Q3 2021 Herc Holdings Inc Earnings Call
Good morning, and welcome.
Does the Hertz Holdings third quarter 2021 earnings conference call.
All participants will be in a listen only mode.
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Please note today's event is being recorded.
I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.
Thank you Rocco and thank you all for joining us this morning.
Welcome everyone tried third quarter 2021 earnings conference call earlier today, our press release presentation slides and 10-Q were filed with the SEC and Alison they're posted on the events page of our IR website at IR got hurt grandchild Dot com.
This morning, I'm joined by Larry Silber President.
<unk>, Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mark <unk>, Senior Vice President and Chief Financial Officer Bill.
We will review, our third quarter and year to date results with comments on operations and our financials, including our view of the industry and our strategic outlook.
The prepared remarks will.
By an open Q&A.
Before we begin our formal remarks I'd like to remind you to review our safe Harbor statements on slide three.
Today's call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties.
Before I would caution you that our actual results could differ materially from the forward looking statements made on this call.
You should also refer to the risk factors section of our annual report on Form 10-K for the year ended December 31 2020.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe.
Useful in evaluating the company's operating performance.
Reconciliations for these non-GAAP measures 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 a webcast on our website replay instructions were included in our earnings release. This morning, we have.
<unk> 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.
Thank you Elizabeth and good morning, everyone. Please turn to slide number four are.
Our third quarter results continued to demonstrate outstanding operational execution.
And reflect new records in many of our financial metrics.
Slide four shows the third quarter results over the last three years given the unusual performance in 2020 due to the impact of COVID-19, We show a comparison with not only 2020, but 2019.
You can see our performance in 2021, clearly accelerated our growth trajectory.
Equipment rental revenue was $519 6 million in the third quarter, an increase of 29, 2% or $117 3 million compared to the prior.
And 13, 1% over 2019.
This increase was driven by solid performance in our core business and growing market share from our specialty businesses, both of which continue to outpace our pre pandemic performance in 2019.
Adjusted EBITDA grew by 25.
5% over prior year and 17, 4% over 2019.
Our focus on operating leverage improved year over year, adjusted EBITDA margin by 160 basis points to 44, 7% in the third quarter of 2021.
We reported net income.
<unk> of $72 $3 million or $2 37 per diluted share in the third quarter compared with $39 9 million or $1 35 per diluted share last year. We are on our way to a record 2021. This is an exciting time for teamwork and as you know from our growth.
Both goals, we presented at our recent Investor day, we have the appetite and desire to achieve even greater success.
Our industry, leading rate management delivered strong results in our favor favorable operating environment, which benefited from tight equipment supply and steady rental demand.
Given.
Given the indications for the rest of the year, we are affirming the full year adjusted EBITDA guidance range, we provided at our Investor day of $870 million to $890 million, which was the third time, we raise guidance now.
Now please turn to slide number five.
<unk>.
'twenty, one has turned out to be a pivotal year for the equipment rental industry tight supplies of equipment and steady demand have created an optimal environment for us.
We increased dollar utilization year over year by 840 basis points to 46% in the third quarter, reflecting improved volume mix.
And right.
Our focus on the top Msas in North America, and filling out our urban density in select locations is driving both our Greenfield and acquisition targets. Since December 2020, we completed five acquisitions for accumulative total purchase price of $280 million.
And announced our sixth acquisition rapid equipment rental of Toronto earlier this month.
We also recently announced the declaration of our first quarterly dividend of <unk> 50 per share to shareholders of record as of October 20th and payable on November 4th.
Our strong year to date performance.
<unk> is clearly providing the momentum and growth that we expect going forward.
Now please turn to slide number six.
With a history of over 56 years in the equipment rental industry are 5100, plus team members works hard to ensure our customers achieve optimal performance safely.
<unk> efficiently and effectively every day everything we do is built on our promise and commitment to help our customers and communities build a brighter future as of today. We are now operating approximately 295 locations across the United States and Canada in 39 States in five provinces. We're excited.
Cited about the momentum we are generating and in developing our M&A pipeline. Please.
Please turn to slide number seven.
We introduced our strategy shifting into high gear at our Investor Day last month. The business model is simple yet it takes experience and commitment to truly capitalize on the opportunities.
We have an expanding addressable equipment market and truly fragmented industry.
