Q4 2022 H&E Equipment Services Inc Earnings Call
Good morning, and welcome to H any equipment Services' fourth quarter 2022 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Today's call is being recorded.
At this time I would like to turn the call over to Mr. Jeff chest pain, Vice President of Investor Relations. Please go ahead. Thank you and good morning, everyone. Welcome to our review of fourth quarter and full year 'twenty 'twenty. Two results. We appreciate your participation on today's call and your continued interest in HD equipment a press.
Release reporting our results was issued earlier today and can be found along with all supporting statements and schedules at the <unk> website, Www Dot H E dash equipment Dot com.
Our discussion. This morning is accompanied by a slide presentation, which can also be found at the <unk> website under the Investor relations tab and events and presentations.
Joining me today are Brad Barber, Chief Executive Officer, John Engquist, President and Chief operating Officer, and Leslie Magee, Chief Financial Officer, and corporate Secretary.
Brad will begin today's discussion, but before I turn the call over to him. If you'll please proceed to slide three I'll remind you that today's call contains forward looking statements within the meaning of the federal securities laws statements about our beliefs and expectations and statements containing words such as.
May could believe expect anticipate and similar expressions constitute forward looking statements forward looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward looking statement a summary of these.
Uncertainties is included in the Safe Harbor statement contained in the company's slide presentation for today's call and includes the risks described in the risk factors in the company's annual report on Form 10-K, and other periodic reports investors potential investors and other listeners are.
Urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements. The company does not undertake to publicly update or revise any forward looking statements. After the date of this call.
Also we are referencing non-GAAP financial measures during today's call you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation supporting schedules to our press release and in the appendix to today's presentation.
Finally, unless specifically noted all results and comparisons for the periods reported and discussed. This morning are presented on a continuing operations basis I'll now turn the call over to Brad Barber, Chief Executive Officer of HCA equipment services.
Thank you, Jeff Good morning, and welcome to our review of fourth quarter and full year 2022 financial results. We appreciate your participation. This morning, and thank you for your continued interest in <unk>.
Please proceed to slide four.
I'll begin this morning, with a review of financial and strategic highlights in the quarter, followed by an update on key performance metrics in our rental business segment.
Also having just concluded an outstanding year for our business I want to identify some expected drivers of activity in 2023, including favorable trends that should support another year of robust robust activity.
I will then close with a summary of our strategic achievements in 2022, which included record results in our rental fleet investment and expansion of our geographic coverage.
We'll also identify our strategic growth initiatives for 2023, lastly will follow with a comprehensive review of fourth quarter financial results, including business segment performance data and an update on our capital and our capital structure and liquidity then we will be happy to address your questions.
Slide six please.
The fourth quarter of 2022 was one of our most productive quarters on record we reported excellent financial results as we have done all year, while reach an important achievement with significant implications in terms of future operations and competitive positioning.
Our excellent financial performance was due impart to resilient and industry trends, which prevail throughout the period, while the supply of equipment remained constrained. These favorable factors produced healthy fleet utilization and further rate appreciation, resulting in a 25, 6%.
Year over year improvement in total revenues and a more than 35% increase in equipment rental revenues. In addition, EBITDA improved 56% over the same period.
Each of these financial measures concluded 2022 at record levels.
We also recognized some important strategic wins in the quarter, which included the sale of our Komatsu earthmoving distribution business in December of 'twenty, two effectively completing our transformation to a pure play rental business. This final step allows for greater revenue stability in margin appreciation throughout the cycle.
The transaction resulted in a gain on the sale, which lastly will explain as part of her financial review.
Further we significantly advanced the integration of one source equipment. Following the closing of our acquisition in October of 22, adding 139 million in fleet. It always see in 10, new branches six of which now place H N in the Midwest.
Other accomplishments include further success with our accelerated branch expansion program. Following the addition of two new locations in the fourth quarter, bringing the total number of new locations added in 2022 to 10.
