Q3 2022 Herc Holdings Inc Earnings Call
Today, we're reviewing our third quarter results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A now.
Now, let's move on to our Safe Harbor and GAAP reconciliation on slide three.
Today's call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would caution you that our actual results could differ materially from our forward looking statements made on this call. You should also refer to the risk factors section of our annual report on Form 10-K for the year.
I ended December 31 2021.
In addition to the final results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials.
Finally, a replay of this call can be accessed via dial in or through the webcast on our website replay instructions were included in our earnings release. This morning, we have not given permission for any other recording of this call and do not approve or sanction any transcribing up the call.
This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief operating Officer, and Mark <unk> Senior Vice President and Chief Financial Officer, I'll now turn the call over to Larry.
Thank you Leslie and good morning, everyone before we get started today I wanted to take a minute to recognize Elizabeth.
As was mentioned after nearly seven years with her has elected to retire next year.
Until then Elizabeth will continue shepherding, our ESG strategy and further developing and executing our corporate sustainability initiatives.
Half of everyone at <unk> I want to thank Elisabeth for her commitment to building, our IR function and for her many contributions to our success over the years, including managing our relationship with all of you Elizabeth will be listening into today's call, but will not be directly participating.
Elizabeth Narrows, our focus I'd like to welcome Leslie to our team I've had the pleasure of working with Leslie in the past and I know she will be a great partner to the Investor and analyst community now, let's go ahead and get started on slide number four.
I am pleased to report another strong growth quarter that reflect strong organic growth across all of our regions as well as contributions from our expanding branch network I'm incredibly proud of our financial and operating performance third quarter total revenue rental revenue and adjusted EBITDA were all time quarterly highs for the.
Company. In addition to an unwavering focus on managing rapid same store growth from our existing locations. We completed the acquisition of seven companies in the third quarter, adding 12 more locations, which brings the year to date total to 16 companies and 24, new locations Youll recall.
Our acquisition strategy helped helps drive revenue scale and operating leverage by increasing fleet in locations in and around targeted urban markets through the end of the third quarter. We have spent $441 million in support of our acquisition strategy and have a solid pipeline to fill in the balance of our 500.
Yeah.
Annual target.
Additionally, we opened seven greenfield locations in the third quarter, which brings the year to date total to 17, the winning combination of targeted M&A and Greenfield in high growth markets will continue to drive our strategy to sustain growth and to expand market share as we solid solidify our position as one.
The leading rental equipment companies in North America.
As you saw in our press release based on third quarter results trends and our outlook for the rest of the year, we updated our 2022 guidance for adjusted EBITDA to $1 2 billion to $1, two 5 billion, which implies a 36% to 40% increase over our 2021 results.
We also tightened our guidance range for net fleet capital spending Mark will share more on our outlook in a few minutes when it comes to capital allocation in the third quarter, we repurchased in excess of a half a million shares of our common stock at an average price of about $109 per share given our op.
Operating performance and long term growth prospects, we believe our stock price implies a discounted valuation to a real word we intend to continue to take advantage of this price inbounds to enhance our return to shareholders longer term, while maintaining debt levels within our targeted range of two to three times net leverage.
Now, let's move on to our financial highlights.
Slide number five shows the third quarter results over the last five years, our third quarter results demonstrate the continued momentum and sustained growth as we focus on executing our shift into high gear strategy.
Equipment rental revenue increased 36% over the prior year driven by robust performance in our core business growing market share from higher margin specialty businesses and the contribution from acquisitions.
Total revenues grew 35% impacted somewhat by lower sales of used equipment. A decision that we made to continue to meet customer rental demand as we continue to experience tight supply of new equipment related to supply chain issues from original equipment manufacturers.
Adjusted EBITDA grew 40% over the prior year with an adjusted EBITDA margin up 160 basis points to 46, 3% in the third quarter of 2022, driven by the growth of our rental business and focus on operating leverage.
We are committed to providing excellent customer service and expanding our rental solutions to a broad array of customers and industries to achieve even greater success.
This is an exciting time for team hurt and we are especially pleased with the performance and the tenacity of our people that was never more evident than in the wake of hurricane Ian over the past several weeks, we have teams on the ground in across the country, including new team members from our acquired branches stepping up to support their Florida.
Colleagues, the impacted communities and our customers our people have worked tirelessly and under difficult circumstances to get equipment, where it needed to be and to provide a central services.
Planning collaboration responsiveness and execution, it's a true reflection of operational excellence. Our people are getting it done and I couldnt be prouder, but it's not surprising with 57 years of history in the equipment rental industry or 6400 team members work hard to ensure our customers achieve.
Optical performance safely efficiently and effectively every day now please turn to slide six.
Everything we do is built on our promise and our commitment to help our customers and communities build a brighter future.
As of the end of the third quarter, we operated 351 locations across the United States and Canada in 42 States and five Canadian provinces, as we add locations and employees to hurt rentals. We are committed to ensuring that we focus on safety training and other programs to assist the new team members and our.
True to our culture.
I would like to personally welcome all of our new members, who joined US in the third quarter through our acquired businesses. It's great to have you on board.
The addressable North American market size is estimated to be $61 billion in growing by about 13% in 2022. According to the American rental association everyday new Mega infrastructure and other industrial and commercial projects that are announced throughout North America, we intend to get our fair share of this new.
Activity, we expect to continue our momentum by addressing the opportunities in the market and outperforming the overall industry as we grow organically supplemented by selective acquisitions and Greenfield operations and now Aaron Birnbaum will update you on our operational progress. Thanks.