Our team is hungry to take advantage of the exceptional opportunity before us now for more details about our operations in the quarter and our outlook are as Aaron Birnbaum, our chief operating officer. Thank.
Thank you Larry.
The third quarter and year to date results reflect the contributions of our outstanding Hersey rentals field management and team every day, our team demonstrates our dedication to serve our customers with a level of professionalism and commitment.
Well in the industry coming off a really tough 2020, we challenged the organization to exceed our 2019 performance.
They have stepped up the challenge and not only are they exceeding our pre pandemic results. They are delivering exceptional performance throughout North America. We greatly appreciate the contributions of each and every one of our team members congratulations team for a job well done now please turn to slide nine.
Our Q3 results showed exceptional performance.
<unk> compared to 2020 and compared to a strong third quarter in 2019 equipment rental revenue in the quarter was $520 million and rose nearly 30% compared with 2020 and 13% higher than the comparable periods in 2019 business activity was solid in all of our end markets are showing positive momentum.
Pro.
<unk> solutions business continued to increase year over year by approximately 30% in the third quarter of 2021, as we continued to expand our market share.
Our focus on the power generation climate control and remediation needs of our customers has contributed to the double digit revenue growth and pro solutions over the last four years.
T Chek investments, we've made to diversify our customer base and industry verticals provided a solid foundation for growth as we successfully built upon our urban market strategy and deepen and widen our market segments throughout North America, our core business showed the normal upturn in demand in the third quarter, we benefited from solid.
Operating performance in our regional operations the.
The integration of the acquisitions, we've made to date is on track and we are actively pursuing other acquisitions in targeted markets.
Our <unk> operating model continues to drive operational performance and fleet efficiencies and margin improvement offsetting increases in year over.
Year personnel related costs in the quarter, our scale and leverage will support further margin improvement over the next few years as our revenue remains robust.
Please turn to slide 10.
<unk> fleet composition at OFC is on the left hand side of this slide total fleet was $4 1 billion as of the end of the.
Third quarter by nine 4% higher than what we see at the end of Q3 2020, we continued to invest in our specialty fleet, which includes pro solutions and pro contractor and accounted for about 23% of our total fleet as of the end of Q3 2021.
We also continued to improve dollar utilization each quarter in.
In 2021 and achieved a record 46% in the third quarter.
On the right hand chart, you can see how we see fleet expenditures in Q3 2021 were $210 million an increase from our third quarter in 2020.
Fleet disposals were $44 million in the third quarter of 2021 compared to 100.
$24 million of OCC sold in last year's comparable period our.
Our fleet Department has done a great job getting in front of a tight market for new equipment purchases from the Oems. We ordered early for 2021 and while we have experienced delays of certain equipment. We have largely received the fleet from our initial orders you may recall.
Second quarter, we announced that we were ordering an additional $100 million in fleet in 2021, and we expect delivery this year.
Our equipment cost increases that have not been material this year, but as shortages inflation in labor costs impact the industry, we anticipate that industry fleet costs will continue to rise in 2022.
And we had most of our 2022 orders in by September some of them at 2021 pricing. So the inflationary impact to our 2022 orders will remain muted given.
Given the current operating demand for our rental fleet, we reduced third quarter disposals in 2021 year over year by $80 million, even as equipment sales.
Sales proceeds as a percentage of OCC rose from 37% last year to 42%. This year. The average age of our disposals was 86 months in the third quarter and fleet ages now about 48 months.
Please turn to slide 11.
Our diverse customer mix with our base of large national customers.
Operating and essential business sectors, and our expanded specialty business continues to drive our sales strategy.
Specialty is expected to continue to be a growth driver as we focus on the expanded addressable markets of climate control remediation and entertainment.
Our other verticals of major industrial customers and utilities and.
In energy healthcare warehousing and manufacturing and general construction are gearing up to look to support growth in 2022 and beyond.
We're also focused on high growth segments of the economy and our end markets are showing momentum to continue a strong recovery in 2022, we expect to drive additional fleet efficiencies.
<unk> and operate a lean cost structure to drive margin improvement.
Turning now to slide 12.
We shared the accumulative values of our acquisitions, we have made to date on the right hand side of this slide at our Investor Day on September 20th.
