Q1 2022 H&E Equipment Services Inc Earnings Call
And welcome to H any equipment Services' first quarter 2022 earnings conference call.
Today's call is being recorded.
At this time I would like to turn the call over to Mr. Jeff Trusting Vice President of Investor Relations. Please go ahead.
Okay. Thank you Betsy and welcome everyone. We appreciate you joining us today for our review of <unk> first quarter 2022 results a copy of the press release covering our first quarter results was issued this morning and can be found along with all the supporting statements and schedules at the H any website and that's www.
Dot H E dash equipment Dot com.
Our discussion. This morning is accompanied by a slide presentation, which can also be found at the <unk> website under the Investor relations tab and events and presentations.
On slide two you'll see a list of the executive officers participating on today's call. They are Brad Barber, Chief Executive Officer, John Engquist, President and Chief operating Officer, and Leslie Magee, Chief Financial Officer, and corporate Secretary.
We'll begin this morning's discussion, but before I turn the call over to him and I've been asked to remind you. Today's call contains forward looking statements within the meaning of the federal securities laws statements about our beliefs and expectations and statements containing words, such as May could believe expect anticipate and Sim.
Expressions constitute forward looking statements.
<unk> looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward looking statement.
Summary of these uncertainties is included in the Safe Harbor statement contained in the company's slide presentation for today's call.
And include the risks described in the risk factors in the company's 2021 annual report on Form 10-K , and other periodic reports invest.
Investors potential investors and other listeners are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements. The company does not undertake to publicly update or revise any forward looking statements. After the date of this call.
Also note we are referencing non-GAAP financial measures during today's call you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation supporting schedules to our press release and in the appendix to todays presentation materials.
Finally, unless specifically noted all results and comparisons for today's reported and discussed.
Are presented on a poor a continuing operations basis.
We're in the preliminary details complete I'll now turn the call over to Brad Barber, Chief Executive Officer of AT&T equipment.
Thank you Jeff Good morning, and welcome everyone. We appreciate your participation as we review the first quarter 2022 results and your continued interest in HD.
As illustrated our first quarter performance 2022 is off to a strong start we've begun the year with an abundance of opportunities minimal seasonal impacts and minimal seasonal impacts from weather as a result, our first quarter financial results benefited from a healthy blend of strong demand type equipment supplies rising rental rates and fleet.
Growth.
On top of these impressive underlying fundamentals, we maintained our focus on operational excellence, while realizing meaningful progress towards our stated growth initiatives.
Proceed to slide foreclose.
I'll start this morning, with our first quarter highlights that provide a glimpse at the excellent financial metrics posted in the quarter. I will then narrow my discussion to our rental segment and identify the key drivers of performance for the quarter also I wanted to share some thoughts on the equipment rental industry as we consider the outlook for the remainder of 2022.
Finally, I'll review, our 'twenty two growth initiatives and the excellent progress achieved during the first quarter Lastly will follow with a thorough discussion on our first quarter financial results, including updates on our capital structure and liquidity than we think then we will be happy to take your questions.
Turning to slide six please.
First quarter highlights showed significant improvement across all of our important measures. We were encouraged by the continued strength of customer demand in the quarter are commonly experiences lower activity due to seasonal challenges.
As I commented earlier strong demand coupled with equipment shortages rising rental rates and fleet growth gave rise to an outstanding business environment, allowing us to achieve strong financial metrics.
Consider our physical utilization in the first quarter of 74, 4%, which was 630 basis points ahead of the year ago quarter and represent the highest first quarter utilization in three years when measured on a continuing operations basis.
The strong utilization measure combined with ongoing rental rate appreciation and fleet growth were key elements, leading to a 30% increase in total equipment rental revenues.
At $199 2 million total equipment rental revenues were 73% up a consolidated revenues in the first quarter compared to 64% in the quarter a year ago.
The higher rental concentration follows the timely implementation of strategic steps taken in 2021 to expand our rental exposure leading to higher more sustained revenues and enhance margins.
Adjusted EBITDA increased 34, 5% compared to the same quarter in 2021, posting a margin of 38% an improvement of 600 basis points.
