Q1 2022 United Rentals Inc Earnings Call
[music].
Please stand by your program is about to begin.
Yeah.
Good morning, and welcome to the United Rentals Investor Conference call. Please be advised that this call is being recorded.
Before we begin note that the company's press release comments made on today's call and responses to your questions contain forward looking statements. The company's business and operations are subject to a variety of risks and uncertainties many of which are beyond its control and consequently actual results may differ materially from those projected.
A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release.
For a more complete description of these and other possible risks. Please refer to the company's annual report on.
On Form 10-K for the year ended December 31st two 2021 as well as subsequent filings with the S E C.
You can access these filings on the company's website at Www dot United Rentals Dot com.
Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events circumstances or changes in expectations.
You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow adjusted EPS Ebitdas and adjusted Ebitdas.
Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure.
Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer, and Jessica Graziano, Chief Financial Officer.
I will now turn the call over to Mr. Flannery, Mr. Flannery you may begin.
Thank you operator, and good morning, everyone. Thanks for joining our call.
I want to frame my comments today around one word demand.
2022 is shaping up to be a year of record demand for our services.
This is the driving force behind our strong first quarter results were reported and it underpins our decision to update our guidance.
As you saw yesterday, we now expect our total revenue.
Adjusted EBITDA and free cash flow to be above our original outlook.
This reflects the positive impact of the new cycle, we talked about in January and we're excited to continue that conversation today.
I'll start with some highlights in the quarter.
It became clear that this was not typical seasonality.
Our rental revenue tends to be down from Q4 to Q1 as winter sets in and that's true for the industry as well.
But this year, we saw only about half of that normal decline.
And as you may recall, we brought in more fleet than usual at the end of last year.
And that capacity helped us to capitalize on demand and deliver strong results in key metrics.
Our first quarter rental revenue and adjusted EBITDA, both increased by 31% year over year to record levels.
And we improved our adjusted EBITDA margin by 270 basis points to 45%.
And this gave us a strong flow through of 57% for the quarter.
And we also drove a 200 basis point improvement in return on invested capital to 10, 9%.
And while the numbers speak for themselves.
The drivers behind the numbers that we want to focus on today.
First.
The underlying macroeconomic growth, which continues to move in the right direction.
Also the sustained rebound in many of our end markets coming out of Covid.
And lastly, rental penetration in our construction and industrial sectors.
We expect all three count wants to continue for the foreseeable future.
We're also confident that we're gaining share with key customers.
As we leverage our ability to solve their problems.
This is the best way to further differentiate United rentals in the customers eyes, and importantly, we see runway here as well.
And Theres, a future tailwind emerging from the infrastructure legislation, we're starting to have conversations with customers about federal projects that should kick off in 2023.
A diverse mix with projects for road and bridge work water control harbors and ports, but also on the tower.
I also want to call attention to something that may not be so apparent on the surface, which is just how good our team is managing growth.
When demand ramps up in our business it requires a tremendous amount of operating discipline, especially with customer service.
We're very fortunate to have a world class team standing behind our strategy.
There's tangible value to this we set the company up to be opportunistic in our people at solid execution.
I'll give you some quick examples.
The first quarter gave us a big lever for growth with demand running about seasonality.
We had the right people and the.
The right fleet in place to pull that lever.
And as a result, we achieved a 13% year over year increase in fleet productivity with strong incremental flow through to the bottom line.
The team also sell that safety, keeping our recordable rate below one for the quarter, while safely onboarding and training over 1400 new employees.
On the ESG front, we made headway on a number of initiatives.
For example in March we added power Bank systems to our fleet. These lithium battery packs have zero emissions and replace some of the diesel fuel used by generators.
The Oems are beginning to move faster with R&D, which should make hybrid and electrical solutions more viable on job sites and we welcome that because we're firmly committed to a sustainable future that makes sense for our customers.
So stay tuned for more updates on that going forward.
The flesh out the backdrop for everything I just described.
Our operating environment is in many ways. The same positive broad based outlook, we shared with you in January but with an extra layer of visibility.
Our line of sight for the balance of 'twenty. Two has improved based on what we saw in Q1, including the number of projects underway.
Solid backlogs and the level of customer bid activity.
Not surprisingly our customer confidence index improved as well.
The underlying data supports it.
All of our regions had significant double digit increase in rental revenue in fact year over year growth in the first quarter outpaced the growth we saw in Q4.
Another positive indicator is the continued strength of the pricing environment for used equipment.
Well, we made a strategic decision to sell less equipment in the quarter relative to our initial plans to make sure we could take care of the customers and the robust demand we were seeing.
But when you look at what we did sell our or we see recovery levels improved from the fourth quarter and our used margins set a new record.
More broadly the data on construction starts and backlogs.
The Abi and the Dodge momentum index all remain positive.
In fact, it's hard to find a leading construction indicator that isn't flashing green right now.
We factored all of this into our guidance along with some projected headwinds like inflation.