Since then we also announced the signing of a purchase agreement with rapid equipment rental with 110.
Employees in seven locations in the greater Toronto area the.
The transaction is subject to the customary closing conditions and is expected to be completed in the fourth quarter. So we will start 2022 with 13 locations in the GTA more than double our current count.
The EBITDA contribution from the acquisitions we've made.
So far in 2021 isn't material to our reported results, but our M&A pipeline is quite robust and we are aggressively seeking additional targeted markets and the top msas to help us enhance our urban density and improve our operating leverage and scale.
Please turn to slide 13.
There's been a fair amount.
Coverage regarding labor shortages, particularly for truck drivers and mechanics, and our industry as.
As we have said repeatedly we intend to be the employer of choice in the industry and it made specific strides to offer competitive salaries and benefits to enhance retention and attract talented team hertz.
We also intend to be the acquirer of choice.
And we've been busy integrating our new team herk members and focusing on her career development job opportunities and training.
With the state of climate related events. This year. We are also supporting the Hertz families impacted by Hurricane Ida our team herk members contribute donations and the company matches their contributions to assist.
Our team members in need.
Our employee resource groups women in action and the veterans employee resource group also are active in offering career related programs networking opportunities and support.
Safety is the foundation of everything we do and exemplifying that belief, we start everyday across our branches with a safety hurdle.
As you've heard us talk in the past about various safety initiatives one of our major internal safety programs focuses on perfect days that is days with no Osha recordable incidents no at.
At fault motor motor vehicle accidents, and no dot violations in the third quarter on a branch by branch measurement all of our branch operations.
At least 98% of days as perfect.
Always striving for 100% perfect days and our commitment to safety means continuous focus through communications and training. It also mean supplying the team with the equipment that will help them perform efficiently and safely, particularly and they're driving in daily equipment servicing and maintenance.
To achieve <unk> at all of our branches are rental days, our best when they are done safely seven days a week.
I'll pass the call onto Mark.
Thanks, Erin and good morning, everyone.
We continue to be really pleased with our performance and have delivered another excellent quarter in Q3.
It's a great.
<unk> for the rail industry with strong demand, although supply is constrained like it is in a lot of other industries at the moment.
Our fleet team has done a great job with getting our orders in early this year, so that our new fleet arrived steadily throughout the quarter.
Our operations team have also done a great job with managing.
Environment would utilization getting the fleet to the right customers in the right jobs managing peak demands for storm response, and by integrating new team members customers and fleet into the hook model.
This consistent execution has led to a record quarter and is maintaining strong momentum into Q4 and 2022.
Slide 15 shows a summary of our third quarter results compared with 2020 and 2019.
Q3 was a record quarter for many key metrics, including rental revenues net income adjusted EBITDA adjusted EBITDA margin and dollar utilization.
Equipment rental revenue increased.
29, 2% from $402 3 million in 2020 to $519 6 million in the third quarter of 2021.
Primarily due to improved volume and continued momentum in pricing.
Compared with 2019 equipment rental revenue increased 13, 1%.
We continued to deliver solid profitability with adjusted net income in the third quarter of 2021 of $72 7 million.
With $2 38 per diluted share compared with adjusted net income of $43 2 million or $1 48 per diluted share in 2019.
Adjusted EBITDA increased 20.
<unk> in comparison to Q3 2020.
Was up by 17, 4% in comparison to our previous peak cycle in the third quarter of 2019.
Adjusted EBITDA margins were also a record for the third quarter at 44, 7% in 2021, improving from 43, 1% in 2000.
And by 350 basis points from 41, 2% in 2019.
As expected rolling over the low base effect of the cost side of the business and the Covid impacted quarters of 2020 was likely to impact our ability to maintain our historical flow through and will temporarily slow.
Our margin expansion.
EBITDA margins of Q3 2021 remained strong at 45, 9% down by 250 240 basis points from 2020, and an increase of 100 basis points from 44, 9% in 2019.
There are all.
With temporary cost anomalies in the Q3 2020 results and we did not expect to be able to replicate those margins this year.
Adjusted EBITDA flow through of 37, 5% was in line with our expectations and should return to our targeted range of 60% to 70% in 2022.
On the cost side.
We have some operating expenses coming back into the business along with record rental revenues, we incurred delivery rearranged payroll and commissions in order to provide superior customer service and to delight our customers.
