Q4 2022 Herc Holdings Inc Earnings Call
Speaker 2: Good morning, my name is Rob and I'll be your conference operator today. At this time I would like to welcome everyone to the Herk Holdings 4th Quarter and full year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. For the speakers remarks there will be a question and answer session.
Speaker 2: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Leslie Hunziger, Senior Vice President of IR Communications, you may begin your conference.
Speaker 3: Thank you operator and good morning everyone. Welcome to Herc Rentals 4th quarter 2022 earnings conference call and webcast. Earlier today our press release presentation slides in 10k were filed with the SEC and are all posted to the events page of our IR website at ir.hercrentals.com.
Speaker 3: Today, we're reviewing our fourth quarter in full year 2022 results with comments on operations and our financials, including our view of the industry and our strategic outlook. So, prepare remarks will be followed by an OAMPing Q&A.
Speaker 3: Now let's move on to our safe harbor and gap reconciliation on slide three. Today's calls include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call.
Speaker 3: You should also refer to the risk factor section of our annual report on Form 10K for the year ended December 31st, 2022.
Speaker 3: In addition to the financial results presented on a GAAP basis, we'll 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.
Speaker 3: And a replay of this call can be accessed via dial-in or through a web test on our website.
Speaker 3: Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call.
Speaker 3: Finally, please mark your calendars to join our meetings and presentations at three conferences We'll be participating in the Barclays Industrial Conference in Miami on February 23rd, JP Morgan's High-Eld Conference on March 6th, also in Miami, and Bank of America's Industrial Conference in London on March 22nd.
Speaker 3: With that, let me introduce you to our speakers. This morning, I'm joined by Larry Silver, President and Chief Executive Officer, Erin Bernbaum, Senior Vice President and Chief Operating Officer, and Mark Irion, Senior Vice President and Chief Financial Officer, on the outrown call over to Larry.
Speaker 2: Thank you, Leslie, and good morning, everyone. Let's start on slide number four. There's no question that 2022 was another exceptional year for HURT. We delivered record-level financial performance across the board. Equipment rental revenue growth was...
Speaker 2: 34% on top of 24% growth in 2021. In support of the rising demand, we invested $1 billion in net sleep purchases while improving in fleet productivity as evidence by an annual increase in dollar utilization year over year.
Speaker 4: We also invested in expanding our branch network by completing 18 strategic acquisitions and opening 21 Greenfield locations in key markets in 2022.
Speaker 4: By focusing on rate growth and operating efficiencies, we have more than offset inflationary pressures as we deliver to 160 basis points of adjusted EBITDA margin improvement and 120 basis points of higher ROIC.
Speaker 4: We're operating from a much stronger position today than at any time in our history with better systems and processes, more diverse end markets, a broader portfolio of products, a growing branch network, economies of sale, and a solid balance sheet.
Speaker 4: As one of the largest equipment rental providers with a national reach, our size, resources, and operational excellence are giving us a significant advantage in the marketplace.
Speaker 4: Moving on to slide five from a macro standpoint, the North American Equipment Rental Market Generate 11% growth in 2022 on robust infrastructure, industrial and other non-residential construction spending.
Speaker 4: Cell went, came from a ramp up in domestic manufacturing after years of inadequate investment.
Speaker 4: The beginnings of allocation of federal funding for construction projects and the ongoing ship that is now taking place in specialty categories from equipment ownership to equipment rental.
Speaker 4: Contractors understand better than ever the economic, environmental, and logistical benefits of running equipment across categories.
Speaker 4: In 2022, Herk grew three times faster than the industry and gained a full point of share by leveraging our increased scale network and capabilities to ensure that we continue to meet the needs of existing and new customers and deliver on our commitments.
Speaker 4: While demand has been strong, supply constraints are ongoing. We manage to secure the fleet necessary by leveraging our purchasing power, placing waters early in the buying cycle, utilizing our solid balance sheet and capitalizing on our preferential position as a Tier I national equipment rental company.
Speaker 4: On slide 6, you can see the successful execution of our growth strategies, also contributed to our outside performance relative to the overall industry.
Speaker 4: We increase revenue in our core categories of aerial material handling at Earth Moving Equipment last year by investing in fleet and optimizing our branch network. Revenue from our high margin pro solutions business also grew in 2022 compared with 2021.
Speaker 4: incrementally benefitting from new products, new locations, and cross selling synergies.
Speaker 4: and our innovative customer facing digital capabilities where the catalyst to several new project wins late last year, especially at the national account level.
Speaker 4: You'll hear more about that from Aaron in a minute.
Speaker 4: At the same time, we're committed to responsible ESG operating practices built on a strong cultural foundation, a safety first protocol, and a pledge to continue to work hard to do more to protect the environment, often in partnership with our customers and suppliers.