Larry and good morning, everyone. Our strong performance in the third quarter reflects the benefits of our strategic branch network expansion, the improved scale and diversity of our equipment fleets and our successful penetration into a variety of industry verticals.
These initiatives driven by the dedication and commitment of the entire <unk> team are making a clear difference in hurts growth trajectory. Moreover, our secular growth trends further position us for sustainable long term growth.
Now please turn to slide number eight.
Third quarter results reflect the opportunity we seized by accelerating investment in fleet with average, though we see fleet up 35% over last year's comparable period.
Equipment rental revenue in the quarter increased 36% compared with the prior year quarter.
Our regional leaders are doing an excellent job leveraging our expanded offering and entry into new markets to incrementally drive the top line, while capitalizing on the broad economic recovery across commercial and end markets.
Rate growth of more than 6% in the quarter helped to offset inflationary pressures and our team successfully managed rising fuel costs through increased revenue recovery and equipment delivery and equipment refueling charges in the quarter.
Our core business benefited from the continued strong demand for equipment across all our regional operations.
And our pro solutions business delivered double digit growth year over year again in the third quarter. As you know <unk> solutions offers targeted solutions that support mobile power and distribution climate control remediation of pump equipment. This is a fast growing high margin business for her we are capturing share here by capitalizing on cross.
Selling opportunities with new and existing core business customers and leveraging the increasing density of our branch network for faster response or.
Our acquisition and integration activities are a core competency of Hersey rentals and we are successfully building on new businesses to our grow the core and urban market strategies.
I'm incredibly proud of this team's performance and the growth they're delivering for the company.
As Larry mentioned, they did an incredible job quickly mobilizing fleet and supplies in Tampa Bay ahead of Hurricane Ian and then responding immediately to meet the needs of our communities and customers in southwest, Florida in the aftermath of the storm.
On slide nine you can see our fleet composition at OFC on the left side of the page total fleet is now a record $5 $4 billion as of September 32020% to 33% higher than OE see fleet at the end of Q3 2021.
As you can see specialty represents about 24% of the fleet and there is room to grow.
Our total fleet expenditures at <unk> totaled $311 million in the recent third quarter. We continue to see strong project starts and our sales teams are absorbing a fleet, we purchased in the third quarter and quickly putting it on rent.
We disposed of $54 million of fleet at OFC in the recent quarter only about $10 million more than last year's third quarter as we continue to be prudent in managing our fleet to meet strong customer demand and address supply chain constraints.
Proceeds from disposals were 43% of always see benefited from stronger pricing of used equipment and an improvement in our sales channel mix utilizing more of the retail and wholesale markets. The average age of our disposals was 94 months in the third quarter of fleet age is now about 49 months. Please.
Please turn to slide number 10.
In addition to our best in class fleet, we have a diverse well balanced customer mix made up of large national accounts and local contractors across all business sectors in North America with a wide variety of equipment needs.
A criminal equipment rental growth is coming from initiatives to expand our local customer base to 60% of our revenues in the third quarter, we achieved that goal specifically investments in M&A and for fleet are driving this growth.
We are also focused on continuing to generate absolute growth in our national account business, while maintaining it at 40% of revenues.
There are significant cross selling opportunities between specialty and core accounts and our greater branch network density allows us to service customers faster and with access to a broader equipment offering.
You can see that we have a lot of strategic initiatives driving growth, but we are also continuing to see macro opportunities from the solid demand in our end markets and the increasing number of new multiyear infrastructure projects being announced.
The secular trends on slide 11 surrounding electric vehicle development power grid modernization renewables transportation and the re shoring of manufacturing.
Ill close to align with our business offerings individual projects are gradually ramping up as both public and private funding are being put in place.
Moreover, many of the industrial projects being announced or in the geographies, where we have focused our acquisitions in greenfield additions, such as Texas, Arizona, Toronto, Detroit and Chicago.
Southeast also has strong prospects.
We are closely monitoring these new project announcements in the field the projects provide solid visibility for upcoming construction starts and support our view of the substantial long term growth opportunities in our markets.
Our regional operations are primed and prepared to continue our growth strategy.
Please turn to slide number 12.
Before I turn the call over to Mark I want to emphasize that safety is always at the core of everything we do and we continue to focus on striving for 100% perfect days throughout the organization.
Our major internal safety program focuses on perfect days.
That is paid with no osha recordable incidents no at fault motor vehicle accidents.
And no DLT violations.
In the third quarter on a branch by branch measurement all of our branch operations achieved a least 98% of days is perfect.
I'd like to thank our team heard for their commitment to operational excellence and safety there.
Their professionalism shows up in the execution of our services to our customers every day.
Now I will pass the call onto Mark.
Thanks, Erin and good morning, everyone.
The team continues to execute our strategy and we continue to operate in high gear as we maintain record performance in our key metrics in the third quarter of 2022.
The strength and momentum we are achieving bodes well for the rest of the year and into 2023 as we focus on fast profitable growth and continue to deliver improvement in the key metrics that create long term value for our stakeholders.
Strong demand in our end markets and the ongoing supply chain challenges of equipment manufacturers continued to provide a strong operating environment for our rental business as Aaron mentioned, we ordered early so a new fleet is arriving at a steady pace throughout the year and we have been putting the additional fleet to work driving revenue growth.
Our operations team has done an excellent job maintaining strong time and dollar utilization in a fast paced high growth environment, while integrating new team members customers and fleet into the hook model.
