Q1 2023 Herc Holdings Inc Earnings Call
Speaker 1: to capitalize on areas of growth.
Speaker 1: If you turn to slide six, in addition to leveraging our scale as a market leader, the successful execution of our growth strategies also contributed to our outsized performance relative to the overall industry. We increased revenue in our core categories from fleet investments as well as acquisitions and new greenfield facilities that support branch network optimization. Revenue from our high margin pro solutions specialty business grew double digit in the first quarter, incrementally benefiting from new products, new locations, and cross selling synergies. And, our innovative customer facing digital capability called ProControl NextGen continues as a catalyst to new project wins, especially at the national account level. 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 for our employees, customers, and suppliers.
Speaker 1: In the first quarter, we were recognized among great places to work in Canada. Finally, between Fleet Investments, Strategic M&A, Dividend Growth, and Opportunistic Share Repurchases, I'm confident that HIRC is allocating capital in the right areas and at the right time.
Speaker 1: With that, I'll turn it over to Aaron to take you through the high-level operational drivers in the first quarter. And then Mark is going to walk you through the first quarter financial metrics. Aaron?
Speaker 2: Thanks Larry and good morning everyone. The excellent performance of our operations and field support teams combined with tight supply of equipment and steady demand have created a favorable environment for us. Our record first quarter results for revenue and profitability served as a continuation of last year.
Speaker 2: as we outperform the market due to geographic expansion, new account wins, and fleet investments.
Speaker 2: Turning to slide 8, our day starts with safety, which is at the core of everything we do. As you know, our major internal safety program focuses on perfect days. That is days with no ocean reportable incidents, no at fault motor vehicle accidents, and no DOT violations.
Speaker 2: And we strive for 100% perfect days throughout the organization.
Speaker 2: In the first quarter on our branch by branch measurement, all of our branch operations achieved at least 97% of days. That's perfect.
Speaker 2: Equally notable, our TRIR improved to 0.45, our best first quarter performance ever.
Speaker 2: On slide 9, let me shift to a progress update on our growth strategies. One of the key initiatives of our urban market growth strategy is expansion through green field locations and acquisitions.
Speaker 2: In the first quarter we added nine locations to our network, three green field locations and six locations from three new acquisitions.
Speaker 2: As you know, we focus on acquisition opportunities in high growth markets that complement our current branch network and fit our strategic, financial and cultural filters.
Speaker 2: Moreover, many of the mega projects being announced are in the geographies where we have focused our acquisitions in Greenfield Editions, such as Phoenix, Houston and Austin, Texas, and Detroit. To Learn More, Go to www.neonnews Mercers
Speaker 2: We spend $138 million in net cash in the corridor on acquisitions. Multiples remain steady as you pay a little less for general rental companies and a little more for specialty rental companies. One of our acquisitions in the corridor was a trench business in Texas.
Speaker 2: This was our fourth trench acquisition since 2021. Trench shoring is a growing category for us that is synergistic with our other products like earth moving equipment and pump solutions.
Speaker 2: Of the other acquisitions, one was in Miami, a top 10 market, and one was in St. Louis, a top 35 market. These acquisitions support our strategic goal of increased density in urban markets.
Speaker 2: Our acquisition process is now a core competency for us. We are quickly integrating these new bolt-on businesses and are excited to welcome their teams to our creating value for our people and our customers. We budgeted $500 million of acquisitions again this year, and with this strong pipeline we are seeing we are confident we can get it done.
Speaker 2: In addition to acquisitions, as Larry said, growing our core and specialty fleet through new equipment investments is a key strategy. On slide 10, our first quarter results reflect an increase in average OEC fleet of 29 percent over last year's comparable period.
Speaker 2: Equipment of mental revenue increased 24% compared with the prior year's first quarter.
Speaker 2: As we mentioned on the last call, we expected seasonality to return in Q1, which is typically the lowest demand quarter of the year. In the prior two years, there was no significant seasonality due to the pent-up demand coming out of the COVID period.
Speaker 2: With supply constraints still very much real for fleets, we brought in equipment during the first quarter that was delayed from 2022 to repair. For the customer requests we are getting from mid-year 2023.
Speaker 2: April to date, we are beginning to see improvement in seasonal demand, as we would expect.
Speaker 2: On slide 11, you can see our fleet composition at OEC on the left side of the page. Total fleet is now $5.9 billion as of March 31, 2021-23.
Speaker 2: We've maintained higher margin special fleet at about 24% of the total. Of course, there's room to grow there, but we're also growing the core fleet as mega projects, infrastructure, and manufacturing projects are heavily weighted toward classic equipment.
Speaker 2: Our fleet expenditures at OAC totaled $348 million in the first quarter. As I just mentioned, we continue to accept new fleet deliveries as we prepare for incremental growth in 2023.