In order to be the employer of choice in the industry. We also have to provide competitive compensation.
Sourcing and benefits we have been adjusting our operating teams compensation to strategically stay ahead of wage inflation and to build a platform for growth.
All of this is manageable within the context of double digit growth in rental revenues, we can invest in our business and in our people and continue to improve our margins.
And Investor returns.
<unk> 2020, Covid impacted base effects will run out over the next couple of quarters, and we will focus on returning to our targeted flow through range of 60% to 70% in 2022 and beyond.
On slide 16, we highlight pricing and utilization trends by quarter.
The graph.
Graph on the upper left illustrates our success in managing price over the last couple of years and is a testimony to our ability to manage right.
This quarter reflects average rates up 280 basis points compared to last year Q.
Q3, 2020 highlights how well we've managed Reits in the Covid downturn down only 80 basis.
This points despite all of the challenges we faced last year.
In Q3 2019, our rates were up four 5% and a much less inflationary environment and we are currently at.
Our track record of executing on price and all sorts of operating environments is clear.
Rates are up by six 5%.
Over the last three years.
The rate momentum we have built in 2021 is also clear and we will maintain this momentum into 2022.
The current market environment of tight equipment supplies and steady demand continues to support our focus on rate and we continue to benefit from our excellent pricing tools and the discipline.
Discipline and professionalism of our sales team.
The industry seems to have gotten price momentum back and we intend to continue leading the industry on rate.
Great record time utilization and continued momentum in our specialty businesses drove another quarter of record dollar utilization at 46% we continue to.
And our goal of industry leading dollars.
This positive momentum changes our fleet efficiency going forward and has a powerful impact on our return on assets.
We managed to get our change in fleet size back into positive territory in Q3, which is exciting.
A combination of savvy purchasing in early ordering.
Doris receiving most of our fleet orders during the quarter and we supplemented those orders with some fleet integrated in conjunction with our acquisition activity.
Volume growth in the quarter was almost four times the growth in fleet size as we managed an excellent operating environment with record time utilization and efficiency.
On slide 17, with no near term maturities, we have ample liquidity to fund the growth goals, we laid out at our recent investor day for 2022 and into the future as we commit capital to invest in our business to drive fleet growth under the new cycle.
We generated $115 million of free.
Free cash flow before acquisitions and the nine months ended September 30.
2021.
After funding $225 $2 million of acquisitions year to date, our net.
Debt increased approximately $140 million to $1 8 billion as of September 30.
We have ample liquidity to fund.
Our growth plans and our leverage at two one times is at the lower end of our target range of two to three times.
On slide 18, we share the latest industry forecasts.
IRI growth forecasts continue to be in the mid single digit range this year accelerating into 2022.
Our rental revenues are up year to date over 2020 by 22, 5%.
Year to date in 2019 by nine 9%.
So we clearly have much more momentum than the broader industry and are probably taking share.
This is consistent with past experience.
Companies of scale.
Rental fleets in a well diversified customer base have consistently grown faster than the rental industry in general and as we have seen in 2021 here because a company of scale with a large well diversified mix of customers.
We are clearly in the early stages of the Knicks construction up cycle with steady demand, even before we get into any.
Any potential benefit from the proposed future boosts to infrastructure spending.
Equipment supplies are tight with our OEM struggling to manufacture and deliver new equipment you worldwide supply chain bottlenecks.
This is a very favorable environment to one $4 $1 billion of rental fleet as our customers really appreciate.
Our fleet availability and commitment to service.
It should remain a favorable environment for increasing rates as everyone is facing cost inflation to a certain extent.
Also the majority of our business is not directly connected to nonresidential construction.
Our pro solutions business is a real strategic benefit and.
To continue to gain share and grow that business.
There is pent up demand for maintenance and turnarounds in a lot of industrial plants and this segment should also rebound.
There is plenty of demand in most of our end markets to support growth into 2022, and we have the balance sheet and liquidity to be able to.
Will that growth by investing in our fleet and <unk>.
And we will look at and that is what we intend to do.
Looking at the left slide of Slide 19, you can see the momentum in our results through 2021, and our expectations to maintain double digit topline growth momentum for 2022 through 2024.
We have raised 2021 guidance three times this year through our current.