Finally, our rental rates our rental fleet based on original equipment cost or are we see close the first quarter of just over one 9 billion representing growth of $218 8 million or 13% when compared to the year ago quarter and included gross expenditures in the first quarter of 'twenty two of 76 million.
Slide seven please.
Turning to our rental business revenues in the first quarter totaled $177 2 million or 29, 2% better than the same quarter. In 2021, we continued to demonstrate strong margin appreciation.
With a rental gross margin in the first quarter, a 49, 9% or 720 basis points ahead of a year ago quarter.
In addition to strong seasonal utilization and 76 million and gross fleet investment our rental segment benefited from the positive trajectory of rental rates, which closed the first quarter, 6.5% better than a year ago quarter and up one 6% sequentially.
With these factors in place dollar utilization in the first quarter increased to 37, 6%, a 500 basis point improvement when compared to the same quarter in 2021.
Our process start to 2022 is indicative of the operating advantages obtaining from our increased rental concentration and an industry that remains fundamentally robust with regard to the industry sound fundamentals are likely to continue as we enter the seasonal strength of the equipment rental business cycle sustaining our encouraging outlook for 2020.
You too.
Slide eight please.
Several factors suggest the equipment rental industry is likely to experience further improvement. These factors include persistent customer demand, which is expected to support steady fleet utilization into the next two quarters as we absorbed the largest portions of our rental investment.
The utilization together with the ongoing equipment supply limitations caused by the OEM supply chain disruption is expected to support an environment that is ripe for continued sequential quarterly rental rate improvement.
Also our end markets are displaying impressive growth driven by nonresidential construction and industrial activity, which accounted for 77% of <unk> revenues in 2021.
The likelihood for further expansion in these end markets are supported by key industry measurements of future construction activity, including the architectural billing index or Abi the Dodge momentum index as well as the Dodge momentum index with both Red screen scores at forecast excellent growth prospects over the next 12 to 18 months.
It is worth noting we have seen no discernible impact from it in these important markets such as project delays or cancellations due to inflationary pressures or labor shortages demand from other markets such as oil and gas have begun to accelerate with the sharp increase of crude prices in several of our branches located in the Gulf Coast States are.
Benefiting.
Finally infrastructure spending is likely to materialize by late 'twenty, two or early 'twenty three with the commencement of state projects spending associated with the infrastructure investment and jobs Act is expected to continue for several years.
Before I turn the call over to Leslie for a review of our financial performance I want to provide an update on our progress toward defined 2022 growth initiatives on slide nine flows.
With regard to our planned 2022 gross capital investment in our rental fleet of $550 to 600 million. We recorded gross investment in the first quarter of $76 million, while we've seen some minor delays with isolate equipment deliveries deliveries, we remain confident in achieving our stated investment goal.
As is typical for our industry, we're planning to receive the majority of our equipment purchases during the second and third quarters.
Slide 10 fleets.
In addition to growing our fleet through significant capital investment the expansion of our branch network remains an important and effective part of our growth strategy as both initiatives position our company to advantageously address the expanding regional opportunities available in this highly resilient business environment.
Following the addition of 10 branches in 2021, all of which are demonstrating strong performance. We concluded the first quarter with two new locations as we advance our goal to no fewer than 10 warm start in greenfield locations over this year.
These new openings included Fairburn, Georgia, representing <unk> six location in the state and Philadelphia, where the company establish its first branch in the state of Pennsylvania.
The new Philadelphia location is currently our northern most branch on the East Coast and will provide access to a growing base of nonresidential construction and industrial projects in the region.
Also following the close of the first quarter, we expanded our presence in Arkansas to two locations with the opening of a location in El Dorado.
With these three additions H N D has expanded its network of locations to 105 across 25 states and we remain confident in achieving our stated goal for branch openings in 2022.
Finally, we are confident that our expansion efforts can be supplemented through acquisition.
We continue that.
We continue to evaluate opportunities static.
That offer access to new geographies as well as further penetration into existing regions.
As I complete my comments this morning, I want to reiterate the fundamentally robust nature of the equipment rental industry.
Demand for our rental fleet remains strong our end markets continue to grow the supply of equipment is constrained infrastructure projects or an emerging source of demand and rental rates are on a positive trajectory.