Speaker 2: We disposed of $144 million depleted OEC in the recent quarter, 80 million more than last year's similar period.
Speaker 2: In the first quarter, we capitalize on the strong used equipment market while shifting disposals to higher return wholesale and retail channels, which is a new focused disposition strategy for us.
Speaker 2: Our sales teams are now digitally equipped with comprehensive information on our use fleet inventory and are incentivized to focus on the higher return sales channels.
Speaker 2: This paid off in the first quarter as proceeds from disposals for a 52% of OEC, compared with 45% last year, and selling margin improved by 300 basis points in the latest quarter.
Speaker 2: The average age of her disposal was 90 months in the first quarter with average fleet age at about 47 months.
Speaker 2: After two years of reducing fleet sales to compensate for supply chain deficiencies, we are working to get back to a more normal sales cadence this year.
Speaker 2: We are planning for a roughly similar level of sales as the first quarter in each of the remaining quarters.
Speaker 2: 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 operating in North America with a wide range of equipment needs across a variety of end markets.
Speaker 2: Our national account business is benefiting from tailwinds from federal and privately funded mega projects, large infrastructure jobs, and manufacturing of EV, semiconductor, petrochem, and LNG facilities to name a few. In addition, there is continued maintenance work in every market in North America, especially when it comes to repairing and upgrading roads, water and sewer systems, and other
Speaker 2: as well as transportation related facilities.
Speaker 2: Furthermore, general facility and waiting is where house maintenance occurs year-round in any economic environment.
Speaker 2: Local accounts which represent 55% of rental revenue in the first quarter are growing due to hercest penetration through our acquisition and greenfield strategy, as well as regional growth and infrastructure, education, data centers and local utilities. Additionally, we have a road bus sales program in place to acquire new local accounts.
Speaker 2: I recently had a channel check with our regional vice presidents and based on reservations and indications from our sales teams. The man is building a strong pace consistent with seasonal expectations. We aren't seeing any cancellations, postponements, or delays out of the ordinary.
Speaker 2: Enchoring and fiscal stimulus trends have accelerated, and these magic mega projects represent the beginning of a multi-year flow of dollars into the industrial space.
Speaker 2: Based on everything we are hearing, I'd say we are very optimistic about the upcoming construction season.
Speaker 2: As one of the largest players in the rental industry, our fleet capacity, digital capabilities, on-site management expertise, and broad location networks set us up to win substantially more than our fair share of the market's growth.
Speaker 2: I want to thank Team Herk for their commitment to operational excellence and safety.
Speaker 2: Their professionalism shows up in the execution of our services to our customers every single day. It's a valuable differentiator for her. Now I'll pass the call on to Mark. Thanks, Aaron, and good morning, everyone. I'm happy to be here today and pleased to be in a position to lead the company's financial strategy as its CFO . As Larry mentioned earlier, I've been supporting her for almost seven years.
Speaker 2: take on this new role and look forward to meeting all of you. With that, let's get into the first quarter financial results. Slide 14 summarizes our key metrics for the first quarter. You can see that record rental revenues that reflect continued market share growth.
Speaker 2: Strong pricing and volume on rent fueled the 24% rental revenue growth for the first quarter. About 75% of the growth was organic and a quarter came from acquisitions. We continue to grow our established core business organically and our organic growth was almost three times that of the rental market in the quarter. While both core and specially rental revenue were a double digit in the quarter.
Speaker 2: the still strong used equipment market and our sales channel shift to wholesale and retail delivered incremental growth.
Speaker 2: Adjusted net income in the first quarter of 2023 increased 17%.
Speaker 2: Adjusted EBITDA increased 30% over the prior year to a record first quarter 308 million and our adjusted EBITDA margin remained flat at 41.6% in Q1 2023.
Speaker 2: The used equipment sales activity had some impact on adjusted EBITDA margin growth year over year as we more than double dispositions at OEC compared with first quarter 2022. Use equipment sales margin, however, increase 300 paces points year over year.
Speaker 2: to approximately 35% on higher proceeds. Rebidom margin for the quarter was up 10 basis points to 42.4%. Excluding the impact of the studio entertainment business, Rebidom margin would have been 43.3% in the quarter, a 50 basis point improvement year over year. Rebidom margin for the quarter was up 10 basis points to 42.4%.
Speaker 2: Reba.flowthrough in the first quarter also was impacted by the slowdown in the studio entertainment business.
Speaker 2: If we exclude that business from the calculation in both years, Rebid-Duff flow-through would have been 45.4%, a 530 basis point improvement compared with last year's first quarter. We are off to a great start with margin improvement and flow through expansion in our base businesses. As a reminder, Q1 is the seasonally weakest quarter.