But we're not immune to the challenges in the macro.
But we mitigated the impact of inflation in Q1, and we're confident that we'll continue to manage through any challenges successfully.
So thats the big picture.
Rounded out with some details at the market level.
In the first quarter, our rental revenue from non res construction was up 28% year over year and.
And infrastructure was up 17%.
Industrial also trended up with 13% year over year growth.
That 13% growth is encouraging because industrial was on its way to recovery before the pandemic hit.
Once the supply changes sorted out we expect that industrial like infrastructure will be another sizable runway for us beyond 2022.
Our specialty segment had another excellent quarter led by our power business.
Every specialty line delivered double digit year over year growth in rental revenue in the segment as a whole grew almost 48%, including the benefit from general finance.
It's been 11 months since we completed that acquisition in the mobile storage and modular office business is quite right into place.
We've given the specialty business is more resources and then cross selling ahead of schedule. This has all the hallmarks of a home run for our customers.
We said at the time, we close that deal that was one of the double size of that business five years, while 11 months and we're firmly on track to make that happen.
Additionally, in specialty we opened 13 cold starts in the fourth quarter and the first quarter towards our target of about 40 cold starts this year.
So to sum it up.
Conveyed the scope for the market opportunity going forward, and our competitive position and to capture that growth.
The prevailing trends that matter to our business are market driven and our markets are healthy.
It's why we've been bullish about this year from day, one and why we raised our guidance when demand continues to track above our initial forecast.
2022 is off to a very strong start with all the makings of a year of record results.
Now, yes will go over those results and then we'll go to Q&A over to you.
Thanks, Matt and good morning, everyone.
I'll build on Matt's comments by saying we are very pleased to have delivered record first quarter results across virtually every financial metric that momentum carrying into the second quarter, along with strong customer confidence and our increasing visibility supports the raise to our 2022 guidance for revenue adjusted EBITDA.
And free cash flow I'll share more on our updated guidance in a bit let's start with a closer look at the results for the first quarter.
Rental revenue for the first quarter was a record 2.18 billion, that's up $508 million or 35% year over year.
Within rental revenue Oh, we are increased $392 million or about 28%.
Our average fleet size was up 16, 4%, which provided a $231 million tailwind to revenue.
Fleet productivity was better by a healthy 13% contributing $183 million and fleet inflation of one 5% with a drag on revenue of 22 million and rounds out the change in OE.
Also within rental ancillary revenues in the quarter were higher by about 99 million or 43%, which is mainly due to increased recovery of delivery fees and other pass through charges.
Re rent was up $17 million.
Sales for the quarter were 211 million a decline of $56 million or about 21% from the first quarter last year.
We decided to sell less fleet. So far this year, mainly to support the robust rental demand we've seen through the first quarter that we expect will continue into our busy season.
The market for our used equipment.
Continue to be very strong supported primarily through better pricing and a higher percentage of fleet sold through our most profitable retail channel.
Adjusted <unk> margin was 57, 8%, which represents a sequential improvement of almost 560 basis points and year over year improvement of just over 500 basis points.
Let's move to EBITDA.
Adjusted EBITDA for the quarter was 1.14 billion another record for us and an increase of 35% year over year or $266 million.
Dollar change includes a $317 million increase from rental.
In that <unk> contributed $278 million.
Ancillary was up $37 million and reruns added $2 million.
<unk> sales helped adjusted EBITDA by $8 million, while other non rental lines of business provided $11 million.
SG&A was a headwind to adjusted EBITDA of $70 million driven in part by higher commissions on higher revenue.
And as expected we saw certain discretionary costs continue to normalize.
Also coming in as expected were adjusted EBITA margin and flow through for the first quarter.
Adjusted EBITDA margin was a solid 45, 1% up 270 basis points year over year with a strong flow through of 57%. This reflects in large part excellent cost discipline across the business as we manage inflation, including in areas like delivery and fuel.
Increased fleet productivity and higher used margins also helped to offset not just inflation pressures, but the impact of normalizing costs like overtime and TNT.
I'll shift to adjusted EPS, which was a company best of $5 73 for the first quarter, that's up 66% or $2.28 versus last year, primarily from higher net income.
Looking at Capex.
Gross rental Capex was 482 million in Q1, which is higher than a typical first quarter and follow the fourth quarter last year, where we brought in a record amount of fleet.
That's the math earlier point, we've managed our fleet levels to service robust customer demand. So while our fleet levels grew sequentially in what is typically our slowest time of the year, we've put that additional fleet to work supporting the 13% increase in fleet productivity I mentioned earlier.
Our proceeds from used equipment sales were $211 million, resulting in net capex in the first quarter of 271 million, that's up $243 million versus the first quarter last year.
Now turning to ROIC, which was a healthy 10, 9% on a trailing 12 month basis.
That's up 60 basis points sequentially, and 200 basis points year over year.
