Q1 2022 Herc Holdings Inc Earnings Call
Yeah.
Good morning, everyone and welcome to the <unk> Holdings first quarter 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one two which all yourself from the question queue. You May Press Star two.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Al Elizabeth Higashi, Vice President of Investor Relations and sustainability. Please go ahead.
Thank you Jamie and thank you all for joining us this morning.
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 deck for grant on Dot com.
This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mark <unk>, Senior Vice President and Chief Financial Officer.
We will review our first quarter results with comments on operations, and our financials, including our view of the industry and our strategic outlook.
Repaired remarks will be followed by an open Q&A.
Before we begin our formal remarks I would like to remind you to review our safe Harbor statement on slide three today.
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 I would caution you that our actual results could differ materially from the forward looking statements made on this call.
It also refer to the risk factor section of our annual report on Form 10-K for the year ended December 31 2021.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials.
Finally, a replay of this call can be accessed via dial in or through webcast on our website replay instructions were included in our earnings release. This morning, we have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call I'll now turn the call over to Larry. Thank.
Thank you Elizabeth and good morning, everyone.
Please turn to slide number four I am pleased to report that we achieved new records in the first quarter of 2022 and total revenues rental revenue net income dollar utilization adjusted EBITDA and adjusted EBITDA margin.
Volume and rates contributed to.
The 32% increase in rental revenue over the prior year dollar utilization increased 280 basis points to 41, 4% outstanding performance by our sales operations and field support teams was enhanced by steady demand and a positive operating environment. In addition.
We completed the acquisition of three smaller companies with three locations and opened five new Greenfield locations in the quarter. We are pleased that earlier. This week, we closed on the acquisition of Coverdale equipment Company, a full service general equipment rental company with 120 employees serving construction.
And industrial customers with core operations of the metropolitan areas of Detroit in Grand Rapids, Michigan, Cleveland, Ohio, and Pittsburgh, Pennsylvania.
I'd like to welcome all of the employees of our latest acquisitions to the heart family and thank our acquisition of immigration teams for their work and closing and integrating the new operations and new employees into our systems and team I'd also like to extend our appreciation to the entire team for executing and delivering a record quarter as we saw.
The new year based on the strength of our first quarter performance and our outlook for the rest of the year. We've raised our 2022 guidance for adjusted EBITDA again, and Mark <unk> will discuss that in detail later this morning.
Please turn to slide number five which shows the first quarter results over the last five years, our first quarter results continued to demonstrate outstanding operational execution equipment rental revenue was $526 8 million in the first quarter an increase of 32%.
Or honored $26 4 million compared to the prior year. This increase was driven by solid performance in our core business and growing market share from our specialty businesses total revenue grew 25% to $567 3 million, despite lower sales of rental equipment.
A decision we made to continue to meet requirements of our customers in light of tight supply of new equipment related to supply chain issues from our original equipment manufacturers, we reported an increase of 78% and net income to $58 $5 million or dollar.
<unk> 92 per diluted share in the first quarter, compared with $32 $9 million or $1 nine per diluted share last year.
Adjusted EBITDA grew 28% over prior year to $236 $8 million, our enhanced scale and focus on operating leverage improved year over year, adjusted EBITDA margin 100 basis points to 41, 7% in the first quarter of 2000 to 2022.
Another record.
This is an exciting time for <unk> America on our first quarter reflects the professionalism and tenacity of our team. Our team is committed to providing excellent customer service and expanding our rental solutions to a broad array of customers and industries to achieve even greater success.
The growth goals, we presented at our Investor Day last fall, where based on the foundations for growth we built over the last several several years, we do know how to grow please turn to slide number six with over 56 years of history in the equipment rental industry or 5700 team members work hard to ensure our customers have.
<unk> optimal performance safely 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 at the end of the quarter. We operated 320 locations across the United States and Canada in 40 states and $5.
ADM provinces. This week, we added four more locations with the <unk> acquisition and so far this quarter, we've opened an additional one greenfield location.
The addressable North American market size is now estimated to be $57 billion and growing by about 10% in 2022. According to the American rental Association.
We expect to continue our momentum by addressing the opportunities in the market and to continue to outperform the overall industry as we grow through organic growth supplemented by select acquisitions.
Now please turn to slide number seven.
As you can see from this slide we introduced that we introduced at our Investor day, our major strategic pillars are focused on growing our core business expanding specialty elevating technology, integrating ESG and maximizing our allocation of capital.
We are executing these strategic initiatives and Aaron Birnbaum, our Chief operating Officer will now update you on our progress in operations Erin <unk>.
Thank you Larry and good morning, everyone, what a great start to the year. The first quarter results reflect the strong operating environment, and our increasing scale and enhanced operating leverage our team has done an excellent job executing our strategy.
It is typically the lightest quarter of the year clearly there is more to come now please turn to slide number nine.
Our Q1 results reflect the opportunity we see is by accelerating investment in fleet with average OE see fleet up 23% over last year's comparable period.