Speaker 2: And therefore, we expect this to be the low water mark for the year with Rebid.flow through moving back to the mid-50s for the four year 2023. Additionally, we believe the strong demand we're experiencing across the manufacturing, industrial, and infrastructure markets will make up for the impact of any shortfall.
Speaker 2: of studio entertainment on our original Pivotog items. Finally, our effective business model allows us to continue to invest in our equipment, locations, and our people in addition to creating value for our shareholders.
Speaker 2: ROIC was a first quarter record, increasing 80 basis points to 10.6%. On slide 15, the graph on the upper left illustrates our success and consistently driving rate growth. This is always an important metric to manage, especially when faced with cost pressures due to infllation.
Speaker 2: In the first quarter, rate was up 7% year-over-year, continuing the quarterly momentum of the last several years.
Speaker 2: We're still targeting mid-single digit rate growth for 2023, utilizing our proven and effective pricing tools, the discipline and professionalism of our sales team, and the rollover benefits from the contract rate increases we began securing last year.
Speaker 2: In the first quarter, we saw stable, low double digit rate increases in the spot market, while contracts continued to be favorably renegotiated. This year's plan for a mid-single digit rate increase is expected to be more front-half loaded as the spot market will encounter a significantly tougher comp in the back after the year.
Speaker 2: As mentioned, our average fleet on rent at OEC in the first quarter was lower than our average fleet growth of 29%.
Speaker 2: In a normal supply environment, we place orders in Q4 and schedule deliveries for the spring in time for the construction season. 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. As we cautioned in the fourth quarter, this impacted time utilization in the seasonal first first quarter of 2023.
Speaker 2: Taking the new fleet now ensures we'll be able to respond to our customers increasing equipment needs this summer.
Speaker 2: This impact, combined with the decline in studio entertainment revenue, also impacted dollar utilization in the first quarter.
Speaker 2: For 2023, we're continuing to target incremental improvement in annual dollar utilization on our base business, excluding studio entertainment, as we move into stronger seasonal periods and continue to capture rate.
Speaker 2: On slide 16, you can see we have no near-term maturities and ample liquidity to fund our growth goals for 2023 and into the future as we allocate capital to invest in our business and drive fleet growth into this cycle.
Speaker 2: We remain confident in our business model and are committed to increasing shareholder value. In the first quarter we announced a 10% increase in our quarterly dividend for 2023 to 63 and a quarter cents or $2.53 per share for the year. And we re-furchase nearly half a million shares.
Speaker 2: of our common stock at an average price of $111 per share. Net capital expenditures exceeded cash flow from operations in the first quarter with cash outflows of 78 million before acquisitions.
Speaker 2: We took a lot more fleet in the fourth quarter of 2022 and in the first quarter of 2023 than we typically would in the winter months, which is a primary driver of our 29% fleet growth year over year.
Speaker 2: Our current leverage ratio at 2.5 times is well within our 2-3 times target range and in line with our expectations as we invest in growth.
Speaker 2: We typically move to the lower end of the range in weaker economic environments where we would adjust new fleet purchase orders and ramp up sales of older equipment to align supply and demand and protect cash.
Speaker 2: This is a playbook we've executed on before. Our flexibility with suppliers, the resiliency of the used equipment buyers, and the fungibility of our fleet gives us the levers we need to address to any market moves.
Speaker 2: However, as Aaron mentioned, there is no indication of a slowdown in any of our key growth areas today. Moving on to slide 17, in the upper left, you can see the continued strength in our primary end market. The ARA estimate for 2023 North American rental industry revenue is $63 billion.
Speaker 2: that's approximately 4% growth over 2022.
Speaker 2: As we've discussed, our rental revenue growth is substantially eclipsing the broader industry growth rate. We expect this outperformance to continue. In this environment, the advantages of scale are magnified and the big rental companies that are focused on diversified end markets and have the ability to surface through the strength and mega projects.
Speaker 2: will continue to get bigger faster. Two of our end markets are industrial and non-residential construction. Both have solid outlooks projected for 2023. Combine, these end markets reflect about two thirds of our customer base, and both are likely to outperform other consumer-driven markets this year.
Speaker 2: of incremental spending in 2023, the highest level on record.
Speaker 2: Dodges forecast for non-residential construction starts is being driven by an unprecedented amount of new mega-project construction in chip, EV, battery, and LNG plants as the on-storing of U.S. manufacturing capacity continues to gather steam.
Speaker 2: Starts in 2023 are estimated to be 412 billion on top of last year's record 427 billion.
Speaker 2: We should emphasize that these are just starts new projects and are being driven by multi-year construction builds that will continue into 24 and 25. The dotted line on both of these charts reflect growth of the pre-pandemic levels. You can see that last year and the next four years are projected to be the strongest periods of activity.