Importantly, our ROIC continues to run comfortably above our weighted average cost of capital.
Let's turn to free cash flow and the balance sheet.
<unk> $572 million in free cash flow in the first quarter after investing a record amount in capex.
We've continued to delever the balance sheet, which is rock solid.
Average with 2.0 times at the end of the first quarter down 20 basis points sequentially and 30 basis points from first quarter 2021.
I'll note that our leverage is currently at the lowest level in our history.
Liquidity at the end of the quarter was a very strong $3 billion. That's made up of ABL capacity of just over $2 9 billion and cash of $101 million.
A quick note on our share repurchase program, we spent $262 million through March 31 on our current $1 billion program, having bought back just over 800000 shares we still expect to finish that program. This year.
Well, let's look forward now and talk about our updated guidance for 2022, which we shared in our press release last night.
Total revenue is now expected in the range of 11, one to $11 5 billion or an increase of $450 million.
Matt shared a number of insights on the demand environment and that is what underlies. This raise broad demand we are seeing across the geographies in which we operate and the end markets we serve.
We have confidence that we can capitalize on that strength in our end markets and flow that through to the bottom line.
That will come largely from a combination of better fleet productivity and a continued focus on cost as we manage inflation in our business as.
As a result, we have raised our adjusted EBITDA range to be 5.2 to $5 $4 billion up $250 million from our previous guidance.
At the midpoint, we will increase EBITDA margin by 150 basis points and deliver strong flow through for the year of about 56%.
Our range for gross and net Capex is unchanged.
We'll expect to source $3 billion of growth Capex at the midpoint.
Similar to our actions in the first quarter for the full year, we expect to sell less fleet than planned given the demand opportunity.
However, we expect proceeds on those sales will remain consistent with our original guidance considering the current strength in our used market.
That leaves our net Capex guide unchanged as well.
And finally, our free cash flow guidance has increased $200 million as we now look to generate between one seven and $1 9 billion.
That increase is mainly due to higher operating profit expected for our business this year.
Now, let's get to your questions. Operator would you. Please open the line.
Certainly at this time, if you would like to ask a question. Please press star and one on your Touchtone phone you may withdraw yourself from the question queue at any time by pressing the pound can you once again that is star and one to join the question queue.
And our first question comes from David Raso. Your line is open.
Hi, good morning.
Morning, Jamie to the decision for the gross Capex.
The decision not to increase the gross capex, how much of that is a conscious decision focusing a bit maybe a little more on margins and returns versus just the inability from what youre hearing from your suppliers to get higher than the rest of the year above.
Original plan.
Sure David well the margins and returns are always going to be the first focal points.
In any year.
Specifically, even with a demand environment that we're having right now we pulled a little bit as you know we spent a lot in Q4 as I mentioned in my prepared remarks. So we got our heads running start and then we even pulled a little bit more into Q1 to feed that strong demand.
Unfortunately, we don't think we're going to have that same opportunity in Q2.
Q3 orders are just not going to be able to be pulled forward. So.
It is certainly our suppliers are working real hard to keep pace with the orders. We have I. Just don't think we're going to have the opportunity to accelerate what that does to your point. It gives a great opportunity for us to continue to focus on returns and margins and I think thats, what our updated guidance tells you where folks.
With that being a focus but I know the comps get harder on the time utilization, but how should we think about the cadence of fleet productivity the rest of the year.
On <unk>, you broke up a little bit I assume you're talking about fleet productivity, Yes, correct fleet productivity.
So as we talked about in January we're going to have tailwind on absorptions last time mute here in Q1, and we did and we even exceeded our expectations as we talked about how this was it was a much different seasonal drop.
Q4 to Q1 rent revenues than would be normal almost half of what what normally would happen. So that really drove that 13% will lose that tailwind in Qs two through four here as we really got hot last year in quarters two through four so we'd be pleased to match that level of absorption that leaves us full.
We are still with a great opportunity to drive mid single digit fleet productivity, we don't try to forecast that but just to help people see what's the gap between our very robust, 13% and a full year number that will probably look more like mid single digits is really just the comps.
And lastly for me the Incrementals for the year or you're targeting about 56%.
Just curious now that you have this level of visibility for the rest of 'twenty two and you know we can debate what 23 is going to bring but just from the way you play it out the rest of the year and your budgeting how shall we just early stages I'm not asking for 'twenty, three EBITDA incremental guidance, but just a sense of.
How much do you feel this 56% is sort of a sustainable rate or is it a little bit more about hey, this is a year, where it's still a little more focused on rate.
That could help drive the margins, maybe some year over year cost relief relatively speaking versus rate just trying to get a sense of how to absorb what is.
I see a pretty impressive incremental that you're targeting for the whole year. Thank you.
Hi, David It's it's Jeff I'll take that one at least to start so I you know what.
We feel pretty good that as we look forward and to your point I mean, we haven't even started the budgeting process for 2023, but I will say as we look forward at what we believe could be another good year for us another growth year for us in 2023.