Market of $870 million to $890 million of EBITDA.
We are focused not only on top line growth, but profitable topline growth and have improved our margins in 2021 and the team to continue to improve our margins with a goal in the high 40% range by 2024.
On slide.
Randy as we laid out at our Investor Day last month, we are affirming fiscal year 2021 guidance from adjusted.
EBITDA range of $870 million to $890 million.
For those of you who have not had a chance to review a video of the NPS today is posted on the Investor Relations section of our website.
We are very.
Very excited with the growth momentum. We currently have in our business and we're also affirming our EBITDA guidance for 2022 105 billion to $1, one 5 billion and net fleet rental.
Fleet capital expenditures of 820 to.
To 112 million.
On slide 21, we.
Slide 12 highlights the growth goals, we laid out at the Investor day.
We are a leader in an industry that is beginning to grow into a new up cycle and that continues to benefit from a secular shift from ownership to radar.
Rental industry leaders can grow at two to three times the growth rate of the broader industry, we see our rental revenue CAGR at 12% to 15.
Percent through 2024, and our adjusted EBITDA CAGR at 17% to 20%.
We are focused on profitable growth and our goal for adjusted EBITDA margins is to improve to a range of 45% to 50% by 2024.
Brandon and exciting industry up cycle and are excited about the performance we.
We also wait over the next couple of years as we look to take advantage of a hot start with that I will turn the call back to Larry.
Thanks, Mark now please turn to slide number 22 before.
Before we move to Q&A I wanted to point out the vision mission and values, we develop when we became a public company.
<unk> plus years ago.
We frequently talk about our vision and mission, but today I also want to focus on the values we hold dear.
Particularly given the commitment we are making to investors about our growth goals over the next several years.
Want you to know that we manage our business by these volumes, which are we do.
Do what is right. We're in this together.
We take responsibility we.
We achieve results.
We prove ourselves every day and we are committed to investing in our communities.
And now operator, please open the lines for questions.
Thank you we will now begin the question.
And answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Enjoy your question. Please press Star then two.
Today's first question comes from Ross Gilardi. Please go ahead.
Hey, good morning, everybody.
Hey, Ross good morning.
Just had a question on your capital spending I mean, you guys are getting your deliveries this year.
From the sounds of additive manage that well, but.
We're obviously out there with big capital spending growth projections for next year.
We've all seen but at least J LG has said about the short term.
For now and they are obviously kind of a big supplier.
So I understand you've got the orders in for next year, but explain again what gives you the competence that your suppliers can actually produce.
At the at the level necessary to deliver.
That suite in and do you have to take bigger cost increases to ensure that you are prioritized by your suppliers next year. Thanks.
Yeah, Ross Great question, and certainly there has been.
Louis.
News.
We've all heard J L G announce an insert.
Certainly with your strike.
That has.
Potential to impact as well not as great for us, but certainly the impact the supply chain for others in the industry, but generally we have received confirmation from all of our major suppliers, where we have placed orders for.
2022.
Our order and production slots are intact and that for the most part we will receive everything according to the schedules.
That we've agreed to with them and we work very closely with them to do things to make sure that our gear is delivered.
On time as far as your question about rate.
We have been able to do very well in negotiating rates for next year and we are in the low single digits relative to inflationary pressures on that gear.
And.
For now I don't foresee.
Issues.
Relative to us receiving that gear in an orderly manner or fashion as we've as we've negotiated with our suppliers Aaron may want to comment more Larry I think you covered it very well when you look back at this year, we did receive all of our fleet buys that we planned when.
<unk> started 2021 and I think that's because we started early planning for it and then so as you look into 'twenty. Two we started early planning for that well so we fully expect to.
We received a fleet we plan fourth I expect disruptions to an extent, maybe some delays, but do expect to receive the fleet and plan for.
Okay. Great. So you would say you are baking in low single digit.
Cost inflation into your Capex outlook for 2002 is that is that right and just can you remind everybody how the accounting works on equipment inflation do you rental gross margins gets squeeze next year a bit due to the inflation or does the impact gets smoothed.
Just because of the depreciation accounting over the life of the fleet.
Yes, no I think gross so yes, we are looking at low single digit cost increases next year.
<unk> being an accounting it gets smoothed out so I mean that fleet comes in and is depreciated over.