Speaker 2: that this industry has ever seen. Additionally, there's another $2903 billion in non-residential, non-building, or infrastructure projects related for 2023. That's a 17% increase over 2022.
Speaker 2: These projects are supported by federal funds approved in the infrastructure package, the chips and sciences act, and the inflation reduction act.
Speaker 2: The current strength and mega projects and infrastructure activity is not particularly sensitive to short-term interest rates and clearly has a structural tailwind. These large projects benefit bigger rental companies of scale with more larger, more diverse rental fleets.
Speaker 2: And as one of the leading North American rental companies, Herk stands to benefit more favorably from this trend.
Speaker 2: Therefore, along with another year of pricing power, we are reiterating our plan for outsized growth again in 2023. This is on slide 18.
Speaker 2: With expectations for stronger operating leverage as we roll over some of the 2022 inflationary challenges, we continue to forecast adjusted EBITDA will be in the range of 1.45 billion to 1.55 billion, which represents growth of 18 to 26%.
Speaker 2: Our plan for net fleet cat-backs of 1 to 1.2 billion allows us to maintain double digit growth and fleet on rent. We should also see an increase in our use equipment sales in 2023 as we return to a more normal level of fleet replacement as Aaron previously mentioned. Enter's expense was which was up roughly 109% in the first quarter year over year.
Speaker 2: and intend to continue to address the needs of our customers as we execute on our growth strategy.
Speaker 2: With that, I'll turn the call back to Larry. Thanks Mark and now please turn to slide 19.
Speaker 1: Everything we do starts with our vision, mission, and values, and the purpose statement that focuses on equipping our customers and communities to build a brighter future.
Speaker 1: We do what's right. We're in this together. We take responsibility. We achieve results and we prove ourselves every day. And now operator, please open the lines for questions. Thank you.
Speaker 3: As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad, and we will pause for just a moment to compile the Q&A roster.
Speaker 3: As a reminder, if you would like to ask a question for a star then the number one on your telephone keypad, and we will pause for just a moment to compile the Q&A roster.
Speaker 3: We will take our first question from Jerry Ravitch with Goldman Sachs. Your line is open.
Speaker 3: And we'll take our first question from Jerry Revich with Goldman Sachs. Your line is open. Yes, I'm Jerry. Good morning, everyone.
Speaker 4: And Mark, congratulations again. Thank you. I'm wondering if we just talk about the cadence in dollar utilization. So, you know, the entertainment business has been rolling off for four quarters now. And so now that it's stabilizing, I'm wondering if you're thinking about dollar utilization is back to four quarters.
Speaker 2: roll out of this seasonal adjusted first quarter and the second quarter. And then I think you will see it stabilized or maybe even outpace 2022's dollar utilization as we roll into Q3.
Speaker 4: Can we talk about fleet growth specifically? Obviously you took stronger deliveries than you normally would in the winter of gear from the past two quarters. Now that we've entered the construction season, can you talk about whether fleet on rent growth has caught up with overall fleet size growth?
Speaker 1: into Q2. We'll continue to take fleet. We took, as you mentioned, we took an outsized portion of our fleet in Q1 as well as in Q4 and we'll continue to take fleet. I think we've...
Speaker 1: We took about 25% of our ordered fleet in Q1. We expect to continue to take that fleet throughout the year. And we'll adjust, you know, if need be. But we're saying fleet.
Speaker 4: So are we equalizing with our utilization as we go in divide of the construction season? Thanks Larry. And Aaron, can I ask you just one more to expand on your M&A comments so you mentioned valuations are becoming more attractive in general rental. I'm wondering if you just talked about how the pipeline looks.
Speaker 5: a full pipeline we think we can fulfill our goals for the year. But the valuations are really stable versus where they've been over the last year. What I was trying to elude in my comments was that you pay a little bit more on a multiple for a specialty business.
Speaker 5: versus a general rental business. They're very stable from where they were over the prior two years with all the other transactions we've done.
Speaker 5: general rental business. They're very stable from where they were over the prior two years with all the other transactions we've done. Yeah thank you.
Speaker 3: Thank you. And we will take our next question from Rob Orkheimer with Melius Research. Your line is open.
Speaker 6: Hi, thanks. Just looking for a little bit more deeper on the end market. You mentioned RFPs are solid. I wonder if you could talk to us about, I don't know whether an RFP is typically done for a $20 million building or $100 million building or what, and then how those RFPs compare with prior years.
Speaker 5: Sure, this is on the RFP front. We did comment that it's stable. So there's still a strong activity of requests for proposals coming into us for work. Typically, those are for industrial plants that either we currently do work with or new offered to entities.