This consistent execution is late the sustained performance and strong momentum that will continue for the rest of 'twenty to 'twenty two and beyond.
Slide 14 shows the summary of our third quarter results compared with 2021.
Equipment rental revenue increased by a very impressive 36% to $706 2 million from $519 6 million in 2021, primarily due to continued volume and pricing momentum.
We are pushing hard on both our organic growth and acquisition strategies and enjoying a lot of success.
Taking a look at the 36% rental revenue growth for the third quarter about two thirds of the growth was organic and a third from acquisitions. This.
This validates our ability to grow our core business.
Our organic growth is outpacing the market growth and we believe we continue to expand our market share.
Our successful acquisition strategy provides a nice supplement to our organic growth story and allows us to quickly bring on key rates with talent and to penetrate key markets.
Our revenue growth is not only fast and impressive but profitable.
We are delivering excellent results for our investors and creating long term value.
Adjusted net income in the third quarter of 2022 increased 42% to a $103 4 million or $3 42 per diluted share compared with adjusted net income of $72 7 million or $2 38 per diluted share in the third quarter of 2021.
Adjusted EBITDA increased 40% in comparison to Q3 of 2021 adjusted EBITDA margins were also a record for the third quarter, improving 160 basis points to 46, 3% in 2022 from 44, 7% in 2021.
All in all an excellent quarter, we achieved most of what we set out to achieve and we're very happy with our margin expansion and flow through.
We are lucky to have a solid inflation resistant model and have grown fast and expanded margins in a challenging inflationary environment.
All of this is manageable within the context of 36% growth in rental revenues and as is clear with the outperformance we can invest in our business and in our people and continue to improve our adjusted EBITDA margin and Investor returns.
On slide 15, we highlight the momentum in our pricing and utilization trends by quarter.
The graph on the upper left illustrates our success in managing price over the last couple of years and our ability to consistently drive rate growth.
There was this is always an important metric to manage and is especially important when faced with cost pressures and an emblazonry environment.
We have maintained momentum in pricing with year over year rates up by six 2% in the current quarter.
The current market environment of tight equipment supply and steady demand continues to support our focus on rate. We also benefit from our excellent pricing tools and the discipline and professionalism of our sales team.
The industry seems to be enjoying price momentum and we are achieving success in the spot market with our pricing tool as well as with our larger national contract negotiations.
Our track record of executing on price and all sorts of operating environments is clear.
The momentum in our rates is clear and we expect to deliver improved rates in Q4, which will result in strong momentum running into 2023.
Now, we see fleet size closed the quarter at about $5 4 billion a combination of early ordering and savvy purchasing has contributed to the steady delivery fleet in 2022, which is also supplemented by fleet integrated in conjunction with acquisition activity.
Our average fleet on rent at OFC in Q3 was up by 35% in comparison to average fleet growth of 35%.
We have been receiving record amounts of fleet, all year and have been efficiently putting it on right.
Dollar utilization dipped slightly in Q3 down 70 basis points to 45, 3%.
Dollar utilization in our core business continued to improve.
However, we had some tough comps in other parts of the business, which impacted dollar utilization a bit.
The entertainment business has lost some momentum in the latter half of 2022 with a lot of studios recalibrating their spending from the boom in 2021, as well as dealing with Covid protocols and.
In addition, we had some hurricane activity in Q3 of last year, which tends to drive utilization in the specialty business.
The storm activity from Hurricane Ian will benefit Q4 utilization this year as Ian made landfall at the end of Q3.
We are targeting annual dollar utilization in the mid Forty's and are on track for another year of improved dollar utilization in 2022 that moves us towards that goal.
Slide 16 summarizes the acquisitions, we've made so far in 2022, we.
We focused our acquisitions on high growth markets that complement our current location network.
So far through the end of the third quarter of 2022, we've acquired 16 companies and 24 locations, which.
$441 million and net cash with an average multiple of approximately five five times.
We see significant revenue synergies and most of the companies were acquire and over time, we can run the fleet and operations more efficiently generating synergize multiples of approximately four times to four five times.
On Slide 17, you can see we have no near term maturities as we announced at our Q2 investor call. We amended our revolving credit facility in July and have doubled the capacity to three 5 billion and extended the maturity to 2027.
We've got ample liquidity to fund our growth goals for the remainder of 2022 and into the future as we commit capital to invest in our business and drive fleet growth into the new cycle.
Yes.
Net capital expenditures exceeded cash flows from operations in the third quarter, and we reported negative cash flow of $252 million before acquisitions.
<unk> of fleet deliveries and the terms with our suppliers usually puts a drag on working capital in Q3 as we pay for fleet delivered during the year.
We are continuing to take deliveries and are taking as much as we can get our hands on our.
Our volume growth was 35% shows that we are putting it out on rate as soon as it hits the yard.
Our leverage remains conservative and our current leverage at two four times as in the middle of our target range is two to three times.
We also continue to pay a quarterly dividend of <unk> $57 five.
Alright, which implies an annual payout of $2 30 per share.
The EIA forecast of 2022, North American rental industry revenue is steady at 61 billion with 15% growth now forecast 2022, and 5% for 2023.
Clearly there is some strengths of the current cycle. Despite all the negative sentiment around recession risks.
Our 36% rental revenue growth is clearly eclipsing the broader industry growth rate with the focus on the top line of our organic or our or our organic growth rate that is over 20%.
We look to have much more momentum than the industry in general and are taking market share.
Two of our key end markets, our industrial spending in nonresidential construction and both have solid growth forecast in 2022 as well as for 2023 <unk>.