We also feel really good that we would be we would continue to deliver you know flow through in that 50% to 60% range right with the setup of a very constructive top line and then the cost management that you can expect we will continue to focus on as we go into 2023, So I would say.
From our perspective, we're confident that.
With the right environment, we're still delivering this kind of a strong flow through going forward.
Alright, thank you.
Thanks, David.
And our next question comes from Rob Wertheimer Your line is open.
Hey, good morning, everybody good.
Going round one Rob.
So you look at your margin performance is up 460 bps from the offline.
Some of the best you've ever had.
And I'm curious how much of that you kind of touched on that on the operations to start the call. How much that was you know rental rates have gotten good maybe the industry as a whole constrained maybe have a little bit of a.
The advantage through your millions.
Billions of supply and how much was just utilization.
Utilization all of those things you work on on making operations smoother and keeping margins when we come out the other side as volumes have been very strong. So maybe just was it was it abnormal price or was it the whole package this quarter.
Question.
Yeah, I think it was really the whole package, what we've been building too.
Supported by robust demand right, let's not forget topline growth does a lot and haven't set ourselves up to take advantage of that topline growth in a profitable way is real important but that's not a light switch we would have been even though we don't talk about the components of fleet productivity individually, we certainly focus at the field level on those components.
On a daily sometimes some would say hourly basis and we built the tools for the team to be able to do that so that's really what our what underlies that the demand and the discipline to run the business effectively and I'm very pleased that the industry is doing the same overall I'm very pleased with the growth and the professionalism and the discipline that the industry as a whole.
And I think Thats whats driving these kind of margins as well as everything you know from having visited our stores right. The processes that we've developed over many many years.
Many of them embedded if not all of them embedded and supported by technology improvements So really pleased.
Perfect. Thank you.
Okay.
Thanks, Rob.
And our next question comes from.
Steven Fisher your line is open.
Great. Thanks, good morning.
Good morning, with your view of mid single digits on fleet productivity for the year that obviously reflects a big slowdown from.
And the 13% because as you said you've got the tough comps against really strong utilization last year, So I guess.
Maybe.
Just to kind of frame for people you can just remind us.
Of the metrics that you're really trying to manage to and how much are moderating fleet productivity.
Matters to what you're really trying to achieve here because I don't know if youre anticipating somewhere in that bag.
Back part of the year, our fleet productivity being kind of negative or zero in any quarter, but how.
How much does that matter to really what you're trying to achieve.
Yeah, So and I know it gets a little I'll try to be helpful. Because I know as we've changed fleet productivity is a little confusing for some but it would be very clear nothing is slowing down there was a comp issue that we will no longer enjoy as we got really busy last year, So fleet productivity as a year over year metric.
Now, we do not certainly don't expect.
I very rarely say certain but I'm pretty certain we're not going to have negative fleet truck activity at any point this year that would be inconsistent with the supply demand dynamics and everything that we've talked about all we're stating is from the time utilization comp that we no longer have we're gonna be relying on the other two factors alone to draw.
Ive fleet productivity, but they will still be significant opportunities and will probably come in somewhere around mid single digits. That's really how we're guiding people towards it Steve not a slowdown in any way shape or form.
Okay, that's very helpful.
And then.
It seems like you've been able to manage fuel costs fairly real time can you just kind of give us a sense of what it is that differentiates your ability to manage that so well and then some of the other the other cost inflation that you seem to be managing pretty well.
<unk>.
Morning, Steve It's Jess so the first thing I'd say is the opportunity to pass some of those costs through right gives us that that that.
That ability to absorb the increase in and protect the P&L first and then second I would say you know Matt mentioned, a couple of minutes ago about the processes that we have and the technology that underscores that those processes built within our technologies.
Is the.
Fuel calculator that basically stays real time or as close to real time as possible with the changes in fuel prices that we then use as part of the equation for how we we charged through delivery cost and delivery recovery. So we're able to keep pace using technology across the network are in.
During that we're covering as much of that pass through cost as possible.
Great. Thank you.
Thanks, Steve.
Yeah.
And our next question comes from Ross Gordon Your line is open.
Hey, good morning, guys Hi, Robert.
Could you talk a little bit more about.
Growth Youre seeing on the industrial side of the business.
What are some of the more structural pockets.
Or that are driving the business be it semiconductor capacity installation BV technology.
Yeah.
Yeah.
Pretty broad like most of the rest I'd say chemical energy, leading away oil and gas, but the point I made about industrials, if you guys remember.
Pre pandemic right industrial had a couple of tough choppy years who's starting to rebound.
Just before the pandemic and then it'll all got stalled. So those are the markets that were stressed and now to see if they we had 13% growth in the beginning of Green shoots I really believe specifically in some of the end markets. We're focused on like downstream like chemical right. There, they're really going to start taking off what we think is going to create a future <unk>.