Speaker 5: You use a number of about 20 million dollars typically you don't see RFPs for those size jobs, but the larger jobs Say you know 300 million in an up or a mega project you definitely would see an RFP come in for that
Speaker 6: Perfect. Okay. And so this would be a relatively, I mean, maybe last year was strong. There's a mega project that's already kicked off or maybe just contextualize how RFP's are today versus, you know, last year and last several years.
Speaker 5: Yeah, they're stable. Activity is strong and or increasing. We're actually seeing probably RFPs from end markets and customers that we wouldn't have seen the prior year. I think that's indicative of the health of the demand for rental fleet.
Speaker 1: Okay, you know, I think Jerry, maybe just one other, I think the reason we may be seeing more of them as well is, you know, the recognition that we are one of the, you know, one of the the top.
Speaker 1: rental companies with a broader reach in terms of geographic reach and a broader fleet and more fleet to be able to support that so we're receiving that recognition and receiving a larger number of those inquiries that we have in the past.
Speaker 3: Okay, I'll stop there. Thank you. Thank you. We will take our next question from Sharif El-Sawahi with Bank of America. Your line is open.
Speaker 6: Good morning. Good morning, Dree. One question I had is just that given that you're still placing orders well in advance and given the runway you see on projects and pick up and cat-backs this year, how are you thinking about those orders as you're placing them?
Speaker 1: Yeah, no great questions. We've placed about 85% of our CAPEX plan in hard orders with our vendors.
Speaker 1: and we have slots available to us in the rest if we need them and we're monitoring and measuring that. I would tell you that in the core fleet, lead times are still extended in that 12 to 18 month period. But we are seeing some improvement and we are getting greater visibility.
Speaker 1: as to when that fleet's available so that we can properly place it in the markets that have that demand. So we have a lot of flexibility in our procurement still and we're really personally managing how we execute the deliveries of that fleet.
Speaker 6: Thank you. And then just on rate, it's continued to accelerate sequentially. You've continued to guide a sort of mid-tingle digit range. And how should we think about that throughout the year, the cadence of it?
Speaker 2: Yeah, I mean, I think, uh, sure, if this is Mark, when, when you think about it, right? So we kind of built a, a seven number in, in Q1. And as you roll that forward into Q2, um, sequentially throughout the months, right? Probably slight increase as we, as we tipped into March.
Speaker 2: and into April . And so I think that seven-ish range in the first half of the year is doable. I think where you run into the challenge is on the back half of the year where the comps on the non-contractor, the spot rate.
Speaker 2: becomes a really big hurdle. So that's the reason we continue to sort of guide into this mid-single digit range. We'll see how the back half of the year behaves, but right now the only thing we know is there are tough comps sitting there in the back half of the year. Understood. Thank you.
Speaker 3: We will take our next question from Neil Tyler with Redburn. Your line is open. Good morning. Thank you. A couple of please. There you go.
Speaker 7: Guys, you called out the RMO market as being particularly resilient. Can you remind me, please, pretty much how much that represents of your end markets, of your business as best you can define it. And then, second one, on the channel checks are in that you referred to...
Speaker 7: Can you just perhaps expand a little bit on the questions that are being asked and really what you're asking those regional managers to look for?
Speaker 7: And then, okay, one question on the on the broader market data on the American rental version data. Obviously, the rental market is growing at a significantly lower pace than would be normally assumed given the rate of non-resisting, you know, putting place activity.
Speaker 7: And particularly if you if you back the current sort of rate cadence out of that and is that is that is that equipment constraint that's limiting the broader market growth or is there something else that play there that you can help us understand.
Speaker 5: We'll take the first one. The MRO market is really activity under roof. So there's a lot of different end markets that have maintenance operations. It could be airports. It could be hangers and airports. It could be warehouses, all of those type of different end markets. So there's a lot of different end markets.
Speaker 5: that you get your industrial petrochemical environments support for the industrial petrochemical markets where they're manufacturing parts and shipping goods. Those all have continued maintenance from electrical mechanical contractors on a regular basis. So we don't really measure this size of that. We just know it's a big market that a lot of our diverse customer may...
Speaker 5: visiting with customers. But the general tools that we use to measure that is how's our reservations look.
Speaker 5: What's the expected reservation cadence for our OEC growth and what markets are showing the most promise. And then secondly, on the mega project side, there's a lot of data we're tracking on the mega projects as they come out of the ground. These RFPs come to us.
Speaker 5: as they start breaking dirt out there. On the EV, car manufacturing, a battery front, right? Some of these buildings are already built up and they're ordering fleet for the transformation that they're doing on the electrical front. So these are all different data points that we're looking at to see.
Speaker 5: If all the positive numbers were seen on the graphs is translating into actually equipment being reserved and going out on rent in Q2 is really what we're focused on right now.
Speaker 8: Thank you. And then you had one more question about the...
Speaker 8: Thank you. And then you had one more question about the size of the rental market.