Within this attractive environment <unk> is operating from an enhanced position with greater rental concentration a strong equipment mix of young and growing rental fleet and expanding branch network that we can further complement through acquisitions, we look forward to what the remainder of this year brings.
On to slide 11, and I'll turn the call now over to Leslie Magee for our financial performance Leslie Thank.
Thank you Brad and good morning, everyone. I'll begin this morning financial review on Slide 12.
First quarter revenues of $272 5 million improved 32 million.
13, 3% linked compared to the first quarter of 2021.
A combination of higher utilization and rental rates along with fleet rate were the primary drivers of the improvement.
The same three factors supported rental revenues, which increased 29, 2% to $177 2 million compared to $137 1 million in the year ago quarter.
As PRASM marks earlier customer demand remained strong through the first quarter with seasonal distractions, resulting in utilization of 74% or 630 basis points better than the first quarter of 2021 rental rates responded to the strong utilization rising six 5% over the same.
A comparison, while improving one 6% on a sequential quarterly basis.
We benefited from a larger rental fleet in the first quarter with our fleet and we see growing $218 8 million or 13% compared to the first quarter of 2021.
The class a 'twenty Wang elysee increased to $41 3 million or two 2% E.
<unk> South at $21 5 million declined $17 3 million or 44, 6% in the first quarter with lower sales across all product lines.
Similar to the fourth quarter of 2021, the decline was largely due to the company's decision to capitalize on high equipment utilization in the quarter.
New equipment sales at 26 million experienced a modest increase of $2 9 million or 12, 4% led by higher sales and material handling and other eye Quentin.
Our consolidated gross profit in the first quarter at $111 6 million and $28 2 million or 33, 8% when compared to the year ago quarter.
The increase was due mainly to higher margins on rental.
And used to Quentin <unk>.
Movement resulted in a gross profit margin at 41% or an increase of 630 basis points when compared to the same quarter in 2021.
Gross profit margins by business segment with a comparison to the same quarter in 2021, including total equipment rental margins of 44, 9% compared to 38% while retail margins raised 720 basis points to 49, 9% compared to 42, seven Christine used equipment margin.
<unk> continued to improve climbing to 41, 7% compared to 32, 2% with played only margin, which excludes used equipment obtained to trade in a 45, 2% compared to 33, 7% new equipment margins were slightly higher at 14, 2%.
Compared to 12% and finally parts and service margins finished the quarter and modestly lower at 27, 1%.
65, 4%, respectively, compared to 28, 3% and 67, 4% respectively in the first quarter of 'twenty one.
Slide 13 please.
Income from operations for the first quarter of 2022 weeks $34, seven nine or more than double the first quarter of 2021 total of $15 3 million.
Our first quarter margin improved to 12, 7% compared to six 4% in the year ago quarter with the increase driven by higher base margins on rental and used equipment, partially offset by higher SG&A.
Proceed to slide 14 please.
Net income was $16 three nine in the first quarter of 2022, or <unk> 45 per diluted share compared to $1 9 million.
Our <unk> per diluted share in the year ago quarter.
The effective income tax rate in the first quarter of 2020 was 26, 3% compared to 26, 9% over the same period of comparison.
Proceed to slide 15 planes.
Adjusted EBITDA in the first quarter of 2020 totaled $103 4 million compared to $76 nine nine in the first quarter of 2021. The first quarter result represented an increase of 34, 5% compared to 13, 3% improvement.
Intel revenue.
Adjusted EBITDA margin for the first quarter, a 600 basis points to 38% compared to 32% in the year ago quarter with the increase primarily due to favorable revenue mix and higher margins on rental and used equipment, partially offset by higher SG&A expenses.
Next on slide 16 please.
SG&A expenses totaled $78 three nine in the first quarter of 2022 at $10 1 million or 14, 9% when compared to the first quarter of 'twenty. One the increase was due primarily to employee salaries wages incentive compensation related to increased profitability and head.
Count payroll taxes and.
Related employee cost with less significant increases.
Related to our branch expansion and professional fees.
G&A expenses in the first quarter of 2022 were 28, 7% of revenues compared to 28, 3% a year ago.
Ranch expansion costs in the first quarter of 2010 were $3 6 million greater than the first quarter of 2021.
Slide 17 please.