Speaker 4: Finally, between fleet investments, strategic M&A, dividend growth, and opportunistic share
Speaker 4: We enter 2023 from a position of strength with a commitment to our growth plan. There's strategies driving it and the incredible people who executed at such a high level. On slide number seven, in addition to continued strength in data centers, healthcare facilities, petrochem.
Speaker 4: and other key end markets, ensuring and fiscal stimulus friends have only accelerated, despite concerns about a potential slowdown in the market.
Speaker 4: These make-up projects represent the beginning of a multi-year flow of dollars into the industrial space.
Speaker 4: Every time you hear sustainability, climate change, and resiliency, you're hearing about growth opportunities for our company.
Speaker 4: In 2021, we outlined our three-year strategic plan to grow and strengthen our core business, diversify our products and services, and operate more efficiently as we drive higher, more durable returns.
Speaker 4: Today we're tracking ahead of that plan as industry demands surpasses forecast and we continue to follow the Hurk Playbook for superior performance.
Speaker 4: With that, I'll turn it over to Aaron Burmbound to take you through the fourth quarter details and provide some high-level operational drivers for the year. And then Mark, Irianne is going to walk you through the fourth quarter financial metrics and share our targets for 20-23. Aaron?
Speaker 5: Thanks Larry and good morning everyone. Our record fourth quarter results for revenue and profitability served as a great conclusion to a year marked by strong execution, geographic expansion and new account wins.
Speaker 5: I'm really proud of the way our team continues to focus on delivering superior products and services for our customers while executing well against our strategic growth initiatives.
Speaker 5: Executions start with safety and of course safety is always at the core of everything we do. As you know from slide 9 our major internal safety program focuses on perfect days. That is days with no OSHA reportable incidents, no at fault motor vehicle accidents and no DOT violations.
Speaker 5: and we strive for 100% perfect days throughout the organization.
Speaker 5: In the fourth quarter, when our branch-by-branch measurement, all of our branch operations achieved at least 98% of days as perfect. Equally notable, RT or IR improved the .52 a best-in-class result.
Speaker 5: On slide 10, our fourth-torture results reflect the market opportunity we see by accelerating our investment in equipment with average OEC fleet of 31 percent over last year's comparable period.
Speaker 5: Equipment of rental revenue also increased 31% compared with the prior year fourth quarter. Our regional leaders and their teams are doing an excellent job placing our expanded fleet offering into new locations and with larger projects to incrementally drive the top line.
Speaker 5: Our core business benefited from the continued strong demand for equiminole across all of our regions. And our pro-solutions business delivered double-digit growth year-to-year again in the fourth quarter. As you know, pro-solutions includes our specialty categories of mobile power and distribution.
Speaker 5: climate control, remediation, and public women to see fast-growing high-margin segment of the market. We are captains shared 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.
Speaker 5: On slide 11 you can see our fleet composition at OEC on the left side of the page. Total fleet is now a record $5.6 billion as of December 31st, 2022.
Speaker 5: 29% higher than OEC fleet at the end of 2021. You'll notice that higher margin, especially fleet, represents about 24% of the total, and there's room to grow.
Speaker 5: Our fleet expenditures at OEC total $327 million in the recent fourth quarter. At the end of 2022, we continue to accept new fleet deliveries despite seasonal demands slowdown as we prepare for additional growth in 2023.
Speaker 5: We disposed of $140 million of fleet at OEC in the recent quarter, 80 million more than last year's similar period. We effectively balance the need to refresh some older fleet, well, continuing to be prudent in managing our equipment level to meet strong customer demand and address the ongoing supply chain constraints.
Speaker 5: Proceeds from fourth quarter disposals were 44% of OEC and benefited from continued strong pricing of used equipment as evidenced by our 510 basis point margin improvement on these sales.
Speaker 5: The average age of her disposal was 94 months in the fourth quarter, with average fleet age at about 48 months.
Speaker 5: In addition to a best-in-class fleet, you can see on slide 12 that 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.
Speaker 5: National Account Business is benefiting from traditional in-market demand, and the increasing number of new multi-year reshoring and infrastructure projects being rolled out.
Speaker 5: In the fourth quarter, local accounts represented 57% of rental revenue.
Speaker 5: Our goal is to have our annual split of local and national customer revenue be about 60-40 respectively.
Speaker 5: Our acquisition and Greenfield strategy supports greater local account penetration.
Speaker 5: Slide 13 is a quick snapshot of the acquisitions we made in 2022. In the fourth quarter, we completed the purchase of two additional businesses with five locations, which brings last year's total of 18 companies and 29 locations as Larry mentioned. As you know, we are focused on opportunities in high growth markets that complement our current branch network.