Speaker 2: Yeah, Neil, this is Mark. I think it's a really good question and I think from my perspective, we had a
Speaker 2: sort of a 12 to 13% growth rate in 2022 in the ARA. And right now we're kind of staring at this forward of four and a half percent, yet all of the other data would indicate that it's probably something bigger than that. You know, the only thing I can tell you is that, you know, there could be revisions to that data, might be revisions to that data up. But at this point, you know, who knows?
Speaker 7: Yeah, okay. I guess the sort of the perspective I was hoping you might share is, you know, to what extent you're still overindexing in terms of a fleet delivery relative to the broader market. Can how far down the list you have to go before you reach the point where the deal, okay?
Speaker 2: supply constraints are limiting ability to take delivery to the moment. I'm not saying that. I mean, I think the prepare remarks, right? We're sort of out if the numbers for or for and a half and we're outpacing that organically at three times right now and the fleet that we have sort of allows us to hit the demand that we've projected throughout the construction year.
Speaker 5: If you have a view on the percentage of your projects that are financed locally versus big money center banks and what you're hearing from customers in terms of that, in terms of the banking situation and lending. No real color on that. I'll tell you that the big projects, as we do our channel checks, there's no postponements or delays due to financing.
Speaker 5: Okay, gotcha. And then just switching gears, your free cash flow, are you still expecting that neutral for the year, or how should we think about that going for 23?
Speaker 2: Hey Larry, yeah, this is Mark. I think yes, that's a reasonable expectation pre-cache flow neutral for 2023.
Speaker 3: Yeah, okay. All right. That's all I have. Thanks guys. Thank you. We will take our next question from Ken Newman with Keybank. Your line is open.
Speaker 9: Thank you. Okay, morning, Mark. Good morning. I saw in the new position.
Speaker 9: Mark Warner on the new position. Thank you.
Speaker 9: First question for me, you know, I just wanted to clarify the acquisitions you made in the quarter. And I think at five and a half times my math is right at the end of the implies, we're on $25 million of EBITDA before synergies. I'm curious is one, is that in the right ballpark and is that contemplated in the maintained guide or how do we think about the timing of the contribution from those acquisitions through the year? We we are doing it for this
Speaker 2: Yeah, Ken, again, this is Mark. Your numbers are pretty close to right in terms of the overall impact of the acquisitions at five and a half times. The largest of those three acquisitions was literally done on the second.
Speaker 2: Day prior to the quarter end and so that impact really was negligible to us in Q1 and so all of that would be baked in as we roll forward into the remainder of the year. Okay. And,
Speaker 9: When I think about that in the context of the maintained guide is that Just modestly offset by some of the moving pieces and in entertainment or mix or just any color there
Speaker 2: Yeah, I mean, I think, right? So if you have a, you know, what, a 20 plus million dollars of acquired EBIT, right? You have three quarters of that that would potentially impact the year. And yeah, I mean, I think when we think about sort of the combination of the acquisitions that are in the door.
Speaker 2: plus all of the other opportunities that Aaron has spoke about, we believe that that should more than offset any of the softness that we potentially will experience here in Q2 around this rider's strike.
Speaker 9: And then for my follow up here, I just want to switch over to SGNA margin. You know, this is one of the higher quarters for SGNA margin that you've had in a while. And understand you that there's again the moving pieces on the fleet and entertainment mix. But any help you can kind of help us think about the cadence of SGNA margin as we progress through the year and. And.
Speaker 9: How do you think about that relative to 2022?
Speaker 2: Yeah, no, good question. Actually, I mean, my math has about 70 basis point improvement, Q1 2023 SGNA margin over 2022. I think we're still projecting if you think about this from a data point of view, I think we're still projecting if you think about this from a data point of view, I think we're still projecting if you think about
Speaker 2: Reba down margin perspective, we're still shooting for that hundred to two hundred basis point Reba down margin expansion year over year as we publicly stated. And so you will continue to gain leverage and that line and the line as we walk through twenty, twenty three.
Speaker 2: and perspective, we're still shooting for that 100 to 200 basis point, Rebid.margin expansion year over year as we publicly stated. And so you will continue to gain leverage in that line and the DOE line as we walk through 2023. That's helpful. Thanks.
Speaker 10: Absolutely. So we will pick our next question from maybe Dobre with Baird. Your line is open. Thank you and good morning, everyone. Just a clarification for me if I may on a capex commentary. So the way I heard it is that you are expecting similar disposals as you are adding Q1 for the rest of the year.
Speaker 10: And I think Larry mentioned that in q1 you received about a Quarter of the fleet that you were sort of planning on for the year
Speaker 10: So if I sort of look at, and I kind of put those two together, it would imply to me that net cap x is coming in somewhere around 800 million, as opposed to the billion to billion two that you've guided. So can you talk a little bit about that? I mean, am I missing something here? Yeah, I'm not.