Shipman rental revenue in the quarter rose to $526 8 million up 32% compared with 2021, our core business continued to benefit from solid operating performance in all of our regional operations are pro solutions business also continued to contribute double digit growth year over year in the first quarter of 2022 as.
We continue to expand our market share in the rental of power generation climate control remediation and pump equipment.
The integration of the 16 acquisitions, we've announced to date is on track and we continue to focus on additional locations in targeted markets through organic growth and acquisitions.
We will continue to capitalize on our fleet expansion and we are investing 900 to $1 2 billion in net fleet capital expenditures this year.
Please turn to slide number 10, our fleet expenditures at OFC totaled $253 million in the first quarter of 2022, given current equipment rental demand in our strategic management of fleet in this equipment constrained environment, we reduced the level of disposals substantially in the first quarter compared with last year we.
Those $64 million of fleet it always see in the first quarter, which was nearly $50 million less than last year's first quarter. At this point in time, we expect OCC disposals for the year to be about the same as last year.
Our fleet composition at OFC is on the left hand side of this slide total fleet is now $4 $6 billion as of March 31, 2022 about 27% higher than OE see fleet at the end of Q1 last year.
We continue to invest in our specialty fleet, which includes pro solutions and pro contractor and accounted for about 24% of our total fleet as of the end of Q1 2022.
Dollar utilization improved 280 basis points compared to Q1 2021.
A first quarter record of 41, 4%. This reflects well for the rest of the year. Since Q1 is typically the lowest dollar utilization quarter in the year due to seasonality.
As we said on our fourth quarter call. We had most of our 2022 equipment orders and early last year. So the inflationary impact to our 2022 orders should be modest in the mid single digit level.
As shortages inflation in labor costs in fact, the industry, we do anticipate that industry fleet costs, we will continue to rise in 2022 and next year.
Stronger pricing of used equipment and an improvement in our sales channel mix contributed to an increase in equipment sales proceeds as a percentage of OE C, which rose to 45% in the quarter compared with 40% last year.
The average age of our disposals was 90 months in the first quarter and fleet age is now about 48 months. The same as it was a year ago at this time please.
Please turn to slide number 11.
Our diverse customer mix a base of large national customers operating in essential business sectors, and our expanded specialty business continue to drive our sales strategy and provide additional growth opportunities.
We are expanding through the opening of greenfield locations and targeted acquisitions in fast growing urban markets to drive topline growth.
Additions to core and specialty fleet are expected to continue to be growth drivers as we can offer a broader array of premium fleet, while the market remains constrained due to supply chain issues.
We will continue to focus on the expanding addressable markets of climate control remediation pump and entertainment as.
As well as other major verticals, and industrial customers and utilities, and energy healthcare warehousing and manufacturing and commercial construction or.
Our diversification strategy over the last several years targeted new industry verticals to drive healthy and stable growth as you can see by the strong growth. We produced we are successfully growing across multiple industry verticals and across all regions new customer growth continues to be a major opportunity.
In the first quarter local rental revenue represented 57% of total rental revenue in line with the fourth quarter of 2021 and up from 54% in the first quarter of 2021. This growth reflects the impact of additional new local customers added through our recent acquisitions.
Please turn to slide number 12.
Safety is at the core of everything we do and we continue to focus on striving for 100% perfect days throughout the organization.
Our major internal safety program focuses on perfect days that is days with no Osha recordable incidents no at fault motor vehicle accidents, and no dot violations in the first quarter on a branch by branch measurement all of our branch operations achieved at least 98% of days as perfect.
As we further integrate ESG into our operations, we recognize that most of the reduction in scope, one and scope two greenhouse gas emissions will come from fuel efficient fleet, we continue to expand our investment in electric or alternative energy powered fleet, including aerial equipment forklifts select vehicles traffic safety light towers and welders.
More and more of our customers are interested in how we can support our goals to reduce their carbon footprint and we are looking for innovative solutions to a system.
Before I pass the call onto Mark I'd also like to point out how our purpose statement, we equip our customers and communities to build a brighter future describes our commitment to our local communities at.
At our recent pro Expo meeting with 800 of our team members, we honored excellence in sales operations and safety performance.
And also an individual who most promoted our purpose statement with community activities in Atlanta to collect food and clothing for the needy.
Our women in action employee resource group also recently launched a corporate wide initiative to support women build projects through habitat for humanity local chapters in North America.
And I should point out that since Tomorrow's Earth day, we are also encouraging our team members to become involved in local projects supporting the team invest in our planet.
I'd like to thank team hurt for their devotion to operational excellence as well as all that they do to enhance the communities. We serve now I will pass the call onto Mark.
Thanks, Erin and good morning, everyone.
The <unk> team is clearly in high gear and performing at a high level as we delivered record first quarter performance in all of our key metrics the.
The strength and momentum we achieved in the first quarter also bodes well for the rest of the year as we focus on fast profitable growth and continue investing improving the key metrics that create long term value.