Turning to capital expenditures and cash flow great slate capital expenditures in the first quarter totaled 76 million, including noncash transfers from inventory net rental fleet capital expenditures in the quarter War $56 3 million.
Grace <unk> capital expenditures for the first quarter were $10 7 million, while net PP&E expenditures were $9 million. Our average fleet age as of March 31st 2022 was 41, five months and compared favorably to the industry average age.
$53 seven months.
Free cash flow in the first quarter was $4 8 million.
Slide 18 please.
On March 31, 2022, the size of our rental fleet based on original equipment cost with just over $1 9 billion, an increase of $218 8 million or 13% larger than the clays.
On March 31, 2021, and our average dollar utilization in the first quarter of 2021 improved to 37, 6% compared to 32, 6% in the prior year quarter.
On slide 19 claims.
With regards to our capital structure, our net debt at the close of the first quarter was $898 million compared to $893 million by the fourth quarter of 2021.
Net leverage improved to two one times compared to two three times over the same period of comparison.
And we have no maturities before 2028 on our 125 billion of unsecured ne.
Sure.
On to slide 20.
Our liquidity position remains in excess of 1 billion with a cash balance on March 31, 2022 at $351 8 million in borrowing availability under our amended ABL facility of $740 3 million excess availability under the ABL facility was approximately.
$1 1 billion at the conclusion of the first quarter of 2022 with minimum availability as defined by the agreement at $75 million and by definition. This excess availability is the measurement used to determine if our springing fixed charge covenant is applicable and with our excess availability of more than 1 billion.
We continue to have no covenant concerns.
And finally, we paid our regular quarterly dividend of <unk> 27, five cents per common share of stock in the first quarter of 2020 team and while dividends are always subject to board approval. It is our intent to continue to pay the dividend.
Slide 21 please.
In summary, we are encouraged by the strong start to 2022 and affirming industry fundamentals that support a healthy business climate and clearly the key ingredients are in place to maintain a robust business cycle. Moreover, in as Brad noted earlier <unk> is a protein this dynamic environment from an enhanced posture.
You can see the results in a stronger position than many of our financial metrics revenue gross margins and operating cash flow respond positively to our increased focus on the equipment rental business.
We continue to advantageously positioned the company for further improvement to our stated growth initiatives with excellent progress demonstrated in the first quarter.
Furthermore, our strong balance sheet and ample liquidity represent material resources in support of further expansion and financial achievement.
So it's a good time to be in the equipment rental business and we look forward to updating you on further progress and with that we're ready to begin the Q&A session. Operator, please provide our extraction. Thank you.
We will now begin our question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Hey, good morning, maybe.
Maybe just start with utilization.
Utilization very high in the seasonally seasonally slow period demand very strong.
Do you view this as a sign of the times supply of fleet being tight relative to demand.
And going forward. This seems to set up for a very high Q2, and Q3, but will Q3 be a bit lower as fleet comes in.
Maybe you could just talk broadly will traditional seasonality applied a time utilization, but maybe at higher levels.
Sure Good morning, Stephen.
Very good question.
We were very pleased we referenced the lack of seasonal seasonal weather in Q1.
But just the most honest responses, it's a very very robust market out there we are continuing to see additional opportunity we closed the quarter at 74% we have been hovering in the 72% range a little above 72% to the back part of your question we have no concerns.
We're executing well we're going to have a nice year here.
But to the extent, we may not see 73, and a half 74 as we normally would.
September October .
You know, we're thinking that utilization may start to level in that 72% to 73% range still very healthy.
I believe still best in class or we expect to deploy a lot of capital as we've talked about our $550 to $600 million plan that we're still confident in so.
The last thing I would want to indicators that we're worried about utilization I think we're going to lead on.
The industry on utilization and I think we're going to do so at a time, where we're going to deploy a lot of capital, but I do not think that that metric is going to continue to ramp it does necessarily ramp at the same pace. The last comment I want to make on that is we certainly expect to see sequential rate improvement while we're deploying this capital in running this set.
$2 73, maybe slightly ahead of times best in class utilization.
Helpful and that leads into my next question on pricing and easier comps in the first quarter.
Going forward on this sequential improvement from Q1, and the comps being a bit more challenging.