These branch additions in combination with the acquisition of one source drove an 18% year over year increase in our branch count extending our operational scale.
Finally, we continue to invest in our rental fleet with a gross investment of $128 3 million in the quarter, resulting in a record gross expenses for the year of $507 8 million are always see concluded the quarter at a record level of just under $2 4 billion or 26, 8% greater than the fourth quarter.
Order of 2021.
I don't want to delve deeper into the results of our rental business onto slide seven please.
Strong core fundamentals in the quarter combined with our fleet growth successful branch expansion program and the addition of one source operations resulted in a 34, 6% year over year increase in rental revenue to 245 million.
The outcome, which was a new record for the rental business led to a gross margin in the quarter of 53, 1% or 140 basis points ahead of the year ago quarter.
Rental rates in the quarter, which exclude one source remain impressive improving 10, 6% when compared to the fourth quarter of 'twenty, one and one 8% on a sequential quarterly basis.
Our average rental rate appreciation for the full year of 22 was equally impressive finishing the year at nine 3% better than 2021.
Each measured ranked remained among best in our industry.
Our smart right pricing platform, which is now used in use across all 10, one source branch locations is expected to capture valuable synergies in future periods due to the application of a dynamic pricing methodology as well as improved equipment mix at each location.
Physical utilization in the fourth quarter averaged a healthy 72% despite pressure from typical seasonal factors, including rain and wet winter conditions across several geographic regions. These.
These events contributed to a decline in the measure of 110 basis points when compared to the year ago results in 130 basis points on a sequential quarterly basis.
Finally dollar utilization in the fourth quarter was 41, 9% or 260 basis points better than the same quarter in 2021 for the year dollar utilization averaged 49% or 410 basis points better than the previous year, largely demonstrating the benefits from fleet manager.
Including improving fleet mix higher rental rates and strong physical utilization.
Next I want to give a breakdown on our perspective on the 2023 industry outlook.
Given the divergent thoughts and opinions addressing the macro economy in 'twenty three I can confirm our optimistic view of the industry has not diminished as favorable trends continued to reinforce important end markets, leading to an expectation of healthy demand for our equipment.
Onto slide eight please.
Customer feedback regarding nonresidential and industrial project backlogs continues to indicate a robust scope of work in 2023.
Which is expected to drive healthy fleet utilization over the year.
The encouraging customer feedback has reinforced by projections of future nonresidential building activity as measured by the Dodge momentum index the.
The construction backlog indicator reported by the associated builders and contractors and AI as architectural building index.
Although recent results from each of these indicators has declined from historic high readings. They continued to reflect robust nonresidential construction project backlog and active planning agenda, which is likely to bode well for 2023 and beyond.
In addition, we expect equipment demand in 2023 to be supplemented by an increase in federal spending addressing U S infrastructure manufacturing capabilities and renewable energy G. Many of these projects will require extended periods of time to complete.
Finally growth in rental penetration should drive new demand for equipment as the comp combination of unfavorable physical conditions, including rising interest rates and lingering delays in equipment deliverability tend to encourage a shift by certain customers away from ownership of equipment.
A recent report from the American rental association disclose that compared to 2021 rental penetration improved 150 basis points in 2022 to 53, 8%. We believe further rental penetration is likely.
We expect these multiple catalysts for increased rental demand to result in the continuation of healthy equipment utilization and to contribute to an attractive pricing environment characterized by modest sequential quarterly rate improvement.
Nonresidential and industrial construction projects accounted for 75% of our total revenues in 2022.
We believe the success of our growth initiatives, including investment in our rental fleet and geographic expansion of our operational presence has advantageously positioned our company for new opportunities in these and other end markets, while our strong mix of equipment and the young age of our fleet have been instrumental in driving greater customer interest in a journey we remain focused on.
Our other growth initiatives in 2022 and believe this fundamentally sound industry will continue to create attractive opportunities for expansion.
Slide nine employees.
As I mentioned earlier HLA successfully added 10, new branch locations in each of the last two years.