Strong demand in most of our key end markets and the ongoing supply chain challenges of equipment manufacturers continue to provide a strong operating environment for the leading rental companies.
As Aaron mentioned, we added early so a new fleet is arriving steadily and we expect fleet growth to drive revenue growth throughout the year.
Our operations team has done a great job with delivering record time in dollar utilization, while integrating new team members customers and fleet into the Heck model.
This consistent execution is excellent performance and strong momentum that will continue throughout 2022 and beyond.
Okay.
Slide 14 shows the summary of our first quarter results compared with 2021.
Equipment rental revenue increased by a very impressive 32% to $526 8 million from $400 4 million in 2021, primarily due to continued volume and pricing momentum.
We are successfully executing the growth strategy, we outlined at our Investor day, and it clearly running in high gear. When you look at our Q1 results.
We are pushing hard on both our organic growth and acquisition strategies and enjoying a lot of <unk> <unk>.
Breaking down the 32% growth in rental revenue for the first quarter. We are pleased with the fact that about three quarters came from organic growth.
This validates our ability to grow our core business, our organic growth is outpacing outpacing the market growth and we believe we continue to expand our market share.
Acquisitions contributed about a quarter of the 32% overall growth in rental revenue, which provides a nice boost from another growth lever and allows us to quickly bring on key Rancho talent and to penetrate key markets.
We have a solid pipeline for M&A and have our integration team working hard welcome our new team members and customers and to the <unk> family.
Our revenue growth is not only fast and impressive but profitable we are delivering excellent results for our investors and creating long term value.
Adjusted net income in the first quarter of 2022 increased 78% to $59 2 million or $1 95 per diluted share compared with adjusted net income was $33 3 million or $1 10 per diluted share in the first quarter of 2021.
Adjusted EBITDA increased 28% in comparison to Q1 2021.
Adjusted EBITDA margins were also a record for the first quarter, improving 100 basis points to 41, 7% in 2022 from 47% in 2021.
All in all an excellent quarter, whereas <unk> sustainable growth mode and growing profitability.
As Q1 is the seasonally weakest quarter to start the year and we were carrying cost increases forward from growth in the business during 2021 and as typical for flow through and margins to be at the lowest level for the year.
With the added Joel to some cost lines late in the current quarter, we along with the rest of the world got a little bit more cost inflation in some line items than expected.
Not a big deal we have an inflation resistant model that will adjust and move on.
The cost per gallon of fuel for example was up 45% year over year, which impacts both our external and internal delivery costs. We have a model that adjusts for inflation and allows us to recover a significant proportion of these cost increases by way of fuel surcharges and delivery fees. However, late in Q1.
These costs moved faster than expected and our cost recovery mechanisms didn't quite keep up.
March over February fuel costs were up 20%, which didnt leave a lot of reaction time adjustments have been made to fuel charges and delivery fees, we expect to see better cost mitigation through the balance of 2022.
We are growing at a fast pace and incurring volume related cost increases as would be expected.
Operating at high utilization and growing the fleet by over 20% in the quarter also puts pressure on our maintenance team and maintenance expenses.
We are building a platform for growth and have added 1000, new team members. This last year about half two existing locations and about half through acquisitions.
All part of our growth strategy, but we will get more leverage on this investment in future quarters than we have in the current quarter.
The EBITDA flow through at 38% is expected to be at the low point for the year and as we dig into the details for this quarter, we see a clear path back to around 50% to 60% flow through in 2022, and this is baked into our updated guidance.
We're lucky to have a solid inflation resistant model and have grown fast and held margins in the historically challenging quarter for inflation.
All of this is manageable within the context of 30% plus growth in rental revenues and as is clear with that performance, we can invest in our business and in our people and continue to improve our adjusted EBITDA margins and Investor returns.
On slide 15, we highlight the momentum in our pricing and utilization trends by quarter.
Graph on the upper left illustrates our success in managing price over the last couple of years and our ability to consistently drive rate growth.
This quarter reflects average rates up 430 basis points compared to last year.
The current market environment of tight equipment supply and steady demand continues to support our focus on rate and we also benefit from our excellent pricing tools and the discipline and professionalism of our sales team and.
In addition, the industry seems to have gotten price momentum back and we intend to continue leading the industry on price.
Track record of executing on price and all sorts of operating environments is clear the momentum in our rates is clear and we expect to increase rates year over year and sequentially each quarter for the remainder of 2022.
Are we see fleet size closed the quarter at about $4 6 billion with a combination of early ordering and savvy purchasing has contributed to the steady delivery fleet in 2022, which is also supplemented by fleet integrated in conjunction with acquisition activity.
Our average fleet on rent it always see in Q1 was up by 29% in comparison to average fleet growth of 23%, which represents excellent execution and a solid operating environment.
Solid utilization continues to improve up by a very impressive 290 basis points in Q1 compared to the same quarter last year.
<unk> reflects.
Our ability to mitigate inflation inflation in fleet costs through rate product.