Speaker 5: and fit our strategic, financial, and cultural filters. Moreover, many of the mega industrial projects being announced are in the geographies where we have focused our acquisitions and greenfield additions such as Texas, California, Ohio, Arizona, and the cities of Phoenix, Houston, Toronto, Detroit, and Chicago.
Speaker 5: We spent $515 million in net cash last year with an average multiple of approximately 5.5 times.
Speaker 5: We seek compelling revenue synergies in most every company we acquire. And over time, we can run the fleet and operations more efficiently, generating synergized multiples of approximately 3.5 times to 4.5 times.
Speaker 5: Our acquisition process is now at core competency, having successfully integrated nearly 30 businesses with 62 locations into the HERT network over the last two years.
Speaker 5: We have efficiently assimilated these companies, teamed, equipment, operations, and customer accounts.
Speaker 5: to rapidly add value to our operations in line with our urban market strategy. And we had a very knowledgeable experience and skill team internally made up of region operators and intimidate specialists.
Speaker 5: Who know our markets well and can leverage relationships?
Speaker 5: This gives us confidence that we explore and evaluate new opportunities.
Speaker 5: As we look forward on slide 14, M&A is only one of our building blocks for future growth. Starting with our foundational core business, Fleet CAPEX and continued investments in greenfield locations provide the launching pad for incremental growth initiatives.
Speaker 5: Our Pro Solutions business also has a lot of runway. It's all grown through seven acquisitions last year, in addition to a larger fleet.
Speaker 5: Proceiling benefits and product-loan expansions.
Speaker 5: When it comes to winning new projects by raising the board on customer experience, our investments in digital technology are making a difference.
Speaker 5: Our Pro Control and Next Gen Digital Platform provides customers with more control and rich data to improve efficiency and lower costs on their job sites. As Larry mentioned, we launched our Advanced Fleet Management System last summer and will continue rolling it out to our broad customer base this year.
Speaker 5: Another area of road stems from our capabilities and providing customers with legislative expertise and a full service on-site support.
Speaker 5: As an experienced manager of onsite solutions, we are well positioned to take the primary fleet management role on large projects as well as to secure recurring revenue from long-term contracts for day-to-day rental fleet oversight, cost control and maintenance and industrial customers existing facilities. National accounts, as I mentioned, are also important to work with.
Speaker 5: as they are a legacy strength for us. As large manufacturing and infrastructure projects continue to ramp up, we are leveraging a reputation and relationships to win more than our fair share of these projects from battery and EV plants to renewable and ship facilities.
Speaker 5: Among our 2022 National Account customers, the average tenure with HERT was more than 28 years. We've earned their loyalty. National Accounts, as you know, are characterized by high volume and longer duration with less seasonality and cycle risk.
Speaker 5: Together, these initiatives represent the foundation of building blocks for substantial long-term growth opportunities for her.
Speaker 5: and our regional operations are primed and ready to advance our progress.
Speaker 5: I'd like to thank Team Hurt for their commitment to growth, operational excellence and safety.
Speaker 5: Their professionalism shows up in the execution of our services to our customers every single day. Now I'll pass the call on to Mark.
Speaker 4: Thanks, Aaron, and good morning, everyone. The city execution of our growth strategies that we just heard about from Larry and Aaron provided strength and momentum and our results throughout 2022 and into 2023. Slide 16 summarizes some of the excellent results we achieved in 2022.
Speaker 4: Fourth quarter equipment rents were revenue increased to a record of 713 million from 542 million in the fourth quarter of 2021.
Speaker 6: At 31% increase, primarily due to continued volume and pricing momentum.
Speaker 6: As you heard, we're pushing hard on both our organic growth and acquisition strategies with great success.
Speaker 6: Taking its post-local at the 31% rental revenue growth for the fourth quarter.
Speaker 6: About two thirds of the growth was organic and the third came from acquisitions.
Speaker 6: This validates our ability to continue to grow our established core business organically.
Speaker 6: and their organic growth is approximately two times that of the overall rental market.
Speaker 6: Smart acquisition strategy provides a nice growth supplement by allowing us to quickly bring on key rental talent, fleet and customers to bolster our position in strategic markets.
Speaker 6: In our ongoing focus on operating leverage, continues to drive improved profitability and expanding margins.
Speaker 6: Adjusted net income from the fourth quarter of 2022 increased 37% to 103 million or $3.44 per dollar to share.
Speaker 6: compared with adjusted net income of $75 million or $2.46 per dollar to share in the fourth quarter of 2021. Adjusted EBITDA increased 41% the year of a year to a record of $4.361 million. And we expanded our adjusted EBITDA margin.