And next year.
That's really a point that we were making about industrial overall now non res as you all know I mean, nonrenewals up 28% for us as I said in my prepared remarks, that's been running really hot and this is without tailwind all these numbers of infrastructure, which we feel is coming and.
We haven't even talked about onshoring, which is another great opportunity is there as the world tries to figure out how to work through supply chain.
A lot of conversation and hopefully funding put behind that opportunity here in North America.
Alright, great and then.
One of your suppliers in particular is talking about.
A transition evolution more to formula based pricing and are you hearing that consistently all of your major suppliers.
Does that make it harder to circumvent the cost inflation into next year on equipment or are you doing anything in terms of committing to longer term supply agreements.
Dampen the cost inflation into 2023.
Yes, so we always talk to our vendors about opportunities and challenges on both ends including rising cost commodities.
So theoretically it makes sense.
Haven't put it seemed that put into practice for us, but we'll see what it brings.
I have a lot of time cost and pricing together as long as it's a two way street, but well see we're opening as we talk a lot with our partners, we havent really delved into that specific topic was done but.
You know it's important for our for us to have open dialogue on that and theoretically I really like the idea of timing costs and pricing that directly together.
Got it thanks, and then maybe just lastly, what what specifically are you hearing on U S. Federal infrastructure into next year I mean, do we do we have shovel ready projects like ready to go by the end of <unk>.
'twenty, two or anything any subtle timing shifts.
That you've learned about relative to what you guys said last quarter.
No shifts, but I would say, we always kind of thought it was going to start in 'twenty three we're starting to hear more real planning type conversations where it's no longer just.
Discussion about when the funding is going to come but people starting to plan how.
They're gonna activation materials labor so.
Not anything new and not anything that people don't have access to but but certainly I would say a louder more steady drumbeat.
Got it thanks very much.
Yes.
Yeah.
And our next question comes from Jerry.
<unk> please.
Please go ahead.
Yes, hi, good morning, everyone.
Good morning, Jeff.
Really nice performance from a free cash flow statement.
Your guidance and also on the balance sheet I'm wondering if you can just update us on what your M&A pipeline looks like and specialty versus general rental versus how you're thinking about.
Buyback from here thanks.
Sure I'll take the M&A part, let's just speak to the buyback the M&A probably boring for you to hear it but it is true the M&A pipeline remains robust and we look at a broad spectrum of opportunities, including looking for those channels like General finance that also would add new products to our portfolio. So we're on the lookout and we don't have.
If anything is imminent right now.
But the pipeline for Boston, We we've had a couple of small deals that we've we finalized here in Q1 and.
We're working a whole gamut and we do certainly have a lean to specialty specifically specialty that will add new product lines, because using G. F. N. As an example, it's really easy for us to grow those businesses once we put them into our network and then Jess.
Speak to you on the share repurchase sure. So you know as I mentioned earlier were $262 million into the $1 billion program, we're going to keep buying against that program. We'll finish. It. This year you can expect us to continue to buy it in our.
Our normal way right with with pretty consistent buys over the period.
And and we'll we'll definitely look to finish that program. This year what comes after that we will see we will talk to our board and we'll let you guys know accordingly.
Okay, Great and then just to transition to the EBITDA margin performance.
This quarter, if we were to apply just normal seasonality off of that run rate that you folks delivered here that would get a couple of hundred basis points of upside to your full year margin guidance. So I know it's super early in the year, but are there any one time type items in the first quarter that.
It might not be helpful over the balance of the year or anything we should keep in mind compared to that normal seasonal pattern.
Yeah, Great Great question, Jerry there's actually nothing discrete that we would call out.
You know that you should be thinking about as a carry forward into into the rest of the year that affected Q1, or even something that we see affecting the rest of the year.
Great. Thanks.
Sure. Thanks Kerry.
And our next question comes from Mig Durbin Your line is open.
Thank you good morning, everyone.
One of them I want to go back to the fleet productivity.
It sounds like.
Time utilization is no longer a lever or it so just maybe a pretty modest wyman.
That mid single digit.
The comment that you provided that is largely driven by pricing I'm presuming. So I guess I guess my question is.
From a from a pricing standpoint, what are you seeing out there relative to prior cycles because.
Now my guess would be that given how tight the supply demand of equipment currently use and the fact that we're seeing some pretty unusual inflation in terms of equipment cost to <unk>.
<unk> ride by now it should be much much better than what we have seen over the past decade. So if I look at something like 2012 for instance, you should be able to do at least what you've done in 2012 as far as pricing is concerned. So I don't know I would appreciate some color color here and if there's anything maybe that I'm, maybe misreading in terms of.
Where we currently are from a price and the ability for the industry.
No I don't think that Youre misreading it I'll make I think you're dead on as far as the end market and the supply demand dynamics, where I think we.
We were maybe you have to look at this through a different lenses.