Combined these end markets reflect about two thirds of our customer base and both are likely to outperform other more consumer driven markets in 2023.
Looking at industrial spending on the top right chart growth for 2022 is forecast at six 3% and further growth of six 5% is forecast for 2023.
This reflects strength in the downstream oil and gas and chemical industries as well as the secular shift towards the onshoring of manufacturing supply chain.
Industrial activity is clearly still trying to rebound from the 2020.
It's not particularly sensitive to movement in short term interest rates and looks to have a cyclical tailwind.
We focus in on nonresidential construction shocks on the on the on the chart to the bottom right.
This is new construction activity that has broken ground this year and looks to be up 19% in 2022 with additional growth of 2% in 2023.
As a lot of analysts have noted there is a change in the current size and scope of the construction activity with many more mega projects filling out the construction client 2022 than has historically been the case.
These mega projects last for couple of years. So there is activity on those projects into 2023 and 2024.
Nonresidential construction put in place in 2022 is forecast at 595 billion, which is almost two times the level of new stats.
So increasing amounts of in construction activity started this year as a benefit into 2023, which gives us a good read through into the relative strength of nonresidential construction activity for 2023.
On top of nonresidential buildings. There is another 313 billion of non res non buildings or infrastructure projects slated for 2023, which is supported by federal funds approved in the recent infrastructure package, the chips and the inflation reduction.
The current strength in Mega projects and infrastructure work benefits bigger rental companies with bigger rental fleets as one of the leading north American rental companies fix stands to benefit from this trend.
There is continued strength in our end markets and strong demand for our <unk> services and that's our current focus to continue to take advantage of the current strong environment to create long term value for our stakeholders.
We remain cognizant of all the risk recession talk and have a lot of experience in running the recession playbook. However, right now we are in a robust operating environment and we are executing on the strong demand for our services and delivering robust operating results.
With that we have raised our guidance range as we grow more confident with the strength of our business and our guidance for adjusted EBITDA is now 122 billion to $1, two 5 billion, which translates to an increase in adjusted EBITDA of 36% to 40% over our 2021 results.
We're also narrowing our net fleet capital expenditures guidance to $1 billion to $1 1 billion.
We're experiencing all of the trends consistent with an industry in an up cycle and intended to continue to deliver excellent performance as we look to execute on our high growth strategy.
With that I'll turn the call back to Larry. Thanks, Mark. This summary demonstrates the acceleration in growth we are achieving with our investments in fleet and M&A. As you can see we are truly shifted into high gear.
Come a long way in the six years since we went public and I'm proud of the tremendous strides. We've made we are demonstrating that we can accelerate topline growth and shown improvement in adjusted EBITDA adjusted EBITDA margin.
Think we provide a unique opportunity for all of our stakeholders, but most important of all I would like to thank our team members for their diligence professionalism and commitment to customer service. We are proud of our team <unk>. Please turn to slide 'twenty one many.
Many companies are now focusing more on purpose, we began our vision mission and values and are committed to our purpose statement to equip our customers and communities for a brighter future.
We do what's right. We're in this together we take responsibility we achieved results and we prove ourselves every day now I'd like to turn the call back to Leslie <unk> before we open the lines. Thanks, Larry I understand that my opening remarks, where I introduced myself were cut off.
It may take one more minute to do that.
Again my name is Leslie Hunziker, I recently joined <unk> to support the company's Investor Relations and corporate Communications program I'll be transitioning the IR responsibilities with Elizabeth Higashi as she recently announced her plans to retire next year I'll Linzess would've been here today to share. This news with you herself as far and emergency appendectomy. They.
Has her solidly in recovery mode. Once you back and we've transitioned IR responsibility Elizabeth will continue to focus on driving <unk> <unk> expanding sustainability initiatives.
For me I come from Park, most recently from Wesco, a fortune 250 industrial distributor. We're also lead Investor Relations and communications and prior to that I handle the IR for Hertz Encana Com and are looking forward to working with all of you. So let's go ahead and get started with Q&A operator.
As a reminder to ask a question press star one on your telephone keypad.
Next question is from the line of David <unk> with Goldman Sachs.
Yes, hi, good morning, everyone and please send our best to Elizabeth for a quick recovery.
I'm wondering if we could just talk about the implied fourth quarter EBITDA guidance.
The midpoint of our full year range that implies EBITDA is up 7% sequentially, which is.
Much better than normal seasonality I'm wondering if you can talk about how much of that is just that.
The impact of the benefit from the storm.
Other parts of the business can we just expand on the drivers of the <unk> outlook.
Yes, Hi, Hi, Jerry I mean, the storms.
Typically.
<unk> generated $5 to $6 million worth of EBITDA. So that's not a <unk>.
The driver of Q4, I mean, the timing is a little bit different this year against the comps. We had won in Q3 last year. We've got it in Q4 this year.
Most of it's coming from fleet growth that's been received steadily throughout the quarter aided continues to come into Q4.
As well as sort of acquisition activity that was consummated during the year that builds into Q4. So it is growth in the business that's already baked in by Q3 that continues to roll into Q4.
Okay got it yes.
Yes, sorry, Larry Please go ahead.
We're just going to say Elizabeth can hear you ashis in listen mode. So Keith you heard your comment.
Thank you.
And can I ask about pricing in the quarter based on the year over year acceleration. It looks like you folks got better than normal seasonal increase in pricing. It looks like it was up two five points in the quarter is that about right Mark and is that momentum continuing into October in Europe .