This positive momentum into <unk> <unk> as a long term value driver going forward and is a powerful and positive impact on our return on assets.
On slide 16, we can see that with no near term maturities, we have ample liquidity to fund the growth goals for 2022 and into the future as we commit capital to invest in our business and drive fleet growth into the new cycle.
Net capital expenditures exceeded cash flow from operations in the first quarter and.
And we reported negative free cash flow of $131 million before acquisitions.
We took a lot more fleet into Q4 of last year and in the current quarter than we would in a typical winter, which is a driver of about 23% fleet growth year over year.
In the current environment, we are taking as much fleet as we can get our hands on and a volume growth of 29% shows that we are putting it out on rent as soon as it hits yet.
We have ample liquidity to fund our growth plans and our leverage at two three times.
At the lower end of our target range of two to three times.
We also paid out a quarterly dividend at the end of March at 57 five.
Which implies an annual payout of $2 30 per share.
On slide 17, we share the latest industry forecasts.
<unk> is forecasting an increase of rental industry growth of 10% to 57 billion in 2022 and.
And a 32% rental revenue growth is eclipsing the broader industry growth rate.
Clearly is much more momentum than the industry in general and are taking market share.
This is consistent with past experience, where 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 hook is a company of scale with a large well diversified mix of customers.
We are in the early stages of the Knicks construction up cycle with steady demand, even before we get into any potential benefits from the proposed future boost to infrastructure spending.
Equipment supplies are tight and our Oems are challenged to manufacture and deliver new equipment due to worldwide supply chain bottlenecks.
This is a very favorable environment are in $4 6 billion of rental fleet.
As our customers really appreciate our fleet availability, the breath of our fleet offerings and our commitment to service.
That 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 specialty solutions business is a real strategic benefit and we will continue to look to gain share and grow that business.
There is pent up demand for maintenance and turnarounds in a lot of our industrial plants and this segment should also rebound in 2022.
There is plenty of demand in most of our end markets to support growth in 2022, and we have the balance sheet and liquidity to be able to fuel that growth by investing in our fleet and our market share and that is what we intend to do.
On the back of a strong first quarter with excellent top and bottom line results and with growing confidence in the momentum. We currently have in our business. We are raising our adjusted EBITDA guidance for 2022.
We have raised the low end of the adjusted EBITDA range to $1 75 billion and the high end to 124 5 billion of adjusted EBITDA for the full year.
That translates to an increase in EBITDA of around 31% to 39% over 2021.
We also raised the bottom end of our net fleet capital expenditures guidance to 900 to one point on $2 billion.
We're in the early stages of an exciting industry up cycle and are excited to be delivering excellent performance and growing confidence as we look to continue to execute on our high growth strategy with that I will turn the call back to Larry.
Thanks, Mark now please turn to slide number 19.
We frequently talk about our vision mission and values, but as you can see from our pyramid safety is at the center of everything we do and we continue to serve our customers and communities. While also striving for 100% perfect days.
We do what's right. We're in this together we take responsibility.
We achieved results.
We prove ourselves every day and we are committed to investing in our communities.
So now operator, let's please open the lines for questions.
Thank you.
Ladies and gentlemen at this time, we'll begin the question and answer session. Once again to ask a question you May Press Star and then one using a touch tone telephone.
If you are using a speaker phone redo asking please pickup your handset prior to pressing the keys to ensure the best quality.
To withdraw your question you May press Star two.
Our first question today comes from Gary <unk> from Goldman Sachs. Please go ahead with your question.
Good morning, Jeremy Good morning, everyone.
Hi, Larry Mark Guerin Liz.
Good morning.
I'm wondering if you could just talk about the <unk>.
Rice and cadence over the course of the quarter. If you don't mind based on the year over year number it looks like maybe you picked up a point of price sequentially in the quarter is that right market can you talk about cadence if you don't mind.
Yes, I mean, it's probably easier just to look at the cadence.
Through the year and then into Q1.
So it's pretty steady improvements in pricing year over year.
Look forward to continuing to execute on that going through the year. So we should have pretty steady improvements in pricing.
Throughout the year.
With favorable.
<unk> for price industry disciplined re.
Turning to the sort of cost pressures that we're under and.
As good at pricing environment as I've seen in 20 years.
And just to piggyback on that last point Mark.
In prior cycles, the industry has pushed pricing in the high single digit range six 7%.
Based on the comment that you just made a moment ago is there a potential that year over year pricing can hit.
Those level of increases.
This year.
Is that feasible from an exit rate standpoint.
Heading into 'twenty three.
Yes, that's possible.
That previous number did come off a much lower debt, so that sort of 6% to 7% range in the coming out of the last cycle was on the back of negative teens.
Sorry year over year comp is a little bit different than what we've got here, but there is momentum in pricing in.
We will continue to push it as high as we reasonably can.
Okay Super and lastly from a time utilization standpoint, you folks have done a lot of work to improve logistics and fleet availability I'm wondering as you're operating.