Can you maybe bogey the range of year over year pricing on a year over year basis, given the comp factor.
Yeah, I'll, let John respond to that John Yeah, sure. So look we fully expect to have sequential rate improvement in every quarter of this year to your point about tougher comps as the year progresses.
That is a fact I mean, when we get to Q3 of 2021 for example, our sequential rates were up to two 6%. So is.
As far as an exit rate for 2022, we feel really comfortable about the 5% range could be a little bit better than that but I'd say, we're comfortable with 5% yeah. Yeah. I think our view of rates has only improved we started and we stated on our last call that we were thinking low mid single digits.
And John just as John just stated now we're thinking more squarely in the middle of the single digits.
Could we do better maybe but again, we're going to deploy a lot of capital, but you can absolutely expect us to execute on consistent pricing improvement each quarter going forward.
Great and a quick follow on there do you feel like your pricing is in line.
With peers in your markets. It seems like at least the large companies that have reported pricing is strong curious to how you feel your pricing aligns with others.
I think our pricing is right in line with.
Any of the other firms doing high quality business, we use a lot of information that supported by Rouse not just anecdotal feedback and we are very comfortable that our pricing is well aligned and I would comment that the amount of discipline. We continue to see particularly among most of our larger public peers is very.
Encouraging I think this is a disciplined environment and we are all looking to pass on.
Any potential cost increases to the end user and I suspect that's going to happen across the board.
Okay helpful. And then last quick one for me your EBITDA coverage of interest expense has increased meaningfully from strong levels already in 2021 and in the trailing 12 months.
And with positive expectations for 'twenty, two and likely 2023 is there an openness to taking on more debt for capital returns or special dividends.
That's not something we would be interested in doing at this point.
Want to stay disciplined we want to use our available debt for growth.
One area, we've been a little disappointed at ourselves internally has been on the acquisition front.
Some of these the pricing has been.
A little higher than we were willing to participate in clearly with our systems and our structure and of course, our balance sheet.
Perfect acquisitions that become another meaningful piece of our overall growth so.
For those type of activities, we would not should we exhaust this $1 billion or a large portion of the $1 billion in available capital that we would make the appropriate consideration, but we are focused on growing the business.
Great. Thank you.
The next question comes from Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone and thank you all for taking the question.
Could you talk a little bit about what youre seeing in the labor market.
What extent if any did that have any impact on your ability to open stores in the quarter or even expectations for the rest of the year.
No Stanley it's not I mean look the labor markets tighten we could complain as most everyone could particularly last year we saw.
Inflation in wages.
It continues to be a very tight market, where theres still mild inflation in wages, but theres not a single location, we're employing a capable team to drive results has ever been part of our calculus to go we're not go and nor do I foresee that occurring.
And kind of switching gears on the equipment side, you know one of the companies we listened to earlier this morning, and they were talking about surcharges for equipment.
Is that something you're seeing in conversations when you start to playing out capital expenditures on a go forward basis or is this kind of a one off just curious kind of the level of magnitude that you are seeing that in any discussions.
You know, it's been a discussion with several manufacturers.
We deal with more than 100 manufacturers and of course, there's probably a half dozen that make up the vast majority of our capital spend of the largest some I've asked for no surcharge.
And confirm that they're not going to ask for the year and those prices are protected.
Some have asked for surcharges.
And we've negotiated.
Somewhere in between where they started in <unk> and.
Zero.
A few of them have back down completely and said you know okay. We won't apply surcharges will just talk about it on a go forward orders for 23, and a very few have kind of stuck to you know.
Where they came out at here and this is very recently I'm speaking in weeks not months and.
And so for the for the few that we do have that ranges between 2% to 6% on average so that really metal we don't like it we would prefer nothing.
But it's not going to change our trajectory and will not impact our returns in any way that causes us concern.
And when you're thinking about some of the brownfield locations.
Are you thinking about.
A similar size locations in terms of like the same amount of fleet.
Thinking about.
Maybe smaller amounts of fleet, just curious kind of how you're positioning where do you want to open up in kind of the size the magnitude of these individual stores.
It's more of the same.
We've always talked about these locations typically rule of thumb year, one mature and around 10 million and inventory that could be a little less it could be considerably more with $10 million on average and the profile of that fleet is very similar to what you would see in our existing operations or footprint.