Speaker 6: by 160 basis points to 46% and Q4 2022. All in all, an excellent quarter and an excellent year.
Speaker 6: You can see we made progress across every metric on this slide and are especially pleased with our margin expansion and rebate our flow for a 54%.
Speaker 6: Our business model drives fast growth and expanding margins, allowing us to continue to invest in our equipment, locations and our people. In addition to creating value for our shareholders, which is clear by the 120 basis point improvement in ROIC in 2022 to 10.8%.
Speaker 6: On slide 17, the graph on the upper left illustrates our success in consistently driving rate growth.
Speaker 6: This is always an important metric to manage and it's especially important in the current environment with inflation creating cost pressure.
Speaker 6: In the fourth quarter rate was up 6.6% year over year, with clear momentum, this rate growth has increased in every quarter over the last few years. We will continue to focus on rate in 2023 and will push hard for mid-single digit rate growth utilizing our proven and effective pricing tools.
Speaker 6: that discipline and professionalism of our sales team, and they're all over benefits from national account contract rate increases secured last year.
Speaker 6: The backdrop for a rate remains favourable as demand continues to outpace supply and the industry appears to remain disciplined given the inflationary fleeing environment.
Speaker 6: Our fleet size and OEC closed the quarter at about 5.6 billion. Continued excellence of our purchasing team is contributing to the steady delivery of fleet in 2022, which was also supplemented by fleet integrated in conjunction with acquisition activity.
Speaker 6: Our average fleet on rent at OEC and Q4 was up 29% compared with average fleet growth of 31%.
Speaker 6: The oil utilization sits slightly in queue for a year over year to 43.5%. Primarily due to return to more normal seasonality.
Speaker 6: That combined with our taking more fleet into the winter off season than we normally would put pressure on utilization.
Speaker 6: In a normal supply environment, we place orders in Q4 and schedule deliveries for the spring and time for the construction season.
Speaker 6: But in the current environment we are placing orders almost a year out and taking receipt as soon as our vendors can deliver the equipment.
Speaker 6: This will impact time utilization in the seasonal first quarter of 2023 as well.
Speaker 6: But by taking the new fleet now, we ensure we'll be able to respond to our customers' demand in the spring. For the year, we improved olialization of 43.3% and continued to move closer to our target range of mid 40% based on our current seat mix.
Speaker 6: With 2023, we're targeting incremental improvement in annual dollar utilization as we continue to focus on rate and as we return to normal seasonal demand patterns. On Saturday, you can see we have no near-term debt maturities and have ample liquidity to fund our growth goals. We have no near-term debt maturities and have ample liquidity to fund our growth goals.
Speaker 6: Net capital expenditure is exceeded cash flow from operations in 2022, with cash outflows of $250 million before acquisitions.
Speaker 6: We'll continue to deploy capital to invest in our business and try to leak growth in this strong multi-year demand environment.
Speaker 6: Now current leverage ratio at 2.4 times as well within F2 to 3 times target range.
Speaker 6: In addition, we repurchase the next test of half a million shares of our common stock in the fourth quarter at an average price of about $110 per share.
Speaker 6: and have announced the 10% increase in our quarterly dividend for 2023 to 63 and a quarter cents or $2.53 per year for the year.
Speaker 6: We remain confidence in our business model and are committed to creating shareholder value.
Speaker 6: The rental market chart on the upper left side of slide 19 shows the continued strength and our key end market.
Speaker 6: The ARA estimate for 2022 North American rental industry revenue is $60 billion.
Speaker 6: As Larry mentioned, that's 11% growth over 2021.
Speaker 6: There's another 5% growth forecast for 2023, so the remains strengthened in the outlook and the current growth cycle should remain intact.
Speaker 6: As we've discussed, the HURX rental revenue growth is a clipsing the broader industry growth rate by a factor of 2-3 times.
Speaker 6: whether you focus on 2022's total top-line increase of 34% or our organic growth rate of over 20%.
Speaker 6: We expect this out performance to continue. In this environment, the advantages of scale are magnified and the big rental company that have diversified in market and the ability to surface the current strength and industrial mega projects will continue to get bigger faster. Two of our key in market to our industrial and non-residential constructions.
Speaker 6: Taking a look at the industrial spending forecast on the top right chart, IAR is projecting 13% growth in 2023 on top of the level of the sink growth in 2022.
Speaker 6: Clearly, the industrial economy is strong and will continue to provide rental opportunities. These forecasts continue to move up the 2022 and 2023, which happened in the third quarter as well. When actual activity continues to exceed the forecasts each quarter, we are in a very robust environment. The non-residential construction stats also keep getting stronger.