The success of our branch expansion program is a critical component to our long term strategy. We aim to increase our footprint and location density in key geographic regions that offer impressive prospects for nonresidential and industrial construction growth.
Being mindful of this important growth initiative, we plan to add no fewer than 10 locations in 2023 and as many as 15 with the escalation indicative of our expansion teams continued success in identifying locations with impactful opportunities for growth.
Also we are targeting a gross fleet investment of 500 million to $550 million in 2023, as we continued to support existing stores and the new branch locations with both a young fleet and a diversified mix of equipment there.
The range amounts to another year of record gross expenditures for our rental fleet.
Although 2022 original gross expenditure target was reduced due to the failure of certain manufacturers to meet their commitments. We believe our Oems have a more realistic understanding of production volumes in 'twenty three.
And that will resolve an achievable target range. Despite the persistent disruptions in the supply chain.
Finally attractive acquisition opportunities continue to appear in our industry and an evaluation of suitable targets remains an ongoing part of our comprehensive plan for growth in 'twenty three.
Slide 10 please.
We opened 2023 with 120 branches across 29 states, including new markets in the Midwest, South and greater density in the southeast Gulf Coast and West Coast before I hand, the call over to Leslie I will close by reiterating the importance of numerous accomplishments of 2020 to these <unk>.
Clued, the completion of our strategic transition to a pure play rental business record gross investment in our rental fleet.
The continuation of branch our branch expansion program and the acquisition of one source.
It was also important to point out our team's exceptional operational execution, which I believe has produced the industry's best rental rate performance and highest levels of physical utilization.
Individually each represents a significant achievement for the company. However, taken together these strategic way and served to fortify our sound base for future operations and strategic growth, while escalating our competitive posture.
Now on to slide 11, and I'll turn the call over the last week for a comprehensive review of our fourth quarter financial performance Leslie.
Thank you Brad good morning, and welcome everyone before I begin my review of the fourth quarter I wanted to first expand upon Brad earlier comment relating to the sale of Akamatsu earthmoving distribution business. They train vaccine with Walker shop here see industries, LLC or W. P I, which class R&D.
Sandburg, 15th 2020 team resulted in cash proceeds of $29 2 million.
Pre tax gain of $15 4 million was recognized in the quarter, including $12 9 million recorded as a gain on the sale of property and equipment and $2 5 million as a gain on either now.
As in the case of the sale of two Arkansas distribution branches in the third quarter of 2021 fourth quarter 2022 was off we're not adjusting for the $15 4 million gain on the sale as the transaction remains consistent with the company's exit from our material business arrangements involving distribution.
For the sake of clarity I will refer to the W. P. I transaction during marrow Dean and with that I'll begin this morning on slide 12.
Fourth quarter revenues totaled $333 1 million, improving $71 8 million or 25, 6% when compared to the fourth quarter of 2021 P.
The improvement was led by our rental business, we're wrapping new raised 63 million or 34, 6% on a year over year basis.
The business segment experienced strong support from our growing fleet excellent rental rate performance and contribution from our acquisition of one source.
We concluded the fourth quarter with a fleet size as measured by original equipment cost or at least see of approximately $2 4 billion, representing a net increase in at least a 498.5 million when compared to the fourth quarter F 2021.
The fleet growth, including a record gracing, Daphne I $578 million, plus $139 2 million, resulting from the acquisition of one source.
Rental rates in the fourth quarter, excluding one source or 10, 6% better than a year ago quarter and 1.8% ahead at the third quarter of 2000 2010, we closed 2022 with average year over year rental rate improvements at nine 3% among the best results in our industry.
Average physical fleet utilization in the fourth quarter at 72% was 110 basis points below the year ago measure what the ordinary seasonal patterns in the quarter modestly impeding results.
Across the other business segments used equipment sales in the fourth quarter saw its best result in 2022 and trading to $30 2 million compared to $29 5 million in the fourth quarter of 2021.