We did have a disruption technically a little bit in 15 from the timelines that you're speaking to in oil and gas and then obviously through COVID-19 , but we didn't have those huge pricing declines right 15, 20% declines that you had when you came out of <unk>. So it would be normal not to have that kind of bounce back.
Matt.
But I don't disagree at all with your point about that we have an opportunity here to continue to focus.
Dry fleet productivity because of the supply demand dynamics. It's just may not be I wouldn't set 11 12 as a baseline for that because there was so much recovery to get back so.
I think you've heard from the others that report pricing is you've had both actually in the last two days you've had you've had both ends of that spectrum all of the the mid single digits and and I think that's consistent with what the industry should be able to achieve and we're very focused on.
Yeah, No I appreciate the.
The point on comms.
But my follow up.
I Gotta go back to Capex as well gross cat box.
You know at least optically at the midpoint of your guidance. Your gross Capex is flat relative to what you've done last year.
And I'm presuming that you know equipment pricing is probably up year over year. So again I'm going to ask the same questions have been asked.
Given the fact that the business is doing well.
Why should we be looking at flat gross capex year over year, what's the constraining factor and then if there is a constraining factor should we be thinking for maybe increased spend in 'twenty three it maybe Oems <unk> ability to convert on backlogs and delivery equipment.
Increases thank you.
Sure. So first I'll touch on the first base of the part about it being flat. It's just remember how back loaded that capex was to get to the 3 billion last year, a little bit of a misnomer you could take whatever number you decide who would have been a normal Q4 last year, whether it was we took an additional $3 50 or four.
$400 million, that's really was a running start into this year. So you could comp those numbers differently. If you wanted to but technically by the calendar Youre accurate then it would it would it would connote a flat year over year spend there certainly we certainly have more fleet than we started then that would come out in this year, where as far as the supplier.
As you know I don't want to pick those guys out there working their tails off to keep pace with what already was high expectations of fleet and we did a lot of planning early on so that they can even support.
3 billion dollar Capex year, and I, just don't think it's realistic that theyre going to be able to.
Change the delivery slots right now for us to pull forward and I said this earlier.
Our back half capital into the front half, which is really when it matters now if we decided at the end of this year that we let some more capex flow in Q4, maybe this number goes up but it's not relevant to us.
Conversation about this year's guidance and that's why we think that the way, we where we're communicating it is accurate to.
For the expectations that we expected to live.
Okay I appreciate the color.
Thanks, Nick.
Okay.
And our next question comes from Ken Newman Your line is open.
Hey, Good morning, guys, Hi, California, Ken.
Once you go back to the leverage obviously its back to the lowest level. I think you have on record I know you talked a little bit about capital deployment priorities right.
To ask a little bit more of a longer term question and how we should be thinking about the leverage profile.
Closer to two times is kind of a normal or is there opportunities to drive that even lower.
Morning, Ken.
We're we're very comfortable right with where the leverage is right now and as we even think about it looking forward the priority for us from a capital allocation perspective is going to be to fund growth right and to have the dry powder available to be able to support M&A that makes sense.
For us to continue to grow the business from an inorganic perspective supporting the robust organic growth that you see us delivering this here. So you know our priority is going to be growth, it's going to remain growth and we're going to want to make sure that we have that dry powder available to be able to action deals that makes sense for us going forward.
Shared on a couple of a couple of calls ago. There was theres nothing magical about falling below two times for any period of time instead, well what we'll do is we'll look at what our pipeline looks like how we can continue to supplement the growth of the business what that cash need could look like.
And then again together with our board talk about where there may be excess cash available with leverage in a good place you know what does that look like for us to do other returns like a share repurchase program and maybe a dividend in the future but at this point right now we're good with you know continuing with the leverage range we have.
And and keeping focused on growing this business.
Organically and Inorganically.
Got it.
And then just going back I think you you talked about incremental market share gains in the corner. Obviously, you were able to pull forward some fleet into the quarter to maybe service some of that demand do you have an idea or is there a way that you can help us kind of bring out just how much share. You think you are taking in this environment relative to some of your smaller competitors.
Not it's too early right so not reliable data, but I think this has been a consistent theme.
The industry where through.
Growth funding right leveraging scale and consolidation.
The top half for the industry continues to take more share and we think as we said it before the bigs getting bigger is good for the industry and I think it's proven out here in the cycle and the way that we responded to Covid and now the way that the supply demand dynamics are being treated responsibly as well. So I don't have numbers that I that I would point to that are any different than what we have in our.
Deck from last year, but I'd say the bigs getting bigger is a trend that's been going on for quite some time and will continue.
Yeah.
If I could just ask one more here.
Want to go back to your comments on the infrastructure.
Conversations youre, having with your with your larger customers I'm trying to get a better sense of just the magnitude of some of these larger projects as you kind of look out into 2023, and obviously the market is becoming a little bit more cautious on economic conditions.
My view is that you know.