Adding into peak season here this year.
Is there more room for fleet absorption heading into 'twenty, three or do you think you're getting the full benefits of fleet absorption.
Over the course of this year based on the cadence in the plan.
So time utilization on the shoulders, there's room to improve these will receive that in Q1.
We had a record year last year and Thats, even better this year.
Sure.
That's volume growth as you sort of get into peak utilization in Q in the middle of Q3.
And then going into 2023, there's room for movement again on the shoulders, just based on seasonality and strengthened demand there's room in Q1 in Q4 for utilization.
Improvement in absorption.
Okay I appreciate the discussion thanks.
Thanks, Jeremy as Gerry.
Yes.
And our next question comes from Seth Weber from Wells Fargo. Please go ahead with your question.
Hey, guys good morning, and thanks for taking the question.
I guess, maybe for Mark I, just it sounds like you pulled in your your EBITDA incremental target for the year, a little bit I, just want to make sure that that's.
Really a function of just the operating expense environment and it doesn't reflect any change in how youre thinking about rates given given the drop through on rate is so high and just want to make sure that.
You're not getting any more cautious on your rate outlook for the year relative to where you were three months ago.
No I mean I think.
We couldnt be clear on on rate momentum and sort of expectations for the balance of the ESI upstate.
I've seen it twice already today, we expect it to continue growing.
We expect it to grow quarter over quarter each quarter. This year. So the right now the rate momentum is solid the rate environment is as good as it's been.
20 years, and we will continue executing on right. So that's.
As bullish as anyone can get out right I think sorry over the year.
<unk> is the sort of driver you we are talking down.
We ask you to looking at least flow through in 2022 than we initially anticipated.
A lot of cost pressure, we've got most of the volume growth and the cost increases if you sort of break them down, but there is cost pressure.
And inflation in lines like fuel and maintenance and wages that are impacting the.
Expected flow through for 'twenty, two still above 50%.
Listen as sort of long range sort of target range of 60% to 70% Brian .
Right understood. Okay. Thanks, and then just on the Capex.
The spending cadence is there any.
Help or any way, we should be thinking about just the spending as our second and third quarters about the same or do you think that'll be more.
And loaded towards the second quarter or spy.
Supply constraints still got it.
Keep it more more balanced two Q3, Q and then I assume fourth quarter is the lowest quarter of the year.
Yes, good question.
We basically put our <unk>.
Majority of our fleet orders out in 2021 to our vendors with the with the distinct.
Commitment to them that as soon as they haven't ready we will take it right we're not.
Sort of saying look, let's let's sort of pace. This through the year, we're taking it as soon as it's ready obviously, we normally get a bigger bulk in Q2 and Q3.
But if they have it available we will take it sooner.
Like last year like 2021, we didn't slow down in Q4, and our expectation is that our Q4 will we will continue in a similar fashion to Q4 of 2021 as we prepare for continued growth in 2023.
Okay have you gotten any indication from the Oems that production is getting better that that.
They are able to improve deliveries relative to what you got in the first quarter.
Jeff This is Aaron for the most part.
Our vendor suppliers are delivering.
The product that we expect it to get although as we've said before yes.
And it's <unk>.
<unk> 69 days late some Oems have trouble.
<unk>, what was expected more than others, but we're able to fill that gap kind of being nimble in and finding other opportunities. So we continue to.
We have quite a bit of fleet coming in through this first quarter in Q2 should be a bigger quarter than Q1.
Okay guys. Thank you I appreciate it.
Thanks.
Our next question comes from Ross Gilardi from Bank of America. Please go with your question.
Thanks, Good morning, guys.
Morning Ross.
Just the mechanics of the net Capex guide went up by about $40 million at the midpoint I mean is that in the gross number are you or are you cutting back on disposals relative to your initial expectations.
And then how much of that $40 million do you think is due to cost inflation versus versus units.
So it's mostly do what's really just sort of taking I guess, a little bit on the hedge out the expectations for delivery. So it's coming from.
Paul the gross line sales are in line with our expectations.
We ended the year planning to sell.
Minimal amount of fleet and just maximize the size of the rental fleet.
And they haven't really been any changes to the.
Cost of the equipment from our expectation so most of the lift is coming from.
Just taking huge out of the gross line with no real impact from inflation over our expectations.
Okay got it and then can you just talk a little bit more about your strategy.
On Capex and van to the infrastructure next year.
And.
Do you expect it.
$40 million.
The big number, but it's a small number I guess in the Grand scheme of things, but many of that expected that that additional equipment to arrive earlier enough to influence fiscal 'twenty two or is it more about front loading 2023 and advance an fob.
Infrastructure stimulus starting to scale up at the end of the year.
I think it's more about us continuing the pattern we've had for the last several years.
Ordering early.
And staging that equipment.
In 2003, and making sure that we get plenty of visibility to our Oems. So that we're at the front of the line so to say.
Hi.