Activity in this segment has run below historic levels due largely to tight equipment supplies higher sales of earthmoving and aerial work platforms were largely offset by lower sales of material handling equipment.
New equipment sales declined four 5% to 21.59% compared to 22.59 in the same quarter of 2021.
Consolidated gross profit in the fourth quarter and praised point 1.2 million or 34, 8% to $159 4 million compared to $119 2 million in the year ago quarter with the improvement in consolidated gross margin grew to 45, 1% compared to 42%.
Over the same period of comparison.
310 basis point improvement was due largely to higher rental margins and sales of used equipment, along with a favorable revenue mix.
Capital equipment rental margins were 47, 9% in the fourth quarter of 2022 compared to 46, 3% in the year ago quarter.
Comparing our results to the year ago quarter rental margins were 53, 1% compared to 51, 7% used equipment margins were 51, 2% compared to 39, 3% with fleet only margins, which exclude used equipment at painting trading coming in at two four.
<unk>, 5% compared to 41, 9%.
Margins on new equipment sales were 13, 6% compared to 14.5% and finally margins on parts sales improved 28, 6% compared to 25, 8% while service margins finished the quarter at 63, 9% compared to 63, 5%.
Slide 13 please.
Income from operations increased $37 2 million in the fourth quarter of 2022, or 89, 4% to $78 8 million compared to $41 6 million in the fourth quarter of 2021, the margin in the fourth quarter improved to 22, 3% compared to 14, 8% in the year ago quarter.
The improvement was due primarily to gains on the sale of property plant and equipment totaling $13 9 million of which $12 9 million related to the previously mentioned transaction with W. P. I.
In addition, higher gross margins on rentals and used equipment sales and a favorable revenue mix of revenues contributed to the margin improvement.
Let's proceed to slide 14.
Net income in the fourth quarter totaled $51 2 million or $1.41 per diluted share compared to $21 7 million or 59 cents per diluted share in the year ago quarter.
Our effective income tax rate in the fourth quarter was 26, 1% compared to 25, 8% for the same quarter in 2021.
Proceed to slide 15 please.
EBITDA in the fourth quarter increased $61 7 million to $171 5 million compared to $109 9 million in the fourth quarter of 2021.
Six 1% increase compared to a 25, 6% improvement in revenue and resulted in an EBITDA margin of 48, 6% in the fourth quarter compared to 39, 1% in the year ago quarter.
Transaction with W. P. I contributed 420 basis points to our fourth quarter margin due to the pretax $15 4 million dollar gains recorded in salad, PP&E and either not a greater significance. The margin benefited from an improved mix of revenues higher margins on used equipment sales and rentals and a favorable.
Result from SG&A, which decreased in the quarter as a percentage of revenue.
Next slide.
<unk> please.
Regarding SG&A expenses in the fourth quarter totaled $94 5 million, an increase of $17 1 million or 22% compared to the fourth quarter of 2021.
The increase was due primarily to employee salaries wages and variable compensation as well as increased head count.
In addition, higher facility expenses professional fees and depreciation added to the quarter over quarter increase.
As a percentage of revenue SG&A expenses in the fourth quarter declined 80 basis points to 26, 8% compared to 27, 5% in the prior year quarter.
Approximately $3 3 million and the increased expense in the quarter, whereas it traded at all to the addition of one source with another $3 6 million related to our branch expansion efforts, which added 10, new branches over the year.
Slide 17.
Capital expenditures in the fourth quarter totaled $128 3 million, including noncash transfers from inventory, resulting in a total gross capital investment for the year at $507 8 million.
Net rental fleet capital expenditures and our fourth quarter were 123 million with net rental fleet expenditures for the year totaling $424 1 million gross.
Gross PP&E capital expenditures for the fourth quarter were $15 1 million.
Following the transaction with W. P. I leave recorded net PP&E pricey to a $4 9 million.
Average fleet age as of December 31, 2022 increased to $43 six months compared to $40 three months in the year ago quarter, and 46 months in the third quarter of 2020 team.