Speaker 6: driven by an unprecedented amount of new mega projects that seem to be announced every day as the ensuring of U.S. manufacturing capacity continues to get a steam. Starts in 2022 and now is made at 427 billion for eye-popping growth of 42% year-over-year.
Speaker 6: The highest level ever. The chart in our third quarter presentation had gross particular 19%.
Speaker 6: So as I said, the forecasters are having trouble keeping up with actual activity. We should emphasize that these are also just starts of new projects and are being driven by multi-year construction builds that will continue into 2023 and 2024. All these starts drive new non-residential construction put in place activity in the next year.
Speaker 6: and construction put in place activity is typically two times higher than the prior year's start. Additionally, there's another $293 billion in non-residential, non-buildings or infrastructure projects slated for 2023.
Speaker 6: That's a 17% increase over 2022. There is growth all across the non-residential construction spectrum and it is looking increasingly clear that our equipment will be in high demand in 2023. That is why we are leaning into the cycle and will be deploying capital to continue double digit volume expansion to keep us cruising along and high here. Therefore, as we move to slide 20.
Speaker 6: Our guidance highlights our plans for outsides growth again in 2023. Our plans and net fleet capyx of 1 to 1.2 billion allows us to maintain double-digit growth and fleet on rent.
Speaker 6: We should also see an increase in our use equipment sales in 2023 as we return to a more normal level of fleet replacement.
Speaker 6: With the expectations for strong operating leverage, as we roll over some of the 2022 inflationary challenges.
Speaker 6: We estimate that the electricity bill will be in a range of 1.45 to 1.55 billion.
Speaker 6: We're presenting another year of profitable growth ranging from 18% to 26%.
Speaker 6: This guidance is organic, but when it comes to M&A opportunities, we have a robust pipeline that should enable us to invest another 500 million or so in acquisitions again this year, driving incremental growth to our guidance.
Speaker 6: Interest expense will continue to increase in 2023 reflecting the accumulation of the fed rate increases and our continued M&A funding. We are experiencing all of the trends consistent with the industry in an up cycle and a tender and continue to drive excellent performance as our gross strategy remains in high gear.
Speaker 4: With that, I'll turn the full back to Larry. Thanks Mark, and everyone, please turn to slide 21.
Speaker 4: Everything we do starts with our vision, mission and values, and a purpose statement that focuses on equipping our customers and communities to build a brighter future. We do what's right, and we're in this together. We take responsibility, we achieve results, and we prove ourselves every day. So now operator, please open the lines for questions.
Speaker 2: At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. Your first question comes from a line of Jerry Revich from Goldman Sachs. Your line is open.
Speaker 7: Yes sir, good morning everyone.
Speaker 7: I'm wondering if you folks can expand on the MNA pipeline this year market. Is there an opportunity for that to be over 500 million as we look at the impact of higher rates on a lot of the smaller players that are ABL funders?
Speaker 6: Is that sort of 500 million range? If something opportunistic was to come up bigger than the kind of deals that we've been doing, we'd certainly look at that. But that's the sort of level that we're comfortable with and that's the level that we're sort of looking to achieve this year.
Speaker 7: Okay, and I'm wondering if we could just expand on the time utilization discussion. So you mentioned just the timing of gear deliveries means lower time utilization the first quarter. Are you expecting an outsized pickup in time utilization versus normal seasonality in 2Q to where we can return to time utilization we saw during the construction season?
Speaker 6: in 22 or is that just running time too high? That's not optimal for the business. I think, I mean, we, you know, the construction season typically gets you into that sort of peak time utilization zone. So we'd expect to get back into sort of 22 levels in Q2 and Q3.
Speaker 6: It's Q4 and Q1 that we're highlighting with the sort of return to a normal seasonal slowdown plus just taking a lot more fleet than we typically would have had some impacts over the winter.
Speaker 7: Got it. And lastly, you know, on the rate outlook, just considering the carrier will reflect the start to year, sounds like you're going to be exiting with rate up in the call. It may be 3% range, but considering costs are as long as well, are you expecting your rear margin expansion in the back half of the year at that lower, top-driven rate number mark?
Speaker 6: You might think you can see we've got a bit of traction in the flow through in the back half of 2022. We're continuing that momentum through into 2023 and we look to see that range moved from low 50s into that mid 50 to 60 range.
Speaker 6: Typically, picks up in the back half of the year, similar to what you saw this year, just as you roll over the previous year's cost and headcount increases.
Speaker 7: Thank you. Thanks, Jerry. Thanks, Jerry.
Speaker 2: Your next question comes from the line of Rob Worth, I'm from Mealius Research. Your line is open.