Yes, no I mean.
Im not too sure brand momentum I mean, we've talked about pricing in terms of.
Looking to sort of maintain that I think mid single digits.
For the medium term rather than sort of looking for.
Sharp spikes. This year. So we will maintain high pricing is probably going to level off.
As we roll through into Q4, and we will look to maintain that.
This does zone.
Into 2023, so it's more managing the pricing.
We've had strong growth in spot.
It's limited into in terms of how far we really want to push that but we've got a sort of tailwind coming in from the ongoing contract negotiations. So as we sort of move those contracts up closer to the spot increase then we get continued sort of pricing strength rolling into Q4 and 2023.
Okay Super and lastly can you talk about your initial views on Capex outlook.
For 'twenty, three and when do you need to have firm purchase orders and then.
You might have flexibility in the business model can you just talk about how.
Yes.
So what's the date around which you would have flexibility to make changes to your commitments to vendors.
Jerry It's Aaron.
Our view for 'twenty three is still very robust so we've got planned capex.
$1 5 billion for new fleet, we've ordered already we have.
On about $1 billion of that and.
Agreed on pricing for about 70% of that number so call it $700 million and.
So the.
Markets are robust.
We take next year is going to be a terrific year as well, but if things don't change we do have a lot of flexibility to pull back if we need to.
Super Thank you.
Sure.
Your next question is from the line of.
Rob Bradley <unk> with <unk> research.
Hey, good morning, everybody.
Good morning, Rado I had.
Two questions kind of following up on that fleet dynamic and just I know people talk a lot about aerials, but you have a pretty diverse supply base can you just generally characterize whether the expected loosening up and freeing of supply constraints does mean, there is a lot more availability for you and the industry next year or if that's not yet evident.
And then I don't suppose we have seen a rising rate environment like this in a long long time. So I'm just I'm curious about any opinions you may have about how it affects the ability or desire of smaller rental companies to purchase with higher funding costs.
This is Aaron again I'll take the first one.
The.
As far as the Ariel.
Ariel specifically.
The.
Supply chain or the availability of equipment is still about how it's been all year long.
I don't think theyre going to be able to produce everything that the market the industry wants and 'twenty three.
Now.
The smaller to your second question at the smaller rental operation operators have difficulty accessing capital.
Capital to buy that equipment might loosen some of that played up but as of right. Now we had none of that's been kind of evidenced.
And outside of aerials do you think.
Any loosening up or not.
No no we haven't seen it yet but that could happen next year. Some time mid two things I mentioned occur.
We expect the supply chain.
Yes, Rob Rob the supply chain looks to be constrained as far as we can see into next year. So there is no loosening up.
By the end of next year there is some progress.
But we are expecting similar environment to what we've been dealing with this year.
Okay.
Okay, great actually I'll stop there and let somebody else Michelle thanks.
Thanks, Rob.
Your next question is from the line of Neil Tyler with Redburn.
Yes, good morning, everyone a.
A couple of questions. Please firstly.
On the customer mix.
You point to the strip can you remind us of the strategic rationale and benefits of targeting the mix as you do and.
Whether you are able to how you benchmark the sort of cross selling penetration rates in the different customer groups.
That's the first question and then secondly.
Any thoughts on.
The sort of potential scale I think Aaron you mentioned, the industrial orders and the link to things like the inflation reduction Act and the same exact but have you done you guys done any work in terms of scaling that perhaps relative to the.
The infrastructure Bill I remember.
Laurie about 18 months ago, you pulled some cold water on my enthusiasm around the size of that in for Bill.
And I'm just wondering whether you want to do the same thing at this point or not.
Well are you talking about the mix between.
Between.
Local business and national account business or.
Yes, yes, yes.
We have said from the time, we got here.
<unk> were exactly opposite it was 60% national account, 40% local customers and we said our desire was to flip that and go 40% national account, but keep that growing not reduce that and.
And go to more of a local mix because that tended to be a higher margin business faster and more rapid turnover, where we could where we could accelerate.
And penetrate the local markets and not totally be reliant on our national account base. So both of them continue to grow and we've gotten to the point, where the mix we feel is appropriate for <unk>.
Now, we want to do business and how we're focused on.
Large metropolitan geographic areas, where there is density.
People and work and where that seems to be more continuous.
On a regular basis, so thats where were at there as far as.
Throwing cold water I'll give you some warming water.
As we're beginning to see the letting of that those funds for infrastructure projects.
There has been some shovels going into the ground, we will see more of that as we progress into 'twenty three and we certainly think battle.
AD and perhaps replace some of the concerns that.
Folks have about slowing consumer spending on the consumer side. So we think a combination of the infrastructure Act and then the other.
<unk> in federal spending that Mark mentioned not to mention the mega projects in the EV World and the data centers and the other things.
We think we'll certainly.
Give us the momentum to.
Push through any concerns about slowing demand on the consumer side.
Thank you that's great very helpful.
Your next question is from the line of <unk> with Bank of America.
Hi, good morning, everyone.
Good morning.
So just looking at the secular shift from ownership to rental over the last few years, how much growth do you expect is coming from customers, who might prefer to typically own their own equipment, but they cannot due to supplier costs.
Then once supplies do improve do you expect to see any impact from some of these customers reverting back to owning their equipment.
Yes, hi, good morning, Sri.
You do tend to see you see a pickup in the secular shift in the down cycle like you saw in 2020 with people sort of unloading fleet and Ian.
Not necessarily getting back into it.