Speaker 1: It was 25% of the net capex is what we received in the first quarter. So if I mislegio, I apologize, but 25% of the net capex that we expected we received and as Aaron said, yeah, our...
Speaker 1: Our disposal will be similar, obviously minor movements quarter to quarter, but similar to what we experience in the first quarter throughout the remaining three quarters. Yeah, sorry to press you on this because that still puts us at 800 million. No, our guidance is still in that.
Speaker 2: Yeah, I guess maybe what I'm really trying to get out here is, have you changed your gross cat-back expectations for the year at all relative to the prior commentary you've provided last week? No, I mean, this is Mark. I mean, we're still staring squarely at that billion to billions to range.
Speaker 2: for net fleet cap expend in 2023.
Speaker 10: Okay, as you think about the rest of the year, considering the fact that you're obviously going to have more fleet coming in, how comfortable are you with the ability to ramp up utilization? And I obviously do understand that there's some seasonality in the business butStriking Confmetics.
Speaker 10: You're also going to have frankly more fleet and You know we've seen some softness in q1. So how do you think about about that?
Speaker 10: frankly more fleet and you know we've seen some softness in Q1 so how do you think about that?
Speaker 5: Yeah, Mick. So, you know, last year we feel good about the fleet that's coming in and our ability to get the time you'd we need and get the growth we need and take care of our customers in 23. Some of the core categories of fleet like Reach 4 Cliffs.
Speaker 5: Ariel were very, very hot last year to the point where we're actually losing opportunities with customers because we couldn't provide the fleet. So strategically, we've been focused on investing in our core fleet. So some of those categories ran really unreasonably hot last year on time utilization. We don't expect to get some of those back to that same level in 23. We really don't want to because we want to capture more customer opportunity, which in essence will drive.
Speaker 5: more revenue and have less sold out situations. But we feel confident about where we're sitting right now and is our volume we see in April building our utilization is following.
Speaker 10: Maybe my final question here, and I guess the thing that I'm struggling with a little bit is your flow through margin guidance, which obviously implies pretty significant acceleration. But at the same time, we are looking at maybe more modest pricing gains in the back half than what we've currently seen.
Speaker 10: And then to your point, the Euro-Viracomparison in terms of utilization is very difficult in certain categories. So at least in my thinking, that should pressure flow through on Ari Bada. So again, as you think about this acceleration in incremental margins.
Speaker 2: how do we get there from where we currently are? Yeah, I mean, I make this, this is Mark. I mean, I think there's really, there's two areas, right? We will have, I should expect to have margin expansion in 2023. And then I think the piece of it that you didn't mention there.
Speaker 2: is really as we continue to cross over the inflationary pressures of 2022. In the 2023, certainly allows for additional flow through opportunity, and that's where that guide to the mid-50s is coming from.
Speaker 3: Understood. Thank you. Absolutely. We will take our next question from Steven Fisher with UBS. Your line is open.
Speaker 9: Thanks. Good morning. I wanted to just follow up on the impact of the bank failures and situation. I think you said to Seth, whoever's seen that there's no impact expected on larger projects, but what do you think the broader impact of credit tightening will be on your markets? And I guess to just establish a baseline.
Speaker 9: What are you seeing in the residential and commercial construction slice of your business? What's that running year over year in Q1 and what are you planning for in terms of magnitude of changes for the rest of the year? Thank you.
Speaker 1: Yeah, so stay a bit Larry as we have said in the past, the residential market really isn't a slice of our business. We don't participate in it. If we do any business, it's by accident and not by intent. And as far as the, what I call the low end or light commercial.
Speaker 1: That sort of went away with COVID and really hasn't returned. So it really will have no impact whether that's impacted by the local banking issues or not. I don't feel that local banking is going to have, at least at this point, any impact on us because most of our work is going to be impacted by the local banking issues.
Speaker 1: locally is around infrastructure, space, and local government type of activity, which is funded through tax rolls and tax dollars, not necessarily through banking. Also, we're a believer that the local markets can have an awful lot of resiliency.
Speaker 1: to support some of these mega projects and larger projects as the spillover. As you know, there's a lot of fleet going to the larger mega projects. There'll be a fair amount of work and fleet available to the local activity and those local contractors will be picking up that local activity.
Speaker 1: We're not expecting to see any of it. It might have an impact, quite frankly, on the smaller rental companies, the mom-and-pop rental companies, who either can't get that credit to fund new fleet acquisitions or maybe resistant or fearful.
Speaker 1: that they don't want to, you know, sort of extend themselves and, you know, take on that extra debt to build their fleet. So, you know, for the moment, we don't feel it, we don't see it, and we don't think it will have a, you know, an impact to us.