Perfect. Thank you very much and congratulation on a good start.
Thank you.
The next question comes from Steven Fisher with UBS. Please go ahead.
Hey, Thanks, Good morning, I Wonder if you could talk about your ability to pass along the higher fuel costs and how that played out in the quarter as it as it progressed.
I know you reported about $1 million of gross profit in the rental other category. So I think that <unk>.
Profit suggests that you stayed ahead of the higher fuel costs, but.
Im curious how that played out and kind of what the trajectory.
There that we should expect is.
Sure Yeah, well as you saw we've turned positive year over year and our margin and so we're very pleased with that there are a lot there are several variables.
Within that Stephen that we'd look at I mean, certainly fuel is one of them also logistics use of third party haulers, how efficient we are with our existing trucks and use of third party haulers. So theres been a lot of data that we've been that we utilize to continue to make gains and we are certainly passing on higher higher.
Fees now we're not doing it in the form of surcharges on fuel there are some complications about how you are required to do so but we're just taking a really simple and direct approach and we're charging more for the average hall and the net result is we turned those margins positive, but we're going to stay focused I'll go further and say we see no real.
Isn't.
That fuel or any other cabinet broad category.
We will not be able to get passed on to our end user going forward. So it's real time, we're responding fast and we're getting the results that we expected.
Great.
In terms of your new branches I'm sure, there's a typical ramp up period.
For for any of these operations as you get the people in place the equipment and kind of build the book of business and I guess I'm curious.
As you are opening these into a pretty strong market are they getting absorbed and utilized faster than you might typically expect or about the same.
Steven I would say it depends on the market right.
We're very pleased with the performance of our new stores.
They don't all ramp at the same pace.
Obviously, the better the market.
Faster a store is going to ramp but all in all.
<unk> spoke about the 10 locations, we opened last year I mean, our performance is outstanding and the two locations that we've started with in the first quarter, thus far so far ramping according to plan. So.
We're very pleased with our with our results of our new locations.
Let me add in this environment, we're picking the right markets for the right reasons and to John's point.
We've been pleasantly surprised to exceed our expectations. Many many more times than we have been concerned about achieving them. So it's a great environment for us to be opening locations in these selected markets.
Okay, and then lastly.
Brad I think if I heard you correctly you said the last thing you are concerned about is utilization and it does seem like you're off to a really strong start across the business.
What are the things the biggest thing that youre concerned about it at this point.
Yes.
There is not a lot real time today to be concerned about I mean, we have got an excellent team of operators, who are executing very well, we're selecting the right markets. We've got the right products on order from the right manufacturers at the right pricing we have the systems that are providing us information on market.
Pricing and that is.
Clearly showing up at that six 5% year over year and may be more important to John and I that.
That one 6% sequentially coming out of Q4 into the first quarter of the year, we're showing the strength of our platform here.
If I have concerns, they're not unique to <unk> or to our geography, they would be about around interest rates and inflationary pressures.
Does that creep into business I had stated in my prepared comments, we have seen no postponements or cancellations due to material price or or people shortages and look frankly, we don't expect to see any here in the near term, but if I had to give you something I'm thinking about that's where it's at as far as the near term.
We're going to execute on our plan.
Sounds good thanks a lot.
Thank you.
The next question comes from Seth Weber with Wells Fargo Securities. Please go ahead.
Hey, everybody good morning.
I guess I wanted to stick on the cost side, if we could.
Incremental margins were really good here in the first quarter.
Do you think that you can sustain in incremental margin for the year and sort of the 60.
<unk> percent range and.
Leslie maybe just some thoughts on SG&A do you think SG&A leverage should be you should get some operating leverage on the SG&A line. This year. Thanks.
Okay. Good morning, SaaS, so as far as.
Incremental more incremental margin as you know, we do expect to see some moderation from this first quarter level throughout the course of the year, particularly in the back half I think that you know 60 ish percent range that you just talked about I think that's reasonable.
Just to give you a little bit of color I made some comments on our last call that our current year drivers of our shifting to different buckets that while also driving.
For us we.
We expect strong flow through from plagued brands day rate. This year last year. The drivers were primarily utilization and rate, which combine just really generate strong flow through and create a more challenging comp, especially in the back half of the year.