<unk> locking those orders down securing production slots and making sure that equipment is flowing as it has been flowing for 'twenty one 'twenty two.
Okay. Thanks, Larry and then just.
Just a couple of more equivalent if I could squeeze and so how much of the EBITDA guide it's from ICD guide increases from acquisitions and how much of it is from either increased fleet on rent or or rate relative to your initial expectations and then just wanted to verify where you think fleet on OCC is by year end 'twenty two I think.
It's around $5 5 billion, but wanted to run that number.
Based on your latest Capex forecasted and where should we be on depreciation for that for the full year.
So if you sort of right down the list and guides us to if you say go midpoint to midpoint being equal.
Equal organic growth in terms of.
Additional volume on rent and M&A and also theres a bit of Messiness to us just in terms of where the.
Sort of the contraction of the range in lifting the range up over the the bottom and so sort of equal parts.
I guess confidence in the outlook.
Organic growth expectations bigger than what we went into the year with and M&A.
And there's a whole bunch of other questions you want to hit me with them sort of one at a time.
Mark what's what's the exit rate.
I know, we see at the end of the year at around $5 5 billion based on your latest Capex forecast and where should we be on depreciation.
The full year.
Okay, yes, good sorry about that yeah, no that's about right in terms of the exit rate on what we see at the end of the year.
And sort of 10% to 11%.
Average, we see as a good sort of marker for depreciation.
Perfect. Thank you.
Thanks Bruce.
Our next question comes from Rob Wertheimer from <unk>. Please go ahead with your question. Good morning. Thanks, Good morning, everybody.
So mark thanks for the cost comments I mean, obviously you guys have a lot going on with investing for growth with incorporating acquisitions some inflation in the business.
Et cetera, I guess, Steven elevated repairs the whole fleet.
You mentioned the fuel costs are you able to say just kind of on a clean basis.
Cost structure pure inflation above or below your current pricing.
Just to just stripping out.
I'd like to cap stripping out the other costs.
No.
This volume is probably the biggest driver Ryan if you sort of look at it in the context of 32% range of revenue growth. So volume is the biggest driver.
Ed.
And then fuel and but I guess.
Talking of fuel directly it's probably 50 50 in terms of volume and unit costs.
Inflation impact on fuel is the most of the line items, it's not as significant.
And wages and maintenance expenses, it's significant in fuel, but its like 50% volume at 50% unit crosses.
Okay, maybe that answers, maybe I didn't ask it cleanly, but wage inflation and all the other pure inflation.
Maybe less than the 40% rental rate running right now.
No.
Wages overall running mid single digits.
And.
<unk> expenses are mostly volume.
You sort of.
The big sort of drivers of Doa So wages mid single digit is the biggest line item in their delivery and fuels the knicks that Scott sort of 50% volume, 50% unit costs and maintenance expenses are.
Mostly volume.
Okay perfect two more one minor one when you do I guess, it's a fuel surcharge or whatever does that come through as rental rate or is that separate and then just if you have any comment on what pricing looks like from the regionals in the industry, whether the industry is cut.
Following price increases and I'll stop there. Thank you.
So.
Fuel surcharges don't come through on rental rate they do come through in the rental revenues. If you look at it in the P&L, but it is not factored into our rate growth.
And yes, it looks like this pricing discipline across the board.
Overall lift.
Across the country across the board in terms of size everybody seems to be focused on.
Pricing.
Perfect. Thank you.
Sure.
<unk>.
And our next question comes from Steven Ramsey from Thompson Research. Please go ahead with your question.
Hey, good morning.
Wanted to.
Yeah again.
On raising the low end of Capex.
Just wanted to make sure is that Q1 delivery being better or is that.
Is that better delivery times in Q2 and Q3.
While Q1 deliveries in Q1 were within expectations, maybe even a little bit better than what we expected.
That said as Aaron mentioned, just a few minutes ago, we continue to see some delays like 30 or 60 day delays, but now we've been experiencing that since the back end of 'twenty and into 'twenty. One so it's becoming more of a normal flow, even though the delivery days are.
<unk> being extended a little bit.
We're just carrying over the past and we're getting the volume that we expected in the quarter. So the volume of deliveries is on target, maybe a little better and and we expect that as we roll through the year it will improve and.
We should see obviously higher deliveries in Q2 and Q3.
Okay helpful and then within.
The fleet specialty.
<unk> is nearing the low end of kind of that target range, 25% to 30% of OCC currently do you expect.
To break into that optimal range in FY 'twenty, two or is that beyond.
Well I think over the next 12 to 18 months, we'll break in to the median part of that optimal range. We continue to invest heavily in it and perform very well.
Okay helpful. And then last thing for me.
Contractors are pressured obviously with the lack of labor and materials challenges.
Getting their projects John is this changing how long your fleet is staying on a job site and therefore, helping utilization or is there some visibility into that dynamic potentially playing out in this business season.
I mean, it's hard to tell there's big projects out there they are able to find their labor to get those jobs started.