Speaker 2: Your next question comes from the line of Rob Wertheimer from Milius Research. Your line is open. Good morning, everybody.
Speaker 4: Hey, so I had a question on acquisitions also and you guys have obviously had a lot of margin increase over the last two years But you know including this year and I'm wondering if your targets are you know becoming? I'll talk here or having similar margin gain and less willing to sell if you have it any any you know commentary on
Speaker 4: how the industry feels and whether people are still willing to come to the table with you. Well look, yeah I think the pipeline that we already have for 2023 is pretty robust. We still see that there is ample opportunity for some further consolidation.
Speaker 4: in the industry. And we think we're in an excellent position to continue what we've been doing. So we really all say much of a change from last year or the year before. There's a big opportunity at the Robin and the smaller deals, which we kind of feel that there's a bit of more of a advantage for us. We...
Speaker 4: on that. And then just a small question, but I know you're trying to handle all the growths that's out there and all that you can. But if you had the opportunity, would you rather be doing a bit more replacement cat-backs? Do you have a catch-up to do if growth ever slows or do you feel kind of comfortable with where fleet age is despite the COVID back and forth? And I'll stop there. Thanks.
Speaker 5: We started to rob in the fourth quarter off, she's selling more fleet for replacement cap tax. And we believe as we go through 2023, as long as it's applied chain cooperation, we'll get back to a more normal cadence. But we feel good about where we are right now. You know, we're glad we started firing a backup in the fourth quarter and feel good about the flow of...
Speaker 5: new and replacement in 23. That said, we're still concerned about supply constraints.
Speaker 4: You know, in the year while we've managed to develop a fairly normal cadence, you know, there's still supply constraints from the OEM level that we're concerned about. Yeah, thank you. Your next question comes from a line of Neil Tyler from Redburn. Your line is open. Open.
Speaker 8: Good morning, everyone. Thanks. Larry, your answer to the previous question actually sort of brings us neatly to the topic I want to ask about, which was in terms of that supply and the gross capEx number, I guess.
Speaker 8: If we see a similar pattern to the demand side of things as we've seen over the last 12 months, namely that initial forecasts end up being raised during the year and that translates into greater demand, is there scope for you at this stage to add much more to your gross catpex number or...
Speaker 8: Do you see that demand manifesting either in terms of you matching it with Accelerated M&A or through rate? Which order do you think those things are likely to stack up in a better demand environment? Thank you. Yeah, look, great question and a number of things to unpack there. But, you know, we're pretty much, you know.
Speaker 4: have on order the fleet that we expect and hope to be able to get in with a fairly normal cadence over the course of the year. Remember our fleet is fundable, right? So certain markets might have some softness and we'll be able to move fleet to those high demand areas where those projects materialize and where we can capitalize on that business.
Speaker 4: We still have some room in our CAPEX, you know, if we choose to go after it, but you know, the constraint there is the availability and ability to get it from the OEMs and they're our sort of limited capacity as we go through the year.
Speaker 4: Certainly they've improved, but not to the level where we have the circumstances of what we're going to get every month. We're still sort of, you know,
Speaker 4: We're still expecting certain amounts of material, but there's still a fair amount of delays and roll over going on today. So I think supply is more of a constraint rather than demand. But fortunately, as I said, our gear is fungible and we can move it. Okay. Thank you. And is there any constraint on? Okay.
Speaker 8: on your side of things. I mean, landing a billion and a half dollars a fleet into your businesses is obviously very different to the situation a year, even a year ago, or two years ago, certainly. And how are the branches able to cope with that and deploy it? Hi, Neil, it's Aaron again. The branches are doing a great job absorbing the fleet. We've really spent a lot of time the past 18 months developing our team.
Speaker 5: larger projects in North America. So we feel like all of our branches can continue to take fleets without any absorption issues in 23rd.
Speaker 8: Got it. Okay. Thank you very much.
Speaker 8: Got it. Okay. Thank you very much.
Speaker 2: Your next question comes from the line of Ken Newman from KeyBank Capital Markets. Your line is open.
Speaker 9: Take good morning guys. Good morning guys.
Speaker 9: So obviously it sounds like demand visibility is very strong for 2023 driven by these large mega projects that we've all been talking about.
Speaker 9: I'm curious, Larry or Mark, is there any way that you can kind of help us quantify just how much of that visibility can be framed by the new guidance? What's the guide kind of implying in terms of incremental infrastructure activity or opportunities versus reshoring activity? I mean, I think it's, you know, our visibility and our...
variability to the revenues and where they're coming from and we're not specifically targeting growth in specific end markets. But you sort of look at that pie, there's growth all across those end markets. So we'll be targeting that and we'll be looking to get out our unfair share. Yeah, I think Tim.