If things were to turn to a hard landing infrastructure, it's probably a little bit more of a resilience catalysts for you given that the funding is already out there.
Maybe a two part question here one do you agree with that and then two if that's the case do you feel like you have the ability to secure a fleet or bring forward and service that demand. If those projects are brought forward a little bit.
Yes, so I absolutely agree with you that it'll be more resilient and I think especially how much of this would be public works type projects.
The latent demand that's out there for this work to be done I, absolutely think it would move forward just about any environment and as far as the fleet.
We feel very comfortable and remember that we serve 90% of the fleet we serve to this earth.
The same type of assets, we have already in our fleet. So they're very fungible, we can move and add as necessary and most importantly, its assets at our team are very comfortable supporting to the end market.
By next year, I mean, I expect hopefully by the end of this year that the supply chain will be sorted out I have no concerns about us being able to fund these projects.
I appreciate it thanks.
Thanks, Ken.
And our next question comes from Stanley Elliott from Stifel. Your line is open.
Hey, good morning, everyone. Thank you all for taking the question.
Quick question, you'll talk about the power bank and literally lithium battery packs.
Is this something more that you're seeing your customers request from you you've obviously made a big move on ESG and then curious how those products rank in terms of the return on invested capital metrics that you guys follow so closely versus the rest is from your other fleet.
So.
I would say there are pockets of customers that are pulling in this direction right and it's it's usually because of where they are working but also because they have their own goals write their own ESG goals and what they want to do in and being a good responsible.
Company in the World and we want to support that so I'd say the Oems are the real drivers here to help support this need and this desire and then we're a conduit between the Oems, but we're kinda with its very active and we're going to partner with Oems and partner with customers to try new stuff, it's going to take.
Some incremental funding that's not tremendous but monies that will spend at some point the real viability of all of this is going to be scale and then the Oems can build it more effectively and efficiently and we can get the benefit of these new products and technologies into the marketplace broad base I think thats once that happens it won't be just a <unk>.
Paul It could be table stakes. So we're excited to be part of that and I don't know how long, it's going to take but it's good to see some movement happening and we're going to participate aggressively in that movement.
And so the second part of your question Stanley.
To Matt's point I think we it's a little premature just a little too early yet to be able to see the full view on the return profile of these particular categories of fleet. Once we get to scale. Then we will have a better view of you know consistent or complementary or greater.
Like that would come from the investment in these types of categories asleep.
Yes, it's certainly small, but I think over the longer term it does feel like that could be a nice tailwind to rock.
Switching gears on the 40 specialty branches.
Let's be more new locations to kind of help you build out.
The storage in an office piece or is this more across the broader portfolio and then I guess.
Given the differences in some of the products are some of the newer specialty size I guess is it more difficult to find real estate and also get the product shipped in.
So it is across the board, but certainly.
We're going to participate in that opportunity to grow our our modular footprint and mobile storage.
But it's across the board, it's not just those that that team and as far as real estate.
It's actually it depends on the product line, it's it's but it's always a challenge, but we have a team working hard on that challenge and we're comfortable there.
Last piece of fleet, but it's no different than the rest supply chain, although I'd say still boxes are easy to get right now than anything that has as engines. Our chips. So we're we've actually after a slow start for the modular team that when we first bought them last year really haven't ramped up even in the back half of last year. They already started loosening up so that team is getting.
<unk> pretty aggressively and doing a great job and I feel the growth of our specialty will be able to be supported I think the Oems there are working through and we feel comfortable supporting these cold starts this year and beyond.
Great. Thanks, so much I appreciate it and congratulations and best of luck.
Great. Thanks, Tim.
Yeah.
And our next question comes from Scott Schneeberger from Oppenheimer.
Your line is open.
Great. Thanks very much.
On the theme of specialty I think you all back in 2019, we're targeting five years out about 3 billion, especially revenue.
Two seven at the end of last year, and then commentary today on the call that <unk> is going well and feeling really good about doubling that within within five years I'm just curious.
Maybe a progress update that on on where you think specialty is in the next few years and how much of that is organic I know it was addressed earlier on M&A.
They're usually big targets out there, but your thoughts on organic and how you get there and then please put in any M&A college as well thanks.
Sure. So as you can hear it's a it's an and strategy for us right not an or strategy on organic and in an acquisition, but the part that we control is the organic.
So we don't need anybody else to ask us to do that so we've been very aggressive with cold starts over the past few years in.
In specialty and specifically in the in the modular storage and storage business, we really have a lot of white space to grow organically, but we're growing all of our specialties with cold starts and we feel comfortable about that growth and we've been saying this for a while now power who's one of the more established especially still.
Showing tremendous growth and we think that penetration as part of the story even for those that are moving along the.
The maturity level of filling out their distribution points. So we are at different levels, depending on product, but all in still have a lot of opportunity both in filling in white space and more secular penetration of our specialty products. So we feel good about it.
Oh, great. Thanks appreciate that and then just as a follow up oil.