I think.
There are some sectors, maybe oil and gas and the fires back up it's going to be hard for them to get that labor to kind of get the rigs going again, so that might be a problem there.
Tried to expand that.
Vertical business, but we really haven't noticed that.
Business was active in Prague.
Projects that are coming online they're coming online.
Helpful. Thank you.
And our next question comes from Ken Newman from Keybanc. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking the question.
Hey, Ken.
I just wanted to put a finer point on the SG&A leverage in the <unk>.
Second quarter and the rest of the year I understand you're expected to improve versus the first quarter, but I'm curious if you think that the SG&A leverage can return to prior year levels barring another spike in fuel costs.
So theres not a lot of fuel.
So that's not really a driver.
Youll see that.
The same cadence will you will see the same cadence gone through the quarters.
SG&A as a percentage of rental revenues is the highest in Q1 as it is in any quarter of the year. It will reduce as a percentage of rental rates going through the year just with.
As the revenues increase and you get more leverage off of that.
<unk>.
In terms of.
Flow through sort of taking down our expectation will be conservative on our expectation with flow through most of that in <unk>.
Thats not really SG&A drive us I think to answer that succinctly, we will get more leverage on SG&A.
Gone through the year in 2022.
Understood.
And then for my follow up.
You've spoken pretty positively obviously about the rate environment about improving volumes going through the year.
Can you help us kind of think about how you're thinking about dollar utilization. It sounds like you expect the first quarter to be the low watermark for the year.
Is it reasonable to think that dollar utilization is up year over year every quarter for the rest of that remaining three quarters.
Yes.
Yes, no I mean, if you think about cost inflation going in.
It takes one year of your fleet, we're holding that fleet for seven years. So we've really got seven years to recover the any increase of cost of the fleet with right.
So.
That's not a real challenge and Thats really kind of a key thing to focus on in terms of having an inflation resistant model.
So I think thats the way.
To approach it in the sort of seven years to get back this quarter's cost inflation on the fleet and we've got it.
Very good shot at doing that.
Understood. Thanks.
Got it.
And our next question comes from Mig <unk> from Baird. Please go ahead with your question.
Thank you good morning, everyone.
Okay.
I think I'll just start with a quick clarification on your earlier comments Mark when you were talking about rental rate improving sequentially.
Make sure. We're clear are you are you meeting Bob.
Year over year growth in rental rates will continue to accelerate sequentially as the year progresses.
Perfect.
Yes, I think we are looking to print increasing year over year growth from increasing from the four 3% that we've got in Q1, each quarter going forward through 2022.
And that implies sequential rate increases.
Okay, I see and again given the base effects that you commented on I'm sort of curious as to what gives you the comfort or confidence that these trends can be sustained on more difficult comps as the year progresses, and then maybe to an earlier question.
Is it fair to assume that the exit rate on rental rates down into 'twenty, three could be somewhat north of 5%.
So when you just look at our history we.
We haven't.
Had any commentary around base of fixed width right right. We've got an ability to raise rates each quarter sort of year over year in this type of environment in and we're looking forward to doing so in a more favorable environment to what we've done it historically.
Historically.
We're at four three we're saying it's going up each quarter, then that's hitting up towards five so yes, I think we're looking at.
Certainly something higher than four three by the end of the year and we will continue sort of pushing it.
As far as we reasonably can there's not really a desire to run that up into a shaving or are in Asia will go sort of.
And just put it all out there in one quarter, we'd rather have a steady improvement.
This is coming from our national accounts, where we need to sort of work in a competitive environment and just manage this in a modest way.
Manage the relationship with our customers. So we're not looking too.
Take advantage in and gouge rates, but we need to recover the costs in that business and we will look to do that sort of steadily and modestly through the course of the year.
Sounds good thanks for that clarification and then.
A question on the flow through on our EBITDA.
You were pretty clear as to your full year expectations, but obviously, we started pretty slow at 37% change. So I'm kind of curious as to how we should be thinking about the cadence of this flow through.
Do you fully catch up to that 50% plus range in the second quarter or is this more of a back half loaded type situations.
Yes, I mean, you're right it's back half loaded.
So there is a leverage a portion of its portion of it is just.
That we've got in Q1 that we don't see recurring in Q2.
But a portion of it is just leveraging this investment and fixed costs that we've made.
With higher revenues as we build through so as you get into your higher revenue quarters, which Q3 and Q4, you get more leverage on that and improve the.
Flow through obviously to get to 50%, 50% to 60% for the year it will have to be higher than 50% in the back half to make up for the.
The <unk> printed in Q1.
Okay, but sequentially, we shouldnt be thinking considerable improvement just given everything that's happening with cost it's more of a Q3 Q4.
What you are saying, yes.
Steadily improvement each quarter through the through the year.
Yes.
And then lastly, sort of a longer term question.
You provided.
<unk> targets at your analyst day.
Memory serves us.
Two and a half to $3 billion over the 2021 2024 timeframe.