So you have an idea sorry.
The increase.
Is smoothed out with no real immediate depreciation impact.
Right, Okay, that's what I thought.
Right I'll hand, it over and get back in queue. Thank you guys.
Yep.
And our next question today comes from Steven Ramsey Thompson Research Group. Please go ahead.
Yeah.
Hi, good morning.
Maybe wanted to get into the low rate environment clearly the thing that won't change your discipline on getting strong rates, but do you feel like this rate environment is pretty favorable into the first half of next year or if this tight supply environment gets.
Incrementally less tight do you think this pressures rates for the industry and what you could get in FY 'twenty two.
Yes, no. This is rate momentum in this environment, Stephen we don't see that disappearing you sort of get us a flywheel effect right, so that sort of tends to build.
And a positive environment and we see momentum.
Running into 'twenty 'twenty to 'twenty, two being a favorable rate environment for us also.
Okay.
Okay, Great and then in the other customers group.
Seeing growth of 70% plus again.
Q3 after Q2.
It is the strength in that purely entertainment sector coming back off the bottom last year or what other areas are driving that strength.
On the other categories would be some of the government activity as well.
Yes.
<unk> portion of this Steve and Thats not really entertainment.
At all so that's that's a swing back from Covid that market was more volatile last year and is coming back sort of stronger this year.
So starting to sort of.
Reflect the normal mix, we see them.
Our local customers versus national accounts.
Excellent and then last one just to clarify.
Operating expenses being normalized or both SG&A and Doe.
Kind of running it back at normalized levels and if not what elements are coming in place.
The Logan months to to normalize into next year. Thanks.
<unk>.
Yes, no we are back.
Normalized levels. So I mean, we're running at sort of record levels of revenue. So the normal levels of operating expense and SG&A are there.
There is no real.
None of the Covid.
Next just reductions are still in place last year. So we're back at normal levels and and we will continue sort of operating.
With those levels through Q4 and into 'twenty two.
Yes.
Great. Thanks.
Our next question today comes from.
Cole with Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Good morning, Jeremy.
Can you talk about the acquisitions that you closed on over $200 million of in fleet, how much room do you have to grow that fleet with your specialty business.
Jerry there areas now that you have the additional branch locations can you step us through the plan.
So we can think about what it might look like as you make additional acquisitions.
Well the ones that we have done so far.
What's exciting about them is that it gives us a lot of it that urban density that we want in some of the big MSA markets.
Only one of them was what we would call as a specialty business, which was a trench business in California. The rest of them are just core general rental businesses. So we have lots of opportunity to drive our specialty synergies through those business and we began that right away working on that with the sales teams.
Okay.
And on your comment on order of magnitude do you know is it an extra $50 million of fleet $100 million in fleet, just just to give us a rough context.
Well I think if you just took the.
Revenues that we acquired from those acquisitions, and then assume that Theres no specialty business running through them, there's probably extrapolate our 25%.
<unk> specialty number and that's the fleet that we could push through there to grow that.
Especially.
Segment type business through there.
Very interesting from a utilization standpoint, you folks have worked hard to get our fleet availability up.
Was the third quarter essentially full out.
It's folks or as we think about third quarter 'twenty two might look like and the comps is there room to take utilization higher and whats your seasonally strongest quarter, how would you frame that opportunity.
I would say this is Eric I would say that there is still some room for us to run at a higher.
For you and what we did through Q3 this year.
Got it.
Lastly, Mark can I get you to expand on the flywheel comments on this type of environment, you know spot rates are well above rates that you charge your monthly and national account customers. If you were to mark to market your monthly or.
Tom account customers.
Two quarter and how much higher with the rate be and can.
Can you talk about what's the timing of those annual agreements just so we can get an appreciation for the cadence.
So yes.
You've got it right there is a lot more.
There's a lot more momentum in the spot market as those right sort of cycle. In every 45 days if you like.
Rate growth that we're seeing in the spot is probably two to three times, what we've got going in national accounts at the moment we.
We do have positive momentum in the national accounts, it just takes longer to sort of get going.
Natural cycle every every 12 months.
And they're relatively evenly spread throughout the year. So we've got a.
<unk> fleet cadence of renewals within those national accounts, and we continue to.
Our focus on getting rate lift as they come up for renewal.