You know, we sort of, or I look at the mega projects as sort of like the icing on the cake, you know, the overall general markets that we cover are all very strong and the mega projects are just sort of additives to what we're doing. So I don't view that as necessarily driving this improved demand. I think...
the base level of demand is very strong. Right. I guess maybe to clarify then, I mean, just given how large these projects are, are a huge competitive advantage, is it fair to assume that you're going to punch well above your weight relative to your market share.
for these larger projects. Yeah, I think that's accurate. And you know, there's certain things that these large projects want, right? They want a lot of fleet. They want a high level of service almost.
Always an on-site type operation. They want technology solutions to manage the fleet and the account management. And there's really only so many national large players in the rental space they can provide all that. We do think we will, as others that are similar to us or big national players, we'll be able to get outside success on those big projects.
Yeah, and then just from my follow up question here, you know, it seems like you are tracking much closer to that 5% market share target that you put out on your analyst day, I think back in 21. You know, obviously the fleet still feels pretty tight from an industry perspective. Do you have any updated views on what you think market share game capture could be relative to 2022 or? Yeah.
lead in capital to growing as fast as we can and that should lead to market share gains. And we're happy, very happy about that.
Thanks. Your next question comes from a line of Shreef El Sabi from Bank of America. Your line is open. Hi, good morning.
Good morning. So I just wanted to ask, you know, 23 will be another year of large cap X spend. Do you expect to be able to draw and select free cashflow positively? And if not, what's the pathway to get there?
Right, yeah, no, we're looking at, you know, neutral free cash flow, I guess, at this level of fleet growth with our current level of Ebit DA expectations before M&A. You know, while we grow and fleet it, you know, in the high 20s.
That is a commitment of capital to growth and that does put a challenge on free cash flow. So the trade-offs really, you know, how fast do you want to grow the fleet versus free cash flow? So we're betting on peak growth and market share growth and we're doing that with improved margins and improved utilization and creating shareholder value at this stage.
that's the way we're executing on the strategy but it should be pre-cash flow
Thank you. Your next question comes from a line of Steven Ransey from Thomson Research Group. Your line is open. Good morning. What did you think about these mega projects? Are you able to cross sell better just by the nature of these projects combined with your own?
internal improvements or do you have any initiatives there that maybe step up your, what you're already doing? These big mega projects, they pop up in different types of markets. Sometimes they're a little bit more rural than you know, urban, but with our footprint that we have nationally, we're able to support them.
And they typically always want a full suite of types of products. So the core fleet, which we're investing heavily in. And then as they build those up, they do need a lot of climate and specialty solutions because a lot of their – often they don't have shore power or permanent power.
inside the plant until it's further down the road of being developed. And they also, depending on what their operation is and what they're doing inside the plant, they often need a lot of climate, heat or air conditioning, de-ubitification until they get their permanent equipment installed. So it's agreed.
project for the whole suite of services that we offer. Great. And then do these mega projects support greater growth in your national accounts versus local local and then to capture more of this mega project opportunity.
Do you feel like you could invest more in branches, green field or acquisitions closer to where these projects are happening?
And the first eight question is yes. Usually it's the big national type mechanical electrical general contractors that go into to do these projects, but there's always an element of local contractors that are supporting the project as well. So it's a great opportunity when you're on those projects to work with that all the customer base.
and you often see the local customers get much larger and give more projects in the general area. These, as far as us, I believe your second part of your question to see, was are we focused on new locations in some of these metropolitan area where these big projects are?
And I would say the answer to that is definitely yes. We invested, we did a lot of green field, a lot of acquisition activity in Texas where we see a lot of this activity going on for one. So we continue to strategically look at those opportunities for a footprint as it maps out with the
you know, reshoring or big projects coming online. Yeah, and also Steve, you know, if a project out in a rural market, we wouldn't necessarily look to open a branch or doing acquisition in a rural market. What we would do is an onsite, which would be for the duration of the project during its construction phase.
and operate from that type of a perspective. So, you know, we're not going to chase, you know, flag poles and chase customers to open, you know, facilities that would be permanent overhead. We would look to have temporary overhead in those locations.
Makes sense. Thanks, guys. Thank you.
Your next question comes from a line of South Webber from Wells Fargo. Your line is open.
Hi guys, this is Larry Stavitzky off the set this morning. Thanks for taking my question. I just wanted to ask about quarter over quarter, any evidence of cancellations or pushouts related to rising interest rates or macro concerns. You guys talked a lot about increased activity from infrastructure and construction and some of these mega projects.
is customers and our sales team. And my ears are open to see if I hear any anecdotal concerns along those lines. And I have yet to hear that. Every market I go to in North America, very robust activity, no cancellations, no postponements, no cancellation due to interest rates. Most of these jobs are big.
big planned investment jobs, strategic reshoring, some public funding and these projects are found through as scheduled.