Yes.
And then is it right right, Yeah, and then as it relates to SG&A.
I wouldn't really.
No. It really follows thought that we would have leverage necessarily this year, particularly with like our our warm start.
Strategy generally.
That's a little drag on our SG&A, but you know I would tell you that our estimates have not really changed for the full year 2022, we expect expect that our costs will settle in closer to the full year 2021.
SG&A as a percentage of revenues, which was 27, 3% so somewhere close to that you know that will kind of began to tick down towards the back half of the year.
And we're down closer to that number.
Right Okay.
Either for Brad or John I guess, just from a capex perspective for the second second quarter is usually your strongest quarter, but are the OE.
OEM constraints.
Kind of creating an environment, where third quarter is going to be your heaviest capex quarter or do you think you could still.
Okay.
A typical normal seasonality in the second quarter be the heaviest quarter for Capex.
Yes.
Clearly the second and third quarter combined will be the heaviest by far but I do think it could be weighted a little heavier to Q3 than Q2, and that's been part of our plan with the cadence we were planning for a warm start as well as some of our growth. So yes Q3.
Believe will be heavier than Q2.
Okay. Thank you and then just lastly on the M&A. It seems like you've been talking about M&A a little bit.
Is that are you going to start to go down the specialty road, a little bit more or do you think youll stick to gen rent.
We certainly could I don't want to lead you to believe that we have something thats eminent but we continually evaluate a variety of types of acquisitions and <unk>.
We evaluate specialty in the same pipeline that we're evaluating the gen rent business.
So we.
We're interested in both and we're looking for the right fit.
At the right valuation.
We're hoping we'll find something soon I can tell you we talk about a lot internally and we're working it diligently and there is an equal focus on both opportunities.
Got it okay. Thanks, everybody appreciate it.
Thank you.
Yeah.
As a reminder, if you would like to ask a question. Please press Star then one to be going into the question queue.
The next question comes from Ross Gilardi with Bank of America. Please go ahead.
Good morning, guys.
Hey, good morning.
Hey, Brad I think you.
You talked about seeing a pickup in.
Some of the oil and gas projects and I'm wondering if you could give us a little more.
Color on that and like the nature of the projects is it more upstream pipeline is it refinery maintenance.
<unk>.
Any additional detail you could share there would be to be interesting.
Refinery maintenance seems to be accelerating.
Before we've seen the uptick in <unk>.
And oil.
As far as oil goes it's primarily around rig count moving rigs and things of that nature.
We are not redevelop assets to those markets as I know you are aware I believe most folks are.
The products, we rent within the oilfield or fungible across our entire footprint. They are the same products, maybe a different mix of those products, but at the same product. We ran on typical commercial and other industrial type site. So.
It's certainly helping us I think maybe more important is the bleed over to the broader markets of South, Texas and South Louisiana.
But I hope I hope that's helpful. If theres something specific within that I'd be happy to try to dig in further for you.
What about pipeline activity, you've seen anything much there.
I can't say that I've seen there's pipeline activity, but there has been pipeline activity and I think that the driver for there to be more pipeline activity is there I would say that additional capacity and pipeline is probably like the infrastructure Bill there's a larger delay than you see with the spike in price.
Thats.
Pronounced a prolonged so I do believe that what has occurred here will lead to an acceleration of that but right now it's just more of the same and theres nothing unusual.
Okay got it and then what are the markets that you feel like it's still not.
Really benefited as much as they should from reopening that youre most.
Excited about.
Kind of in the aftermath of Covid, if it ever really fully goes away, we'll see but just anything that really is still well below where it was like.
Pre pre COVID-19 at this point or just has got outsized growth potential just based on timing or whatnot.
Well listen there's not much I mean, when you look across our footprint with the product type and project types.
They're all they're all healthy and improving.
If there were a geography would probably be the northwest from CF.
Seattle down to San Francisco, where there's been probably more disruption more consistently or for a prolonged period of time, but even there those markets and activities have resumed at <unk>.
Closer to normal than abnormal so I don't think I could call any one area out as far as where we hope to continue to do better Thats also broad base, but we see a lot of opportunity right now and there's not a particular area of concern for us.