The increase which followed the acquisition of the one source fleet. Our fleet age continued to compare favorably to the industry average fleet age of 53.3 months.
Net cash provided by operating activities totaled $110 million in the fourth quarter and $313 2 million for the year. Your free cash flow used in the fourth quarter and full year of 2022 was $128 million and $233 3 million respectively, demonstrating the companys.
Focus on fleet growth and expansion into new branch locations in acquisition.
Slide 18.
As I noted earlier, our rental fleet size based on original equipment cost close 2022 at approximately $2 4 billion, an increase of 498.59, a 26, 8% larger than our fleet size at the close of 2021 and a record level for <unk> average dollar utilization.
Fourth quarter of 2022 improved to 41, 9% compared to 39, 3% in the prior year quarter.
Let's move to slide 19 please.
Net debt at December 31st 2022, with approximately $1 2 billion compared to $892 7 million at December 31st 2021.
The increase was due to a decline in cash and cash equivalents. Following the acquisition of one source and our continued investment in our rental fleet.
Net leverage in the fourth quarter was two two times essentially unchanged from the year ago quarter.
We have no maturities before 2020, a on a 1.25 billion of senior unsecured notes.
Slide 20 please.
Our liquidity position at December 31st 2000, 2022 totaled $820 7 million, including a cash balance of $81 3 million and borrowing availability under our amended ABL facility of $739 4 million.
Excess availability under the ABL facility improved to approximately $1 5 billion at December 31st compared to approximately $1 1 billion at December 31 2021.
The increase in availability reflects the continued invest nationally and and minimum availability as defined by the ABL agreement.
<unk> 75 million by definition excess availability as the measure used to determine if our springing fixed charge is applicable and with our excess availability of $1 5 billion. We continue to have no covenant concerns.
Also we recently completed an extension of our ABL facility with the $715 million credit facility extended five years to February 2028.
Finally, we paid our regular quarterly dividend of <unk> 27, and a half cents per share of common stock in the fourth quarter of 2020 team and while dividends are subject to board approval. It is our intent to continue to pay the dividend.
Slide 21.
In summary.
<unk> reached a new level of financial performance in 2020 team as our timely shaft greater rental intensity served as a highly influential catalysts for improvement. This successful transaction together with a dynamic business environment led to many achievements every year. They included records in the categories of total revenues total rental revenue.
<unk> gross margin in rental gross margin.
And in addition, EBITDA generation surpass the half billion dollar level closing the year at a record EBITDA margin of 43% or 600 basis points better than 2021.
These financial accomplishments together with record player investment and an 18% increase in our branch count were significant contributors to a year of remarkable growth.
With new strategic initiatives established for 2023, our growth targets will be supported by ample resources and a conservative capital structure, including our liquidity position of approximately $800 million.
Also we have no senior unsecured note maturities until 2028 and at two two times our leverage ratio remains at the low end of our guidance range of two to three times.
We are prepared to build from our successes in 2022, and we believe superior operational foundation is in place as we enter 2023.
With that operator, we are ready to begin our Q&A period.
We will now begin the question and answer session to.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Seth Weber with Wells Fargo Securities. Please go ahead.
Oh, Hey, guys. Good morning, Thanks for taking the question.
Yes.
Maybe for Brad just trying to think through how we should be thinking about your rental gross margin.
And when the lens of the acquisitions that you've been doing in the new branch openings is that.
Does that create a near term headwind on rental margin or just how should we be thinking about full year incremental.
Incremental guidance.
Targets for the rental business.
Yeah. Good morning, Seth I'll take the first part of that Leslie may have something to add but.
Your assumption is correct between the purchase accounting associated with the fleet, where we have some additional depreciation for a period of time with one source.
And then of course, the warm starts while we're very happy.
Our group of warm starts all 20 that we've opened the last two years are performing as group exceptionally well, but theyre a drag I mean, it takes them a while to ramp up to the levels. They are a drag in several different categories, but they are generating solid EBITDA and of course, adding actually greater value than we had planned for them too. So we're.