A few months have gone by here and obviously the demand environment is pretty good we have more clarity on infrastructure I guess I'm kind of curious if your thinking on this.
Capex through this intermediate term has changed at all in terms of either the low end or the high end.
And also.
Our cadence in terms of how youre looking at deploying this capital through the period might've shifted at all.
So that guidance was pretty much organic guidance right. So as the M&A stacks up at MNI those branches.
Acquisitions take a little bit more capital so that increases that number.
Where we're at.
In line with our 2022 expectations, but probably getting more bullish and to 2023. So I think to the extent that we are confident in the end markets and competent in the cycle, we'd be looking to.
Spend over and above that.
Capital guidance that we put out last year.
Very helpful. Thank you guys.
Thanks, Mike.
Our next question comes from Don wildly from Northcoast. Please go ahead with your question.
Thanks.
Just two quick questions for me was just hoping to understand on the acquisition side of things.
How do we think about the revenue contribution for acquisitions for the year I know you said it was about 25% of the growth in Q1.
Is that a good proxy to use for the rest of the year or is the contribution from those lines differently and then just a clarification question.
The 4% rate this quarter and then you kind of.
Optimism that it could potentially get better from here.
Is that what's baked into the guidance is plus 4% price.
<unk>.
Is that the number that didn't.
And the guide or is there a different number there.
So you under cover stonewalling from Northcoast.
John Yes.
I am Andre.
John Youre on a student loan lender.
Rendering.
So John I think so the acquisitions, if you think through that.
Almost 500, we did last year the full impact of that is running in Q1 into the guidance as expected right. So that's not part of the right rate.
We did.
The larger acquisition <unk>, which we just closed yesterday that.
Has the most impact on the lifting guidance a niche that's factored into the rice.
And then.
The what was the other part of <unk> Christiansen pricing, yes. So we've got four 3% rate in Q1, we're saying we're going to grow that every quarter. This year. So we do have more than four 3% pricing factored into our guidance.
And then just on the M&A side of things how would you characterize that.
The pipeline. There obviously you guys are talking about wanting to get more fleet should we interpret that same level of optimism and enthusiasm beyond the M&A side, though.
Maybe there's more.
More properties.
Closed in the quarter on the horizon for the rest of the year or are you going to take some time and tenant try to level things out of it.
Now we have a John .
John we have a fairly robust pipeline of both smaller and larger.
Acquisitions are strategically located in markets and in product loans, but.
<unk> focus on what we want to do on our top 50 Msas.
<unk>.
A robust funnel and we hope to continue along the same path that we demonstrated in Q1 early Q2.
Great look forward to it thanks Ed.
Thanks, John I think we have time for one more question.
And our final question today comes from Steven Fisher from UBS. Please go ahead with your question.
Great. Thanks for taking my questions.
I think you mentioned to Ross earlier that you don't expect any change in the inflation to your fleet purchases. Just curious is that because there are no further surcharge requests or increases in that pricing.
This year from your major suppliers after sort of the agreements last year.
Or is that Youre, just able to say hey, no we already have our agreements for this year.
We have had some very few.
Less than a handful of requests from some suppliers for.
Some consideration around surcharges based on incremental costs.
We've been able to.
For the most part avoid that or diminish slot and as Mark mentioned earlier, if we did see and we bring it would be minimal and it would happen. We are seven years to recover those costs, but the vast majority I would say 99% of <unk>.
Our suppliers have not requested any.
Surcharge and like I said less than one handful of suppliers.
So it's very small.
Factor and loans that have been requested have been minimal.
The comment I made was that the cost of the fleet that we received in Q1 was in line with the <unk>.
The inflation was in line with what we expected we do expect cost inflation going forward. So there will be additional cost inflation on that fleet going into 'twenty three over what we've been paying in the first quarter of 2002.
Okay. That's helpful. And then just you mentioned the ability to catch up on pricing for fuel costs in Q2 after that March step up.
Is that going to end up just being sort of a dollar for dollar going forward.
Where you are less than a dollar for dollar offset in.
In say February and March or can you actually.
Get that pricing ahead of them.
Ahead of what the fuel cost increases and sort of generate a margin on that.
So we've done.
So are we done on charge the customers unusual about fuel.
If you like so.
A new pilot has recovered in the surcharge.
The margin will come back.
In Q2 so.
Surcharge when after the cost increases really late in the quarter and we will get the benefit from that going into Q2, which will.
And pick that flow through.
But no we don't really get a dollar for dollar of every unit of fuel that we put in in terms of charge backs.
Thank you very much.
Thank you.
And ladies and gentlemen at this time, we have reached the end of today's question and answer session.
I'd like to turn the conference call back over to Elizabeth Higashi for any closing remarks.
Thank you Jamie and thank you.
Everyone for joining us on the call today as always if you have any further questions. Please don't hesitate.
Give me a call and we look forward to seeing you often.
Thank you.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining US. This morning, you may now disconnect your lines.