Terrific. Thanks.
And our next question today comes from Rob Wertheimer with Melius Research. Please go ahead.
Yeah, Hey, good morning, everyone.
I Wonder if you could just remind us or talk through the dynamics of the drop through you expect for the next couple of years is it largely just SG&A leverage that will come.
More evident as you've now done.
A reset.
Is it how much is price versus a.
Rental rate versus cost inflation et cetera, just maybe just some some background around that thank you.
I mean, there's probably mostly operating cost leverage that's the bigger portion of the cost.
Being in the P&L.
But it's a combination of the two.
Obviously SG&A is a lot more fixed.
Operating expenses. So most of it really comes from just putting more fleet on existing locations. So as you add fleet. There's a step function in the cost that comes along with that so you don't need to add drivers and mechanics straightaway.
You do.
The fleet increase gets more substantial but this is a step function to the the cost and the opex and is that sort of work your way through that as a pretty steady flow through and that sort of 60% to 70% Simon most of our branches can handle existing fleet.
Away and a big part of the strategy over the next couple of years is just really accelerating the fleet growth on those existing locations.
Okay that was very helpful. And then just can I ask a question about our about it Larry we talked about this at the Investor day, but just what's your feeling on whether it spend goes up materially or not where you are positioned on your.
From a technology base and maybe the opportunity from from from IP as well and I'll stop there. Thank you.
Look I think when we were on Investor day and presented our plans.
Our it spend is baked into everything that we're doing and that planning and spending is sort of baked into it.
Looking at for the next three years so.
I don't think theres any kind of a step function.
Any kind of incremental spend that you'll see that's not already baked in.
And then just the opportunity in separation versus smaller competitors as U S.
Do you.
We're loyal user scale.
Look I know I think the market as you know is extremely fragmented.
Top three or four players.
Have you know roughly a third or more of the market. So there is a great great amount of opportunity due.
Fragmentation in the industry and I think where the separation comes.
Is the ability to spend the kind of capital that we spend Bolton fleet in <unk> and an overall structure.
And the business that gives us.
Due to the following a few other of our peers.
Stinker advantage over.
Smaller independent rental companies, so that'll continue to happen there'll be fragmentation.
Will will there will be further consolidation due to that fragmentation and will be a part of that.
Thank you.
Yeah.
Okay.
As a reminder, if you'd like to ask a question. Please press Star then one.
Next question comes from Ken Newman at Keybanc. Please go ahead.
Hey, good morning, guys good.
Alright, Thanks, Ed.
Sorry, if I missed this but.
Can you. Please just quantify the impacts of the personnel costs that you incurred in the quarter and just how should we think about labor costs that maybe we should be aware of in coming quarters and into 2022.
So I mean part of it is just.
But tommy to normal on that sort of basic fit come from from 2020. So obviously commissions were low last year and there was there were some.
Furlough actions still going on in the entertainment business was effectively shut down and then part of it is just the return.
Two.
For two normal and sort of inflationary pressures that are touching into sort of 2022, so that the.
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Payroll cost as a percentage of revenues isn't huge.
We're looking at maybe 5% ish increases in cost across that sort of spin then that's manageable.
In the context of double digit revenue growth so with drivers and mechanics are hard to find these days, we're focused on staying staying competitive in the market.
All of the airlines and Theres adjustments being made on a regular basis to sort of do that so.
Manageable.
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It's something that we can deal with and still maintain margins and improved margins as we go forward.
Right.
I guess kind of just sticking with labour, but taking it I guess a bit of a different route I mean, luckily it seemed like we were able to avert a strike in Holly.
And earlier this week, which potentially could have been an impacts of our entertainment business, but I.
I am curious, how you view potential labor headwinds or challenges across your customers.
Are the end markets that you serve is there anything that you are seeing in terms of things that are keeping you awake at night or even potential.
Opportunities going forward.
Yes look.
I think to try to predict that.
Beyond what you hear about.
Every day, whether it could be a John Deere strike.
Verdict strike in the entertainment business.
I think we plan for that we certainly understand it.
Hollywood react to it.
As we reacted last year to COVID-19, very quickly we can react to any type of.
Of an abnormality in the market. If we have resources that are applied to that so I wouldn't view that as a big challenge I, certainly don't lose sleep over it.