In this environment, you're going to see that extend and probably take another step up just due to the difficulties in getting their hands on the new fleet, even if they wanted to so.
Kind of incremental on the margin you might have someone who owns four pieces of equipment and rates for pieces of equipment sales.
Sales of two and then it doesn't replace demand moves into.
A few more pieces of original equipment.
But without a doubt the current environment, where we're struggling to get our $1 billion with them.
Plus with the fleet, if you were going to a retail store and trying to buy retail. It's one very expensive until you're probably waiting a year or two for that so.
Without a doubt I suspect the current environment is driving an increase in that secular shift and and once that step change happens. It doesn't revert right. So you can look at that over history. It continues just to go up and go up it might slow down as the.
As the.
Dealers returned to a more normal sort of inventory cycle, but it's not likely to reduce.
Got it thank you.
Your next question is from the line of bias Mammer with Gabelli funds.
Hi, Brian .
Hi, Larry Hi, Leslie.
And then obviously Hello to Elizabeth I Hope your I hope Youre doing well, so I'll speak to you soon.
If I could just start with just a question on leverage and the confidence there.
<unk>.
We've seen others in.
In the in this industry see it two to three times level as being a little too heavy to four now in and buying back stock into what is still going to be a fairly heavy capex cycle here.
Any thoughts there Larry is as far as well.
Wanting to stay towards the lower end or even going below that once you start generating considerable cash in the fourth quarter here.
Yes.
We've said.
Two to three times as our desirable level and certainly M&A.
Strong economic environment, we don't mind going up.
A bit towards the top end of the range and in an environment, where we were we feel.
That there might be any headwinds, we would try to keep that towards the lower end of the range, but I'll, let mark comment a.
Ben.
How easy is viewing that.
Now we're going to.
We utilize our or our capital allocation.
Yes, no I mean, we are comfortable in that two to three times zone.
The balance sheets pretty much bulletproof theres not a lot of risk to that.
As you've seen in the recent sort of 2022 unified through 2025 zero.
We are at peak leverage in the quarter, just given the working capital drain on terms of funding the capex or it does decrease slightly going into Q4.
So we will manage it at the lower end of the range, but unlikely to be dropping it below two in the current environment just given hour.
Sort of trajectory in the amount of money, we're investing in the business.
Sure Mark while I have you given the level of profitability. The absolute level of profitability are you are you are subject to any.
Anyway, any minimum tax thresholds from a cash perspective.
Not at this stage, yes, not at this stage. So I mean, there's still we still benefit from accelerated depreciation on the fleet coming in so.
Predicts us on Texas for the short term.
So.
If it continues for another two to three years and we start moving into a cash tax position.
But not this year and not next year.
<unk>.
Okay I'll get back in line. Thank you very much.
Thanks, Brian .
Your next question is from the line of Seth Weber with Wells Fargo.
Yes.
Hi, Good morning, guys. This is actually <unk>.
Larry Savitsky on for Seth.
Hi, Larry.
Hi, guys I just wanted to ask about the acquisitions I think you mentioned third quarter acquisitions contributed about.
$250 million to total revenues.
How should we think about that in the fourth quarter and.
Was that one of the main sources of the EBITDA rates.
Yes.
Now that <unk> got that number right.
We mentioned that one third of our growth was from acquisition activity and Thats from all the acquisitions completed for 'twenty, one and 2022 so you might have.
Construe that comment a little bit.
And I think thats.
The ratio that we're looking at so its about two thirds of.
Okay.
Organic growth and about one third of acquisition growth and thats likely to be the contribution in Q4.
Part of the raise was from additional acquisitions and part of it is sort of continued strength in the.
And that two thirds of the business thats driving organic growth.
Got it got it that makes sense thanks for the clarification.
And then I just wanted to touch on used equipment pricing.
If you guys can get kind of give your take on it and what you guys are seeing out there.
Regarding used equipment pricing.
It's still a.
<unk> used equipment market Theres still a lot of demand.
Because there is limited supply.
Most categories when you look at.
If its retail wholesale is still very very strong if you look at the auction prices depending on the category.
Most of them, probably peaked already and theyre starting to gradually rollover, but still higher.
Higher than a normal baseline so it's still a good really good overall used equipment market.
Yes, I was just wondering how that contrasts to the Ritchie brothers release earlier this week and if there is any.
Disparity between what came out from that and what you guys are seeing.
I understand I believe no I believe I read that maybe the same one that you are referring to and they said the volume was picking up.
Auction assets being sold.
I believe that's that's accurate I mean, thats, what they stated firsthand that too.
Okay, Okay, great. Thanks, a lot guys.
Thank you.
Your next question is from the line of Steven Ramsey with Thompson Research group.
Hey, good morning, maybe to circle back on.
The topic of suite the fleet spend of one 5 billion next year is that net or is that on a total basis and then.
Do you expect used sales will be lower again next year, if fleet supply conditions are similar to this year.
So that's that $1 five that was a gross number.
Dave and.
As far as disposals for next year, we believe that towards the.
Back half of next year, we will start to pick up.
We sell more of our age fleet, we've really.
<unk>.
So it out to a degree and we need next year, we'll be selling more of it than we did this year based on its useful rentals.
Okay helpful. And then thinking about acquisitions is the macro picture.
Our end markets changing your appetite to do deals in the next two to four quarters our chain.
Changing conditions.
Changing sellers' willingness to do deals and is it changing the multiples that you or others willing to transact at.
No not really I mean, the pipeline's pretty robust.
I would say a steady stream of opportunities that we're looking at.
