Getting ahead of the contraction in demand in 2020, and getting ahead of the tightening of demand in 2021, and we'll continue to do a great job as we roll into 2022 and so that's one.
Daily dialogue.
And and we will sort of work that through as we.
How does not pay a forecast for 2022.
Alright, thank you for the color.
Thanks.
I think we have time from one last question.
Okay.
Currently there is no more question.
Great. Thank.
Thank you all for joining us on the call today and if you have any further questions as always please don't hesitate to call me and we all and we really do look forward to seeing you soon.
Take care and thanks for participating today.
The conference has now concluded.
And then <unk> presentation, you may now disconnect.