Happy, but yes, there are a headwind as it pertains to the incremental margins lastly, could you guys help Sir sure. Good morning, Seth So our rental gross margin play through well as Brad stated continue to be impacted by higher depreciation.
Resulting from the fair value Mark up of the fleet obtained through one source.
A few other things to keep in mind you know we expect that 2023 will include periods of normal seasonality following a year I really little seasonality.
From a utilization perspective.
You know playing into rental gross margin planetary what's also rate and Brad or John May want to add some color, but the expectation of rates continue at continuing at 2022 levels.
You know, it's probably not a fair assumption.
Okay.
Right. Okay. Thank you for that and then just maybe.
Maybe lastly, a follow up on just the Capex.
Our guidance is that should we assume the cadence is a more traditional cadence you know kind of second third quarter weighted.
Last couple of years have been kind of all over the map, but do you feel like 2020, where he is a more traditional.
Cadence of bringing in fleet or do you think it's going to be.
Spread out across the year.
As of now Seth I think we are looking at more of a normal cadence throughout the year.
And Seth I want to go back and Additionally, respond yes Leslie mentioned.
Because I want to be really clear here our outlook is.
Solid for this year very positive, but as you mentioned, 10% rate improvement year over year.
We're not expecting to produce 10% again, we far outpaced the Ralph benchmark last year, we're exceptionally pleased with our group. We think the execution was fantastic. Our fleet mix has continued to improve the use of smart rates.
<unk> is fully supported by our sales force and that's why we're getting these excellent outcomes that being said, what we're really comfortable with is that we're going to continue to get incremental sequential performance in rates going forward. So we're not we're not giving up on rate improvement I think we won't have it we're going to have rate improvement, but the lessons comment it just won't be at.
To say record setting levels.
Yep understood guys I appreciate it thanks again.
Thank you.
The next question is from Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, good morning.
I wanted to ask first on Mega projects, clearly a big story in non res and for rental companies.
How much of a factor is this in your recent results and if you look at 2023, even just order of magnitude is this a sizable percentage of rental revenue.
Sure Good morning, Stephen.
And our existing results Youre looking at.
So nominal it wouldn't show up.
That being said, we've got our company broken into three divisions East West and Central and we have currently active mega projects more specifically.
Infrastructure governmental supported infrastructure projects in each area of the country. So we're starting to see that work we've got equipment on projects as we speak so it's emerging I think it's only going to further accelerate as we move throughout the year and how material it becomes.
You know I don't know that were ready to give guidance on it but we're very encouraged and it is going to become a meaningful piece of additional market opportunity going forward. So it's positive to see that is existing today, where all of these projects that will be on more projects every time, we get on a call for the rest of this year for sure.
That's helpful and a quick add on to this topic do you need to shift strategically or operationally in any way to fully take advantage of this or is this just normal operations.
With an added.
Market opportunity.
No Theres no shift I would say what's important is our strategic sales efforts well in advance of the opportunities when you're dealing with projects.
That is measured starting with $1 billion, maybe as much as 40 or $50 billion.
Don't wait too late to participate so were strategic in making sure that we approach is at the right time with the right strategy, but operationally.
We execute the same way we always have is just associated with fleet management and our sales force effort.
Okay, Great and then thinking about your regions with half of your gross profit.
Coming from the Gulf Coast, and the southeast clearly a great place to be now in for the long term how much do you want to grow in that geography with more fleet in branches or would you prefer.
Spanning in other geographies, maybe youre branch openings reflect some of this so just any thoughts there.
It.
The short answer is of course both.
We are not deterred by the density we like greater density in.
This southeast region, when we arrive at roughly 50% of our gross margin I think arguably is has been and will likely be the hottest part of the country for sustainability and growth that being said, we have tremendous opportunity to continue to expand our reach.
As evidenced by some of our excitement with one source, putting us in six new markets in the Midwest and so youre going to see US do both if we had the toss a coin and pick one or the other we're going to look at the robustness of the marketplace. We're going to look at available facilities and then we can look at the team we can assemble and thats whats going to drive us to either increase density.