Speaker 1: to sort of extend themselves and take on that extra debt to build their fleet. So for the moment, we don't feel it, we don't see it, and we don't think it will have an impact to us. Terrific. Thank you.
Speaker 3: We will take our next question from Brian Spahnheimer with Gabelli Funds. Your line is open.
Speaker 11: Morning Brian . Hey Brian . I am just curious about capital allocation and how you weigh growing the business through M&A. You mentioned five and a half times EBITDA.
Speaker 11: versus obviously you did some repo in the quarter, buying your own stock at foreign change for basically an acquisition of yourself. So just curious as to the thought process there.
Speaker 1: Yeah, look, you know, I think both are opportunistic, Brian . You know, M&A is opportunistic as well as we have taken on a share repurchase on an opportunistic basis. And we'll continue to look at both of those opportunistically on Go Forward and, of course,
Speaker 1: can do on share repurchase and we said we're still going to target that $500 million worth of spend on acquisitions. But again, they're both opportunistic from our standpoint. All right, terrific. And Mark, congratulations again and look forward to talking to you all later.
Speaker 10: Thanks, Brian . We will take our next question from David Russell with Evercore ISI. Your line is open. I think as people think about rates beyond 23, contract pricing versus spot, I mean, the generalization is going to be.
Speaker 12: be if mega projects are going to drive the business, a contract will probably drive the pricing. Can you give us a little sense right now of the mix of your business that is contract pricing versus spot? And maybe a little more color, I think you gave a little kind of qualitative color, but a better sense of the contract pricing that you're looking at when you discuss these multi-year projects? Great question, next question please.
Speaker 2: Yeah, hey David, this is Mark. I mean I think when we think about it it's probably 60, 40, 65, 35 split.
Speaker 2: And then I think when you look forward into 2024, right, the flywheel effect of the contracts continue to rain down on us. And so that's the piece of this flywheel that we've been building from the back half of 2022 into 2023 and will continue to benefit us into 2024.
Speaker 2: And I think when you look forward into 2024, the flywheel effect of the contracts continue to rain down on us. And so that's the piece of this flywheel that we've been building from the back half of 2022 into 2023 and will continue to benefit us into 2024. And again, can you clarify which is
Speaker 12: 65 and which is 35 just so we get that straight the split 65 contract 35
Speaker 12: Okay, and when it comes to the again, I know you want you don't want to quantify in a call exactly Where are you getting from contractors? But the trend for let's say the second half of the year sounds like the total company rental rate You're guiding so that you know, two to three percent to get the average back down to mid single for the year is Contract pricing higher than spot pricing toward the end of the year We're trying to get a sense of that that rate momentum into 24
Speaker 2: Is contract pricing expected to be higher than spot pricing as we exit 23? I would say as you exit, it's probably more at the level of even. Okay. Exiting 2023 into 2024. Perfect. Okay. I appreciate it. Thank you.
Speaker 2: higher than spot pricing as we exit 23. I would say as you exit, it's probably more at the level of even. Exiting 2023 into 2024.
Speaker 3: And we'll take our final questions from Steven Ramsey with Thompson Research Group. Your line is open. Hi, good morning. On national accounts growth, can you maybe parse out to some degree the strengths there? It's doing better than local. How much of that is megaprojects and how much of national account growth is not megaprojects?
Speaker 5: of the MEGA project work. So our portfolio of national accounts is expanding with our strategic in-market vision and the way we kind of vertically run our sales organization. So we're in a real good spot to capture opportunities in the MEGA project world.
Speaker 3: Okay, helpful. And then maybe can you talk to national accounts making up a greater percentage of revenue in the first quarter than what you ran at last year? Do you expect, as you get more into mega projects ramping up that that national accounts?
Speaker 5: and local accounts will be split fairly evenly by the end of this year or early next year. In the different quarters of the year, you have different penetration of where the revenue is coming from local or national account in the winter.
Speaker 5: Typically, the local business is a little bit lower than the national business, but then the local business ramps up through the peak season Q2, Q3, first part of Q4. Now, with the amount of work that is planned and discussed in this mega environment, we could see it feels like a campaign in this country,...
Speaker 5: That shift kind of going heavier towards the national side. So it might look more like it did in the 1st quarter. There are other parts of this year. Okay, that does it for me. Thank you. Please join me in thanking Paul for chance to speak on the vice chair of theiroonpower and at ethicscon BC.
Speaker 3: And I will now turn the call back to Leslie Humziker for any closing remarks.
Speaker 13: Great. Thank you 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, everyone.
Speaker 3: And maybe as a gentleman, this concludes today's conference call and we thank you for your participation. You may now disconnect.
Speaker 14: You
Speaker 14: I.