We're pretty confident going into 2023 that will be able to sort of maintain at this level.
And multiples remain.
Unchanged so.
It's a similar sort of environment that we've seen all year.
We don't really see it changing.
And I'd say, it's pretty robust.
Line of opportunities for us to look at the air and we sort of approach that with a strategic lens and go after the ones that make sense for us.
Great. Thank you.
Our next question is from the line of John Healy with Northcoast research.
Thank you quick question for Rob for Mark I wanted to ask about the M&A strategy, just a little bit.
When you guys are buying these properties I think you have in one of the slides, Canada spends a day and the amount of EBITDA, you've gotten and then what you are kind of pro forma target EBITDA.
And our creation multiple would be how do you think about kind of the timing to get toward that end.
Are there is there anything that we should be expecting that maybe not be in our.
It's not being talked about as it relates to getting those synergies or anything like that as we look to next year.
Yes, so I mean clearly.
And we're doing smaller tuck in deals. So are typically focused on one key market and.
Single branches or or a couple of branches are not big deals.
They benefit straight away by being part of our network right that moving into a district that Scott additional fleet, it's got more cash.
Cat classes available to ramp that Scott at the sales guys in the market already and other customers that are rented so the cross sell and the fleet efficiencies that straightaway.
Most of the synergies we look to have.
Not realizing by the end of year one.
And it's a big lift.
Some of them might roll into year, two but we've got I would say, 80% of the synergies starting to roll within 18 months.
Great and then just Tom just one question. When you are buying these properties I just cannot cumulus kind of get you.
Our thoughts on how the operators are pricing versus your pricing is.
And kind of lessons learned there in terms of our pricing strategies or the opportunities to kind of harmonize.
Harmonize pricing between acquired properties and how you guys are running the business and how you had been running the business.
Yes, so I mean, we've got tools is a big national platform. That's operating in 350 stores that across a lot of geographic markets that allow the small players just don't have.
<unk> <unk>.
Competing against Big National players in the market. So they would have to sort of focusing on our niche customer base or have any sheet pricing strategy.
So.
As part of the.
Operating fleet as efficiently as we can in operating margins as we can that typically not pricing as well as we do.
We don't look to change that straightaway as part of a cultural change in terms of moving them into our network and just assimilating that customer base. So we're not looking to shop.
System, if you like.
Overtime, we plug them into our tools and the risks of the sort of operating model that we operate with and we get pricing lift.
And to the into the sort of stick in Europe , the hold of your life.
Makes sense. Thank you.
Your next question is from the line of Mig <unk> with Baird.
Yes, Thank you and good morning, all the best to Elizabeth.
I wanted to go back to that fleet as well.
<unk>.
Maybe clarify for us.
As Youre thinking about net Capex, you talked about gross Capex next year, but presumably net capex would be would be up relative to 'twenty two as well.
Yes, yes, no it will be up.
<unk> still going to be somewhat constrained on our sale of used equipment certainly through the first half and we will have to.
Determine what our fleet availability looks like into the back half of the year.
Let's see if we can relieve some of the older fleet, but look if we have an on ramp we're not going to take it offline just to sell it.
So it will all depend upon availability of the new gear that comes in from our OEM suppliers.
Yes.
Understood Thanks for that.
I'm also trying to think about some of the.
Framework that you laid out at your analyst day, a little while back.
We're thinking through 2024.
The way you are kind of talking about.
Capex and deplete into 'twenty three.
It seems like we're doing the 2024 plan a year earlier and maybe into 2023, so related to that im kind of curious.
What have been kind of the moving pieces that youre seeing to your business again relative to.
Got it.
That plan that you laid out.
It seems like the overall demand environment is maybe a little more robust than what you anticipated initially, but im wondering if theres anything else.
That difference relative to that plan that you might want to kind of highlight for us as well.
Right, Yes, I would make.
So that plan was organic that we laid out so there is no most of.
There's $1 billion of M&A since then.
And we'll probably $700 million more since then.
So those branches need fleet.
Placement in the fleet growth side, we're working off a bigger base.
And that plan now that plan was obviously frontloaded.
Growth was frontloaded into the fronting of that plan, which we've seen but as you mentioned.
We had anticipated.
35% growth in 2022, so the demand has been stronger.
We've responded to that with with more places in more M&A and that creates a bigger bite for us going into 2023, so I need capex.
There's likely to be higher than it was in 2022.
But the growth rate slows down which was kind of anticipated.
Model and that September Investor day so.
It's a bigger fleet base to work with we've decided replacement for a year just sort of working into this slight demand environment.
So that'll start loosening up.
And towards the end of the <unk>.
For the year, particularly but I think we've got more growth into 2022.
It creates more.
<unk>.
2023 and will.
It's kind of a first look at this stage, we'll adjust accordingly.
As we deal with effects on the ground next.
Next year.
That makes sense one final one for me as you are looking at your fleet age.
Based on your comments for 2023 kind of curious what your expectations are exiting 2023 the actually.
Convert on that Capex plan should.
Should we be thinking that fleet age sort of remains kind of around the current levels or <unk>.
Do you see that reverting back closer to pre COVID-19 levels. Thank you.
It would be sub 15 months.
In a range of like 45 to kind of where we are that we reported this quarter of 49 months.
The oil drop I mean, we're not selling that old fleet.
At the same rate that we normally do so that's.
We're not getting the same benefit as we normally would from from the amount of new fleet that we're putting in.
Brian .
That's sort of what I was wondering if you are stepping up your sales towards the back half of 'twenty three we start to see do we start to see this average age coming down and.