Or to.
Spread out a little bit further, but we're happy with our footprint youll see us filling it out as well as expanding them.
Great and then last quick one for me and I may have missed this in the prepared comments on SG&A leverage.
Good good leverage against total revenue in the fourth quarter.
<unk> strong performance as a percentage of rental revenue can you talk about SG&A leverage in 2023 or the longer term.
Yes, Leslie respond to that sure stay just as a reminder, you know we finished the full year 2022 at 27, 6% of our revenues and considering our warm start strategy.
This is a fair assumption for now and moving into 2023.
Great. Thank you.
The next question is from Steven Fisher with UBS. Please go ahead.
Thanks, Good morning.
Just wanted to follow up on the rate spread you mentioned the potential for modest sequential quarterly rate improvement can you just maybe give us a sense of how that trend with year over year. I know you said you wouldn't do another 10%, but I guess others are targeting kind of mid single digit range does that sound.
About right in your mind as well or how are you thinking about that.
It does sound about right mid single digits.
What's going to be interesting Stephen as the year unfolds. We know we feel very certain we're going to continue to get these incremental gains quarter to quarter to quarter, we've got momentum coming into the year. So I think our view is more currently in the 3% to 5% range, but yes mid single digits.
Okay and are you going to continue to report that X one source or will that just be sort of a combined measure.
We are going to.
Let me tell you. The reason we're reporting at X. One source is one source did not have the data the year ago data supply to ralphs that would've allowed us to adequately do imagine we would've had to have a placeholder or an assumptive place.
Placeholder to measure against so for the first 12 months, we are not going to report with one source.
Additionally, say that Theres, a lot of opportunity with one source for rate improvement and we're seeing that already John do you want to add to some of what we're seeing with one source within smart rates. Currently yes. So obviously, we've got them onto our platform now.
We did that was one of the big synergies when we looked at one source was the pricing synergies than now that we have them active on our system. We're already seeing solid sequential month over month increases and we expect that to continue.
We expect a lot for 2023, so all positive there.
That's great and what about.
The impact of one source on on utilization do you see opportunities there to improve.
Nation as well.
Yes, we do.
We do.
Not running at the same levels that we are currently but again, we see that as an opportunity.
Not only with the utilization, but with the fleet mix and that's something that we're focused on in.
We're going to continue to make those improvements throughout the year. So we look forward to reporting on that progress later in the year, Yes, Steven and obviously there you look their physical utilization is just reflected in our overall company performance because we.
We measure that at a point in time, so we know where we are there and as John just stated that's another opportunity.
We're very pleased with our progress with that with that team so far.
Great and just lastly.
Been a lot of discussion on the call about the strength of demand in the mega projects and across the regions I guess.
I'm curious if you can.
Give us a sense of what variation you see in demand at this point.
We do sense there is some mixed messages coming from various parts of the of the nonresidential construction market as interest rates kind of filter through how do you see that variation or or do you not see it kind of filtering into your business at all.
We just don't see it as much and I've seen some of the same reporting I think you may be referring to or similar reporting and I think we're a little more isolated with with the geography recover I mean these high growth 29 states, we happen to be and are holding up better than some of the areas. We're seeing some pauses.
We feel as strong today, as we did a quarter or two quarters ago about the opportunities in front of us and these mega projects, whether they'd be stimulus related or not I was just going to be additional fuel for our fire.
Terrific, Thanks very much.
Thank you. The next question is from Stanley Elliott with Stifel. Please go ahead.
Hi, Good morning, this is Brian broken out for Stanley Congrats on the quarter.
I was hoping you could talk a little bit more about smart rates give us a little bit more color on some of the actions you are taking there and whats your sense for how much that contributed to the rate growth in the fourth quarter.
Well.
Yes, smart rate as a dynamic.
Program, that's proprietary to our company we've developed it.