Alright, and then just it's interesting you mentioned Pacific Northwest I mean, your branch footprint map, certainly seems to be sort of drifting more northerly and just like longer term I mean, do you see <unk>, becoming more of a true like national player over time.
Or do you see if we're looking out five years to 10 years is the company still.
Predominantly more of a regional player and Youre strong holds around the Gulf coast and the southeast.
Yes, well I, absolutely believe HMA in 10 years will be a national player a true national player.
Again, oftentimes, we talk about our investment in systems and technology and that is really to say that we have the ability to serve these markets and we could run a business multiples of our current size with our existing infrastructure.
Infrastructure.
Everyone's aware of our balance sheet everyone's aware of our fundamentals they've watched our progress certainly if not before since we took the company public in February of 2006, and so we have shown over the cycles, our ability to manage the business very appropriately and I think maybe most important was really.
Getting rid of that disruption, we had with the crane business. The Crane business is a good business and we're happy for Manitowoc to be the owner of that business. It was for us very low margin.
Cyclical or lumpy.
Difficult to predict.
<expletive> and clouded up our focus and what I would say to you. Today is we are maniacally focused on growing the rental business. We love the sunbelt that we that we operate in we love warm starts filling in existing geography, but we also like new geography, and we plan on expanding.
Okay, and just lastly.
I think Stan asks you about surcharges, but.
Yes, we just got off the the Oshkosh call and they're talking more about moves to just formula based pricing more specifically for 2023 and I'm wondering are you seeing.
<unk> see an approach for future pricing in future years as opposed to just surcharges on the ground.
Now.
Or is it.
Our different supply like Youre amongst your major sort of top five or six suppliers is it more varied as you said before with their approach to surcharge I'm just trying to understand like how.
<unk> is the approach on just making these like automatic pass throughs, if you order equipment and you get cost inflation from the time of order to the time of delivery.
Contracts in the future are going to be protecting the suppliers better than they have in the past.
Yes.
It's a good question and the answer is it's really different by manufacturer I will tell you that Oshkosh in.
<unk> and our respect as is very focus takes a measured approach and I think they want to be consistent consistent supplier to all of those that they sell product too and I think that makes a lot of sense.
In general the more sophisticated companies take that approach in times like this and the less sophisticated companies just respond to make kind of near term decisions based off of what's going on currently so.
I'm not going to list manufacturers, but I will say since you brought up Oshkosh that Jay LG takes a thoughtful approach to how they price their customers. So.
It's a win win situation in wood.
I would like to see other manufacturers do the same.
Well in those situations like if cost actually go down or do you do you benefit if costs go down from the point of order to the point of delivery as well or are they just really like right, adding these clauses that protect them from further cost inflation in the future.
If we're talking today, we have so minimal.
Magnitude is so minimal log price increases for us with the surcharges from the select folks.
It only goes one way right now, but it's almost not worth mentioning although it's just a fact and we do have some minimal surcharges.
Over history.
Manufacturers are generally about giving you a decrease at the same time, there's been very few cycles, we've been and where we've seen real cost reductions that come it seems like everything's always offset with something else covenants either labor is technology with you remember the tier four interim tier four final and that these things continue to.
Evolve it's been steel multiple times.
Now, it's steel in logistics and basic componentry, and many manufacturers not only are they fighting pricing, they're fighting getting all of the products together. So that they don't have a lot of unfinished product that they can't ship until it's 100% complete so.
No.
Career, I've not seen people come back and give price decreases at the same time, that's a very logical approach when people can.
Approach it and basically have an index that you work from Thats understood.
Well I would just think if you guys are going to agree to a formula based pricing for the suppliers you'd also be protected the downside.
What I'm getting at is it sort of that that approach.
And if we did that's exactly how it would work.
That's a it's not a new concept it may become new in practice and it will be a 2023.
Item and we'll negotiate once we understand more but it is it's logical to us is what I would say.
Okay. Thank you very much Brad.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jeff Chaffin for any closing remarks.
Okay. Then we will conclude the call today and we appreciate everyone taking the time to join US and for your continued interest in HD equipment. We look forward to speaking with you again Betsy. Thank you for your assistance today and good day everyone.
Sure.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.