Okay, thank you. I'll leave it there. Thanks, Chris. Thank you. Thank you. Your next question comes from a line of Meg Dovery from Beard. Your line is open.
Good morning. Thanks for taking a question. I want to follow up on that last comment about really not seeing any cancellation in momentum remains strong. What do you make of the ABI index being below 50? I mean, obviously you have that as a key indicator for your business. And I recognize that the mega projects are there.
But what about the sort of regular mom and pop for like a better term of construction business? Yeah, I mean, you can see on the chart that it's been below 50 cents of toba. I mean, it's obviously coming off extraordinary high readings before that.
It's maybe an indication of activity 12 months to 18 months out. And we're focused on the activity that's in front of us. So there's strong demand now. There's going to be strong demand in the next couple of quarters, and that's what we're focusing on. And will adjust this as necessary.
to what the ABI might or might not be telling us for the 2024.
understood. And then, a clarification, I don't know if I missed this, how are you thinking about gross CAPEX and maybe can you help us understand in your current outlook what what the plan fleet disposal might look like in 2023.
Right, so yeah, we're definitely going to return to a normalised level of sleep disposal, so that'll sort of pick up into that.
2019 ish sort of range, you know, we've been running maybe in the 200 to 300 million dollar zone of OET For the last couple of years and that'll sort of pick up to the you know, 500 million to the 600 million dollar zone we expect and you know the CapEx the gross CapEx is rolling in faster than
than it was at the beginning of the year. We expect to sort of see improvements throughout this year but we're getting a steady supply. It's not as predictable as it is in a normal environment but the supply is coming in and we expect to be able to get enough lead to execute on the plan.
was at the beginning of the year. We expect to sort of see improvements throughout this year, but we're getting a steady supply. It's not as predictable as it is in a normal environment, but the supply's coming in, and we expect to be able to get enough lead to execute on the plan. Understood, and then maybe the last question.
This is kind of going back to the answer that you provided to my first question that, you know, I understand that you guys are focused on the opportunity at hand here, but if conditions do change, right, if the ABI is actually telling us something valuable here.
What are the things that you're looking for in your day-to-day business to make adjustments to either your CapEx or your cost structure as 2023 progresses? Yeah, look, I think we monitor on a daily basis our dollar utilization across our Is worth all valuable and animal Gospel semTerm Out of its ages we are able to
districts and regions. We monitor our time utilization by category. We look at what the seasonality is to make sure that you know the plan seasonality movement is happening as we expect whether it's going into the spring construction season will monitor that closely and then as we proceed into the hot weather to make sure you know we're seeing that seasonality.
about closely down to our branches and districts. So, you know, we're very close to what's happening in activity on a daily basis, and we make adjustments accordingly.
very helpful. Thank you so much. Thanks, Mike. Your next question comes from line-up Brian Spahnheimer from Gamco. Your line is open.
Good morning, everyone. Good morning. I'm just very curious about the entertainment business. You've touched on pretty much everything I wanted to talk about, but this was a...
Exciting vertical for you. I think it's got a little bit softer anything you can add there as far as Whether organic or or or in organic growth something you might be looking at Yeah, I mean it's obviously a Important pieces of business for us. It's sort of been through some real cycles in the last couple of years So real big driver
growth and mix in 2021 and less of a contributor in 2022 just as some of that, the growth rate slowed down. But we all remain committed and we're excited to the various parts of that business, both the sort of studio space and the entertainment space.
It's an important part of our mix that will remain focused on. All right. And if we were to think about your current level of...
revenue and what maybe a normalized cat-backs steady state growth would look like for the business of the size.
What do you think that would be? Well, I mean I think we're in a, we're certainly looking to catch up in terms of market share and grow faster than the overall markets. It's an opportunity for us, you know, as a strategy that we outlined in 2021 just to get in front of the cycle.
and really take advantage of the early growth opportunities. That's worked out even better than we could have imagined. Growing at 30% is not sustainable over the whole life cycle of this company if it was to slow down to maybe 10%.
15% at the end of the cycle that would probably be more normalized level and that would create a lot more free cash flow than what we're currently throwing off.
All right, terrific. Well, congratulations on another great year. Look forward to seeing what the 2023 holds. Thanks. Thanks, Brian .
And there are no further questions at this time. Ms. Leslie Hunsicker, I'd turn the call back over to you for some final closing comments.
Great, thank you everyone for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day. This concludes today's conference call. Thank you for your participation. You may now disconnect.