<unk> five or six years at this point and we continue to perfect that as we move forward and it uses a variety of data points, both real time existing with.
What's going on within our branch within our division region or districts of course, as well as market related data.
Use customer profile SaaS customers and many other data points.
Again since its proprietary we don't talk in any greater detail about how we weight. These variables, but what I can tell you is the combination of our professional sales force understanding the power of this information and being motivated to use it at the point of need is what has transpired to give us a better than 10%.
Increase Q4 over Q4.
So.
Also as I've mentioned I believe earlier, maybe in the first question.
Yes.
We far outpaced I believe we far outpaced all of our competitors larger competitors.
Last year with rate improvement and then we have access to the routes benchmark data that lets us, though we outpaced the benchmark by a nice margin as well so.
Our view of that moderating should not be interpreted that theres anything going on in the marketplace are that we are less focused in any way of achieving greater rates. It's just there is a marketplace out there and we have to be competitive and so we're going to you'll see more incremental gains going forward.
Got it yeah. That's helpful. Thank you and then.
Unused gross margins, obviously quite strong this past year, how sustainable do you think that trend is going into 2023 years at some point do you think we start to normalize back to you know mid 30 ish type of used equipment margins that you guys have historically put up thanks.
Yes, Brian I'll take that one so.
We don't see ourselves going back to the mid 30.
Gross margin on used sales.
The us markets today pricing is strong.
We know that pricing peaked out late last year, but from what we're seeing we see continued strength I mean, I would not be surprised for us to continue on with us margins in the 50% range.
So again, we expect a healthy used equipment market for the balance of the year and <unk>.
Confident we can achieve that level.
Got it thanks, that's really helpful and then.
Can you help us with the modeling impact from the Komatsu distribution sale, how should we think about that flowing through 2023.
The biggest thing to point out is I would say that.
The commodity business that we sold was accounted for a little more than half.
No more than 50% of our new equipment sales.
So.
Yeah definitely keep that into account and then as well as you know we would expect our parts and service business to decline.
Related to the commodity sale not at that same rate.
Because the bulk of the revenue solid word name.
That's very helpful. I'll pass it on thank you.
Yeah.
Again, if you have a question. Please press Star then one.
The next question is from Alex Rygiel with B Riley. Please go ahead.
Thank you in the past I think you've stated that you would spend more on your rental fleet. If the equipment was available. So I guess my question here is has the global supply chain for no Commission approved at all and if so how should we think about sort of the outlook for the supply chain through 2023.
Yeah, Good morning, Alex.
Don't believe that the supply chain has improved enough.
To talk about an improvement I think what has improved as our manufacturers understand the environment, they're in and they're planning is.
Much more crisp this year than it was the same time a year ago, but no. There is still a real disruption out there there's still a lack of availability and we are still in a position where we could take more equipment than we are currently planning for and our existing forecast so.
It wont, let up I mean look the bright side of this is it's it just continues to emphasize the supply and demand in balance that gives us the confidence on solid utilization going forward in this incremental improvement in rental rates on a sequential basis.
And secondly, as it relates to one source.
I think it was expected that.
Utilization would be below kind of.
Company averages for some time do you have any better visibility on that and when it might kind of reach company averages.
Yeah, I would say in the back half of the year.
Look at the where the one source locations or most of which are in the Midwest.
Seasonality is a bigger factor there than what we would typically see in some other markets. So I would say as we get later into the year.
Third quarter that we should start to see that level out and get closer to those company averages, but look this this could be a 12 month project or it could happen a little bit sooner, but we are focused on it and we know there is an opportunity to improve.
We're getting positive gains already a second John's comments there.
<unk>.
Roop will be performing at company utilization levels by year end, if not sooner.
Very helpful. Thank you very much.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jeff <unk> for any closing remarks.
Okay. Thanks, Gary.
Today's call. We appreciate everyone, taking the time to join US today and for your continued interest in the company. We look forward to speaking with you again soon Gary Thanks, again for the assistance and good day everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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