The implication here is really replacement demand right are you are you really kind of satisfying that replacement demand that you'd naturally we have given.
More age fleet at this point.
Yes, no thats correct and we are we are not replacing at the same pace that we normally do.
So there'll be no.
Once this market loosens up in terms of supply they will be.
Moving back to our.
More normal replacement.
Hi.
Yes.
Understood. Thank you.
Your next question is from the line of Ken Newman with Keybanc capital markets.
Hi, everyone. This is Katie on for Ken Newman.
I wanted to ask about the SG&A this quarter. So I know, there's a little bit elevated I think.
Most of that was driven by the acquisitions.
How should we think about that going forward and do you see it normalizing too.
More normal level.
Yes.
Got it.
We didn't get as much leverage so I would say out of SG&A as we typically do.
That is expanding and most of it is volume driven so it's sort of coming into selling expenses and variable comp.
A little bit a little bit of.
Receivables soda provision.
Ed.
Some of the step ups, we might in terms of selling expenses were down in the back half of last year. So we will be anniversarying over those so that rate of increase won't be to the same extent as it was in Q3. So we should revert to sort of more normal leverage on that SG&A line going forward.
Okay great.
Then just one more quick question.
Can you talk about some of the conversations that you've been having with your customers as you finalize pricing for 2020, sorry, I know you had talked about in the last call.
Are you able to pass through.
Cost of those customers are there any concerns about that for next year or have you been getting pretty good feedback from them so far.
Okay.
So we stepped up a lot of the ancillary charges I mean that was really just the sort of one month delay.
In February that sort of caught us off guard just that big leap in fuels. So we've been increasing our.
Fuel ancillary charges.
They were increasing our recovery of the increased fuel costs fuel costs have flattened out.
To a certain extent theres still an increase in volume, but that increase in unit cost is not as dramatic into.
Into Q3 moderate even dropped a little bit.
So yes, we continue to focus on ancillary as we've had great success in delivery.
Fuel charges.
We are recovering a big.
Portion of the increased fuel cost on a year over year basis.
Okay. Thanks.
You got it.
Your next question is from the line of Steven Fisher with UBS.
Thanks, Good morning.
Wondering what impact if any are you seeing from a softer housing market.
And if it's too soon to see anything now kind of what might you.
Be doing to prepare for that or is it just not a market that really kind of swings or business too much.
The housing market residential market really doesn't swing our business very much at all.
So the potential go.
Go ahead.
Yes, I mean, the only place it might as big multifamily.
But.
Purely.
Track homes and that kind of construction not at all so I did I have we've been watching some statistics on multifamily and that has slowed down but it's really a smaller piece of our business we're very.
Balanced with industrial.
Government commercial contractors larger projects.
And is there any sort of impact you're seeing on sort of a lighter commercial side at this point from from housing or not really.
Actually nothing at all I get out to the field.
Tap the month every single month, so I see a lot of the activity in the field and now there is no slowdown to.
And at this point.
Okay. Thank you very much.
Okay.
Your next question is from the line of David Raso with Evercore ISI.
Hi, Thank you for taking my question the gross Capex for next year I apologize if I missed this but all of that roughly 30% to 33% growth.
How much of that is pricing and also the cadence of your suppliers to ship are you hearing anything unique about it having to be later than normal or maybe some slots have opened up for whatever supply chain reason that you can get it on a normal cadence.
Yes, so I think what.
We're probably looking at high single digits mid to high single digits for most of the suppliers in terms of pricing.
And.
And the cadence is probably not going to change significantly from the cadence that we've seen this year.
We several years ago due to the.
<unk>.
The efforts of our fleet team began to take fleet on a year round basis, rather than sort of drive at all into Q1 or Q2.
So we.
<unk>.
Input fleet on a fairly normalized an even level.
Into our business and consequently, we have been able to work with our suppliers on their supply side and our demand side too.
Get acceptable levels, although we still see delays of 30 to 60 to 90 days, but that.
It won't change much throughout next year, and we don't hear anything different from some of our suppliers other than that they're hopeful and I use the word hopeful in parentheses, they're hopeful that their second and third tier suppliers improve which will allow them to improve their supply line to us in the back half of the year, but.
Going into the first half of the year the balance of this quarter of.
This year and going into the first half of next year.
Not anticipating nor planning for any type of a different supply chain.
No that's helpful and real quickly on your national account contracts that are being renewed can you.
Give us some sense of what's the biggest impact is at the <unk>.
Fourth quarter contracts are some of the more data at scale, where the price increase was most significant or are there still a lot to be re priced for first quarter that are pretty significant in what should be a decent step up just trying to get a sense of that cadence. Thank you.
It's pretty level, we've sort of worked hard to just have a sort of a pretty even sort of monthly renewal. So thats an ongoing an ongoing monthly renewals. So theres no real big lumps coming in in Q4 and at the end of the year or into Q1.
So that but.
It's a flywheel effect right. So we're getting the benefit now from the contracts week renegotiated sort of three months ago and that starts running through and picking up momentum. So.
<unk>.
The benefit does.
Help us disproportionately into 'twenty three from all the work that we've done so far in 2022.
Terrific. Thank you appreciate it.
Okay.
At this time, we have came to the conclusion of our Q&A session I will now hand todays call back over to Leslie for any closing remarks.
Thank you for joining us on the call today. If you have any further questions. Please don't hesitate to reach out to elicit SME. We look forward to seeing you all soon.
Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
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<unk>.
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