Have a.
We have a quick relief valve and can can deal with that but I don't expect that there'll be.
A lot that we're going to have be challenged with.
Because I think the general tone is.
Let's keep people working right and I think the resolution and the entertainment.
Industry is indicative of of that type of thought process.
Right.
I was curious if you could just give some color on the growth in rental revenues between specialty and the core fleet that you saw in the quarter and I am trying to get a better sense of how you.
You think about the momentum for rental revenue growth between those two fleets in coming quarters.
It was pretty balanced this quarter.
So.
Specialties and coming back, especially was strong through last year in Cogs coming back.
Just as the market normalizes.
It was pretty balanced in terms of the growth contributions this quarter and we anticipate that going forward, especially.
Historically is growing faster, but it's a smaller part of the business and now as we sort of focus on core growth.
And the two of those.
This should be relatively balanced.
Yes.
And then just last one for me if you don't mind.
Just going back to the supplier tightness.
Can you just provide color on.
Our current delivery slippage is in terms of the equipment across your fleet that youre seeing and any any additional.
Additional color on just how how much.
How much more extension youre seeing in the slippage.
Yes. This is Aaron.
Ken.
The slippage from delivery to expectation.
It Hasnt changed much from the last time we've.
Our Q2 parties color or.
Much it because some of you at the Investor day, it's about the same and what I would say as you know some.
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Really had struggled to deliver their goods, mostly the smaller ones and then we would pivot and by another supplier or put that capital somewhere else for a segment of our fleet that was grown.
But.
Let a bigger ones are delivering our scheduled fleet, although a little bit late like we mentioned several times.
It's kind of a mixed bag, it's hard to pinpoint a particular OEM, but.
They are all working really hard to satisfy us I know that.
But the.
That's good color. Thanks.
Nevertheless of course.
Sure Ross.
Please go ahead.
Hey, good morning, Thanks, guys.
Can you just touch on your energy exposure and what you are seeing there.
What kind of pick up youre seeing.
There if any.
You had referenced just pent up demand for industrial maintenance.
Where it's happening and then just remind us of your exposure.
Exposure in roughly in how it's divided by upstream midstream and downstream.
So on the upstream part.
Uh huh.
I know the price of oil has accelerated pretty rapidly.
Demand.
For rental gear into that segment, Hasnt really accelerated as fast as the price of a barrel of oil.
We have our basket of customers up in the Permian area that wed like to serve.
And we stick with that play.
On the downstream part we did mention that we continue to expect more turnaround activity or pent up turnaround activity that was delayed that's happening.
Yeah.
Some of our capital some of our new fleet to move into that segment.
I meant to satisfy our customers in that segment as well and we continue that downstream.
Improvement in activity to continue all the way through starting in the fourth quarter and continue all through next year.
And as Darren what is your rough.
Percentage of.
I don't know how you want at the EBITDA percentage of fleet or percentage of sales to two energy.
These days and just upstream versus downstream.
For us the upstream is about three or 4% from the downstream splay five or 6%.
Got it thanks guys.
Thank you.
Our next question comes from Steven Fisher.
Yes. Please go ahead.
Great. Thanks. Good morning, you guys mentioned that mechanics are hard to find I'm curious how the availability of parts is are you seeing any challenges there and how might that be affecting your ability to.
The turn equipment around and get it back out on rent.
This is Erin yes, we have.
Similar parts delays as the fleet delays.
Though.
We have a team here that specifically focuses on fulfill on the parts demand.
At our branches need and connecting with the Oems and other secondary suppliers daily.
I think what we the way we measure our fleet is in our operating model and we can measure how much of our fleet got returned from a rental how much of it's down waiting for parts and the good news is that.
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Degradation of our operating model during the last 15 months. So we are keeping our fleet running and although it's not as easy and efficient getting the parts. We are putting the resources the human capital towards it to to move it along faster than.
The way, we're running our business is.
We really than we were before.
The pandemic.
Very helpful. Thanks, a lot.
Yes.
Ladies and gentlemen. This concludes the question and answer session I would like to turn the conference back over to Elizabeth Higashi for any closing remarks.
Thank you all we appreciate you participate.
Very something today and as always if anybody has any further questions. Please feel free to give me a call and we look forward to seeing you. All soon thank you.