Oil and gas, obviously, performing very well right now you said it earlier in this call. There you know we were back in 14 15 16. There was there was a you know oil oil price impact, whereas the other end of the spectrum right now just curious how you're maybe some commentary on how its going a percent of revenue.
And any limitations on size you want in that business, given the cyclicality nature of it or or what you see as far as riding the wave here. Thanks.
Sure.
And then we'll look at oil and gas in two spots right will separate the upstream and the downstream, but overall oil and gas grew when you just look at upstream downstream and midstream 19% in Q1. So that's what we're talking about they're showing great growth, but the area, where we're even more focused on will support the upstream for the right customers and.
You've heard us say it will manage how far and how hard do we go with that business, but downstream is totally different animal for us where inside the gates and so many of these refineries and as such long standing strong relationship with these folks.
That's going to be supported with all of our might.
And so we're excited about that.
As I said earlier those markets have been down for a while and to see that growing right. Now is really important as far as a percentage of our business. Our energy all in is about 10% of our total revenues with as I mentioned earlier downstream being one half.
Half of that so it's a this is a big part of our opportunity for future growth.
Thanks, Matt Congrats for a great start.
Thanks I appreciate it.
And our next question comes from Seth Weber from Wells Fargo. Your line is open.
Hey, guys good morning.
Just a.
I'm trying.
Tying together a couple of questions here from what what you guys have talked touched on a little bit, but just I noticed the specialty capex was more than 25% of your total for the quarter I mean two.
27%, which is a pretty high number relatively so is that kind of the right mix to think about going forward for this year.
Because one of the.
The flip side of like why aren't you, adding more specialty fleet as you know there is there are some concerns about just equipment supply in the market. So.
It's a bigger it's a bigger slug of your Capex is actually a specialty that might help.
Help people understand that it's not all done right.
So can you just talk to the mix of Capex Mexico forward.
Sure and that makes it isn't too far off of the way that the revenues are distributed so maybe bolstered a little bit by the fact that we were able to get stuff like containers faster right. There werent really supply constraints. There. So some of the specialty products, we were able to accelerate when you look at it by the quarter, but full year, that's not too far off of how we look.
At how we want to fund specialty and part of it's the cold starts but part of it's the continued opportunity and growth opportunity. They have in the network. So it might dampen a hair from there, but not tremendously and.
Where we're all in on supporting our specialty growth as well as our full portfolio Gen rent growth.
Right. Okay. Thanks, and then Matt in your in your prepared remarks, you talked about cross selling.
With general Finance and specialty business are there any metrics that you can give us around.
Cross selling or.
You know share of wallet with some of your national customers or anything that you could share to that they would.
Help us understand the progress that you're making there.
That's a little too much secret sauce for my liking on open Mike.
All kidding aside we you know we we should we think that are.
Not anything that we're going to share publicly but we think the.
The philosophy behind having a broader portfolio of solving more problems for customers is has been key to our strategy for many many many years and we're just we're just continuing to further that line of thinking with adding new products and and a broader network, so not metric driven but certain.
Lee retention driven and we are we're really pleased with the level of retention that cross sell brings as well as growth so very pleased.
Thank you guys.
Take care.
And our next question comes from Stephen Volkmann from Jefferies. Your line is open.
Great.
Hey, guys. Thanks for squeezing me in just a couple of really quick cleanups.
Thank you said seasonality in the first quarter was a little better than you expected do we get normal seasonality as we move into the second quarter.
Yeah, I think for the whats what we are what's embedded within our guidance is what we expected for the normal seasonality in the balance of the year. So this is really about and it was more than just a little bit better it was.
In 31 years best I've seen in Q1, so we're now starting off a higher base and adding our normal seasonality in and that's the way we look at the year end and the trends are heading in that direction. So we I think I think this updated guide as appropriate.
Okay, Great and then I think you said that some discretionary costs normalized in the first quarter does that also occur in the second quarter and then maybe it's sort of done in the second half, but just any thoughts there.
Sure it'll it'll carry through the year. If you think you know one of the biggest areas is teeny yeah. That's something that's recovering from essentially nothing during the Covid period. So we do expect we're going to see that through the end of the year and that's assumed in our guidance as well overtime. Another area. You know kind of same phenomenon. If you will.
Great I appreciate it.
Great. Thank you.
And with that I would like to turn it back to Matt for closing remarks.
Thank you operator, and thanks to everyone for joining us.
As you can see where we're clearly bullish about how this year is playing out and we have a high level of confidence in our outlook for 2022.
We'll have more to share in July so look forward to talking to you then in the meantime, you can get a call at anytime with any questions or comments with that have a great day and operator could you on the call.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Yeah.
[music].
Hum.
[music].
Hmm.
[music].
[music].
Okay.
Yeah.
[music].
Okay.
Yeah.
Hum.
Yeah.
Yeah.
Uh huh.
Yeah.